Indian Economy: Liberalization, Privatization, and Globalization

Jul 4, 2024

Lecture on Indian Economy: Chapter 3 - Liberalization, Privatization, and Globalization (LPG)

Introduction

  • Coverage: Chapter 1 and 2 completed, now moving to Chapter 3
  • Focus: Entire Indian Economy in one shot, 8 videos in total
  • Goal: Complete the book in 2 days
  • Today's Topic: Liberalization, Privatization, and Globalization (LPG)

Background and Need for New Economic Policy (1991)

  • Pre-1991 issues: No foreign exchange, high deficit, economic slowdown
  • Main Drivers:
    • Poor performance of the public sector
    • High balance of payment deficit
    • High inflation
    • Fall in foreign exchange reserves
    • Heavy debt burden
    • Inefficient management
  • Aim of New Economic Policy (1991): Accelerate growth and development by addressing these issues

Main Reasons for Policy Changes

  1. Poor Performance of Public Sector
    • Assigned major role but showed poor performance from 1951-1990
    • High corruption, inefficiency, and economic drag
  2. Deficit in Balance of Payments
    • High imports vs. low exports leading to deficit
    • Lack of foreign exchange reserve
  3. High Inflation
    • Controllable inflation leading to economic instability
  4. Fall in Foreign Exchange Reserves
    • Only one week’s worth of foreign exchange left
  5. Heavy Debt Burden
    • Massive debts with high interest payments
  6. Inefficient Management
    • High corruption, delays, and inefficiency in public sector enterprises

New Economic Policy (1991)

  • Objective: Change economic policies for stability and long-term growth
  • Approach: Two types of measures introduced: Short-term (Stabilization) and Long-term (Structural Reforms)

Stabilization Measures

  • Target short-term goals to stabilize the economy
  • Focus on foreign exchange problems and inflation control

Structural Reforms

  • Long-term measures to overhaul economic structure
  • Improve efficiency and international competitiveness
  • Creating new economic order with liberalization, privatization, and globalization

Elements of New Economic Policy

  1. Liberalization
  2. Privatization
  3. Globalization

Liberalization

  • Definition: Removal of restrictions on private sector, deregulation, reduction of government control
  • Purpose: Unlock economic potential, invite MNCs, increase competition
  • Key Reforms:
    • Reduction in Industrial Licensing: Eliminated for most industries
    • Public Sector Role Reduction: From 17 to 3 industries under Schedule A
    • Reservation for SSIs removed
    • Import and Export Liberalization
    • Entry of Private Banks and financial institutions

Privatization

  • Definition: Reducing public sector and enhancing private sector role in economy
  • Purpose: Improve financial discipline, enhance modernization, reduce corruption
  • Methods: Disinvestment, selling equity of public sector enterprises
  • Need for Privatization:
    • Poor performance of public sector units
    • Need for technological advancement and efficiency
  • Benefits: Increased competition, improved financial health, technological innovations, better consumer focus

Globalization

  • Definition: Integrating domestic economy with the world economy
  • Objective: Remove international trade barriers, enable free capital movement
  • Key Policies:
    • Increasing Foreign Investment Limits: From 51% to 100%
    • Partial Convertibility of Currency: For trade improvements
    • Reduction in tariffs and quantitative restrictions

Impact of LPG Reforms

  • **Positive Effects: **Enhanced market access, advanced technology, increased GDP growth, higher competition
  • Negative Effects: Increased inequality, market-driven disparities, limited benefits for the poor

Demonetization and GST

Goods and Services Tax (GST)

  • Date: 29th March 2017 (Implemented 1st July 2017)
  • Purpose: One nation, one tax; simplify the tax structure
  • Types of GST: CGST, SGST, IGST
  • Benefits: Reduced tax burden, unified market, increased revenue transparency

Demonetization

  • Date: 8th November 2016
  • Aim: Curb black money, corruption, and illegal activities
  • Impact: Removal of 500 and 1000 rupee notes, affecting 86% of cash supply

Conclusion

  • Major Takeaways: Understanding the shift in economic policies in 1991 and its importance
  • Focus for Further Study: Read about GST and Demonetization for general knowledge, nothing more in-depth required