The liberlization and privatization of the indian economy

Rajiv Gandhis authorities initiated the insurance policy of liberalization since mid-80s. The liberalization initiatives have been undertaken in India with a view to increase a development, improve quality and access market for products and service overseas. Radical liberalization or globalization options have been brought in since July 1991 to help make the Indian market progressively market focused and assimilate it with the emerging global economy structure. These methods include reduction and rationalization of excise duty and customs responsibilities, delicensing of several medicine and pharmaceutical products, ready usage of import of fresh material and capital goods and so forth.

It has created a host conducive to an enterprise, investment and innovation. Indian sectors have started to attract foreign profile investment and equity participation in new endeavors. The government is focused on make foreign players feet relaxed to invest directly and bring with it new technology and marketing skills.

There has been impressive development in FDI inflows to India with the benefits of coverage reforms. When compared with a in close proximity to total attention in developing till 1991, the majority of new inflow has come in the energy and service sector.


The New Industrial Coverage, 1991

A volume of significant economical changes created by many a number of countries all the world over, the motivating results of the liberalization measures introduced in 1980s by the federal government of India, and the precarious monetary situation that prevailed during the later part 80s have motivated and pressured the then Congress federal, which returned to ability at the center, under the command of Shri. P. V. Narasimha Rao-a non - Nehru family member, to take some bold measures to rejuvenate the economy also to accelerate the rate of development. Within this background, the Government of India announced its New Industrial Plan (NIP or IP) on July 24, 1991. The key objectives are: (a) to improve the distortions which may have crept in, and combine the advantages built on the gains already made, (b) to keep sustained expansion in the production and gainful work, and (c) to attain international competitiveness. Therefore, the basic philosophy of the New IP, 1991 has been the continuity with change. Because, the new insurance plan signifies a renewed effort towards consolidating the gains of nationwide reconstruction as of this crucial level. But what is more important is the change (in continuity with change)-change in the attitude of the state towards the commercial society, change from centrally planned overall economy to advertise led economy, differ from excessive government involvement to minimal treatment, change from nationalization to privatization, differ from subsidization and cross-subsidization to continuous withdrawal of subsidy, etc. But these changes, that your government has released, represent a distinct departure from the sooner industrial procedures. These changes pertain broadly to five areas viz. , (a) Industrial licensing,

(b) People sector policy, (c) MRTP Action, 1969, (d) Overseas investment, and (e) Overseas technology agreements.

Industrial Licensing

This is one of the areas in which considerable change has been made by the government. With a view to give impact to these changes, the federal government granted a notification [viz. , Notification No. 477 (E)] on July 25, 1991 and this notification has exempted the professional undertakings from the operation of the following Sections of Business Development and Laws Act, 1951 subject to the fulfillment of certain conditions.

Section 10 (which handles registration of existing commercial undertakings);

Section 11 (which can be involved with the licensing for new professional undertakings); and

Section 13 (which is concerned with the licensing requirements for significant extension).

Further, the next schedule appended to the notification cited above [viz. , No. 477 (E)] lists the sectors which are at the mercy of mandatory industrial licensing. According to this notification, only 18 companies were subject to compulsory professional licensing. Further, five more business have been excluded from the set of industries that happen to be subject to compulsory industrial licensing subsequently. That means, only 13 establishments are now subject to compulsory commercial licensing.

Public Sector Policy

A large numbers of Public Sector Companies have didn't achieve at least an acceptable rate of success. Some of the factors that have contributed to this situation are over staffing and over managing, price and distributions control buttons, etc. Hence, the government, in its Industrial Plan, 1991, introduced the amount of significant changes pertaining to the PSEs. A number of the important changes envisaged by the brand new Plan are summarized below.

