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International Business Management Report International Business Management Report
Page 1 of 37
Indian Institute of Planning & Management
Satbari, New Delhi
International Business Management Report
Index
S.NO TOPIC PAGE
1. CERTIFICATE 3
2. ACKOWLEDGEMENT 4
3. INTRODUCTION 5
4. LIBERALIZATION 7
5. PRIVATIZATION 14
6. GLOBALIZATION 20
7. CONCLUSION 26
8. BIBLIOGRAPHY 37
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CERTIFICATE
T h i s i s t o c e r t i f y t h a t t h e P r o j e c t R e p o r t t i t l e d “ D r a w b a c k s o f
l i b e r a l i z a t i o n , P r i v a t i z a t i o n , G l o b a l i z a t i o n i n I n d i a n B u s i n e s s ”
s u b m i t t e d b y :
N a m e R o l l N o
1 . A r v i n d B i n d a l 2 2
2 . Y a s h R a t h o r e
3 . R u c h i r S o o d
4 . A n i s h G a r g 1 3
5 . A m r i t A g g a r w a l
6 . A r j u n V i j
7 . S h i v a n g S a x e n a
8 . S u n a y a n a K h o u n d
9 . S u m i t B a d o r i a
e m b o d i e s t h e w o r k d o n e b y t h e m O n / O f f c a m p u s i s u n d e r m y
s u p e r v i s i o n .
Date: _____________
S ignature:_________________
(Prof: PankajUpadhayay)
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ACKNOWLEDGEMENT
This project involved the collection and analysis of information from a wide variety of sources and the efforts of many people beyond me. Thus it would not have been possible to achieve the results reported in this document without their help, support and encouragement.
I will like to express my gratitude to the following people for their help in the work leading to this report:
Prof: PankajUpadhayay: for their useful comments on the subject matter and for the knowledge I gained by sharing ideas with them.
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INTRODUCTION
Raj iv Gandhi ’ s government in i t iated the po l icy of
l ibera l i zat ion s ince mid-80s . The l ibera l i zat ion in i t iat ives have
been undertaken in Ind ia wi th a v iew to increase a product ion,
improve qual i ty and get access to market for products and
serv ice abroad. Radica l l ibera l i zat ion or g loba l i zat ion
measures have been brought in s ince Ju ly 1991 to make the
Ind ian economy progress ive ly market or iented and integrate i t
wi th the emerg ing g loba l economy st ructure . These measures
inc lude reduct ion and rat iona l i zat ion of exc ise duty and
customs dut ies , de l i cens ing of severa l drug and
pharmaceut ica l products , ready access to import of raw
mater ia l and cap i ta l goods and so on.
I t has created an env i ronment conduc ive to an enterpr i se ,
investment and innovat ion. Ind ian industr ies have s tarted to
at t ract fore ign port fo l io investment and equi ty part ic ipat ion in
new ventures . The government i s committed to make fore ign
p layers feet at ease to invest d i rect ly and br ing wi th i t new
technology and market ing sk i l l s .
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There has been impress ive growth in FDI in f lows to Ind ia
wi th the introduct ion of po l i cy reforms. As compared to a near
tota l concentrat ion in manufactur ing t i l l 1991, the bu lk of new
inf low has come in the energy and serv ice sector .
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LIBERALIZATIONLIBERALIZATION
The New Industrial Policy , 1991
A number of s ign i f i cant economic changes introduced by
many a number of countr ies a l l the wor ld over , the
encourag ing resu l ts of the l ibera l i zat ion measures introduced
in 1980s by the Government of Ind ia , and the precar ious
economic s i tuat ion that preva i led dur ing the later part 80s
have encouraged and forced the then Congress government ,
which came back to power at the centre , under the leadersh ip
of Shr i . P . V . Naras imha Rao—a non - Nehru fami ly member , to
take some bold measures to re juvenate the economy and to
acce lerate the pace of deve lopment . In th is background, the
Government of Ind ia announced i t s New Industr ia l Po l i cy (NIP
or IP) on Ju ly 24, 1991 . The important ob ject ives are :
a ) To correct the d is tort ions that may have crept in , and
conso l idate the s t rengths bu i l t on the ga ins a l ready made
b) To mainta in susta ined growth in the product iv i ty and
ga infu l employment
c) To at ta in internat iona l compet i t iveness .
