[Indian Economic Development] Chapter 3: Liberalisation, Privatisation and Globalisation: An Appraisal

Liberalisation, Privatisation and Globalisation: An Appraisal

By 1991, India faced a severe Balance of Payments (BoP) crisis — foreign exchange reserves fell to barely two weeks of import cover. The government had to pledge gold as collateral to obtain an IMF loan. This crisis forced a fundamental rethinking of economic policy, giving birth to what is popularly called the LPG reforms — Liberalisation, Privatisation, and Globalisation.

Liberalisation means removing or reducing government restrictions on economic activities.

• Key measures of liberalisation:
• Abolition of industrial licensing for most industries (except a few like alcohol, tobacco, defence)
• Removal of production capacity restrictions
• Reduction of import duties and removal of import quotas
• Relaxation of foreign exchange controls (FEMA replacing FERA)
• Freedom for banks to determine interest rates within a band

Privatisation means transferring ownership or management of public sector enterprises to private hands.

• Forms of privatisation in India:
• Disinvestment — government sells part of its shareholding in PSUs to private investors
• Strategic sale — sale of a majority stake and transfer of management to a private buyer
• The Disinvestment Commission was set up in 1996 to advise on PSU sales

Globalisation refers to integration of the domestic economy with the world economy through trade, investment, technology, and movement of people.

• Key globalisation measures:
• Reduction of import tariffs from an average of 87% in 1990 to about 25% by 2000s
• Allowing Foreign Direct Investment (FDI) in more sectors
• Convertibility of the rupee on current account (1994)
• India joining WTO in 1995

The reforms are collectively called the New Economic Policy (NEP). Its components can be grouped as:

• GDP growth rate improved — India achieved 6-7% growth from mid-1990s, called the "Hindu Rate of Growth" escape
• Foreign exchange reserves rose from USD 1 billion (1991) to over USD 300 billion by 2008
• FDI inflows increased significantly
• IT, telecom, and service sectors boomed
• Inflation was controlled better
• Consumer choice expanded with global brands available

• Jobless growth — GDP grew but formal employment did not grow proportionately
• Increased inequality — rural-urban divide and income inequality widened
• Agriculture neglect — industrial/service liberalisation benefited urban areas; farmers continued to face distress
• Small industry decline — removal of SSI reservations and cheap imports hurt traditional small producers
• Vulnerability — integration with global markets exposed India to external shocks (2008 global financial crisis)

Example 1: The 1991 Crisis Trigger
India had just USD 1.2 billion in forex reserves — enough for barely two weeks of imports. Annual external debt repayment obligations were higher than available reserves. The government arranged a USD 1.8 billion loan from the IMF by pledging 67 tonnes of gold. This humiliation spurred reformers to act decisively.

Example 2: Industrial Delicensing Impact
Before 1991, if a steel company wanted to increase its production from 1 million tonnes to 1.5 million tonnes, it needed a "capacity expansion licence." After delicensing, firms could expand freely based on market demand. Indian manufacturers became more responsive and competitive.

Example 3: Disinvestment Example
The government held 100% equity in Maruti Udyog Limited. Disinvestment meant selling 40% to private investors (Suzuki Motor Corporation increased its stake). The government earned revenue, and Maruti gained private sector dynamism — eventually becoming India's largest car maker.

Example 4: Tariff Reduction and Consumer Benefit
In 1990, import duty on colour televisions was 200%. A TV that cost Rs. 10,000 internationally would cost the consumer Rs. 30,000 due to duties. After gradual tariff reduction, by 2000 the same TV quality was available at Rs. 12,000, benefiting consumers but pressuring domestic manufacturers to improve quality.

Example 5: FDI in Telecom
Allowing FDI in telecom brought global companies like Vodafone and technology investment. Mobile phone subscribers grew from near zero in 1994 to over 900 million by 2012. Call rates fell from Rs. 16 per minute (1994) to less than Rs. 1 per minute, demonstrating how globalisation can benefit common people.

Example 6: Current Account Convertibility
After 1994, an Indian importer could freely buy US dollars to pay for goods. Before, each transaction needed RBI approval. This ease of trade facilitated the growth of India's service exports (software, BPO), which earned foreign exchange and helped India's BoP position.

Example 7: Impact on Farmers
Globalisation reduced import duties on agricultural products. Cheap agricultural imports (like edible oils from Malaysia) competed with domestic crops. Many Indian oilseed farmers found it unviable to grow sunflower or groundnut, reducing their incomes. This is the "negative" side of globalisation for Indian agriculture.