Prior to the announcement of New Industrial Policy, 1991, seventeen establishments were reserved entirely for their state for their future development. Further, with respect to another 12 companies, the state was to play an important role by taking initiative to establish new undertakings. Besides, the state had power to enter into other area reserved for the private sector. However, the failure on the part of most PSEs has pressured the government to examine its previous decision. Consequently, the government in its New Industrial Insurance plan, 1991 has pruned the set of the establishments reserved for the public sector to only 8. Further, the government has dereserved 2 more establishments. Because of this, only six industries are actually reserved for the general public sector. They are: (a) Forearms and ammunition and allied components of defence equipment, aeroplanes and warships, (b) Atomic energy, (c) Coal and lignite, (d) Nutrient oils, (e) Mineral deposits given in the agenda to the Atomic Energy Order, 1953, and (f) Railway carry. Hence, the target of the public sector will be only on tactical and high tech companies and on basic infrastructural assignments. However the purpose of the New Industrial Insurance policy has gone to withdraw the general public sector investment from the activities which can effectively be taken up by the private sector corporations. The emphasis of PSEs in future will be on: (a) Basic and essential infrastructural facilities, (b) Nutrient resources, (c) Essential areas in the interest of the market over time and where the private sector investment is inadequate, and (d) Defence equipment.

With a view to mobilize the resources also to have a wider public participation, apart of governments show holdings in its businesses will be wanted to the mutual cash, financial institutions, employs of PSEs, and everyone. THE BRAND NEW Industrial Policy also proposes selective privatization of PSEs. Further, the insurance plan also proposes to close down the PSEs that have become sick and which can't be rehabilitated. The suffering PSEs which is often revived will be refered to Plank for Industrial and Financial Reconstruction for the formulation of revival plans. THE BRAND NEW Industrial Plan also aims at providing greater functional and managerial autonomy to the management of PSEs and making the managements in charge of the performance through a system called Memorandum of Understanding.

MRTP Function, 1969

The New Industrial Plan, 1991 proposes to amend suitably the Monopolies and Restrictive Trade Techniques Act, 1969. To eliminate the threshold limitations of assets according of MRTP companies and the prominent industrial undertakings. The important objectives of this were two in quantity. They are simply

Prevention of awareness of economic vitality in the hands of few which will be detrimental to the normal interest; and

Regulation of monopolistic, restrictive and unfair trade practices which are pursued by the business enterprise community and that happen to be prejudicial to the general public interest.

The New Insurance plan proposes to renew the threshold restrictions of assets and therefore, to repeal the Procedures of MRTP Function, 1969 pertaining to the first goal. Hence, the MRTP Take action now worried only with the prohibition of monopolistic, restrictive and unfair trade tactics accompanied by the commercial undertakings and the trading neighborhoods.

Foreign Investment

As very good as the immediate foreign investment can be involved, the New Policy proposes to give automatic agreement up to 51% of collateral in the case of high priority sectors and it has also discovered 34 such industry groupings. Further, the plan proposes to allow majority foreign equity holdings up to 51% of equity for the trading companies that are involved in export activities. This is to enable the home companies an easy access to international marketplaces. With a view to work out with the large international financial institutions also to approve the direct foreign investments proposals in decided on areas, the New Insurance plan proposes to constitute a particular committee.

Foreign Technology Agreements

The New Industrial Policy proposes to provide automatic authorization for international technology agreements in determined high priority companies. Further, it also proposes to permit other business to import overseas technology at the mercy of the fulfillment of certain conditions.


The New Industrial Insurance policy, 1991 certainly differs significantly from the sooner philosophies, strategies, etc. of the federal government. For instance, prior to 1991, range of open public sector was expanded by reserving more number of industries for the public sector. However now, its opportunity has been reduced considerably by reducing the amount of sectors reserved for the public sector. Such as this, a large variety of changes can be seen in the new insurance policy. This technique has been carrying on even in post liberalization era. Adding to this, the government has taken a number of steps to provide impact to its policy decisions contained in the New Industrial Policy, 1991. Though the market has been benefited significantly from these actions, the economy has not been able to enjoy the full benefits of the Economic Reform Package deal owing to the politics instability, etc.