Therefore , the bas ic ph i losophy of the New IP , 1991 has
been the cont inu i ty wi th change. Because, the new pol icy
represents a renewed in i t iat ive towards conso l idat ing the
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ga ins of nat iona l reconstruct ion at th is c ruc ia l s tage. But what
i s more important i s the change ( in cont inu i ty wi th change)—
change in the at t i tude of the s tate towards the industr ia l
soc iety , change f rom centra l ly p lanned economy to market led
economy, change f rom excess ive government intervent ion to
min imal intervent ion, change f rom nat iona l i zat ion to
pr ivat i zat ion, change f rom subs id izat ion and cross-
subs id izat ion to gradual wi thdrawal of subs idy , etc . But these
changes , which the government has introduced, represent a
sharp departure f rom the ear l ier industr ia l po l i c ies . These
changes perta in broadly to f ive areas v iz ,
a) Industr ia l l i cens ing,
b) Publ ic sector pol icy
c) MRTP Act , 1969
d) Fore ign investment
e) Fore ign technology agreements .
Industr ia l L icens ing
This i s one of the areas in which substant ia l change has
been made by the government . With a v iew to g ive ef fect to
these changes , the government i ssued a not i f i cat ion [v i z . ,
Not i f i cat ion No. 477 (E) ] on Ju ly 25, 1991 and th is not i f i cat ion
has exempted the industr ia l undertak ings f rom the operat ion
of the fo l lowing Sect ions of Industr ies Development and
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Regulat ions Act , 1951 sub ject to the fu l f i lment of certa in
condi t ions .
(a ) Sect ion 10 (which dea ls wi th reg is t rat ion of ex i s t ing
industr ia l undertak ings)
(b) Sect ion 11 (which i s concerned with the l i cens ing for
new industr ia l undertak ings)
(c ) Sect ion 13 (which i s concerned with the l i cens ing
requi rements for substant ia l expans ion) .
Further , the second schedule appended to the
not i f i cat ion c i ted above [v i z . , No. 477 (E) ] l i s ts the industr ies
which are subject to mandatory industr ia l l i cens ing . Accord ing
to th is not i f i cat ion, on ly 18 industr ies were subject to
compulsory industr ia l l i cens ing . Further , f i ve more industr ies
have been exc luded f rom the l i s t o f industr ies which are
subject to compulsory industr ia l l i cens ing subsequent ly . That
means , on ly 13 industr ies are now subject to compulsory
industr ia l l i cens ing .
Publ ic Sector Pol icy
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A large number of Publ ic Sector Enterpr i ses have fa i led to
ach ieve at least a reasonable rate of success . Some of the
factors which have contr ibuted to th is s i tuat ion are over
s taf f ing and over managing , pr ice and d is t r ibut ions contro ls ,
etc . Hence, the government , in i t s Industr ia l Po l i cy , 1991,
int roduced the number of s ign i f i cant changes perta in ing to the
PSEs . Some of the important changes env isaged by the New
Pol icy are summar ized be low.
Pr ior to the announcement of New Industr ia l Po l i cy , 1991,
seventeen industr ies were reserved exc lus ive ly for the s tate
for the i r future deve lopment . Further , wi th respect to another
12 industr ies , the s tate was to p lay an important ro le by tak ing
in i t iat ive to estab l i sh new undertak ings . Bes ides , the s tate had
power to enter into any other area reserved for the pr ivate
sector . However , the fa i lure on the part of major i ty of PSEs
has forced the government to rev iew i ts ear l ier dec is ion.
Consequent ly , the government in i t s New Industr ia l Po l i cy ,
1991 has pruned the l i s t o f the industr ies reserved for the
publ ic sector to on ly 8 . Further , the government has
dereserved 2 more industr ies . As a resu l t , on ly s ix industr ies
are now reserved for the publ ic sector . They are : (a ) Arms and
ammunit ion and a l l ied i tems of defence equipment , a i rcraf t
and warsh ips , (b ) Atomic energy , (c ) Coa l and l ign i te , (d )
Minera l o i l s , (e ) Minera ls spec i f ied in the schedule to the
Atomic Energy Order , 1953, and ( f ) Ra i lway t ransport . Hence,
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the focus of the publ ic sector wi l l be on ly on s t rateg ic and
h igh tech industr ies and on bas ic in f rastructura l pro jects .
However the object ive of the New Industr ia l Po l i cy has been to
wi thdraw the publ ic sector investment f rom the act iv i t ies
which can successfu l ly be taken up by the pr ivate sector
enterpr i ses . The emphas is of PSEs in future wi l l be on: (a )
Bas ic and essent ia l in f rastructura l fac i l i t ies , (b ) Minera l
resources , (c ) Cruc ia l areas in the interest of the economy in
the long run and where the pr ivate sector investment i s
inadequate , and (d) Defence equipment .
With a v iew to mobi l i ze the resources and to have a wider
publ ic part ic ipat ion, apart of governments share ho ld ings in i t s
enterpr i ses wi l l be of fered to the mutual funds , f inanc ia l
inst i tut ions , employs of PSEs , and the genera l publ ic . The New
Industr ia l Po l i cy a l so proposes se lect ive pr ivat i zat ion of PSEs .
