LIBERALISATION, PRIVATISATION AND GLOBALISATION REFORMS OF 1991

The economic liberalisation in India refers to the economic liberalization of the country’s economic policies with the goal of making the economy more market and service-oriented and expanding the role of private and foreign investment. Indian economic liberalization was part of a general pattern of economic liberalization and modernization occurring across the world in the late 20th century.

Impact

1. Liberalisation:

• Competitive Market: The reforms introduced competition from both domestic markets and multinational corporations (MNCs). Indian companies had to face competition from internal and global markets.
• Market-Oriented Approach: Earlier, companies followed a “selling concept” (producing goods first and then selling them). After liberalization, the focus shifted to a marketing concept, wherein companies produced based on market demands.
• Stimulant to Industrial Production: Liberalisation policies significantly boosted industrial production. The IT industry especially benefited from these reforms, allowing Indian companies to achieve global success.
• Poverty: The LPG reforms led to a reduction in poverty rates due to rising incomes and the emergence of a strong middle class.
  • Data: According to the World Bank, poverty declined by 1.36 percentage points annually after 1991, compared to a decline of 0.44 percentage points before 1991.
• Political Risks Reduced: Liberalisation policies helped reduce political risks, as they attracted foreign investment and boosted investor confidence.
• Divestment: The purpose of selling state-owned assets (disinvestment) was to improve financial discipline and aid modernization efforts.

1. Privatisation:

• Removal of PSU Budgets: Before 1991, the losses of Public Sector Undertakings (PSUs) were covered by the government. After the reforms, many PSUs were privatized, reducing the burden on government finances.
• Reduced Fiscal Deficit: Before 1991, the fiscal deficit was around 8.5% of the GDP. After the LPG reforms, it was reduced to 4% due to increased government revenue.
• Banking: The reforms led to three rounds of licenses being granted to private banks like ICICI, HDFC, and Yes Bank, along with the entry of foreign banks, diversifying the Indian banking landscape.
• Healthy Competition: Global market integration fostered competition, leading to improvements in quality, cost efficiency, and reduced processing time.

1. Globalisation:

• Rise in Exports: Indian companies began focusing on exports to earn foreign exchange, leading to increased success in global markets.
  • Data: Over the last 30 years, India’s exports have grown more than 17 times.
• GDP Growth: India’s GDP growth increased significantly after the reforms. During 1990-91, growth was only 1.1%, but after 1991, it steadily increased, reaching 7.5% in 2015-16 as per IMF estimates.

1. Birth of IT Sector: Sectors such as Software, BPO, KPO, and LPO industries saw a boom, allowing India to leverage its demographic dividend. These industries helped absorb a large portion of the population that could have otherwise been underemployed.
2. FDI (Foreign Direct Investment): Liberalisation led to an opening up of the economy, attracting foreign investment that boosted India’s development.
   • Data: India’s FDI inflows increased 564 times since the reforms began in 1991.
3. Employment: The LPG reforms led to a notable rise in employment, reducing unemployment levels in India.
4. Higher Standard of Living: The onset of globalisation and liberalisation improved the standard of living for Indian citizens.
5. Integrated Supply Chains: Globalisation allowed India to integrate itself into global supply chains, making it a critical player in global trade.
   • Data: India’s share in global exports increased from 0.6% in the early 1990s to 1.7% currently.

Challenges due to LPG

1. Liberalisation:
   • Poor Informal Growth: The reforms largely benefited the formal sector, leaving behind the informal sectors, such as agriculture and forest-dependent communities.
   • Unfair Competition: Increased competition from multinational corporations put Indian firms, particularly smaller ones, at a disadvantage.
   • Reduced Government Liability: FDI in the banking and insurance sectors decreased the government’s stake and influence in these critical areas, leaving control to foreign investors.
2. Privatisation:
   • Profit Seeking in Social Sectors: Industries providing essential services (health care, education, public transport) were increasingly influenced by profit motives, which should not be the primary focus of these sectors.
   • Monopoly: Privatisation can lead to natural monopolies in sectors where efficient firms dominate, reducing competition.
   • Dilution of Government Stake: The process of disinvestment has allowed private players to gain larger stakes in previously public enterprises, weakening government control over critical sectors.
3. Globalisation:
   • Inflation: The global demand for food and energy caused price inflation, especially in food products (agflation), affecting the poorest populations.
   • Inequality: Market-based reforms widened the gap between the rich and poor.
     • Data: The top 10% of India’s population holds 77% of the national wealth.
   • MSMEs: Micro, Small, and Medium Enterprises (MSMEs) struggle to compete with cheaper imports, especially from China.
4. Other Challenges:
   • Agriculture: While agriculture continues to employ a large portion of the population, its contribution to GDP has declined significantly. This imbalance creates a challenge in addressing the needs of those dependent on agriculture.