Privatization of PSUs

Majority of the professional enterprises in the general public sector have failed to achieve the required result. Of course, lots of factors-internal and external, controllable and non- controllable are in charge of his precarious performance. A look at the history of open public sector undertakings (PSUs) in the country reveals the constant extension in the role of PSUs. Consequently, lots of businesses have been set up and large amount of lent capital has been employed by the state of hawaii even in the non-core, non-strategic rather than so essential area. Hence, their state has made a number of changes in its New Industrial Insurance plan released on July 24, 1991.


In the sixties and seventies, the public sector coverage has been mainly guided by Industrial Insurance plan Image resolution, 1956 which provided the public sector a proper role throughout the market. During the last four decades, large investments have been designed to build a general public sector which has a commanding role in the economy. Today, many key sector of the current economic climate are dominated by the adult public sector corporations that have successfully expanded the production.

In the early post-Independence years, there is online consensus about the need for the government intervention in monetary activities. Pandit Jawaharlal Nehru referred to the public sector as Temples of Modern India. In those days, nearly neither questioned the strategy nor elevated any uncertainties about its execution. The number of central general public sector enterprises increased from 5 in the entire year 1951 to 240 by the finish of 1995 and purchases in public areas sector undertakings (PSUs) increased from Rs29 crore in 1951 to Rs. 1, 72, 438 crore by the finish of 1995. They added nearly 1 / 3 of your exports. They made significant contribution to import substitution. Federal undertakings take into account more that 70% of the task force employed in the structured sector. They may have greatly reduced the imbalanced of local development and also have laid strong base for the speedy development of the united states. A number of the PSUs have gained a reputation par excellence at the international level. Some large public sector devices (e. g. , Indian Petrol Corporation, Steel Power of India, Oil and Natural Gas Percentage, Hindustan Petroleum Corporation Ltd. , Coal India Ltd and Bharat Petroleum Corporation Ltd) number in Lot of money International's large companies. Further, the public sector accounts for one-fourth of the country's GDP.

There are two million employees in authorities undertakings and the average emoluments per annum amount to more than Rs. 50, 000 each. Besides paying higher incomes, public enterprises assure job security, good working condition, attractive incentive structure, participative management, higher amount of safety, satisfactory facilities, etc.

Meaning of Privatisation

The trend of privatization were only available in 1980 and pass on to many elements of the earth. Several countries are privatizing their open public sector companies. India is no exception to it. Privatization was designed to enhance the performance of open public enterprises. Privatization techniques have been tried out in countries like THE UK, China, US, Turkey, Brazil, Mexico, Japan, etc. Privatization, in the slim sense, means copy of possession, or sale of public corporations. However, privatization has been used in different ways as comprehensive below

Liberalization Approach: Privatization may be used in the sense of liberalization having fewer control buttons and rules by the state in economical activities. This also means slowing of new adjustments and polices and also dismantling of the existing controls and laws.

Relative Share Enhancement Approach: Privatization may relate with enlargement of the talk about of private enterprises in the development of goods and services throughout the market. Which means that faster economic extension of goods and services produced by private sector and slowing down of production of goods and services in the general public sector.

Association of Private Sector Management Way: This approach suggests utilizing the services of managerial employees or executives of private sector enterprises for the conduct and management of PSUs.

Transfer of Minority Collateral Ownership Methodology: Privatization may be defined as the transfer of minority equity ownership of public enterprises to private individuals and organizations so that the ultimate control continues to stay with their state.

Transfer of Complete Possession Strategy: Privatization is also found in the sense of sales of all the stocks to the private gatherings so that the public enterprises are changed into private businesses.

In India, privatization is occurring by implementing two common methods viz. ,

(a) Having fewer handles and restrictions by their state in economical activities, and

(b) Transferring possession of state equity in PSUs to private individuals and institutions.

Benefits of Privatization

It is expected that privatization will ensure the next benefits
Increasing overall efficiency
Improvement in the grade of management and decision making

No federal financial backing, and therefore, capital market will compel these enterprises to be more efficient;

Substantial decrease in government's budgetary support leading to reduction in budgetary deficit;

Recovery of authorities fund that could more productively be utilized in development activities;

Reduction in politics and bureaucratic interferences;

Better industrial relationships management; etc.