Further , the po l icy a l so proposes to c lose down the PSEs which
have become s ick and which cannot be rehabi l i tated. The s ick
PSEs which can be rev ived wi l l be refered to Board for
Industr ia l and F inanc ia l Reconstruct ion for the formulat ion of
rev iva l packages . The New Industr ia l Po l i cy a l so a ims at
prov id ing greater operat iona l and manager ia l autonomy to the
management of PSEs and making the managements
accountable for the per formance through a system ca l led
Memorandum of Understanding .
MRTP Act , 1969
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The New Industr ia l Po l i cy , 1991 proposes to amend
su i tab ly the Monopol ies and Restr ic t ive Trade Pract ices Act ,
1969. To remove the threshold l imi ts of assets in respect of
MRTP companies and the dominant industr ia l undertak ings .
The important ob ject ives of th is were two in number . They
are :
(a ) Prevent ion of concentrat ion of economic power in
the hands of few which wi l l be detr imenta l to the
common interest ; and
(b) Regulat ion of monopol i s t i c , rest r ic t ive and unfa i r
t rade pract ices which are pursued by the bus iness
community and which are pre jud ic ia l to the publ ic
interest .
The New Pol icy proposes to renew the threshold l imi ts of
assets and therefore , to repeal the Prov is ions of MRTP Act ,
1969 perta in ing to the f i r s t ob ject ive . Hence, the MRTP Act
now concerned only wi th the prohib i t ion of monopol i s t i c ,
rest r ic t ive and unfa i r t rade pract ices fo l lowed by the
industr ia l undertak ings and the t rad ing communit ies .
Fore ign Investment
As far as the d i rect fore ign investment i s concerned, the
New Pol icy proposes to g ive automat ic approva l up to 51% of
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equi ty in the case of h igh pr ior i ty industr ies and i t has a l so
ident i f ied 34 such industry groups . Further , the po l icy
proposes to a l low major i ty fore ign equi ty ho ld ings up to 51%
of equi ty for the t rad ing companies which are engaged in
export act iv i t ies . Th is i s to enable the domest ic companies an
easy access to internat iona l markets . With a v iew to negot iate
wi th the large internat iona l f inanc ia l inst i tut ions and to
approve the d i rect fore ign investments proposa ls in se lected
areas , the New Pol icy proposes to const i tute a spec ia l
committee.
Fore ign Technology Agreements
The New Industr ia l Po l i cy proposes to g ive automat ic
permiss ion for fore ign technology agreements in ident i f ied
h igh pr ior i ty industr ies . Further , i t a l so proposes to a l low
other industr ies to import fore ign technology subject to the
fu l f i l lment of certa in condi t ions .
PRIVATIZATIONPRIVATIZATION
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Introduct ion
In the s ix t ies and sevent ies , the publ ic sector po l i cy has
been large ly gu ided by Industr ia l Po l i cy Reso lut ion, 1956 which
gave the publ ic sector a s t rateg ic ro le in the economy. Dur ing
the last four decades , mass ive investments have been made to
bu i ld a publ ic sector which has a commanding ro le in the
economy. Today, many key sector of the economy are
dominated by the mature publ ic sector enterpr i ses that have
successfu l ly expanded the product ion.
In the ear ly post - Independence years , there was v i r tua l
consensus about the need for the government intervent ion in
economic act iv i t ies . Pandi t Jawahar la l Nehru descr ibed the
publ ic sector as Temples of Modern Ind ia . At that t ime,
v i r tua l ly ne i ther quest ioned the s t rategy nor ra i sed any doubts
about i t s implementat ion. The number of centra l publ ic sector
enterpr i ses increased f rom 5 in the year 1951 to 240 by the
end of 1995 and investments in publ ic sector undertak ings
(PSUs) increased f rom Rs29 crore in 1951 to Rs . 1 ,72 ,438 crore
by the end of 1995. They contr ibuted near ly one th i rd of our
exports . They made s ign i f i cant contr ibut ion to import
subst i tut ion. Government undertak ings account for more that
70% of the work force employed in the organized sector . They
have great ly reduced the imbalanced of reg ional deve lopment
and have la id s t rong base for the rap id deve lopment of the
country . Some of the PSUs have earned a reputat ion par
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exce l lence at the internat iona l leve l . Some g iant publ ic sector
un i ts (e .g . , Ind ian Oi l Corporat ion, S tee l Author i ty of Ind ia , O i l
and Natura l Gas Commiss ion, H industan Petro leum Corporat ion
Ltd . , Coa l Ind ia L td and Bharat Petro leum Corporat ion Ltd)
f igure in Fortune Internat iona l ’ s large companies . Further , the
publ ic sector accounts for one- fourth of the country ’s GDP.
