NCERT Class 11 Economics Chapter 3: Liberalisation, Privatisation And Globalisation: An Appraisal YouTube Lecture Handouts

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  • 1991: Balance of Payment crisis led to introduction of economic reforms – reforms, how these were introduced, globalization and impact of reforms

  • Economic crisis relating to external debt – govt. was not able to make repayments on borrowing abroad, foreign exchange reserves dropped to a level that was not sufficient for even 15 days, price rise was registered for essential goods

Background

  • Financial crisis traced from inefficient management of Indian Economy in 1980s

  • Expenditure > Income = Deficit (Government borrows to finance it from banks, people and international financial institutions)

  • We imports goods like petrol – we pay in dollars (earn from exports)

  • Despite low revenue – overshoot revenue to meet unemployment, poverty, population explosion

  • Not able to generate income from internal sources like taxation

  • Foreign exchange was spent to meet consumption needs

  • Late 1980’s – expenditure >>>>> revenue (so meeting expenditure by borrowings became unsustainable)

Impacts:

  • Steep price rise

  • Import grew at high rate without matching exports

  • Foreign exchange reserves declined sharply

  • India approached IBRD (International Bank for Reconstruction & Development) or World Bank and IMF – received $7 billion as loan to manage crisis – India was asked to liberalize and open economy by removing restrictions on private sector, reducing role of government and removing trade restrictions

India Announced NEP (New Economic Policy)

  • Create competitive environment – remove barriers to entry and growth of firms

  • Stabilization measures: Short term measures to correct some of the weaknesses that have developed in BoP & to bring inflation under control. There was a need to maintain sufficient foreign exchange reserves and keep the rising prices under control

  • Structural reform policies: Long-term measures to improve efficiency of the economy and increasing its international competitiveness by removing the rigidities in various segments of the Indian economy.

Policies under 3 Heads – LPG

Image of New Economic Policy of 1991

Image of New Economic Policy of 1991

Image of New Economic Policy of 1991

Liberalization

  • Put an end to restrictions and open up the economy

  • Liberalization measures were introduced in 1980s in areas of industrial licensing, export-import policy, technology upgradation, fiscal policy and foreign investment, reform policies initiated in 1991 were more comprehensive

  • Deregulation of Industrial Sector – till now there was check on permission to get started with a firm, no entry for private sector, some goods only by SSI and control on price fixation and distribution of selected industrial products.

  • Industrial licensing was abolished for all categories except product (alcohols, hazardous, explosives); goods produced by SSI have been dereserved; industries reserved for public are defence, atomic energy and railways

  • Financial Sector Reforms (commercial banks, investment banks, stock exchange & foreign exchange market) – regulated by RBI (decides amount of money, interest rate, nature of lending) – aim to reduce role of RBI from regulator to facilitator; establishment of private sector banks; foreign investment limit raised to 50% in banks; managerial aspects with RBI to safeguard interest of account holders; FII (Foreign Institutional Investors) like merchant bankers, mutual funds and pension funds are now allowed to invest in India

  • Tax Reforms (taxation and public expenditure together as fiscal policy) – Direct (income tax & business profits – reduction due to tax evasion – also moderate rate encourages savings and voluntary disclosure); corporation tax has been reduced; reform indirect taxes for common national market (GST – better compliance and simplification)

  • Foreign Exchange Reforms: rupee devalued as immediate action to resolve BoP crisis – led to increased inflow of foreign exchange; now exchange rate based on demand and supply

  • Trade and Investment Policy Reforms: more competitiveness, foreign investment, promote efficiency of local industries and adoption of modern technologies

Protect domestic industries - tight control on imports & high tariff

  • Dismantling of quantitative restrictions on imports and exports

  • Reduction of tariff rates

  • Removal of licensing procedures for imports

  • Removal of export duties to increase competitive position of Indian goods in international markets

Privatization

  • Shedding of the ownership of government owned enterprise – by withdrawal of government from ownership & outright sale of public sector companies

  • Disinvestment – selling a part of PSEs to public – improve financial discipline and facilitate modernization

  • Provide impetus for FDI

  • Improve efficiency of PSUs

Maharatnas, Navratnas and Miniratnas

Maharantas – based on 3 year performance

Image of Maharatna Category

Image of Maharatna Category

Image of Maharatna Category

7 Maharatnas Are:

  • Bharat Heavy Electricals Limited

  • Coal India Limited

  • GAIL (India) Limited

  • Indian Oil Corporation Limited

  • NTPC Limited

  • Oil & Natural Gas Corporation Limited

  • Steel Authority of India Limited

The company must have ‘Miniratna Category – I’ status along with a Schedule ‘A’ listing. It should have at least 3 ‘Excellent’ or ‘Very Good’ Memorandum of Understanding (MoU) during the last five years.

