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LPGLiberalization, Privatization & Globalization

INDIA’S DEVELOPMENT STRATEGY PRIOR TO 1991-AN EVALUATION

Prior to 1991, India followed mixed economy and the control of critical industries as under were under the control of the state.

• Coal mining • Steel, power• Roads

• The private sectors were allowed to establish certain industries again under the rules and regulations of the govt.

• In case of the public sector, the Govt invested a large amount and the purpose behind this strategy was to remove poverty, reduce inequalities in the distribution of income and wealth and to achieve economic growth and social justice

POSITIVE ASPECTS

• A large industrial base and increase in industrial production.

• The proportion of population living below poverty line has declined.

• India has become self sufficient in food grains• A base for export-oriented industries has been created.• India has mobilized savings and created their own

resources.• Educational institutions have produced large number

of scientists and technically skilled working people.• This has helped in industrial and technological growth

and self-reliance.

NEGATIVE ASPECTS

• Industrialisation did not take place as per the expectation.• The growth rate of industrial production declined from 8% to 4%.• The laws that were framed to regulate the private sector were responsible

for slow growth of Industrial sector.• These laws have also failed to reduce the concentration of economic

power in the private sector.• Corruption, lack of efficiency in work and ineffective management became

the common features of the public sector.• Many public sector companies were making losses.• Official machinery became a major hindrance to the development.

NEED FOR REFORMS

• Not only the negative aspects but also several problems like rising prices, shortage of adequate capital, slow economic development and technological backwardness contributed to the increase in govt’s expenditure than the revenue.

• India’s borrowings (1991) from abroad had increased to that level Indian Govt had to borrow money from World Bank and IMF.

• All these factors led to the framing a New Economic Policy (NEP) that contains three strategies-

Liberalization, Privatization and Globalization

LIBERALIZATION

2 components

• Allow the private sector to run those activities which were restricted earlier only to public sector.

• Relaxation of rules and regulations which were restricted to the growth of private sector

PROCESSES

• Private sector has been allowed to produce all the goods except alcohol, cigarettes, hazardous chemicals, industrial explosives, electronic aerospace and drugs and pharmaceuticals.

• Industries reserved for public sector has been reduced from 17 to 3.• Private sector can also enter in to core industries like iron and steel,

electricity, air transport, shipbuilding, heavy machinery and some defence goods.

• The private sector has been freed from many regulations such as (a) licensing (b) permission to import raw materials (c) regulation on price and distribution and (d) restriction on investment by large business companies.

GLOBALIZATION

• Integrating the Indian economy with the world economy.• Many producers from outside the country can sell their goods and services

in India.• India can also sell its goods and services to other countries.• Globalization facilitates those who have capital to establish enterprises in

India, produce goods for sale within the country or export them.• Entrepreneurs from India also can go and invest in other countries.• Not only the movement of capital but also the movement of people takes

place.• Exchange of capital, technology and experience take place between the

various countries of the world.• Govt has removed restrictions on import of goods, reduced taxes on

imported goods and encouraged investors from abroad to invest in India.

ADVANTAGES

• Promise of increase productivity and higher living standards• Increase in trade in goods and services• Provide new opportunities for growth

– Exports, Imports & Entre-ports• Globalization of financial markets• Increased flow of foreign market capital• Impact on poverty• Increase in the level of interdependence & competitiveness• Induce domestic firms to improve technology

DISADVANTAGES

• Takeover of national firms• Ruin traditional crafts and industries• Brings instability• Widens the disparity

PRIVATIZATION

• Means- Transfer of ownership or sale of public enterprises Liberalization Approach: Fewer controls and regulation by the state. Relative Share Enlargement Approach: Enlargement of the share of

private enterprises in the production of goods and services in the economy.

Association of Private Sector Management Approach: Utilizing the services of managerial personnel or executives of private sector enterprises for the conduct and management of PSUs.

Transfer of Minority Equity Ownership Approach: Transfer of minority equity ownership of public enterprises to private individuals and institutions so that the ultimate control continues to remain with the state.

Transfer of Complete Ownership Approach: Sale of all the shares to the private parties so that the public enterprises are converted into private enterprises.

HOW TO PRIVATIZE?

Franchising• Arrangement where one party (the franchiser) grants another party

(the franchisee) the right to use its trademark or trade-name as well as certain business systems and processes, to produce and market a good or service according to certain specifications. The franchisee usually pays a one-time franchise fee plus a percentage of sales revenue as royalty, and gains– Immediate name recognition– Tried and tested products – Standard building design and décor, – Detailed techniques in running and promoting the business,– Training of employees, and – Ongoing help in promoting and upgrading of the products

Leasing

• Written or implied contract by which an owner (the lessor) of a specific asset (such as a parcel of land, building, equipment, or machinery) grants a second party (the lessee) the right to its exclusive possession and use for a specific period and under specified conditions, in return for specified periodic rental or lease payments.

• Advantages– Conservation of capital (because the lessor provides

100 percent financing– Tax savings (in most cases),– Avoidance of the risk of obsolescence, and– Relative ease of obtaining a lease as opposed to a comparable bank

loan.

Contracting

• A legal agreement between two parties in which each agrees to do, make, buy, or sell a good or service, or in which one party grants a right or undertakes an obligation, often in exchange for a fee.

• By way of tender bidding

Disinvesting

• Divestiture, liquidation, or sale of a segment of a firm. • Disinvestment may occur for a number of reasons including a poor

outlook for a particular line of business or a firm's need to raise additional capital for other more promising segments of its business

ADVANTAGES

Increasing overall efficiency Improvement in the quality of management and decision making: No government financial backing, and therefore, capital market will

compel these enterprises to be more efficient Substantial reduction in government’s budgetary support resulting in

reduction in budgetary deficit; Recovery of government fund which could more productively be used in

development activities; Reduction in political and bureaucratic interferences; Better industrial relations management; etc.

DISADVANTAGES

PSUs have been incurring and reporting losses on a continual basis; referred of BIFR;

Multiplicity of authorities to whom the PSUs are accountable; Delay in implementation of projects leading to cost escalation and other

consequences; Ineffective and widespread inefficiency on management; Many PSUs are operating without the leader (i.e., chief executive or

chairman); PSUs are over-staffed resulting in lower labour productivity, bad

industrial relations, etc.; Un-remunerative pricing policy; and