There are two mi l l ion employees in government
undertak ings and the average emoluments per annum amount
to more than Rs .50 , 000 each. Bes ides pay ing h igher sa lar ies ,
publ ic enterpr i ses assure job secur i ty , good work ing condi t ion,
at t ract ive incent ive scheme, part ic ipat ive management , h igher
degree of safety , adequate fac i l i t ies , etc .
Meaning of Pr ivat i sa t ion
The revolut ion of pr iva t iza t ion s tar ted in 1980 and spread
to many par ts of the wor ld . Severa l countr ies a re pr iva t iz ing
the i r publ ic sec tor enterpr ises . India i s no except ion to i t .
Pr iva t iza t ion was meant to improve the performance of publ ic
enterpr ises . Pr iva t iza t ion techniques have been t r ied in
countr ies l ike Great Br i ta in , China , US, Turkey, Braz i l ,
Mexico, Japan, e tc . Pr iva t iza t ion , in the narrow sense , means
t ransfer of ownership , or sa le of publ ic enterpr ises . However ,
pr iva t iza t ion has been used in d i f ferent ways as de ta i led be low:
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1. L ibera l i zat ion Approach : Pr ivat i zat ion may be used in the
sense of l ibera l i zat ion hav ing fewer contro ls and
regulat ion by the s tate in economic act iv i t ies . Th is a l so
means s lowing of new contro ls and regulat ions and a lso
d ismant l ing of the ex is t ing contro ls and regulat ions .
2 . Relat ive Share Enlargement Approach : Pr ivat i zat ion may
re late to en largement of the share of pr ivate enterpr i ses
in the product ion of goods and serv ices in the economy.
Th is means that faster economic expans ion of goods and
serv ices produced by pr ivate sector and s lowing down of
product ion of goods and serv ices in the publ ic sector .
3 . Assoc iat ion of Pr ivate Sector Management Approach :
Th is approach suggests ut i l i z ing the serv ices of
manager ia l personnel or execut ives of pr ivate sector
enterpr i ses for the conduct and management of PSUs.
4 . Transfer of Minor i ty Equity Ownership Approach :
Pr ivat i zat ion may be def ined as the t ransfer of minor i ty
equi ty ownersh ip of publ ic enterpr i ses to pr ivate
ind iv idua ls and inst i tut ions so that the u l t imate contro l
cont inues to remain wi th the s tate .
5 . Transfer of Complete Ownership Approach : Pr ivat i zat ion
i s a l so used in the sense of sa le of a l l the shares to the
pr ivate part ies so that the publ ic enterpr i ses are
converted into pr ivate enterpr i ses .
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Shortcomings
Though the PSUs have contr ibuted heav i ly to deve lop the
industr ia l base of the country , they cont inue, even today, to
suf fer f rom a number of shortcomings which are ident i f ied
be low very br ie f ly .
1 . A s i zab le number of PSUs have been incurr ing and
report ing losses on a cont inua l bas is . Consequent ly , a
large number of PSUs have a l ready been referred of B IFR;
2 . Mult ip l i c i ty of author i t ies to whom the PSUs are
accountable ;
3 . Delay in implementat ion of pro jects lead ing to cost
esca lat ion and other consequences ;
4 . Inef fect ive and widespread inef f i c iency on management ;
5 . Many PSUs are operat ing wi thout the leader ( i .e . , ch ief
execut ive or cha i rman) ;
6 . With a v iew to prov ide opportuni t ies for more and more
unemployed youths , more number of people , than
requi red, were recru i ted and therefore , many PSUs are
over-staf fed resu l t ing in lower labour product iv i ty , bad
industr ia l re lat ions , etc . ;
7 . un-remunerat ive pr ic ing po l i cy ; and
8. A number of s i ck companies (40 companies) which were in
the pr ivate sector was taken over by publ ic sector main ly
to protect the employees . These s ick un i ts are caus ing a
b ig dra in on the resources of the s tate ; etc .
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Methods of Privatization
There are four important modes of pr ivat i zat ion. They are :
(a ) Franchis ing
(b) Contract ing
(c ) Leas ing
(d) D is investment .
In Ind ia , d i s investment of government share of equi ty in
PSUs i s predominant . I t s tar ted in 1992 immediate ly a f ter the
New Economic Po l i cy in a phased manner . The main cr i t i c i sm
of d i s investment of shares of PSUs in Ind ia i s that i t has been
part ia l and ha l f -hearted. There seems to be no p lans to
d is invest complete ly . The government s t i l l would l i ke to keep a
dominant contro l . 39 companies have been proposed for
d is investment t i l l 1995-96. A l l the companies proposed for
d is investment are centra l PSUs. No state leve l PSU has been
proposed for d is investment . I t cou ld on ly d is invest 1% to 35%
shares of PSUs on an average. I t i s a l so observed that the
shares of e f f i c ient and prof i t -making companies are
d is invested more than the companies which are potent ia l ly
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s ick or s i ck companies . The d is investment percentage i s a l so
not much in loss -making and inef f i c ient un i ts , thereby
defeat ing the purpose.
