Chapter 3 — Liberalisation, Privatisation and Globalisation

Chapter 3, titled 'Liberalisation, Privatisation and Globalisation: An Appraisal', explains the economic crisis of 1991 that forced India to reform its policies, the three pillars of the New Economic Policy — liberalisation, privatisation, and globalisation — and an assessment of the impact of these reforms on different sectors of the Indian economy.

By the late 1980s, India's government expenditure far exceeded its revenues, and borrowings to finance the deficit became unsustainable. Foreign exchange reserves dropped to a level not adequate to finance even two weeks of imports, and no country or international institution was willing to lend to India. This balance of payments crisis, compounded by rising prices of essential goods, forced India to approach the World Bank and IMF and introduce economic reforms.

The NEP was a wide-ranging set of economic reforms announced by India after securing a $7 billion loan from the World Bank (IBRD) and the IMF. Its thrust was towards creating a more competitive environment by removing barriers to the entry and growth of firms. The policies broadly fall into two groups: stabilisation measures (short-term, to control inflation and maintain forex reserves) and structural reform measures (long-term, to improve efficiency and international competitiveness). These were implemented under three heads: liberalisation, privatisation and globalisation.

Liberalisation means removing the rules and restrictions that were hampering growth and development. Key measures included abolishing industrial licensing for almost all products (exceptions being alcohol, cigarettes, hazardous chemicals, industrial explosives, electronics, aerospace, and drugs and pharmaceuticals), raising the foreign investment limit in banks to around 74 per cent, devaluing the rupee in 1991 to resolve the forex crisis, reducing direct and indirect tax rates, and dismantling quantitative restrictions and tariffs on imports.

Before the reforms, the RBI regulated all banks and financial institutions through various norms — deciding how much money banks could keep, fixing interest rates, and determining the nature of lending to various sectors. One major aim of financial sector reforms was to reduce the RBI's role from regulator to facilitator, meaning the financial sector could take many decisions without consulting the RBI. Banks that fulfilled certain conditions were given freedom to set up new branches without RBI approval.

Privatisation implies shedding the ownership or management of a government-owned enterprise. It happens in two ways: withdrawal of the government from ownership and management of public sector companies, or outright sale of public sector companies. Disinvestment specifically refers to privatising public sector enterprises (PSEs) by selling off part of their equity to the public. The stated purpose was to improve financial discipline, facilitate modernisation, and utilise private capital and managerial capabilities to improve PSU performance.

To improve efficiency, infuse professionalism and enable PSEs to compete in the liberalised global environment, the government identifies and designates them as maharatnas, navratnas, and miniratnas, giving them greater financial, managerial and operational autonomy. Examples from the text: Maharatnas include Indian Oil Corporation Limited and Steel Authority of India Limited; Navratnas include Hindustan Aeronautics Limited, Mahanagar Telephone Nigam Limited, and Indian Railway Catering and Tourism Corporation Limited; Miniratnas include Bharat Sanchar Nigam Limited and Airport Authority of India.

Globalisation generally means integration of India's economy with the world economy, though the chapter describes it as a complex phenomenon involving creation of networks and activities transcending economic, social and geographical boundaries. It led to rapid increase in foreign direct investment and foreign exchange reserves — foreign investment grew from about $100 million in 1990-91 to about $23 billion in 2022-23, and forex reserves rose from about $6 billion in 1990-91 to about $646 billion in 2023-24. India became a successful exporter of auto parts, pharmaceutical goods, engineering goods, IT software and textiles.

Outsourcing occurs when a company hires regular services from external sources (mostly from other countries) that were previously provided internally — such as legal advice, computer services, advertisement, voice-based business processes (BPOs or call centres), record keeping, accountancy, and banking services. Outsourcing intensified due to the growth of IT and fast communication. India became a preferred global outsourcing destination because of low wage rates and the availability of skilled manpower, making services available at cheaper cost with reasonable skill and accuracy.

The WTO (World Trade Organisation) was founded in 1995 as the successor to GATT (General Agreement on Trade and Tariff), which was established in 1948 with 23 countries. The WTO aims to establish a rule-based trading regime in which nations cannot place arbitrary restrictions on trade; its agreements cover trade in goods and services and seek to remove tariff and non-tariff barriers. As an important member, India has been in the forefront of framing fair global rules and advocating the interests of the developing world, and has kept its commitments by removing quantitative restrictions on imports and reducing tariff rates.

Reforms have not been able to benefit agriculture — the growth rate has been decelerating. Since 1991, public investment in agriculture infrastructure (irrigation, power, roads, market linkages, research and extension) has fallen. The partial removal of fertiliser subsidy increased the cost of production, severely affecting small and marginal farmers. Export-oriented policy strategies caused a shift from food grain production to cash crops for the export market, putting pressure on food grain prices. Reduction in import duties and lifting of quantitative restrictions also exposed Indian farmers to increased international competition.

Industrial growth recorded a slowdown in the reform period. This was because of decreasing demand for industrial products due to cheaper imports, inadequate investment in infrastructure (including power supply), and the compulsion in a globalised world to open up to greater flows of goods from developed countries, making domestic industries vulnerable to imports. The chapter notes that the infrastructure facilities, including power supply, remained inadequate due to lack of investment.

Post-1991 India witnessed rapid and continual GDP growth for two decades. According to Table 3.1 in the chapter, total GDP growth increased from 5.6 per cent during 1980-91 to 9.4 per cent during 2021-22. Foreign exchange reserves rose from about $6 billion in 1990-91 to about $646 billion in 2023-24, making India one of the largest foreign exchange reserve holders in the world. However, this growth has been concentrated mainly in the services sector — particularly telecommunication, IT, finance, entertainment, travel, hospitality, real estate and trade.

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