Though the PSUs have contributed heavily to build up the industrial base of the country, they continue, right now, to suffer from a number of shortcomings that are discovered below very briefly.

A sizable variety of PSUs have been incurring and reporting losses over a continual basis. Consequently, a large quantity of PSUs have been referred of BIFR;

Multiplicity of regulators to whom the PSUs are accountable;

Delay in execution of projects leading to cost escalation and other implications;

Ineffective and common inefficiency on management;

Many PSUs are functioning without the first choice (i. e. , leader or chairman);

With a view to provide opportunities for increasingly more unemployed youths, more amount of people, than required, were recruited and therefore, many PSUs are over-staffed leading to lower labour productivity, bad industrial relations, etc. ;

un-remunerative pricing plan; and

A quantity of sick and tired companies (40 companies) that have been in the private sector was taken over by public sector mainly to safeguard the employees. These sick units are leading to a large drain on the resources of the state of hawaii; etc.

Methods of Privatization

There are four important methods of privatization. They can be

Franchising, (b) Contracting, (c) Renting, and (d) Disinvestment.

In India, disinvestment of federal government share of equity in PSUs is predominant. It were only available in 1992 soon after the brand new Economic Insurance plan in a phased manner. The primary criticism of disinvestment of stocks of PSUs in India is that it's been partial and half-hearted. There appears to be no plans to disinvest completely. The federal government still would like to keep a dominating control. 39 companies have been proposed for disinvestment till 1995-96. All the companies suggested for disinvestment are central PSUs. No status level PSU has been proposed for disinvestment. It could only disinvest 1% to 35% shares of PSUs on the average. Additionally it is observed that the shares of effective and profit-making companies are disinvested more than the companies which are probably sick or unwell companies. The disinvestment ratio is also very little in loss-making and inefficient units, thereby defeating the purpose.

The Finance Ministry has also explained that the federal government is consciously not off-loading bigger chunks of its keeping. The Rangarajan Committee has recommended that government keeping in public sector starting must be significantly less than 50%. But partial disinvestment will be of no avail to change the culture in the public sector undertaking.

Future Programs of Government

The following are the future programs of government

Strengthening strategic units,

Privatizing non-strategic units by (1) Gradual disinvestment, and (2) Strategic sales, and

Devising suitable treatment package for poor units.


The privatization process launched with all seriousness following the announcement of New Industrial Insurance policy, 1991 was failing. The state of hawaii must recognize this and take necessary steps either to privatize or to increase the efficiency and performance of PSUs.



The extension of economical activities across politics boundaries of nation expresses. More important, perhaps, it identifies an activity of increasing monetary included and growing financial interdependence between countries on earth economy. It is associated not only with a growing cross- border motion of goods, services, capital technology information and people but also with a business of economic activities which straddles nationwide boundaries. This process is driven by the lure of profit and risk of competition on the market.

The term Globalization as such denotes modification of national current economic climate start of the world market. It is alteration of a countrywide market into international range of motion of factors of development. In others words, it may be described as the integration of countrywide economy with this of global economy.

An important feature of Globalization is the increasing degree of openness, which includes three dimensions, i. e. ; international trade, international investment and international money. According to World Development Article, Globalization displays the progressive integration of world's economies.

The manifestation of production includes spatial reorganization of development the interpenetration of industries across edges, the get spread around of financial market segments, and the diffusion of indistinguishable consumer goods to faraway countries and massive transfer of population across nationwide frontiers.

Globalization is a process of reaffirmation of trust in the market segments, retaining the character of independence of the country. Here, the united states employs a pragmatic coverage with a switch in decision making from federal government to business. The marketplace pushes and the laws of economics will have greater importance than the politics ideology. To produce a country an effective spouse in Globalization, the federal government must play a complimentary role.