Pr ivat izat ion of PSUs
Major i ty of the industr ia l enterpr i ses in the publ ic sector
have fa i led to ach ieve the des i red resu l t . Of course , a number
of factors - interna l and externa l , contro l lab le and non-
contro l lab le are respons ib le for h i s precar ious per formance. A
look at the h is tory of publ ic sector undertak ings (PSUs) in the
country revea ls the cont inuous expans ion in the ro le of PSUs.
Consequent ly , a number of enterpr i ses have been estab l i shed
and huge amount of borrowed cap i ta l has been employed by
the s tate even in the non-core , non-st rateg ic and not so
essent ia l area . Hence, the s tate has made a number of changes
in i t s New Industr ia l Po l i cy announced on Ju ly 24 , 1991.
GLOBALISATIONGLOBALISATION
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Introduction:
The expans ion of economic act iv i t ies across po l i t i ca l
boundar ies of nat ion s tates . More important , perhaps , i t
re fers to a process of increas ing economic integrated and
growing economic interdependence between countr ies in the
wor ld economy. I t i s assoc iated not on ly wi th an increas ing
cross- border movement of goods , serv ices , cap i ta l technology
in format ion and people but a l so wi th an organizat ion of
economic act iv i t ies which s t raddles nat iona l boundar ies . Th is
process i s dr iven by the lure of prof i t and threat of
compet i t ion in the market .
The term Global i zat ion as such denotes ad justment of
nat iona l economy with that of the wor ld economy. I t i s
convers ion of a nat iona l market into internat iona l mobi l i ty of
factors of product ion. In others words , i t may be descr ibed as
the integrat ion of nat iona l economy with that of g loba l
economy.
An important at t r ibute of G lobal i zat ion i s the increas ing
degree of openness , which has three d imens ions , i .e . ;
internat iona l t rade, internat iona l investment and internat iona l
f inance. Accord ing to Wor ld Deve lopment Report ,
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Global i zat ion ref lects the progress ive integrat ion of wor ld ’s
economies .
The mani festat ion of product ion inc ludes spat ia l
reorganizat ion of product ion the interpenetrat ion of industr ies
across borders , the spread of f inanc ia l markets , and the
d i f fus ion of ident ica l consumer goods to d is tant countr ies and
mass ive t ransfer of populat ion across nat iona l f ront iers .
G lobal i zat ion i s a process of reaf f i rmat ion of fa i th in the
markets , reta in ing the character of independence of a country .
Here , the country fo l lows a pragmat ic po l i cy wi th a sh i f t in
dec is ion making f rom government to bus iness . The market
forces and the laws of economics wi l l have greater importance
than the po l i t i ca l ideology . To make a country a successfu l
partner in G lobal i zat ion, the government must p lay a
compl imentary ro le .
Factors contributing to Globalization :
The impor tant fac tors tha t cont r ibute to Global iza t ion are :
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(a) Technological Advances In communication :
Technological advances in communicat ion have made i t
possible to know in an instant what is happening in di f ferent
parts of the world . The f low of information and ideas ,
boosted great ly by the Internet , can enable developing
countr ies to learn more rapidly from each other and from
industr ia l countr ies .
(b) Improvements In Transportation And Technology :
Improvements in t ransportat ion networks and technology
are reduc ing the costs of sh ipp ing goods by water , ground and
a i r . Th is can fac i l i tate the movements of goods . Technolog ica l
improvements can enable deve lop ing countr ies to leap s tages
in the deve lopment process that re ly on inef f i c ient uses of
nat iona l resources .
(c) Other Factors:
Ris ing educat iona l leve ls , technolog ica l innovat ions that
a l low ideas to c i rcu late , and the economic fa i lures of most
centra l ly p lanned economies have a l so contr ibuted to
G lobal i zat ion.
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Trends in Globalization:
The important t rends in G lobal i zat ion are the fo l lowing:
(a) International Trade :
Trade in goods and serv ices has grown twice as fast as
g loba l GDP in the 1990’s and the share at t r ibutab le to
deve lop ing countr ies has r i sen f rom 23 to 29 percent . There i s
a compos i t iona l sh i f t in t rade, which has created a new
pattern in the internat iona l exchange of goods , serv ices , and
ideas . Trade in components i s one part of that new pattern .
Advances in in format ion technology he lps to l ink f i rms f rom
deve lop ing countr ies into g loba l product ion networks . The
t remendous growth of t rade in serv ices and, more recent ly , o f
e lectronic commerce i s a l so a part of the new trade pattern .
