Class 11 Economics Notes Chapter 3 (Liberalisation; privatisation and globalisation: an appraisal) – Indian Econimoc Development Book

Alright class, let's delve into a crucial chapter for understanding modern India's economic trajectory: Chapter 3, 'Liberalisation, Privatisation, and Globalisation: An Appraisal'. This is vital not just for your Class 11 understanding but forms the bedrock for many questions in government exams.

Chapter 3: Liberalisation, Privatisation and Globalisation: An Appraisal

1. Background: The Crisis of 1991

Before understanding the reforms, we must grasp why they were necessary. By 1991, India faced a severe economic crisis characterized by:

• Balance of Payments (BoP) Crisis: Imports grew much faster than exports. Foreign exchange reserves depleted drastically, barely enough to cover a few weeks of imports.
• High Fiscal Deficit: Government expenditure consistently exceeded revenue, leading to heavy borrowing.
• Rising Prices (Inflation): Persistent borrowing and deficit financing fuelled inflation, eroding purchasing power.
• Poor Performance of Public Sector Undertakings (PSUs): Many PSUs were inefficient and incurred heavy losses, straining government finances.
• External Debt: India's external debt burden became unsustainable.
• Immediate Trigger: Gulf War (1990-91) led to rising oil prices and a fall in remittances from Indian workers in the Gulf, worsening the BoP situation.

India approached the International Bank for Reconstruction and Development (IBRD), commonly known as the World Bank, and the International Monetary Fund (IMF) for loans. These institutions mandated India to undertake structural economic reforms, leading to the New Economic Policy (NEP) of 1991.

2. The New Economic Policy (NEP), 1991

The NEP aimed to create a more competitive environment and remove barriers to economic growth. It rested on three main pillars:

• Liberalisation: Reducing government control and restrictions on economic activities.
• Privatisation: Transferring ownership and management of public sector enterprises to the private sector.
• Globalisation: Integrating the Indian economy with the world economy.

3. Liberalisation

This involved relaxing rules and regulations that restricted economic activity. Key areas included:

• (a) Industrial Sector Deregulation:
  • Abolition of Industrial Licensing: Licensing requirements were abolished for almost all industries, except for a short list (e.g., alcohol, cigarettes, hazardous chemicals, defence equipment, pharmaceuticals).
  • De-reservation under Small-Scale Industries (SSI): Many goods previously reserved for production by SSIs were de-reserved, allowing large players entry.
  • Market-determined Prices: Price controls were removed for many goods.
• (b) Financial Sector Reforms:
  • Role of RBI: Shifted from regulator to facilitator. RBI now focuses more on controlling inflation and ensuring financial stability rather than micro-managing banks.
  • Origin of Private Banks: Allowed the establishment of Indian and foreign private sector banks.
  • Foreign Investment Limit: Increased the limit for foreign investment in banks.
  • Easier Branch Expansion: Banks given more freedom to set up new branches without excessive RBI approval.
  • SEBI (Securities and Exchange Board of India): Established in 1988, given statutory powers in 1992 to regulate the stock market.
• (c) Tax Reforms:
  • Focus on simplifying the tax structure and reducing tax rates.
  • Direct Taxes: Rates of income tax and corporate tax were gradually reduced to encourage compliance and savings.
  • Indirect Taxes: Efforts made to simplify and rationalise indirect taxes (like excise duty, customs duty), eventually paving the way for GST (Goods and Services Tax) later.
• (d) Foreign Exchange Reforms:
  • Devaluation: The Rupee was devalued against foreign currencies in 1991 to boost exports.
  • Market Determination of Exchange Rate: Moved towards a system where the exchange rate was determined more by market demand and supply forces rather than solely by the government.
• (e) Trade and Investment Policy Reforms:
  • Dismantling Quantitative Restrictions: Quotas and other non-tariff barriers on imports and exports were largely removed.
  • Reduction in Tariffs: Customs duties on imports were significantly reduced to promote trade and competition.
  • Liberalisation of Foreign Investment: Procedures for Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII) / Foreign Portfolio Investment (FPI) were simplified, and limits were raised across various sectors.

4. Privatisation

This involves reducing the role of the public sector and increasing the role of the private sector in the economy.

• Meaning: Transfer of ownership, management, and control of public sector enterprises (PSEs) to the private sector.
• Methods:
  • Disinvestment: Selling off part of the equity (shares) of PSEs to the public or private entities. This was the primary method used in India.
  • Strategic Sale: Selling a significant portion (often over 51%) of government shareholding along with management control to a private entity.
  • Outright Sale: Complete sale of a PSE to the private sector.
• Rationale:
  • Improve efficiency and performance of enterprises.
  • Reduce the financial burden on the government.
  • Generate resources for the government.
  • Introduce competition.
  • Facilitate inflow of FDI.
• PSU Status: To improve PSU efficiency and autonomy, the government granted special status like Maharatna, Navratna, and Miniratna to select profitable PSEs, giving them greater operational freedom.

5. Globalisation

This refers to the increasing integration of the domestic economy with the world economy.

• Meaning: Growing economic interdependence between countries through cross-border flows of goods, services, capital, technology, and information.
• Key Components:
  • Increased international trade (exports and imports).
  • Greater mobility of capital (FDI, FII/FPI).
  • Flow of technology across borders.
  • Movement of people (labour) across borders (though often more restricted).
• Policy Measures Promoting Globalisation: Reduction in tariffs, removal of quantitative restrictions, liberalisation of foreign investment.
• Outsourcing: A significant outcome of globalisation for India. This involves contracting out business processes (like customer service, technical support, accounting) to external agencies, often located overseas (in India's case, receiving work from developed countries). India became a major hub due to skilled, low-cost labour and proficiency in English.
• World Trade Organization (WTO): Founded in 1995 (succeeding GATT - General Agreement on Tariffs and Trade, est. 1948), the WTO aims to promote free and fair international trade through multilateral agreements. India is a founding member.