Factors contributing to Globalization:

The critical indicators that donate to Globalization are

(a) Technological Developments In communication:

Technological advancements in communication have made it possible to know in an instant what is happening in various parts of the globe. The movement of information and ideas, boosted greatly by the Internet, can enable expanding countries to learn more rapidly from one another and from professional countries.

(b) Advancements In Travel And Technology:

Improvements in travel sites and technology are minimizing the expenses of shipping and delivery goods by normal water, earth and air. This may facilitate the actions of goods. Technical improvements can enable developing countries to jump stages in the development process that rely on inefficient uses of countrywide resources.

(c) Other Factors:

Rising educational levels, technological innovations that allow suggestions to circulate, and the financial failures of most centrally designed economies also have contributed to Globalization.

Trends in Globalization:

The important movements in Globalization will be the following

International Trade:

Trade in goods and services is continuing to grow doubly fast as global GDP in the 1990's and the share attributable to expanding countries has risen from 23 to 29 percent. There is a compositional move in trade, which has created a fresh structure in the international exchange of goods, services, and ideas. Trade in components is one part of this new pattern. Advances in information technology helps to web page link firms from producing countries into global development networks. The tremendous expansion of trade in services and, more recently, of electronic business is also an integral part of the new trade style.

(b) International Financial Flows:

There has been increase in international capital moves of developing countries. However, the financial meltdown of 1977-99 have put the growing interdependencies among countries in the limelight and resulted in strong scrutiny. Such moves are started to rise again. The financial performance of emerging market segments in the 1990s made capital accounts liberalization a stylish option for expanding countries. Many growing countries have started to loosen control buttons on inflows and outflows of capital.

The East Asian meltdown has enhanced the elegance of long-term capital investment. Countries have began to recognize that international direct investment brings with it not only capital but also technology market access and organizational skills. An research of the time 1996-97 shows that foreign direct investment was less volatile than the commercial loans and foreign profile flows.

(c) International Migration:

Along with goods, services, and investment, people are crossing borders in good sized quantities. According to World Development Statement 1999-2000, each rip between 2 million and 3 million people emigrate, with most them heading to just 4 countries: the United States, Germany, Canada and Australia. The market for highly skilled workers can be even more globally included in the coming decades.

At the end of the 20th century Globalization has recently demonstrated that economical decisions, wherever they are created in the world, must take international factors into account. There may be acceleration of goods, services, ideas and capital across land borders.

Advantages of Globalization:

(a) Offer of Increase Efficiency And Higher Living Specifications:

Globalization earns new opportunities such as access to marketplaces and technology copy. These opportunities hold on the offer of increased output and higher living standards.

(b) Increase In Trade In Goods And Services:

There is huge growth in trade in goods and services. "Trade in goods and services is continuing to grow twice as fast as global GDP in the 1990s and the talk about attributable to developing countries has climbed from 230to 29 percent". Increased international competition in services will lead to decrease in prices and advancements in quality. This may improve the competitiveness of downstream market sectors. Both industrial and development economics will gain by opening their markets.

(c) Provide New Opportunities For Development:

For producing countries, trade is the primary vehicle for realizing the benefits associated with Globalization. Imports bring additional competition and variety to home markets, which profit consumers. Exports, on the other side, enlarge foreign marketplaces and gain business. Further trade exposes domestic businesses to the best practices of foreign companies and encourages greater efficiency. Trade provides forms usage of better capital inputs such as machine tools, which enhances productivity. Trade motivates the redistribution of labour and capital too relatively to more beneficial sectors. They have contributed to the ongoing switch of some developing and services activities from commercial to expanding countries, providing new opportunities for expansion.

(d) Globalization of Financial Marketplaces:

Globalization of money markets influences development because finance performs an important role in financial progress and industrialization. Financial Globalization affects expansion in two ways. First, it increases the global supply of capital. Second, it stimulates home financial development and therefore, increases allocative efficiency, creates new financial musical instruments, and raises the quality of baking services.

