chapter 3 lpg dt. 25.01.2006 version 5 - prashanth...

UNIT

II

ECONOMIC REFORMS

SINCE 1991

UNIT

IIIUNIT

II

After forty years of planned development, Indiahas been able to achieve a strong industrial baseand became self-sufficient in the production of foodgrains. Nevertheless, a major segment of thepopulation continues to depend on agriculture forits livelihood. In 1991, a crisis in the balance ofpayments led to the introduction of economicreforms in the country. This unit is an appraisal ofthe reform process and its implications for India.

After studying this chapter, the learners will

• understand the background of the reform policies introduced in Indiain 1991

• understand the mechanism through which reform policies wereintroduced

• comprehend the process of globalisation and its implications for India

• be aware of the impact of the reform process in various sectors.

LIBERALISATION, PRIVATISATION

AND

GLOBALISATION: AN APPRAISAL

3

39LIBERALISATION, PRIVATISATION AND GLOBALISATION: AN APPRAISAL

3.1 INTRODUCTION

You have studied in the previouschapter that, since independence,India followed the mixed economyframework by combining theadvantages of the market economicsystem with those of the plannedeconomic system. Some scholars arguethat, over the years, this policy resultedin the establishment of a variety ofrules and laws which were aimed atcontrolling and regulating theeconomy and instead ended uphampering the process of growth anddevelopment. Others state that India,which started its developmental pathfrom near stagnation, has since beenable to achieve growth in savings,developed a diversified industrialsector which produces a variety ofgoods and has experienced sustainedexpansion of agricultural outputwhich has ensured food security.

In 1991, India met with aneconomic crisis relating to its externaldebt — the government was notable to make repayments on itsborrowings from abroad; foreignexchange reserves , which wegenerally maintain to import petroland other important items, droppedto levels that were not sufficient foreven a fortnight. The crisis wasfurther compounded by rising pricesof essential goods. All these led thegovernment to introduce a new set of

policy measures which changed thedirection of our developmentalstrategies. In this chapter, we willlook at the background of the crisis,measures that the government hasadopted and their impact on varioussectors of the economy.

3.2 BACKGROUND

The origin of the financial crisis canbe traced from the ineff ic ientmanagement of the Indian economyin the 1980s. We know that forimplementing various policies andits general administration, thegovernment generates funds fromvarious sources such as taxation,running of public sector enterprisesetc. When expenditure is more thanincome, the government borrows tofinance the deficit from banks andalso from people within the countryand from international financialinstitutions. When we import goodslike petroleum, we pay in dollarswhich we earn from our exports.

Development policies required thateven though the revenues werevery low, the government hadto overshoot its revenue to meetproblems like unemployment, povertyand population explosion. Thecontinued spending on developmentprogrammes of the government didnot generate additional revenue.Moreover, the government was not

There is a consensus in the world today that economic development is not alland the GDP is not necessarily a measure of progress of a society.

K.R. Narayanan

40 INDIAN ECONOMIC DEVELOPMENT

able to generate sufficiently frominternal sources such as taxation.When the government was spendinga large share of its income on areaswhich do not provide immediatereturns such as the social sector anddefence, there was a need to utilise therest of its revenue in a highly efficientmanner. The income from publicsector undertakings was also not veryhigh to meet the growing expenditure.At times, our foreign exchange,borrowed from other countries andinternational financial institutions,was spent on meeting consumptionneeds. Neither was an attempt madeto reduce such profligate spendingnor sufficient attention was given toboost exports to pay for the growingimports.

In the late 1980s, governmentexpenditure began to exceed itsrevenue by such large margins thatit became unsustainable. Prices ofmany essential goods rose sharply.Imports grew at a very high ratewithout matching growth of exports.As pointed out earl ier, foreignexchange reserves declined to a levelthat was not adequate to financeimports for more than two weeks.There was also not sufficient foreignexchange to pay the interest thatneeds to be paid to internationallenders.

India approached the InternationalBank for Reconstruction andDevelopment (IBRD), popularlyknown as World Bank and theInternational Monetary Fund (IMF),and received $7 billion as loan to

manage the crisis. For availing theloan, these international agenciesexpected India to liberalise and openup the economy by removingrestrictions on the private sector,reduce the role of the government inmany areas and remove traderestrictions.

