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LPG
Liberalisation , Privataisation and Globalisation
Rationale of economic reforms-crisis of 1991
• NI was growing at the rate of 0.8%• Inflation reached the height of 16.8%• Balance of payment crisis was to the extent
of10,000 crores.• India was highly indebted country. It ws paying
30,000 crores interest charges per year.• Foreign exchange reserves were only 1.8 billion
dollars which were sufficient for three weeks.
• India sold large amount of gold to Bank of England.
• India applied for the loan from World Bank and IMF
to the extent of 7 billion dollars.
• Fiscal deficit was more than 7.5%.
• Deficit financing was around 3%.
• Trade relation with Soviet block had broken down.
• Remittances from non-residence Indians stopped due
to war un Arab countries.
• Prices of petroleum products was very high.
For Availing loan , IMF and World Bank expected India to:
• Liberalise and open up the economy by removing
restrictions on the private sector,
• Reduce the role of the government in many areas
• Remove trade restrictions.
India agreed to the conditionalities of World Bank
and IMF.
Economic Reforms Since 1991- New Economic Policy
• ECONOMIC REFORMS:
Economic reforms or structural adjustment is a
long-term multi-dimensional package of various
policies and programmes for further economic
development.
NEP1991:
In July 1991, Prime Minister Narasimha Rao along with his
Finance Minister Manmohan Sigh initiated the
economic liberalisation of 1991, to remove the
inefficiencies in the economic system.
OBJECTIVES OF NEP1991:
• To reduce fiscal deficit and to have relative price stability.
• To reduce the area of operation of the public sector and to open up more areas for the private sector.
• To liberalise industrial policy and abolish industrial licensing for most of the private sector industries.
• To encourage inflow of foreign capital by granting more concessions to foreign direct investment.
• To liberalise foreign trade by reducing tariff duties and abolishing quota restrictions in case of many imports.
Components of NEP 1991
1. MACROECONOMIC STABILISATION- demand side
management:
This is a short-run measures to return to low and stable
inflation and a sustainable fiscal and balance of
payments position.
o Control of inflation
o Fiscal correction
o Improvement in a balance of payment s situation
Structural adjustment –supply side management
This is a long run measures to remove the bottlenecks and obstacles in the growth path of an economy. These policies includes :
Trade and capital flow reformsIndustrial deregulationPublic sector reforms and disinvestmentFinancial sector reformsThe goals is to abolish controls, eliminate bureaucratic
hurdles and redtapism and make the decision making process efficient and transparent.
NEP –Policy of Liberalisation, Privatisation And Globalisation(LPG)
Structural reforms can be seen with
respect to:
• Liberalisation
• Privatisation
• globalisation
LIBERALISATIONLiberalisation means removing all unnecessary controls and restrictions like permits, licenses, protectionist duties, quotas, etc. imposed by the government.
In 1991, government was enforcing regulation in many ways.
o Industrial licensingo Private sector was not allowed in many industries.o Some goods only produced in small scale industries.o Price controls and control on distribution of
selected industrial products.
• Import licence.
• Foreign exchange control
• Restrictions on investment by big business house etc.
These controls resulted in:
a) Consumption delays
b) Inefficiency
c) Losses
d) High cost economy
Objectives of liberalisation
• To raise internal competitiveness of industrial
production.
• To raise foreign investment and technology.
• To reduce debt burden of the country.
• To get an opportunity to export to developed
countries and to import capital goods and
machinery from them.
Liberalisation MeasuresIndustrial
sector reforms.
Financial sector reforms.
Tax reforms.Foreign Exchange reforms.
Trade policy reforms
Industrial sector reforms• Except for 6 industries related
to security and strategic concerns:
a) Liquorb) Cigarettesc) Industrial explosivesd) Defence equipmentse) Drugs and pharmaceuticalsf) Dangerous chemicals
Abolition of Industrial Licensing.Contraction of public sector.Reforms in small scale sectorConcessions in the MRTP Act.
PRIVATISATION
PRIVATISATION Improving govt: financial composition
• Raising funds from the sales Improving the performance of
an enterprise • Increasing efficiency• Requiring enterprises to meet
performance objectives• Relief from public sector
financial constraints.
It is defined as
the transfer of a
function, activity
or organisation
from the public to
the private sector.
Objectives :
Privatisation measures
means sale of a part of equity holdings held by the government in any public sector undertaking to private investor.
Two methods: Minority sale Strategic sale
The govt: has decided to give special treatment to some of the important profit making PSUs and they were given the status of Navratnas.
1. Disinvestment2.Policy for Navratnas.
GLOBALISATION
• It refers to growing economic interdependence among countries in the world with regard to technology, capital, information, goods and services etc:
FEATURESOpening and planning to expand business
throughout the world.Erasing the difference between domestic
and foreign marketBuying and selling goods and services
from / to any countries in the world.Locating the production and other physical
facilities on a considerations of the global business dynamics, irrespective of national considerations
Global sourcing of factors of production i.e. raw material, components ,machinery, technology, finance etc. are obtained from the best source anywhere in the world
Global orientation of organizational structure and management culture
FACTORS
• Technological Advances in communication
• Improvements in transportation and Technology
• other Factors:
ADVANTAGE• Increase in Trade in Goods and Services• Free flow of technology• Increase in industrialization• Increase in production and higher standard of
living. • Commodities at lower price with high quality • Increase in jobs and incomes• Balanced human development
DISADVANTAGE• Loss of domestic industries• Exploits human resources• Decline in incomeo Transfer of natural resources• Widening gap between rich and poor• Dominance of foreign institute
Out sourcing
• Means obtaining goods and services by contract from an outside source.
• The main services which are being outsourced from India by developed countries are:
1. Voice-based business processes2. Banking3. Railway inquiry4. Record keeping5. Accountancy etc:
Main Organisations for Facilitating Globalisation
• IMF
• WORLD BANK
• WTO
IMF
• Came to exist on dec.27,1945 with the signing of its Articles of Agreement.
• It commenced operations on March 1,1947Objectives:1. Promoting international monetary cooperation.2. Helps in facilitating the expansion and balanced growth of
international trade.’3. Promoting exchange stability.4. Helps in expanding international liquidity (convertability to cash )5. Expand capital investment in underdeveloped countries 6. Remove disequilibrium in the balance of payments7. Establish multilateral trade and payments.8. Helps to generate higher employment and income.
World Bank(IBRD)
• Affilited with united Nations a