(e) Increased Circulation Of overseas Market Capital:

Globalization contributes to increased flows of capital across countries. Moves of international capital offer substantive economic gains to all or any parties. Foreign shareholders diversify their hazards outside their home market and gain access to profitable opportunities through the globe. Economies acquiring inflows improve the degree of investment. When there may be foreign investment it is generally associated with management skills, training programs and important linkages to suppliers and international markets.

(f) Effect on Poverty:

The fast growth and overall development caused by liberalization, increased flow of trade ad capital would have a major impact on poverty. Chances are to reduce the quantity of people living in overall poverty.

(g) Increase The Level Of Interdependence And Competitiveness:

Globalization is meant to accelerate and raise the level of interdependence and competitiveness among region. It is a change from plan to market. As a consequence, markets for goods trade are increasing, increasingly more service are being traded internationally, and capital is streaming in quicker and progressively more diverse ways across countries and regions. There is increasing integration of countries into World markets for goods, services and capital. In short, Globalization widens and intensifies international linkages in trade and financing.

(h) Induce Local Firms TO BOOST Technology:

The better technology earned by the MNCs may cause or provoke the home firms to soak up similar technology. This may enhance their competitiveness and development.

Disadvantages of Globalization:

The universal acceptance of the marketplace current economic climate and the Globalization led by private businesses tend to have some harmful effects on the overall economy of growing countries. They are really discussed below

Takeover of Country wide Firms:

There are a huge numbers of situations of takeover of countrywide firms by international firms. In some cases, the domestic businesses had to handover nearly all equity to international partners of joint endeavors because of their inability to bring in additional capital.

Ruin of Traditional Crafts And Establishments:

Globalization has lead to replacing of traditional and indigenous products by modern products. It has resulted in the damage of traditional crafts and business and the livelihood of folks depended on these areas.

Brings Instability:

Globalization sometimes brings instability and unwelcome change throughout the market. It exposes workers to competition from imports, which can threaten their careers. The inflow of foreign capital into the country through Globalization may undermine banking companies.

(d) Widens The Disparity:

Globalization will broaden the disparity between person who are associated with market and one who are not. Together with the growth of trade and foreign investment, the spaces among the growing countries will widen. it has taken in increased income inequality in many industrial countries. it is argued that the growing countries and the poor people aren't in a position of achieving advantages from Globalization. The sole beneficiaries of computer will be the developed countries and the MNCs.

Growth rate of India's real GDP per capita

Per Capita GDP of South Asian Economies.

Estimates of the Per Capita Income of India.


Economic liberalization has increased the duty and role of the private sector. At exactly the same time, it has reduced the control of the federal government on current economic climate affairs. It is expected that the reforms would liberalize the Indian economy enough to make a conducive environment for fast monetary development. The Ninth Five 12 months Plan, therefore, rightly witnessed, "The conditions that exist today, demand a decisive break from the past. The federal government has considered on itself way too many responsibilities with the result that this not only motivated a dependency syndrome among our people, but also imposed severe strains on financial and administrative capabilities of the federal government.

Private effort whether specific, collective or community-based varieties the substance of the development strategy articulated in the plan.

The process of reforms according to many economists and communal experts is not fast enough to attain the goals. Jeffrey Sachs, director of Harvard University's centre for international development and a observed economist, remarked that the reform process in India had a long way to go. He feels that with out a give attention to the "twin pillars" of sociable and economical strategies, the future would be bleak for India, especially in the context of competition throughout.

Liberalization process is on the poor track. Federal government is likely to reduce and finally quit its involvement in economic concerns and play a major role in providing the required socio-economic infrastructure. The federal government, however, is reluctant to stop its role of owning and controlling monetary activities. At the same time its inability to invest for providing lowest health and education services. It really is eager to devote to advanced schooling without spending enough on main and supplementary education. It offers failed in providing a corruption free administration, an essential precondition for increasing competitiveness.

Success of the monetary reforms depends after the commitment of all concerned - people, political people, bureaucracy, and federal - to the socio economical progress of the united states.

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