India agreed to the conditionalitiesof World Bank and IMF andannounced the New Economic Policy(NEP). The NEP consisted of wideranging economic reforms. Thethrust of the policies was towardscreating a more competit iveenvironment in the economy andremoving the barriers to entry andgrowth of firms. This set of policiescan broadly be classified into twogroups: the stabilisation measuresand the structural reform measures.Stabilisation measures are short-term measures, intended to correctsome of the weaknesses that havedeveloped in the balance ofpayments and to bring inflationunder control. In simple words, thismeans that there was a need tomaintain sufficient foreign exchangereserves and keep the rising pricesunder control. On the other hand,structural reform policies are long-termmeasures, aimed at improving theefficiency of the economy and increasingits international competitiveness byremoving the rigidities in varioussegments of the Indian economy. Thegovernment initiated a variety ofpolicies which fall under three headsviz., liberalisation, privatisation andglobalisation. The first two are policy


strategies and the last one is theoutcome of these strategies.

3.3 LIBERALISATION

As pointed out in the beginning,rules and laws which were aimed atregulating the economic activitiesbecame major hindrances in growthand development. Liberalisation wasintroduced to put an end to theserestrictions and open up varioussectors of the economy. Though a fewliberal isation measures wereintroduced in 1980s in areas ofindustrial licensing, export-importpolicy, technology upgradation,fiscal policy and foreign investment,reform policies initiated in 1991 weremore comprehensive. Let us studysome important areas such as theindustrial sector, financial sector, taxreforms, foreign exchange marketsand trade and investment sectorswhich received greater attention inand after 1991.

Deregulation of Industrial Sector: InIndia, regulatory mechanisms wereenforced in various ways (i) industriallicensing under which every entrepreneurhad to get permission from governmentofficials to start a firm, close a firmor to decide the amount of goodsthat could be produced (ii) privatesector was not allowed in manyindustries (iii) some goods could beproduced only in small scale industriesand (iv) controls on price fixation anddistribution of selected industrialproducts.

The reform policies introduced inand after 1991 removed many ofthese restrict ions. Industriallicensing was abolished for almost allbut product categories — alcohol,cigarettes, hazardous chemicalsindustrial explosives, electronics,aerospace and drugs and pharma-ceuticals. The only industries whichare now reserved for the public sectorare defence equipments, atomicenergy generation and rai lwaytransport. Many goods produced bysmall scale industries have now beendereserved. In many industries, themarket has been al lowed todetermine the prices.

Financial Sector Reforms:Financial sector includes financialinstitutions such as commercialbanks, investment banks, stockexchange operations and foreignexchange market. The financialsector in India is controlled by theReserve Bank of India (RBI). You maybe aware that all the banks and otherfinancial institutions in India arecontrolled through various normsand regulations of the RBI. The RBIdecides the amount of money thatthe banks can keep with themselves,fixes interest rates, nature of lendingto various sectors etc. One of themajor aims of financial sector reformsis to reduce the role of RBI fromregulator to facilitator of financialsector. This means that the financialsector may be al lowed to takedecisions on many matters withoutconsulting the RBI.


The reform policies led to theestablishment of private sectorbanks, Indian as well as foreign.Foreign investment limit in bankswas raised to around 50 per cent.Those banks which fulfil certainconditions have been given freedomto set up new branches without theapproval of the RBI and rationalisetheir existing branch networks.Though banks have been givenpermission to generate resourcesfrom India and abroad, certainaspects have been retained with theRBI to safeguard the interests of theaccount-holders and the nation.Foreign Institutional Investors(FII) such as merchant bankers,mutual funds and pension funds arenow allowed to invest in Indianfinancial markets.

Tax Reforms: Tax reforms areconcerned with the reforms ingovernment’s taxation and publicexpenditure policies which arecollectively known as its fiscalpolicy. There are two types of taxes:direct and indirect. Direct taxesconsist of taxes on incomes ofindividuals as well as profits ofbusiness enterprises. Since 1991,there has been a continuousreduction in the taxes on individualincomes as it was felt that high ratesof income tax were an importantreason for tax evasion. It is nowwidely accepted that moderate ratesof income tax encourage savings andvoluntary disclosure of income. Therate of corporation tax, which was

very high earlier, has been graduallyreduced. Efforts have also been madeto reform the indirect taxes, taxeslevied on commodities, in order tofacilitate the establishment of acommon national market forgoods and commodities. Anothercomponent of reforms in this area issimplification. In order to encouragebetter compliance on the part oftaxpayers many procedures havebeen simplified and the rates alsosubstantially lowered.