(b) International Financial Flows :
There has been increase in internat iona l cap i ta l f lows of
deve lop ing countr ies . However , the f inanc ia l c r i s i s o f 1977-99
have put the growing interdependenc ies among countr ies in
the spot l ight and led to intense scrut iny . Such f lows are
s tarted to r i se aga in . The f inanc ia l per formance of emerg ing
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markets in the 1990s made cap i ta l account l ibera l i zat ion an
at t ract ive opt ion for deve lop ing countr ies . Many deve lop ing
countr ies have began to loosen contro ls on in f lows and
outf lows of cap i ta l .
The East As ian meltdown has enhanced the at t ract iveness of
long-term capi ta l investment . Countr ies have s tarted to
recognize that fore ign d i rect investment br ings wi th i t not on ly
cap i ta l but a l so technology market access and organizat iona l
sk i l l s . An ana lys i s o f the per iod 1996-97 shows that fore ign
d i rect investment was less vo lat i le than the commerc ia l bank
loans and fore ign port fo l io f lows.
(c) International Migration:
Along with goods , serv ices , and investment , people are
cross ing borders in large numbers . Accord ing to Wor ld
Deve lopment Report 1999-2000, each tear between 2 mi l l ion
and 3 mi l l ion people emigrate , wi th major i ty of them going to
just 4 countr ies : the Uni ted States , Germany, Canada and
Austra l ia . The market for h igh ly sk i l led workers wi l l become
even more g loba l ly integrated in the coming decades .
At the end of the 20 t h century G lobal i zat ion has a l ready
demonstrated that economic dec is ions , wherever they are
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made in the wor ld , must take internat iona l factors into
account . There i s acce lerat ion of goods , serv ices , ideas and
cap i ta l across nat ion borders .
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CONCLUSION:
The low annual growth rate of the economy of
India before 1980, which stagnated around 3.5% f rom
1950s to 1980s, whi le per capi ta income averaged
1.3% ] At the same t ime, Pakistan grew by
5%, Indonesia by 9%, Thai land by 9%, South Korea by
10% and inTaiwan by 12%.
Only four or f ive l icences would be g iven
for s teel , power and communicat ions . L icense owners
bui l t up huge powerfu l empires.
A huge publ ic sector emerged. State-owned enterpr ises
made large losses.
In f rast ructure investment was poor because of the
publ ic sector monopoly .
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License Raj establ ished the " i r responsib le, se l f -
perpetuat ing bureaucracy that s t i l l ex is ts throughout
much of the country andcorrupt ion f lour ished under th is
system.
Economic l ibera l i zat ion has increased the respons ib i l i ty
and ro le of the pr ivate sector . At the same t ime, i t has
reduced the contro l o f the government on economy af fa i rs . I t
i s expected that the reforms would l ibera l i ze the Ind ian
economy enough to create a conduc ive env i ronment for rap id
economic deve lopment . The Ninth F ive Year P lan , therefore ,
r ight ly observed, “The condi t ions that ex is t today , demand a
dec is ive break f rom the past . The government has taken on
i t se l f too many respons ib i l i t ies wi th the resu l t that i t not on ly
encouraged a dependency syndrome among our people , but
a l so imposed severe s t ra ins on f inanc ia l and admin is t rat ive
capabi l i t ies of the government .
Pr ivate in i t iat ive whether ind iv idua l , co l lect ive or
community-based forms the essence of the deve lopment
s t rategy ar t icu lated in the p lan.
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The process of reforms accord ing to many economists and
soc ia l sc ient i s ts i s not fast enough to ach ieve the goa ls .
Je f f rey Sachs , d i rector of Harvard Univers i ty ’ s center for
internat iona l deve lopment and a noted economist , po inted out
that the reform process in Ind ia had a long way to go. He fee ls
that wi thout a focus on the “twin p i l lars” of soc ia l and
economic s t rateg ies , the future would be b leak for Ind ia ,
espec ia l ly in the context of compet i t ion a l l around.
L ibera l i zat ion process i s on the s low t rack . Government i s
expected to reduce and f ina l ly g ive up i t s invo lvement in
economic matters and p lay a major ro le in prov id ing the
requi red soc io-economic in f rastructure . The government ,
however , i s re luctant to g ive up i t s ro le of owning and
contro l l ing economic act iv i t ies . At the same t ime i t s inab i l i ty
to spend for prov id ing min imum heal th and educat ion serv ices .
I t i s eager to spend on h igher educat ion without spending
enough on pr imary and secondary educat ion. I t has fa i led in
prov id ing a corrupt ion f ree admin is t rat ion, an essent ia l
precondi t ion for increas ing compet i t iveness .
Success of the economic reforms depends upon the
commitment of a l l concerned – people , po l i t i ca l part ies ,
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bureaucracy , and government – to the soc io economic progress
of the country .
The economic l iberal isat ion in India refers to
ongoing economic reforms in India that s tar ted in 1991.