Along with the above, it should also have a composite score of 60 or above out of possible 100 marks in the 6 selected performance parameters:

  • Net Profit to Net Worth (Maximum: 25)

  • Manpower cost to cost of production or services (Maximum: 15)

  • Gross margin as capital employed (Maximum: 15)

  • Gross profit as Turnover (Maximum: 15)

  • Earnings per Share (Maximum: 10)

  • Inter-Sectoral comparison based on Net profit to net worth (Maximum: 20)

There are 17 Navratnas like HAL, MTNL etc.

Miniratnas

  • Those that have shown profits in the last continuous three years and have positive net worth, can be considered eligible for grant of Miniratna status. Presently, there are 71 Miniratnas in total like IRCTC, AAI BSNL etc.

  • Category I: These have made profits for the last three years continuously or earned a net profit of Rs. 30 crore or more in one of these three years. There are 54 such companies.

  • Category II: These companies have made profits continuously for the last three years and must have a positive net worth. There are 18 such companies in this category.

Globalization

  • Integration of Indian economy with world economy

  • Greater independence and integration

  • Creation of networks & establish linkages

  • Outsourcing – company hires services from external sources which was previously mainly from other countries or within the country

  • Outsourcing is intensified mainly with growth of IT, voice based BOP or call centers, record keeping, accountancy etc.

  • India expanding to other nations – ONGC Videsh – expansion to 16 nations; HCL has offices in 31 nations

  • India is now a global outsourcing destination due to low wage rates and available skilled manpower

WTO

  • World Trade Organization

  • Founded in 1995

  • Successor of GATT (General Agreement on Trade and Tariff)

  • GATT established in 1948 with 23 nations – to administer multilateral trade agreements by giving equal opportunity to all countries in trade market

  • WTO to establish a rule-based trading regime in which nations cannot place arbitrary restrictions on trade; production and trade of services, optimum use of world resources and protect environment

  • WTO facilitates international trade by removing tariff and non-tariff barriers & giving greater market access

  • Major volume of trade from developed nations – then why India is a member of WTO? Again when developed nations file complaints on agricultural subsidy, developing nations feel cheated as they are forced to open the market and not allowed access to markets of developed nations

Indian Economy During Reforms

  • GDP increased from 5.6% in 1980-91 to 8.2% in 2007-12

    • Agriculture has declined

    • Industries registered fluctuations

    • Growth is driven by service sector

  • Target growth rates: Agriculture – 4-4.2%, industrial - 9.6-10.9% & service – 10%

  • Rapid increase in FDI and foreign exchange reserves (increased from $6 billion in 1990-91 to $321 billion in 2014-15)

  • Foreign Investment = FDI + FII (foreign institutional investment) has increased from $1000 million in 1990-91 to $73.5 billion in 2014-15

  • India is one of the largest foreign exchange reserve holders in the world

  • Reform led growth has not generated employment opportunities

Reforms in Agriculture

  • Mainly in infrastructure, which includes irrigation, power, roads, market linkages and research and extension; removal of fertilizer subsidy has led to increase in cost of production and affected small and marginal farmers

  • Policy changes include reduction in import duties on agricultural products, removal of minimum support price and lifting of quantitative restrictions on agricultural products

  • Shift from production for domestic market towards production for export market focusing on cash crops

Reforms in Industry

  • Decrease in demand, cheaper imports, inadequate investment; cheaper imports have replaced demand for domestic goods; infrastructure and power supply remains low; lack of access to developed countries market because of high non-tariff barriers

  • Growth has slowed down due to cheaper imports and lower investments

Disinvestment:

  • 1990-91 target was Rs. 25000 crore mobilization by disinvestment and achieved was Rs. 3040 crore higher.

  • In 2014-15, the target was about Rs. 56,000 crore whereas the achievement was about Rs. 34,500

  • Proceeds from disinvestment was used to offset shortage of government revenue rather than using it for development of PSEs

  • Tax reduction in reform period have not resulted in increase in tax revenue for government

  • Tax incentives were given to foreign investors

Siricilla Tragedy

  • Wages of powerloom workers are linked to cloth production, power cut means cut in wages of weavers who are suffering from hike in tariff

  • 50 workers committed suicide in Andhra Pradesh – Siricilla

Key Take Away!

  • Globalization as greater access to global markets, higher technology and higher probability of large industries

  • Strategy to expand market to other countries

  • Market-driven globalization has widened the economic disparities among nations and people

  • Income and consumption of only high income groups increased