Foreign Exchange Reforms: Thefirst important reform in the externalsector was made in the foreignexchange market. In 1991, as animmediate measure to resolve thebalance of payments crisis, the rupeewas devalued against foreigncurrencies. This led to an increase inthe inflow of foreign exchange. It alsoset the tone to free the determinationof rupee value in the foreignexchange market from governmentcontrol. Now, more often than not,markets determine exchange ratesbased on the demand and supply offoreign exchange.

Trade and Investment PolicyReforms: Liberalisation of trade andinvestment regime was initiated toincrease international competitivenessof industrial production and alsoforeign investments and technologyinto the economy. The aim was alsoto promote the efficiency of the localindustries and the adoption ofmodern technologies.


Work These Out

Give an example each of nationalised bank, private bank, private foreignbank, FII and a mutual fund.

Visit a bank in your locality with your parents. Observe and find out thefunctions it performs. Discuss the same with your classmates and preparea chart on it.

Classify the following as direct and indirect taxes: sales tax, custom duties,property tax, death duties, VAT, income tax.

Find out from your parents if they pay taxes. If yes, why do they do so andhow?

Do you know that for a very long time countries used to keep silver and goldas reserves to make payments abroad? Find out in what form do we keepour foreign exchange reserves and find out from newspapers, magazinesand the Economic Survey how much foreign exchange reserves we havetoday. Also find the foreign currency of the following countries and its rupeeexchange rate

Country Currency Value of 1(one) unit of foreigncurrency in Indian rupee

U.S.A.U.K.JapanChinaKoreaSingaporeGermany

In order to protect domesticindustries, India was following aregime of quantitative restrictionson imports. This was encouragedthrough tight control over importsand by keeping the tariffs very high.These policies reduced efficiency andcompetitiveness which led to slowgrowth of the manufacturing sector.The trade policy reforms aimed at (i)dismantling of quantitative restrictionson imports and exports (ii) reduction

of tariff rates and (iii) removal oflicensing procedures for imports.Import licensing was abolishedexcept in case of hazardous andenvironmentally sensitive industries.Quantitative restrictions on imports ofmanufactured consumer goods andagricultural products were also fullyremoved from April 2001. Exportduties have been removed to increasethe competitive position of Indiangoods in the international markets.


3.4 PRIVATISATION

It implies shedding of the ownershipor management of a governmentowned enterprise . Governmentcompanies can be converted intoprivate companies in two ways (i) bywithdrawal of the government fromownership and management ofpublic sector companies and or (ii) byoutright sale of public sectorcompanies.

Privatisation of the public sectorundertakings by selling off part of theequity of PSUs to the public is knownas disinvestment. The purpose of thesale, according to the government, wasmainly to improve financial disciplineand facilitate modernisation. It was alsoenvisaged that private capital andmanagerial capabilities could beeffectively utilised to improve theperformance of the PSUs. The

Box 3.1: Navaratnas and Public Enterprise Policies

You must have read in your childhood about the famous Navaratnas or NineJewels in the Imperial Court of King Vikramaditya who were eminent personsof excellence in the fields of art, literature and knowledge. In 1996, in order toimprove efficiency, infuse professionalism and enable them to compete moreeffectively in the liberalised global environment, the government chose ninePSUs and declared them as navaratnas. They were given greater managerialand operational autonomy, in taking various decisions to run the companyefficiently and thus increase their profits. Greater operational, financial andmanagerial autonomy had also been granted to 97 other profit-makingenterprises referred to as mini ratnas.

The first set of navaratna companies included Indian Oil Corporation Ltd(IOC), Bharat Petroleum Corporation Ltd (BPCL), Hindustan PetroleumCorporation Ltd (HPCL), Oil and Natural Gas Corporation Ltd (ONGC), SteelAuthority of India Ltd (SAIL), Indian Petrochemicals Corporation Ltd (IPCL),Bharat Heavy Electricals Ltd (BHEL), National Thermal Power Corporation(NTPC) and Videsh Sanchar Nigam Ltd (VSNL). Later, two more PSUs —GasAuthority of India Limited (GAIL) and Mahanagar Telephone Nigam Ltd(MTNL)— were also given the same status.

Many of these profitable PSUs were originally formed during the 1950sand 1960s when self-reliance was an important element of public policy. Theywere set up with the intention of providing infrastructure and direct employmentto the public so that quality end-product reaches the masses at a nominalcost and the companies themselves were made accountable to all stakeholders.

