The Indian economy is passing through a process of transition from a highly regulated economy in which a number of sanctions had to be acquired before starting a unit of production in any industry. Sometimes, it took over three years to obtain all the sanctions from different authorities of the government before an entrepreneur could start production. This led to widespread corruption in which the principal beneficiary was the bureaucracy engaged in the grant of sanctions. This resulted in enormous corruption and government officials in collusion with political bosses earned fabulous sums as hush money via corruption. It was strongly felt that the system of licenses and controls should be dismantled so that businessmen desirous of undertaking investment could achieve their objective of industrial growth without unnecessary hurdles.

Secondly, during the first four decades of development planning, the country relied heavily on the public sector which was considered as the engine of development. There is no doubt that the public sector did play very crucial role in setting up industrial units in heavy and basic industries, in infrastructure development – both economic and social. But at that time, the private sector neither possessed the resources to undertake lumpy investment, nor did it have the necessary competence and expertise.

• Quite a large number of public enterprises were running in losses continuously for several years. 

• The losses had to be made good by the Government out of the receipts of taxes from the people. 

First level change

The first clear pronouncement on the public sector was made by the Government in 1984 when it was stated the public sector has spread into “too many areas where it should not be. We will be developing our public sector to undertake jobs that the private sector cannot do.

• But we will be opening up more to the private sector so that it can expand and the economy can grow more freely”. 

• Consequently, it opened the debate for redefining the role of the public sector. In other words, restricting the role of the public sector and enlarging the area of privatisation became the new ‘mantra’ of economic reform.

Once an infant, always an infant

Thirdly, soon after independence, to help the growth of industry, the infant industry argument was used to protect Indian industry in hitherto unknown and newly emerging areas by using various trade barriers. 

As a consequence, Indian industry developed the mindset, ‘once an infant, always an infant’. So every time, the Government thought of reducing trade barriers, the damage to national industrial interests argument was used to stall them

It was in 1991 that the Government under pressure from World Bank/IMF was forced to reduce trade barriers. It was argued under WTO pressure that all quantitative restrictions on all import items will be withdrawn by April 2001. The aim was to expose Indian industry to face world competition. The principal aim of economic reforms was to enter an era of globalisation which meant 

(a) free flow of goods and services, 

(b) free flow of technology,

 (c) free flow of capital, and

 (d) free movement of human beings, especially labour from one country to another. 

Economic reforms, therefore, require integrating the Indian economy with world economy. Thus, instead of depending on import-substitution strategy of growth, the emphasis in economic reforms was shifted to export-led growth strategy.

To sum up, economic reforms constitute three fundamental policy changes. They are: liberalisation, privatisation and globalisation. In short, this is known as LPG model of development.

The rationale of economic reforms was provided by the Industrial Policy announced by the Government in 1991. The major objectives of the industrial policy were stated as under:

i) to unshackle the Indian industrial economy from the cobwebs of unnecessary bureaucratic controls; 

ii) to introduce liberalisation with a view to integrate the Indian economy with the world economy;

 iii) to remove restrictions on direct foreign investment as also to free the domestic entrepreneur from the restrictions of Monopolies and Restrictive Trade Practices (MRTP) Act; and 

iv) to shed the load of public sector enterprises which have shown a very low rate of return or which were incurring losses over the years.

IMF Conditions

 

To tackle the BoP crisis, IMF offered support to India under its Extended Fund Facility (EFF) but put forth some obligatory conditions to be fulfilled by economy. These conditions were:

• Immoderate reduction in import tariff from 130% to 30%.

• Devaluation of Indian Rupee by 22%.

• All government expenditure to be reduced by 10% annually.

• Hike in excise duty by 20%.

 

Reform measures taken by government - The reform measure taken by government can be categorised into two groups:

• Macroeconomic stabilisation measures which include all the policies which intend to boost aggregate demand in the economy. The emphasis was given on increased employment opportunities which lead to high purchasing power of masses ultimately leading to increase in demand.

• Structural reform measures which include all policies pursued by government to boost the aggregate supply of goods and services in the economy. It calls for high productivity and production in economy.