Af ter Independence in 1947, India adhered
to socia l is t pol ic ies. In the 1980s, Pr ime Minis ter Raj iv
Gandhi in i t ia ted some reforms. In 1991, af ter India sold 67
tons of gold to the Internat ional Monetary Fund ( IMF), the
government of P. V. Narasimha Rao and h is f inance
minis ter Manmohan Singh star ted breakthrough
reforms. The new neo- l ibera l pol ic ies inc luded opening for
in ternat ional t rade and investment , deregulat ion , in i t ia t ion
ofpr ivat izat ion , tax reforms, and inf la t ion-contro l l ing
measures. The overal l d i rect ion of l ibera l isat ion has s ince
remained the same, i r respect ive of the ru l ing par ty ,
a l though no par ty has yet t r ied to take on powerfu l lobbies
such as the t rade unions and farmers, or content ious
issues such as reforming labour laws and
reducing agr icu l tura l subsid ies . The main object ive of the
government was to t ransform the economic
system f rom socia l ism to capi ta l ism so as to achieve
h igh economic growth and industr ia l ize the nat ion for the
wel l -being of Indian c i t izens. Today India is main ly
character ized as a market economy.
As of 2009, about 300 mi l l ion people—equivalent to the
ent i re populat ion of the Uni ted States—have escaped
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extreme poverty . The f ru i ts of l ibera l isat ion reached thei r
peak in 2007, when India recorded i ts h ighest GDP growth
rate of 9%. With th is , India became the second fastest
growing major economy in the wor ld, next only to
China. An Organisat ion for Economic Co-operat ion and
Development (OECD) report s tates that the average growth
rates 7.5% wi l l double the average income in a decade and
more reforms would speed up the pace.
Indian government coal i t ions have been advised to
cont inue l ibera l isat ion. India grows at s lower pace
than China, which has been l ibera l is ing i ts economy s ince
1978. McKinseystates that removing main obstacles "would
f ree India ’s economy to grow as fast as China’s, at 10
percent a year" .
Indian economic pol icy af ter independence was inf luenced
by the colonia l exper ience (which was seen by Indian
leaders as explo i tat ive in nature) and by those leaders '
exposure to Fabian socia l ism. Pol icy tended
towards protect ionism, wi th a st rong emphasis on import
subst i tu t ion , industr ia l izat ion under s tate
moni tor ing , s tate in tervent ion at the micro level in a l l
businesses especia l ly in labour and f inancia l markets, a
large publ ic sector , business regulat ion, and centra l
p lanning Five-Year Plans of India resembled centra l
p lanning in the Soviet Union . Steel , min ing, machine
tools , water , te lecommunicat ions , insurance, and e lect r ica l
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plants, among other industr ies, were
ef fect ive ly nat ional ized in the mid-1950s. Elaborate
l icences, regulat ions and the accompanying red tape,
commonly referred to as L icence Raj , were required to set
up business in India between 1947 and 1990.
Before the process of reform began in 1991, the
government at tempted to c lose the Indian economy to the
outs ide wor ld. The Indian currency, the rupee, was
inconvert ib le and h igh tar i f fs and import l icensing
prevented fore ign goods reaching the market . India a lso
operated a system of centra l p lanning for the economy, in
which f i rms required l icenses to invest and develop. The
labyr inth ine bureaucracy of ten led to absurd rest r ic t ions—
up to 80 agencies had to be sat is f ied before a f i rm could
be granted a l icence to produce and the state would
decide what was produced, how much, at what pr ice and
what sources of capi ta l were used. The government a lso
prevented f i rms f rom lay ing of f workers or c los ing
factor ies. The centra l p i l lar of the pol icy was import
subst i tu t ion , the bel ie f that India needed to re ly on internal
markets for development , not in ternat ional t rade—a bel ie f
generated by a mixture of socia l ism and the exper ience of
colonia l explo i tat ion. Planning and the state, rather than
markets, would determine how much investment was
needed in which sectors.
In the 80s, the government led by Raj iv Gandhi s tar ted
l ight reforms. The government s l ight ly reduced L icense
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Raj and a lso promoted the growth of
the te lecommunicat ions and sof tware industr ies
The VishwanathPratap Singh government (1989–1990)
and Chandra Shekhar Singh government (1990–1991) d id
not add any s igni f icant reforms.
1991 India economic crisis
The assassinat ion of pr ime minis ter Indi ra Gandhi in 1984,
and later of her son Raj iv Gandhi in 1991, crushed
internat ional investor conf idence on the economy that was
eventual ly pushed to the br ink by the ear ly 1990s.