6. An Appraisal: Impact of LPG Reforms

The reforms have had a mixed impact on the Indian economy:

• Positive Impacts:
  • Increased GDP Growth: India experienced a significant jump in its GDP growth rate, moving from the sluggish "Hindu rate of growth" (around 3.5%) to averaging 6-8% in subsequent years.
  • Rise in Foreign Investment: FDI and FII/FPI inflows increased substantially, boosting capital availability.
  • Increase in Foreign Exchange Reserves: Reserves grew significantly, providing economic stability.
  • Control of Inflation: While fluctuating, inflation was generally brought under better control compared to the pre-reform crisis period.
  • Rise of the Service Sector: The service sector witnessed rapid growth, particularly IT and BPO (Business Process Outsourcing).
  • Increased Exports: India's share in world trade increased, especially in services.
  • Consumer Sovereignty: Increased competition led to greater choice, better quality, and often lower prices for consumers.
• Negative Impacts / Criticisms:
  • Neglect of Agriculture: The agricultural sector's growth rate decelerated. Reforms focused more on industry and services. Issues like reduced public investment, removal of subsidies, and increased international competition affected farmers adversely.
  • Jobless Growth: While GDP grew, employment generation did not keep pace, particularly in the formal sector.
  • Increased Income Inequality: The benefits of growth were perceived to be concentrated among higher-income groups and in urban areas, widening the gap between rich and poor, and between urban and rural India.
  • Adverse Impact on Small Scale Industries (SSI): Faced increased competition from large domestic players and imports, leading to challenges for survival.
  • Industrial Sector Slowdown (in some phases): While liberalised, industry faced challenges like cheaper imports, inadequate infrastructure, and competition, leading to periods of slower growth compared to services.
  • Disinvestment Issues: The process was often criticized for undervaluation of assets and lack of transparency. The funds raised were sometimes used to meet budget deficits rather than for infrastructure or social sector development.
  • Vulnerability to Global Shocks: Increased integration made India more susceptible to global economic downturns.
  • Weakening of Welfare Measures: Fiscal consolidation efforts sometimes led to reduced government spending on social sectors like health and education.

Conclusion:

The LPG reforms of 1991 were a watershed moment for the Indian economy. They successfully pulled India out of the immediate crisis and put it on a higher growth path. However, the benefits have not been uniform, and challenges related to agriculture, employment, inequality, and balanced regional development persist. The reforms are an ongoing process, requiring continuous evaluation and adaptation.

Multiple Choice Questions (MCQs) for Government Exam Preparation:

1. The immediate trigger for the introduction of Economic Reforms in India in 1991 was:
   (a) High fiscal deficit
   (b) Poor performance of PSUs
   (c) A severe Balance of Payments (BoP) crisis
   (d) High inflation rate

2. Which of the following was NOT a key component of Liberalisation under the NEP, 1991?
   (a) Abolition of industrial licensing for most industries
   (b) Increase in import tariffs across the board
   (c) Shift in RBI's role from regulator to facilitator
   (d) Market determination of foreign exchange rates

3. The process of selling shares of Public Sector Enterprises (PSEs) to the private sector or the public is known as:
   (a) Globalisation
   (b) Liberalisation
   (c) Disinvestment
   (d) Nationalisation

4. Integrating the Indian economy with the world economy is referred to as:
   (a) Privatisation
   (b) Liberalisation
   (c) Globalisation
   (d) Disinvestment

5. Which international organisation(s) did India approach for loans in 1991, leading to the imposition of conditions for economic reforms?
   (a) WTO and UN
   (b) IMF and World Bank (IBRD)
   (c) SAARC and ASEAN
   (d) G-20 and BRICS Bank

6. Outsourcing, particularly in the IT and BPO sectors, is considered a major outcome of which aspect of the NEP?
   (a) Liberalisation
   (b) Privatisation
   (c) Globalisation
   (d) Tax Reforms

7. Which of the following is often cited as a major criticism or negative impact of the LPG reforms in India?
   (a) Significant increase in foreign exchange reserves
   (b) Deceleration in the growth rate of the agricultural sector
   (c) Rapid growth of the service sector
   (d) Increased availability of consumer goods

8. SEBI (Securities and Exchange Board of India) was given statutory powers in 1992 primarily to regulate the:
   (a) Banking sector
   (b) Insurance sector
   (c) Stock market (Securities market)
   (d) Foreign exchange market

9. The policy of De-reservation under industrial sector reforms meant:
   (a) Abolishing licenses for all industries
   (b) Allowing private banks to operate freely
   (c) Removing items from the list of goods exclusively reserved for production by Small Scale Industries (SSI)
   (d) Reducing the number of public sector enterprises

10. Which sector of the Indian economy witnessed the highest growth rate in the post-reform period (post-1991)?
    (a) Agriculture and Allied Activities
    (b) Manufacturing Sector
    (c) Service Sector
    (d) Mining and Quarrying

Answer Key:

1. (c)
2. (b) - Import tariffs were generally reduced, not increased.
3. (c)
4. (c)
5. (b)
6. (c)
7. (b)
8. (c)
9. (c)
10. (c)

Study these notes thoroughly. Remember the context, the specific measures under L, P, and G, and critically evaluate their impact. Good luck with your preparation!