The granting of navaratna status resulted in better performance of thesecompanies. Scholars state that instead of facilitating navaratnas in theirexpansion and enabling them to become global players, the government partlyprivatised them through disinvesment. Of late, the government has decidedto retain the navaratnas in the public sector and enable them to expandthemselves in the global markets and raise resources by themselves fromfinancial markets.


government envisaged that privatisationcould provide strong impetus to theinflow of FDI.

The government has also madeattempts to improve the efficiency ofPSUs by giving them autonomy intaking managerial decisions. Forinstance, some PSUs have beengranted special status as navaratnasand mini ratnas (see Box 3.1).

3.5 GLOBALISATION

Globalisation is the outcome of thepolicies of liberalisation and privati-sation. Although globalisation isgenerally understood to meanintegration of the economy of thecountry with the world economy, it is acomplex phenomenon. It is an outcomeof the set of various policies that areaimed at transforming the worldtowards greater interdependence andintegration. It involves creation ofnetworks and activities transcendingeconomic, social and geographicalboundaries. Globalisation attempts to

establish links in such a way that thehappenings in India can be influencedby events happening miles away. It isturning the world into one whole orcreating a borderless world.

Outsourcing: This is one of theimportant outcomes of theglobalisation process. In outsourcing,a company hires regular service fromexternal sources, mostly from othercountries, which was previouslyprovided internally or from within thecountry (like legal advice, computerservice, advertisement, security —each provided by respectivedepartments of the company). As aform of economic activity, outsourcinghas intensified, in recent times,because of the growth of fast modesof communication, particularly thegrowth of Information Technology(IT). Many of the services such asvoice-based business processes(popularly known as BPO orcall centres), record keeping,

Work These Out

Some scholars refer to disinvestment as the wave of privatisation spreadingall over the world to improve the performance of public sector enterpriseswhereas others call it as outright sale of public property to the vestedinterests. What do you think?

Prepare a poster which contains 10-15 news clippings which you consideras important and relating to navaratnas from newspapers. Also collect thelogos and advertisements of these PSUs. Put these on the notice board anddiscuss them in the classroom.

Do you think only loss making companies should be privatised? Why?

Losses incurred by public sector undertakings are to be met out of the publicbudget — do you agree with this statement? Discuss.


accountancy, banking services,music recording, film editing, booktranscription, clinical advice or eventeaching are being outsourced bycompanies in developed countries toIndia. With the help of moderntelecommunication links includingthe Internet, the text, voice and visualdata in respect of these services isdigitised and transmitted in real timeover continents and nationalboundaries. Most multinationalcorporations, and even smallcompanies, are outsourcing their

services to India where they can beavailed at a cheaper cost withreasonable degree of skil l andaccuracy. The low wage rates andavailability of skilled manpower inIndia have made it a destination forglobal outsourcing in the post-reformperiod.

World Trade Organisation (WTO):The WTO was founded in 1995 asthe successor organisation to theGeneral Agreement on Trade andTariff (GATT). GATT was established

in 1948 with 23 countriesas the global tradeorganisation to administerall multilateral tradeagreements by providingequal opportunities toall countries in theinternational market fortrading purposes. WTO isexpected to establish a rule-based trading regime inwhich nations cannot placearbitrary restrictions ontrade. In addition, itspurpose is also to enlarge

Box 3.2: Global Footprint!

Owing to globalisation, you might find many Indian companies expanding theirwings to many other countries. In 2000, Tata Tea surprised the world byacquiring the UK based Tetley, the inventor of the tea bag, for Rs 1,870 crore.In the year 2004, Tata steel bought the Singapore-based Nat steel for Rs 1,245crore and Tata Motors completed the buyout of Daewoo’s heavy commercialvehicle unit in South Korea for Rs 448 crore. Now VSNL is acquiring Tyco’sundersea cable network for Rs 572 crore, which will control over 60,000 kmundersea cable network across three continents. The Tatas also plan to investRs 8,800 crore in fertiliser, steel and power plants in Bangladesh.

Source: Business Today, 22 May 2005.

Fig. 3.1 Outsourcing: a new employment opportunity in big cities


production and trade of services, toensure optimum utilisation of worldresources and to protect theenvironment. The WTO agreementscover trade in goods as well as servicesto facilitate international trade(bilateral and multilateral) throughremoval of tariff as well as non-tariffbarriers and providing greater marketaccess to all member countries.

As an important member of WTO,India has been in the forefront offraming fair global rules, regulationsand safeguards and advocating theinterests of the developing world.India has kept its commitmentstowards liberalisation of trade, madein the WTO, by removing quantitativerestrictions on imports and reducingtariff rates.