1. Manufacturing:
   • While service sectors have seen exponential growth, the manufacturing sector’s growth has stagnated, which hinders overall balanced economic development.
2. Neglect of Social Sector:
   • Social sectors like health and education were largely ignored during the reforms. This has led to poor health and education outcomes and a lack of quality growth in human capital.
3. Environmental Degradation:
   • The rapid pace of economic growth has come at the cost of ecological sustainability, leading to deforestation and a reduction in forest cover.

Need for Economic Reforms 2.0

1. Red Tapism: Although the Licence Raj was dismantled, permission Raj still persists, and governments have avoided overhauling the clearance process for various industries.
2. Overregulation: Small and medium enterprises (SMEs), the backbone of employment and exports, suffer from excessive regulations and limited access to capital.
3. Social Outcomes: India has struggled with ensuring adequate spending on education and health sectors.
4. Poor Tax Base: Reliance on non-tax revenue is unsustainable, and the tax base must be broadened for long-term growth.
5. Economic Inequality: Liberalisation has not effectively reduced income inequality. The need for reforms to address this is urgent.
6. Share in Global Trade: India’s share in global trade remains low, especially compared to countries like China.
   • Data: The share of informal employment in India increased from 32% in 1999-2000 to 54% in 2004-05 and 67% in 2011-12.
7. Gender Inequality: India needs more targeted reforms to address gender inequality in economic participation.
   • Data: India ranks 112th out of 153 countries in the Gender Inequality Index (2020).
8. FDI Reforms: India’s policy on foreign direct investment (FDI) is often reactive to crises rather than driven by clear, long-term objectives.

Way Forward

Macro-Economic Reforms:

• Balance Between Growth and Inflation: Managing the trade-off between growth and inflation is key, as inflation disproportionately affects the poor and can erode purchasing power.
• Ease Liquidity for Banks: Banks should move toward better self-regulation and adopt stricter risk management standards such as Basel III norms.
• Invest in Social Sectors: Economic gains must be translated into investment in social sectors like health and education, especially in the post-COVID era.
• Promote Gender Equality: The empowerment of women is critical, as a significant portion of India’s productive workforce is hindered by inequities, leading to broader economic losses.
• Managing Migration from Rural Areas: With a significant population migrating from rural to urban centers in search of better employment opportunities, there is a need for infrastructural development that ensures orderly and controlled migrations.

• Non-Conflicting Growth of Capital: A bottom-up approach to growth must be adopted. This strategy should prioritize inclusive capital growth, ensuring that it does not trigger social conflicts. Historical evidence shows that disproportionate growth in certain sectors without considering the majority population can cause disruptions.

 Industry Reforms:

• FTA Management: Free Trade Agreements (FTA) need to be strategically utilized. India’s experience with FTAs has led to trade deficits, which highlights the need for more strategic planning.
• Sunset Clause in Legislations: Periodically reviewing laws through sunset clauses can ensure that outdated policies are phased out. Legislation must be adaptable to future needs, and the relevance of laws should be reassessed continuously.
• Encouraging Entrepreneurs: New-age entrepreneurs should be supported through policy initiatives that create opportunities for innovation and economic expansion.

Agricultural Reforms:

• Cooperatives: Promoting cooperatives can help improve market linkages, bringing more profits and stability to the agricultural sector.
• Integrating Agri Markets: Fragmentation in agricultural markets is a major inefficiency, and better integration could streamline processes, reduce costs, and improve farm incomes.
• Rationalising Supply Chains: The Indian agricultural supply chain suffers from multiple inefficiencies, such as intermediation and market imperfections, which increase transaction costs. Simplifying the supply chain would benefit farmers.
• Land Reforms: Property rights in agriculture need clearer definitions to promote efficiency and accountability.
• Rationalising Subsidies: Streamlining subsidies would create greater operational efficiency without unnecessarily burdening the government.

Environmental Reforms:

• Forest Management: The current system is based on outdated British-era regulations, which need immediate updating to address contemporary environmental challenges.
• Disaster Management: India’s disaster management systems are not aligned with global best practices. Ineffective disaster management results in significant economic losses.
  • Data: India loses approximately $9.8 billion annually due to disasters.
• Climate Change: Reducing reliance on fossil fuels and investing in renewable energy is crucial for long-term sustainability.

Conclusion

While economic growth is vital for national progress, it must not be viewed as the sole indicator of well-being. Human well-being encompasses broader aspects, including equitable distribution of resources, social security, and environmental sustainability. These reforms are necessary to bridge the gap between economic growth and holistic human well-being.