In 1991 India approached the World Bank (IBRD) and the IMF for loans to repay its external borrowings. These agencies expected India to liberalise and open up its economy. India agreed and announced the New Economic Policy (NEP), commonly known as the LPG model: Liberalisation, Privatisation and Globalisation.
20.01 Dimensions of New Economic Policy
Three dimensions: liberalisation, privatisation and globalisation.
The base for the NEP in various countries is the Dunkel Draft, about the General Agreement on Trade and Tariff.
Arthur Dunkel (1932-2005) submitted a 22,000 page document for the World Trade Organisation (WTO).
India committed itself to the New Economic Policy in 1991.
20.02 Meaning and forms of liberalisation
Liberalisation means relaxation of various government restrictions in social and economic policies, so that economies are free to enter the market.
It includes removal of tariffs, subsidies and other restrictions on the flow of goods and services between countries.
It is the result of the New Industrial Policy, which abolished the "License system" or "Licence Raj".
Form
What changed
Industrial licensing
All industries freed from licence except six: drugs and pharmaceuticals, hazardous chemicals, explosives, tobacco products, alcoholic drinks, and electronic, aerospace and defence equipment. Drugs and pharmaceuticals has since been liberalised, so only five remain.
Expansion and production
Industries decide their own production limits by market needs.
Small industries
Investment limit raised to Rs. 1 crore.
Foreign exchange reforms
Rupee devalued in 1991 to meet the balance of payments crisis.
Exports and imports
Procedures simplified for the free flow of goods, services, capital, people and technology.
20.03 Advantages and disadvantages of liberalisation
Advantages
Disadvantages
Increase in foreign investment
Increase in unemployment
Increase in foreign exchange reserve
Loss to domestic units
Increase in consumption
Increased dependence on foreign nations
Control over price
Unbalanced development
Reduction in external borrowings
Reforms were taken in the financial, fiscal, industrial and trade sectors.
20.04 Impact of liberalisation
India contributed $1.3 trillion to world GDP and became the seventh largest economy.
New business opportunities abroad and more foreign direct investment.
New markets brought urban and rural development.
Bank loans for business expansion became easy.
"Foreign Collaboration" is the latest outcome; many MNCs started operating in India.
20.05 Meaning and forms of privatisation
Privatisation is the process of transferring ownership of a business enterprise, agency or public service from the government to the private sector.
Simply, it permits the private sector to set up industries previously reserved for the public sector.
Main reason: PSUs ran in losses due to mismanagement and political interference; managers could not work independently and capacity was under-utilised.
India Scooters Limited was the first ever company privatised in India.
Form
Key point
Contraction of public sectors
Reserved industries cut from 17 (1956 policy) to 8. Now only Atomic Energy, Defence and Railways are Government monopolies.
Sale of shares of PSUs
Shares sold to the public and financial institutions; private share rose from 45% to 55% in 2011 and after.
Memorandum of Understanding
Introduced in 1991 to raise productivity and performance of PSUs.
Disinvestment
Loss-making PSUs sold to the private sector.
20.06 Advantages and disadvantages of privatisation
Advantages
Disadvantages
Increase in efficiency
Lack of welfare
Professional management
Political pressure
Increase in competition
Ignores the weaker sections
Reduction in economic burden of Government
20.07 Impact of privatisation
Positive impact on financial growth by decreasing deficits and debts.
Increase in efficiency of government undertakings.
Better goods and services to consumers.
Making way for Foreign Direct Investment (FDI).
20.08 Meaning and forms of globalisation
Globalisation means interaction and integration of the domestic economy with the rest of the world in foreign investment, trade, production and financial matters.
It results from removing barriers between national economies to encourage the flow of goods, services, capital and labour.
Forms: foreign trade policy (TRIPS, Trade Related Intellectual Property Rights), export promotion, freedom to repatriate (send or bring money back to one's own country), reduction in tariffs, encouraging open competition.
20.09 Advantages and disadvantages of globalisation
Advantages
Disadvantages
Increase in foreign collaboration
Loss of domestic industries
Expansion of market
Increase in inequalities
Technological development
Dominance of foreign institutions
Reduction in brain drain
20.10 Impact of globalisation
Lower operating costs, new raw materials and additional markets for corporations.
MNCs manufacture, buy and sell worldwide.
Boom in the consumer products market; job creation.
Technological advancement in agriculture.
20.11 Highlights of the LPG policy
New foreign trade agreements; foreign investment (FDI and FII); amended MRTP Act, 1969; deregulation; opportunities for overseas trade; steps to regulate inflation; tax reforms; abolition of licence.
Dr. Manmohan Singh, former Prime Minister, is considered the architect of Indian economic reforms.