Work These Out

Many scholars argue that globalisation is a threat as it reduces the role ofthe state in many sectors. Some counter argue that it is an opportunity asit opens up markets to compete in and capture. Debate in the classroom.

Prepare a chart consisting of a list of five companies that have BPO servicesin India, along with their turnover.

Read this excerpt of a news item from a daily newspaper describingsomething that is now becoming increasingly common.

“On a morning, a few minutes before 7 A.M., Greeshma sat in front ofher computer with her headset on and said in accented English ‘Hello,Daniella’. Seconds later, she gets the reply, ‘Hello, Greeshma’. The two chattedexcitedly before Greeshma said that ‘we will work on pronouns today’.Nothing unusual about this chat except that Greeshma, 22, was in Kochiand her student Daniella, 13, was at her home in Malibu, California. Usinga simulated whiteboard on their computers, connected by the Internet, anda copy of Daniella’s textbook in front of Greeshma, she guides the teenagerthrough the intricacies of nouns, adjectives and verbs. Greeshma, who grewup speaking Malayalam, was teaching Daniella English grammar,comprehension and writing.”

How has this become possible? Why can’t Daniella get lessons in herown country? Why is she getting English lessons from India, whereEnglish is not the mother tongue?India is benefiting from liberalisation and integration of world markets.Do you agree?

Is employment in call centres sustainable? What kinds of skills should peopleworking in call centres acquire to get a regular income?

If the multinational companies outsource many services to countries likeIndia because of cheap manpower, what will happen to people living in thecountries where the companies are located? Discuss.


Some scholars question theusefulness of India being a memberof the WTO, as a major volume ofinternational trade occurs among thedeveloped nations. They also say thatwhile developed countries f i lecomplaints over agriculturalsubsidies given in their countries,developing countries feel cheated asthey are forced to open up theirmarkets for developed countries butare not allowed access to the marketsof developed countries. What do youthink?

3.6 INDIAN ECONOMY DURING

REFORMS: AN ASSESSMENT

The reform process has completedone and a half decades since itsintroduction. Let us now look at theperformance of the Indian economyduring this period. In economics,growth of an economy is measuredby the Gross Domestic Product. Lookat Table 3.1. The table shows thegrowth of GDP in different periods.The growth of GDP increased from5.6 per cent during 1980-91 to 6.4per cent during 1992-2001. Thisshows that there has been anincrease in the overall GDP growthin the reform period. During thereform period, the growth ofagriculture and industrial sectorshas declined whereas the growth ofservice sector has gone up. Thisindicates that the growth is mainlydriven by the growth in the servicesector. The Tenth Plan (2002-07) hasprojected the GDP growth rate at

8 per cent. In orderto achieve such ahigh growth rate, theagriculture, industrial andservice sectors have togrow at the rates of 4, 9.5and 9.1 percentage pointsrespectively. However,some scholars raiseapprehensions over theprojection of such highrates of growth asunsustainable. The opening up of theeconomy has led to rapidincrease in foreign direct

TABLE 3.1

Growth of GDP and Major Sectors (in %)Sector 1980-91 1992- 2002-07

2001 (Tenth PlanProjected)

Agriculture 3.6 3.3 4.0Industry 7.1 6.5 9.5Services 6.7 8.2 9.1GDP 5.6 6.4 8.0

Source: Tenth Five Year Plan

Fig. 3.2 IT Industry is seen as a major contributor to India’s exports


investment and foreign exchangereserves. The foreign investment, whichincludes foreign direct investmentand foreign institutional investment,has increased from about US $ 100million in 1990-91 to US $ 150 billionin 2003-04. There has been anincrease in the foreign exchangereserves from about US $ 6 billion in1990-91 to US $ 125 billion in2004-05. At present, India is the sixthlargest foreign exchange reserveholder in the world. India is seen as a successfulexporter of auto parts, engineeringgoods, IT software and textiles in the

reform period. Rising prices havealso been kept under control. On the other hand, the reformprocess has been widely criticisedfor not being able to address someof the basic problems facing oureconomy esepecially in the areas ofemployment, agriculture, industry,infrastructure development and fiscalmanagement.

Growth and Employment: Thoughthe GDP growth rate has increasedin the reform period, scholars pointout that the reform-led growth hasnot generated sufficient employment

Work These Out

In the previous chapter, you might have studied about subsidies in varioussectors including agriculture. Some scholars argue that subsidy inagriculture should be removed to make the sector internationally competitive.Do you agree? If so, how can it be done? Discuss in class.Read the following passage and discuss in class.