Features of New Economic Policy-

• Dereservation of the industrial sector

• Industrial delicensing policy

• Opening up of the economy to foreign competition

• Liberalization of trade and investment

• Financial Sector Reforms

• Reforms related to the Public sector enterprises

• Abolition of MRTP Act

 

The Eighth plan is also popularly known as ‘Liberalization’ of the economy. The liberalization policies were unveiled by then Finance Minister Dr Manmohan Singh in the year 1991–92. This was accompanied with substantial opening of the economy.

Removal of Industrial Licensing: 

All industrial licensing was abolished but for a shortlist of 18 industries related to security and strategic concerns, social reasons, hazardous chemicals and over-riding environmental reasons and items of elitist consumption industries reserved for the small scale sector which were to continue under the reservation list. Subsequently, all industries except for a small group of five industries, industrial licensing requirements have been done away with

Dereservation of SSI Items: 

Although initially the Government decided to continue reservation of items under the SSI sector, but later, it gradually withdrew reservation in several SSI items every year. 

During 2005-06 budget, the Finance Minister announced dereservation of 108 items from the SSI list, out which 30 items belonged to the category of “textile products, including hosiery”.

Withdrawing MRTP Restrictions: 

The restriction on the scrutiny of an investment proposal that it does not violate the provisions of MRTP Act was withdrawn.

This freed big business houses to undertake expansion and establishment of new undertakings as well as to undertake mergers, amalgamations and takeovers, they were also freed in the appointment of directors.

 

• Industrial sector reforms

Abolition of Industrial Licensing

Contraction off Public Sector

Freedom to Import capital goods

• Financial sector reforms.

Reducing various Ratios(SLR, CRR)

Change in role of RBI from regulator to facilitator

De-regulation of interest rates

Foreign exchange reforms

Devaluation of rupee

• Trade and investment reforms.

Privatisation has to be viewed in two ways: 

• In a narrow sense, it implies the induction of private ownership in a public sector undertaking.

• In a broader sense, it implies the enlargement of the scope of the private sector in the growth of the economy. 

In the initial phase of development planning in India, more especially after the Industrial Policy of 1956, the socialisation of the economy was measured by the size of the public sector in the national economy.

By placing restrictions on the public sector and by reducing its role in several areas where it earlier enjoyed a monopolistic position, the new environment assigned an increasing role for the private sector. 

Over the years, this was bound to increase the share of the private sector in the economy. 

This is the meaning of privatisation in a broader sense.

Privatisation in the narrow sense can take several forms:

• Total Denationalisation: This implies complete transfer of ownership of a public enterprise to private hands.

• Joint Venture: This implies partial induction of private ownership from 25 to 50 per cent or even more in a public sector enterprise, depending upon the nature of the enterprise and state policy in this regard.

i) 26 per cent ownership by the private sector (banks, mutual funds, corporations, or individuals) and workers also to be included to the extent of 5 per cent equity to be transferred to them. However, in this situation, veto power remains with the public sector against the private sector. 

ii) Government retains 51 per cent equity and sells 49 per cent equity to the private sector. Although the basic character of the enterprise remains unaltered and it continues to be a public sector unit, it introduces a big share for the private sector.

iii) 74 per cent of the equity is transferred to the private sector and the Government retains 26 per cent with the added provision of Government veto power and minority control over major corporate decisions.

c) Workers’ Co-operative: 

Another form of privatisation is transfer of ownership of a loss-making concern to the workers. Mr. R. Ganpati, former Chairman of the Board of Industrial and Financial Reconstruction (BIFR) is of the view: “If more managements are divested of control of their companies and workers’ co-operatives set up in their place, promoters may be galvanised into curing their sick units.”

d) Token Privatisation: 

This implies the sale of 5 per cent or 10 per cent shares of a profit-making public sector enterprise in the market with the objective of obtaining revenue to reduce budget deficit. This is also referred to as ‘deficit privatisation’. Finance Ministers in India have been undertaking such privatisation to reduce their budget deficits

This policy has also been referred to as ‘disinvestment’. It was customary for finance ministers to set targets for disinvestment during a year.

