Liberalisation, Privatisation & Globalisation

Reforms were introduced in 1991 due to a severe financial crisis:

• Balance of Payments Crisis: Foreign exchange reserves dropped to a level that could barely finance imports for two weeks.
• Fiscal Deficit: The government’s expenditure far exceeded its revenue, creating an unsustainable debt burden.
• Inflation: Prices of essential goods were rising sharply due to an increase in the money supply.
• Inefficient PSUs: Many Public Sector Undertakings were incurring huge losses and becoming a burden on the economy.

It is necessary because:

• Market Access: It provides access to international markets for Indian goods by removing trade barriers in member countries.
• Rule-Based Trading: It ensures fair trade practices and a dispute resolution mechanism to protect against unfair policies by other nations.
• Technology Transfer: Integration with the global economy facilitates the flow of advanced technology and capital.

Prior to reforms, RBI controlled every aspect (interest rates, branch expansion). The shift to facilitator was necessary to:

• Allow commercial banks autonomy to set their own interest rates and make decisions based on market forces.
• Encourage competition by allowing private and foreign banks to enter the market.
• Make the banking sector more efficient and customer-centric.

Even as a facilitator, RBI retains control through prudential norms and quantitative/qualitative tools:

• CRR (Cash Reserve Ratio): Percentage of deposits banks must keep with RBI.
• SLR (Statutory Liquidity Ratio): Percentage of deposits banks must maintain in liquid assets (gold, govt bonds).
• Repo Rate: The rate at which RBI lends to commercial banks.

Devaluation is the deliberate downward adjustment of the value of a country’s currency relative to a foreign currency (like the US Dollar) by the government.
In 1991, the Rupee was devalued to make Indian exports cheaper (more competitive) and imports expensive, thereby increasing the inflow of foreign exchange to solve the BoP crisis.

Concept A	Concept B
Strategic Sale: The government sells a major portion (51% or more) of its equity to a private partner, transferring management control.	Minority Sale: The government sells a small portion (less than 49%) of equity to the public/private sector but retains management control.
Bilateral Trade: Trade agreement between two countries.	Multi-lateral Trade: Trade agreement among many countries (e.g., via WTO).
Tariff Barriers: Restrictions on trade through taxes (import duties).	Non-Tariff Barriers: Restrictions through administrative measures (quotas, health safety standards).

Tariffs (import duties) are imposed for two main reasons:

• Protection: To protect domestic industries from cheaper foreign goods (“Infant Industry Argument”).
• Revenue: To generate revenue for the government.

Quantitative Restrictions (QRs) are limits set by the government on the physical quantity or amount of a commodity that can be imported or exported during a specified period (e.g., Import Quotas). Reforms led to the removal of most QRs to liberalize trade.

Opinion: No (generally).
While privatization improves efficiency, profit-making PSUs (Navaratnas/Maharatnas like ONGC, IOCL) are assets to the nation.

• Revenue Source: They provide significant dividends to the government, which funds social welfare.
• Strategic Control: Key sectors (energy, defense) should remain under state control for national security.
• Social Welfare: They balance profit with social obligations (employment, backward area development) which private firms may ignore.

For India: Yes.
It creates large-scale employment (BPOs, IT services), brings in foreign exchange, and upgrades skills and technology.

Opposition by Developed Countries:
They oppose it because it causes “job losses” in their own countries. As jobs move to cheaper locations like India (offshoring), their local workers face unemployment and wage stagnation, leading to protectionist outcries.

• Low Cost: Availability of skilled manpower at a fraction of the cost compared to developed nations.
• Skilled Manpower: A vast pool of English-speaking graduates, engineers, and IT professionals.
• Time Zone Difference: Allows for 24×7 operations (work done in India while the US sleeps).
• IT Infrastructure: Rapid growth in hardware, software, and telecommunication sectors.

Yes. The policy identifies high-performing PSUs (Navaratnas, Maharatnas) and grants them greater autonomy.
How it helps:

• Financial Freedom: They can invest significant amounts without government approval.
• Operational Freedom: They can form joint ventures, raise debt, and set up subsidiaries abroad.
• Competitiveness: This freedom allows them to compete effectively with global private giants.

• Economic Reforms: Liberalization of finance, banking, and telecommunications opened doors for private and foreign investment.
• High Income Elasticity: As income rises, demand for services (tourism, health, education) grows faster than goods.
• IT Revolution: India became a global hub for software and IT-enabled services.
• Structural Change: Manufacturing often outsources services (advertising, legal), boosting the service sector.

Reforms largely neglected agriculture:

• Public Investment Reduction: Government spending on irrigation, power, and roads declined.
• Subsidy Removal: Reduction in fertilizer subsidies increased the cost of production for small farmers.
• Import Competition: Removal of import duties led to cheaper agricultural imports, hurting domestic prices.
• Shift to Cash Crops: Focus on export-oriented cash crops reduced the production of food grains, affecting food security for the poor.

• Cheaper Imports: Cheap manufactured goods from countries like China replaced domestic goods (e.g., toys, electronics).
• Lack of Infrastructure: Power shortages and poor transport facilities hindered industrial growth.
• High Cost of Credit: While global interest rates were low, Indian industries faced high interest rates.
• Inverted Duty Structure: Sometimes duties on raw materials were higher than on finished goods, discouraging local manufacturing.

While reforms increased GDP growth, they compromised social justice:

• Jobless Growth: Growth was driven by the service sector which employs less labour, leading to unemployment.
• Inequality: The rich became richer, while the poor (especially in agriculture) suffered.
• Neglect of Agriculture: 60% of the population dependent on farming was ignored.
• Social Sector Neglect: Public spending on health and education as a % of GDP did not increase significantly.

Interpretation:

• Growth Phase (2012-2017): The economy showed an upward trend, peaking at 8.3% in 2016-17.
• Slowdown (2017-2020): Growth slowed down to 3.9% in 2019-20, indicating structural issues.
• Recovery (2021-22): A sharp spike to 9.7% indicates a strong “V-shaped” recovery post the pandemic slump (Base Effect).

Product	Company	Pre/Post 1991
Biscuits	Britannia (Foreign origin, now Indian)	Pre-1991
Biscuits	Oreo (Mondelez)	Post-1991
Cars	Maruti Suzuki (JV)	Pre-1991
Cars	Hyundai / Honda	Post-1991
TV/Fridge	Samsung / LG	Post-1991
Stationery	Reynolds	Post-1991