Groundnut is a major oilseed crop in Andhra Pradesh. Mahadeva, whowas a farmer in Anantpur district of Andhra Pradesh, used to spendRs 1,500 for growing groundnut on his plot of half an acre. The cost includedexpenditure on raw materials (seeds, fertilisers etc.), labour, bullock powerand machinery used. On an average, Mahadeva used to get two quintals ofgroundnut, and each quintal was sold for Rs 1,000. Mahadeva, thus, wasspending Rs 1,500 and getting an income of Rs 2,000, Anantpur district isa drought-prone area. As a result of economic reforms, the government didnot undertake any major irrigation project. Recently, groundnut crop inAnantpur is facing problems due to crop disease. Research and extensionwork has gone down due to lower government expenditure. Mahadeva andhis friends brought this matter repeatedly to the notice of the concernedauthorities, but failed. Subsidy was reduced on materials (seeds, fertilisers)which increased Mahadeva’s cost of cultivation. Moreover, the local marketswere flooded with cheap imported edible oils, which was a result of removalof restriction on imports. Mahadeva was not able to sell his groundnut inthe market as he was not getting the price to cover his cost.

Is a farmer like Mahadeva better off after reforms? Discuss in the class.


opportunities in the country. You willstudy the link between differentaspects of employment and growth inthe next unit.

Reforms in Agriculture: Reformshave not been able to benefitagriculture, where the growth ratehas been decelerating.

Public investment in agriculturesector especially in infrastructure,which includes irrigation, power, roads,market linkages and research andextension (which played a crucial rolein the Green Revolution), has beenreduced in the reform period. Further,the removal of fertiliser subsidy has ledto increase in the cost of production,which has severely affected the smalland marginal farmers. Moreover, sincethe commencement of WTO, this sectorhas been experiencing a number ofpolicy changes such as reduction inimport duties on agricultural products,removal of minimum support price andlifting of quantitative restrictions onagricultural products; these haveadversely affected Indian farmers asthey now have to face increasedinternational competition.

Moreover, because of export-oriented policy strategies in agriculture,there has been a shift from productionfor the domestic market towardsproduction for the export marketfocusing on cash crops in lieu ofproduction of food grains. This putspressure on prices of food grains.

Reforms in Industry: Industrialgrowth has also recorded a slowdown.

This is because of decreasing demandof industrial products due tovarious reasons such as cheaperimports, inadequate investment ininfrastructure etc. In a globalisedworld, developing countries arecompelled to open up their economiesto greater flow of goods and capitalfrom developed countries andrendering their industries vulnerable toimported goods. Cheaper importshave, thus, replaced the demandfor domestic goods. Domesticmanufacturers are facing competitionfrom imports. The infrastructurefacilities, including power supply, haveremained inadequate due to lack ofinvestment. Globalisation is, thus, oftenseen as creating conditions for the freemovement of goods and services fromforeign countries that adversely affectthe local industries and employmentopportunities in developing countries.

Moreover, a developing countrylike India still does not have theaccess to developed countries’markets because of high non-tariffbarriers. For example, although allquota restrictions on exports oftextiles and clothing have beenremoved from our side, U.S.A. hasnot removed their quota restrictionon import of textiles from India andChina!

Disinvestment: Every year, thegovernment f ixes a target fordisinvestment of PSUs. For instance,in 1991-92, it was targeted tomobilise Rs 2,500 crore throughdisinvestment. The government wasable to mobilise Rs 3,040 crore more


than the target. In 1998-99, thetarget was Rs 5,000 crore whereasthe achievement was Rs 5,400 crore.Critics point out that the assets ofPSUs have been undervalued andsold to the private sector. This meansthat there has been a substantial lossto the government. Moreover, theproceeds from disinvestment wereused to of fset the shortage ofgovernment revenues rather thanusing it for the development of PSUsand building social infrastructure inthe country.

Reforms and Fiscal Policies:Economic reforms have placed limitson the growth of public expenditureespecially in social sectors. The taxreductions in the reform period,aimed at yielding larger revenue andto curb tax evasion, have not resultedin increase in tax revenue for thegovernment. Also, the reform policies

involving tarif f reduction havecurtailed the scope for raisingrevenue through customs duties. Inorder to attract foreign investment,tax incentives were provided toforeign investors which furtherreduced the scope for raising taxrevenues. This has a negative impacton developmental and welfareexpenditures.