Globalisation to Integrate the Indian Economy with the World Economy

Globalisation is the process of integrating the various economies of the world without creating any hindrances in the flow of goods and services, technology, capital and even labour or human capital. This involves four components:

 i) Reduction of trade barriers in the form of custom duties or quantitative restrictions or quotas so as to permit free flow of goods and services among different economies;

 ii) Creation of an environment in which free flow of capital (or investment) can take place between nation-states; iii) Creation of an environment for free flow of technology; and

 iv) Last but not the least, from the point of view of developing countries, creation of an environment in which free flow of labour or human resources can take place among different countries of the world.

The advocates of globalisation, more especially from developed countries, limit the scope of globalisation to only three parameters, viz.,

• free flow of goods and services,

• free flow of technology 

• free flow of capital.

. In case, the ultimate aim is to integrate the world 35 economies as a ‘global family’, then fourth component, viz., unrestricted movement of labour and human resources has to be incorporated within the scope of globalisation.

Stiglitz in his book ‘Globalisation and its Discontents’ defines globalisation in the following words: “Globalisation is the closer integration of the countries and peoples of the world which has been brought about by the enormous reduction of costs of transportation and communications, and the breaking down of artificial barriers to the flow of goods and services, capital, knowledge, and (to a lesser extent) people across borders.” 

Jagdish Bhagwati also similarly defines globalisation in the following manner: “Economic globalisation constitutes integration of national economies into the international economy through trade, direct foreign investment (by corporations and multinationals), short-term capital flows, international flow of workers and humanity generally, and flow of technology.”

Policy promoting globalisation.

 

Increase in equity limit of foreign investment.

Partial convertibility.

Long term trade policy.

Reduction in tariff.

 

Increase in foreign investment.

Increase in foreign exchange reserves.

A check of inflation.

Increase in national income.

Increase in exports.

Consumer sovereignty.

 

Neglect of agriculture.

Jobless growth.

Increase income inequalities.

Adverse effect of disinvestment policy.

Spread of consumerism.

Cultural erosion.

Encourages economic colonialism

 

• Increase in National Product: Before 1990, the growth rate of national income was 4.7% on the implementation of new economic policy, growth rate reduced to 0.6 percent. In 1993-94 growth rate rose to 5.0 percent at 1993-94 prices and in 1996-97 it rise to 8.2 percent.

• Foreign Investment: With the implementation of new economic policy foreign capital investment has increased. In 1990, total foreign investment was 5133 million dollar and it increased to 6133 million dollar. In 2003-04, foreign investment was 35.31 billion dollar.

• Agricultural Production: Prior to implementation of new economic reforms, growth rate of agricultural production was 3%. But in 91-92 growth rate got down to 1.9%. The growth rate came down. In 1995-96 growth rate of agricultural production stood at to 6.6% and in 2003-04 it was 6.3%.

• Foreign Currency Reserves: New economic reforms have favourable effect on foreign currency reserves. In 1989-90, the foreign currency reserve was Rs. 6251 crore. In 1995-96, foreign currency reserve stood at Rs. 58446 crore and in 2003-04 it touched 2,07,204 crore mark.

• Fiscal Deficit: The main thrust of new economic policy is to bring down fiscal deficit to the extent of 3 percent of GDP. In 1991-92, fiscal deficit come down to 5.9% and further to 5.2% in 1992-93. No doubt, after the implementation of economic policy fiscal deficit has reduced but Govt. is still far away from its target. As in 1995-96 fiscal deficit rise to 7.9% against the target of 4.7%. Moreover, it again moved to 4.5% in 2003-04.

• Imports: Growth rate of imports saw wide fluctuation after the implementation of new economic policy. In 1991-92, growth rate of imports declined to 11% against 22% in 1990-91. But in 1992-93 it jumped to 32.4%. Then in 1995-96, it come down to 15%. In 2003-04, growth rate of imports declined to 20.8 percent.

• Deregulation of Interest Rate: Interest rate has been deregulated as a part of money market reform. Bank rate has been reduced to 6%. The Cash Reserve Ratio was reduced to 4.5% which put more cash with the banking system of the country. Lower interest rate would stimulate investment. The rate of interest on housing loan was 7.5% per annum.

• Control of Inflation: The new economic policy tried to maintain the price level. In August 1991, the rate of inflation was 17% and in 1997-98 it fell down to 4.9%. In 2002-01 the inflation rate was 3%. It encouraged the growth of the economy.