LIBERALIZATION
• Liberalization is any process whereby a state lifts restrictions on some private or individual activities.
• Liberalization occurs when something which used to be banned is no longer banned, or when government regulations are relaxed.
• Economic liberalization refers to the reduction or elimination of government regulations or restrictions on private business and trade.
• It is usually promoted by advocates of free markets and free trade, whose ideology is also called economic liberalism.
• Economic liberalization also often involves reductions of taxes, social security, and unemployment benefits.
• The economic liberalization in India refers to the economic liberalization of the country's economic policies with the goal of making the economy more market and service-oriented and expanding the role of private and foreign investment.
• The reform was prompted by a balance of payments crisisthat had led to a severe recession.
• Specific changes included reducing import tariffs, deregulating markets, and reducing taxes, which led to an increase in foreign investment and high economic growth in the 1990s and 2000s
Rationale of Liberalization
• Indian economic policy after independence was influenced by the colonial experience (which was seen by Indian leaders as exploitative in nature) and by those leaders' exposure to Fabian socialism.
• Policy tended towards protectionism, with a strong emphasis on import substitution industrialization under state monitoring.
• State intervention at the micro level in all businesses especially in labour and financial markets, a large public sector, business regulation, and central planning.
• Five-Year Plans of India resembled central planning in the Soviet Union.
• Under the Industrial Development Regulation Act of 1951, steel, mining, machine tools, water, telecommunications, insurance, and electrical plants, among other industries, were effectively nationalized.
• Elaborate licenses, regulations and the accompanying red tape, commonly referred to as License Raj, were required to set up business in India between 1947 and 1990 Rationale of Liberalization
• Before the process of reform began in 1991, the government attempted to close the Indian economy to the outside world.
• The Indian currency, the rupee, was inconvertible and high tariffs and import licensing prevented foreign goods reaching the market.
• India also operated a system of central planning for the economy, in which firms required licenses to invest and develop.
• The extensive regulation was sarcastically dubbed as the "License Raj"; the slow growth rate was named the "Hindu rate of growth".
• The labyrinthine bureaucracy often led to absurd restrictions—up to 80 agencies had to be satisfied before a firm could be granted a license to produce and the state would decide what was produced, how much, at what price and whatsources of capital were used.
• The government also prevented firms from laying off workers or closing factories.
• The central pillar of the policy was import substitution, the belief that India needed to rely on internal markets for development, not international trade—a belief generated by a mixture of socialism and the experience of colonial exploitation.
• Planning and the state, rather than markets, would determine how much investment was needed in which sectors
Process of Liberalization
- In 1991, after the International Monetary Fund (IMF) had bailed out the bankrupt state, the government of P. V. Narasimha Rao and his Finance Minister Manmohan Singh started breakthrough reforms.
• The new policies included opening for international trade and investment, deregulation, initiation of privatization, tax reforms, and inflation-Controlling measures abolishing quota license raj and promoting demand based economy promoting free and fair competition.
• It abolished the License Raj by removing licensing restrictions for all industries except for 8 that "related to security and strategic concerns, social reasons, problems related to safety and overriding environmental issues.
• To incentivize foreign investment, it laid out a plan to pre-approve all investment up to 51% foreign equity participation, allowing foreign companies to bring modern technology and industrial development.
• To further incentivize technological advancement, the old policy of government approval for foreign technology agreements was scrapped.
• The fourth point proposed to dismantle public monopolies by floating shares of public sector companies and limiting public sector growth to essential infrastructure, goods and services, mineral exploration, and defense manufacturing.
• Finally the concept of an MRTP company, where companies whose assets surpassed a certain value were placed under government supervision, was scrapped.[ Process of Liberalization ➢ Macroeconomic Stabilization Measures
• Includes all those economic policies which intend to boost the aggregate demand in the economy-be it domestic or external.
• For the enhanced domestic demand, the focus has to be on increasing the purchasing power of the masses which entails an emphasis on the creation of gainful and quality employment opportunities. ➢ Structural Reform Measures
• It includes all the policy reforms which have been initiated by the government to boost the aggregate supply of goods and services in the economy. It naturally entails unshackling the economy so that it may search for its own potential of enhanced productivity and production.
Privatization
• Privatization is the process of involving the private sector in the ownership or operation of a state-owned or public sector undertaking.
• In a broader sense, it connotes private ownership (or even without change of ownership) the induction of private control and management in the PSUs.
• It covers the contracting out and privatization of management – through management contract, leases or franchise arrangement
Privatization ( Methods)
➢Ownership Measures:
• Total Denationalization
• Joint Venture:
• Liquidation:
• Workers Co-operative:
➢Organisational Measures:
• A Holding Company Structure:
• Leasing:
• Restructuring:
➢ Operational Measures:
• Grant of autonomy to public enterprise in decision making.
• Provision of incentives for workers and executives consistent with increase in efficiency and productivity.
• Freedom to acquire certain inputs from the market.
• Development of proper criteria for investment planning.
• Permission to public enterprises to raise resources from the capital market to execute plans of diversification and expansion.
➢ Divestiture is one of the important ways of privatization; it is a privatization of ownership through the sale of equity.
• It entails selling stock to the public.
➢De-reservations:
• The 1991 industrial policy reduced the number of industries reserved for the public sector from 17 to 4.
• The reserved sectors were:
• Arms and ammunition and allied items of defense equipment, combat aircraft and warships. • Atomic Energy.
• Minerals specified in the schedule to the Atomic Energy Order.
• Railway Transport.
• Example: Presently, only Railways and Atomic Energy are reserved areas.
Globalization
• Globalization is a process that encompasses the causes, courses, and consequences of transnational and transcultural integration of human and non-human activities.
• Globalization means the interaction of the domestic economy with the rest of the world with regard to foreign investment, trade, production and financial matters
Rationale of Globalization
• India was largely and intentionally isolated from the world markets, to protect its fledgling economy and to achieve self-reliance.
• Foreign trade was subject to import tariffs, export taxes and quantitative restrictions, while foreign direct investment was restricted by upper-limit equity participation, restrictions on technology transfer, export obligations and government approvals; these approvals were needed for nearly 60% of new FDI in the industrialsector
Process of Globalization
• Following steps are taken for Globalization:
➢ (i) Reduction in tariffs:
• Custom duties and tariffs imposed on imports and exports are reduced gradually just to make India economy attractive to the global investors.
➢ (ii) Long term Trade Policy:
• Forcing trade policy was enforced for longer duration.
• Main features of the policy are:
(a) Liberal policy
(b) Controls on foreign trade have been removed
(c) Open competition has been encouraged.
➢(iii) Partial Convertibility of Indian currency:
• This convertibility stood valid for following transaction:
• (a) Remittances to meet family expenses
• (b) Payment of interest
• (c) Import and export of goods and services.
➢ (iv) Increase in Equity Limit of Foreign Investment:
• Equity limit of foreign capital investment has been raised from 40% to 100% percent.
• In 47 high priority industries foreign direct investment (FDI) to the extent of 100% will be allowed without any restriction.
• In this regard Foreign Exchange Management Act (FEMA) will be enforced.
• If the Indian economy is shining at the world map currently, its sole attribution goes to the implementation of the New Economic Policy in 1991
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