3.7 CONCLUSION

The process of globalisation throughliberalisation and privatisationpolicies has produced positive as wellas negative results both for India andother countries. Some scholars arguethat globalisation should be seen asan opportunity in terms of greateraccess to global markets, hightechnology and increased possibilityof large industries of developingcountries to become importantplayers in the international arena.

Box 3.3: Siricilla Tragedy!

As a part of liberalisation, privatisation and globalisation, the governmentstarted to reform the power sector. The most important impact of these reformshas been a steep hike in power tariff. Since the powerlooms, on which a largenumber of industrial workers in cottage and small-scale sector depend, aredriven by power energy, the impact of high tariff on them has been very serious.Further, while the power sector reforms have led to hike in tariffs, the powerproducers have failed in providing quality power to the powerloom industry.Since the wages of the powerloom workers are linked to the production ofcloth, power-cut means cut in wages of weavers who were already sufferingfrom hike in tariff. This led to a crisis in the livelihood of the weavers and fiftypowerloom workers committed suicide in a small town called ‘Siricilla’ in AndhraPradesh.

Do you think the power tariff should not be raised?What would be your suggestions to improve the profitability of electricityproducing companies?


On the contrary, the critics arguethat globalisation is a strategy of thedeveloped countries to expand theirmarkets in other countries. Accordingto them, it has compromised thewelfare and identity of peoplebelonging to poor countries. It hasfurther been pointed out thatmarket-driven globalisation haswidened the economic disparitiesamong nations and people.

Viewed from the Indian context,some studies have stated that thecrisis that erupted in the early 1990swas basically an outcome of thedeep-rooted inequalities in Indiansociety and the economic reform

policies initiated as a response to thecrisis by the government, withexternally advised policy package,further aggravated the inequalities.Further, it has increased the incomeand quality of consumption of onlyhigh-income groups and the growthhas been concentrated only insome select areas in the servicessector such as telecommunication,information technology, finance,entertainment, travel and hospitalityservices, real estate and trade,rather than vital sectors such asagriculture and industry whichprovide livelihoods to millions ofpeople in the country.

Recap

The economy was facing problems of declining foreign exchange, growingimports without matching rise in exports and high inflation. India changedits economic policies in 1991 due to a financial crisis and pressure frominternational organisations like the World Bank and IMF.In the domestic economy, major reforms were undertaken in the industrialand financial sectors. Major external sector reforms included foreignexchange deregulations and import liberalisation.With a view to improving the performance of the public sector, there was aconsensus on reducing its role and opening it up to the private sector. Thiswas done through disinvestment and liberalisation measures.Globalisation is the outcome of the policies of liberalisation and privatisation.It means an integration of the economy of the country with the worldeconomy.Outsourcing is an emerging business activity.The objective of the WTO is to establish a rule based trade regime to ensureoptimum utilisation of world resources.During the reforms, growth of agriculture and industry has gone down butthe service sector has registered growth.Reforms have not benefited the agriculture sector. There has also been adecline in public investment in this sector.Industrial sector growth has slowed down due to availability of cheaperimports and lower investment.


1. Why were reforms introduced in India?

2. How many countries are members of the WTO?

3. What is the most important function of RBI?

4. How was RBI controlling the commercial banks?

5. What do you understand by devaluation of rupee?

6. Distinguish between the following

(i) Strategic and Minority sale(ii) Bilateral and Multi-lateral trade(iii) Tariff and Non-tariff barriers.

7. Why are tariffs imposed?

8. What is the meaning of quantitative restrictions?

9. Those public sector undertakings which are making profitsshould be privatised. Do you agree with this view? Why?

10. Do you think outsourcing is good for India? Why are developedcountries opposing it?

11. India has certain advantages which makes it a favouriteoutsourcing destination. What are these advantages?

12. Do you think the navaratna policy of the government helps inimproving the performance of public sector undertakings in India?How?

13. What are the major factors responsible for the high growth of theservice sector?

14. Agriculture sector appears to be adversely affected by the reformprocess. Why?

15. Why has the industrial sector performed poorly in the reform pe-riod?

16. Discuss economic reforms in India in the light of social justiceand welfare.

EXERCISES


1. The table given below shows the GDP growth rate at 1993-94prices. You have studied about the techniques of presentationof data in your Statistics for Economics course. Draw a timeseries line graph based on the data given in the table and interpretthe same.

Year GDP Growth Rate (%)

1991-92 1.31992-93 5.11993-94 5.9

1994-95 7.3

1996-97 7.8

1997-98 4.8

1998-99 6.5

2000-01 4.4

2001-02 5.8

2002-03 4.0

2. Observe around you — you will find State Electricity Boards(SEBs), BSES and many public and private organisations sup-plying electricity in a city and states. There are private buses onroads along side the goverment bus services and so on

(i) What do you think about this dual system of the co-existenceof public and private sectors?