As of 1991, India st i l l had a f ixed exchange rate system,
where the rupee was pegged to the value of a basket of
currencies of major t rading par tners. India star ted
having balance of payments problems s ince 1985, and by
the end of 1990, i t was in a ser ious economic cr is is . The
government was c lose to defaul t , i ts centra l bank had
refused new credi t and fore ign exchange reserves had
reduced to the point that Indiacould barely f inance three
weeks’ worth of imports .
A Balance of Payments cr is is in 1991 pushed the country
to near bankruptcy . In return for an IMF bai lout , gold was
t ransferred toLondon as col la tera l , the Rupee devalued
and economic reforms were forced upon India . That low
point was the cata lyst required to t ransform the economy
through badly needed reforms to unshackle the economy.
Contro ls s tar ted to be
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dismant led, tar i f fs ,dut ies and taxes progressively lowered,
s tate monopol ies broken, the economy was opened to
t rade and investment , pr ivate sector enterpr ise and
compet i t ion were encouraged and g lobal isat ion was s lowly
embraced. The reforms process cont inues today and is
accepted by a l l pol i t ica l par t ies, but the speed is of ten
held hostage by coal i t ion pol i t ics and vested interests .
Later reforms
Atal Bihar i Vajpayee 's administ rat ion surpr ised many by
cont inuing reforms, when i t was at the helm of af fa i rs of
India for f ive years.
The Vajpayee administ rat ion cont inued
wi th pr ivat izat ion , reduct ion of taxes, a sound f iscal
pol icy a imed at reducing def ic i ts and debts and
increased in i t ia t ives for publ ic works.
The UF government at tempted a progressive budget that
encouraged reforms, but the 1997 Asian f inancia l
cr is is and pol i t ica l instabi l i ty created economic
stagnat ion .
Economic and technology-re lated sanct ions have
repeatedly not proved to be very ef fect ive in compel l ing
nat ions to change thei r sovereign decis ions made in
enl ightened sel f - in terest . India faced severe sanct ions
af ter Pokhran- I ( f ive nuclear tests on May 11 and 13,
1998 at the Pokhran range in Rajasthan
Desert ) ,andsanct ions that were more comprehensive
were imposed fo l lowing Pokhran- I I . There were d i re
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predict ions of the col lapse of the economy, double-d ig i t
in f la t ion etc.
After f ive years, most of the sanct ions have been l i f ted
and the Indian economy is cont inuing to grow at an
acceptably sat is factory rate. The ant ic ipated growth rate
for 2003-04 is 6.0%. Though India ’s Gross Nat ional
Income is only $477.4 b i l l ion by convent ional
ca lculat ions, i t t ranslates in to $2,913 b i l l ion purchasing
power par i ty (PPP), according to the latest wor ld
development indicators. In PPP terms, i t is the wor ld 's
four th largest economy, behind only the US, China and
Japan.
Liberalization vs Democratization
There is a dist inct difference between l iberal ization
and democratization, which are often thought to be
the same concept. Liberal ization can take place
without democratization, and deals with a
combination of pol icy and social change special ized
to a certain issue such as the l iberal ization of
government-held property for private purchase,
whereas democratization is more pol it ical ly
special ized that can arise from a l iberal ization, but
works in a broader level of government.
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What are Disadvantages of
Privatisation ?
1. Pr iva t i sa t ion i s expensive and genera tes a lo t of income in
fees for specia l i s t advisers such as banks .
2 . Publ ic monopol ies have been turned in to pr iva te monopol ies
wi th too l i t t le compet i t ion , so consumers have not benef i ted as
much as had been hoped. This i s the main reason why i t has
been necessary to crea te regula tors (OFWAT, OFGAS etc) . This
i s an impor tant point . I t par t ly depends on how the
pr iva t i sa t ion took place . For example , the ra i lways were
pr iva t i sed in b i t of a rush and there might have been other ways
to do i t so tha t more compet i t ion was crea ted . I t par t ly depends
on the market . Some markets a re 'na tura l monopol ies ' where
compet i t ion i s d i f f icul t . For example , i t would be very wasteful
and expensive to bui ld two se ts of t rack in to Liverpool St ree t
jus t to crea te some compet i t ion . Natura l monopol ies crea te a
specia l jus t i f ica t ion for publ ic ownership in the genera l publ ic
in teres t .
3 . The na t ional i sed indust r ies were sold off too quickly and too
cheaply . With pa t ience a be t te r pr ice could have been had wi th
more benef ic ia l resul t s on the government ' s revenue. In a lmost
a l l cases the share pr ices rose sharply as soon as dea l ing began
af ter pr iva t i sa t ion .
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4. The pr iva t i sed bus inesses have sold off or c losed down
unprof i table par ts of the bus iness (as bus inesses normal ly do)
and so services eg t ranspor t in rura l a reas have got worse .
5 . Wider share ownership d id not rea l ly happen as many smal l
inves tors took the i r prof i t s and d idn ' t buy anything e lse .
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Bibliography
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