(ii) What are the merits and demerits of such a dual system?Discuss.

3. With the help of your parents and grandparents prepare a list ofmultinational companies that existed in India at the time ofindependence. Now put a ( ) mark against those which are stillgrowing and a (× ) against those which do not exist any more. Arethere any companies whose names have changed? Find out thenew names, the country of origin, nature of product, logo andprepare a chart for your class.

SUGGESTED ADDITIONAL ACTIVITIES


4. Give appropriate examples for the following

Nature of Product Name of a Foreign CompanyBiscuitsShoesComputersCarsTV and RefrigeratorsStationery

Now find out if these companies which are mentioned above existedin India before 1991 or came after the New Economic Policy. For this,take the help of your teacher, parents, grandparents and shopkeepers.

5. Collect a few relevant newspaper cuttings on meetings organisedby WTO. Discuss the issues debated in these meetings and findout how the organisation facilitates world trade.

6. Was it necessary for India to introduce economic reforms at thebehest of World Bank and International Monetary Fund? Was thereno alternative for the government to solve the balance of pay-ments crisis? Discuss in the classroom.

Books

ACHARYA, S. 2003. India’s Economy: Some Issues and Answers. AcademicFoundation, New Delhi.

ALTERNATIVE SURVEY GROUP. 2005. Alternative Economic Survey, India 2004–05,Diseqalising Growth. Daanish Books, Delhi.

AHLUWALIA, I.J. and I.M.D. LITTLE. 1998. India’s Economic Reforms andDevelopment. Oxford University Press, New Delhi.

BARDHAN, PRANAB. 1998. The Political Economy of Development in India.Oxford University Press, Delhi.

BHADURI, AMIT and DEEPAK NAYYAR. 1996. The Intelligent Person’s Guide toLiberalisation. Penguin, Delhi.

BHAGWATI, JAGDISH. 1992. India in Transition: Freeing the Economy. OxfordUniversity Press, Delhi.

REFERENCES


BYRES, TERENCE J. 1997. The State, Development Planning and Liberalisationin India. Oxford University Press, Delhi.

CHADHA, G.K. 1994. Policy Perspectives in Indian Economic Development.Har-Anand, Delhi.

CHELLIAH, RAJA J. 1996. Towards Sustainable Growth: Essays in Fiscal andFinancial Sector Reforms in India. Oxford University Press, Delhi.

DEBROY, B. and RAHUL MUKHERJI (Eds.). 2004. The Political Economy ofReforms. Bookwell Publication, New Delhi.

DREZE, JEAN and AMARTYA SEN. 1996. India: Economic Development and SocialOpportunity. Oxford University Press, Delhi.

DUTT, RUDDAR AND K.P.M. SUNDARAM. 2005. Indian Economy. S. Chand andCompany, New Delhi.

GUHA, ASHOK (Ed.) 1990. Economic Liberalisation, Industrial Structure andGrowth in India. Oxford University Press, Delhi.

JALAN, BIMAL. 1993. India’s Economic Crisis: The Way Ahead. OxfordUniversity Press, Delhi.

JALAN, BIMAL. 1996. India’s Economic Policy: Preparing for the Twenty FirstCentury. Viking, Delhi.

JOSHI,VIJAY and I.M.D. LITTLE. 1996. India’s Economic Reforms 1991-2001.Oxford University Press, Delhi,

KAPILA, Uma. 2005. Understanding the Problems of Indian Economy.Academic Foundation, New Delhi.

MAHAJAN, V.S. 1994. Indian Economy Towards 2000 A.D. Deep & Deep,Delhi.

PAREKH, KIRIT and RADHAKRISHNA, 2002, India Development Report 2001-02.Oxford University Press, New Delhi.

RAO, C.H. HANUMANTHA. and HANS LINNEMANN. 1996. Economic Reforms andPoverty Alleviation in India, Sage Publication, Delhi.

SACHS, JEFFREY D., ASHUTOSH VARSHNEY and NIRUPAM BAJPAI.1999. India in theEra of Economic Reforms. Oxford University Press, New Delhi.

Government Reports

Economic Survey 2005-06. Ministry of Finance, Government of India.

Tenth Five Year Plan 1997-2002. Vol. 1. Government of India, PlanningCommission, New Delhi.

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