Liberalization refers to the process of removing government restrictions and regulations in various economic sectors, with the goal of increasing efficiency and competitiveness.
- This can include things like reducing tariffs and trade barriers, allowing foreign investment, and deregulating industries.
Privatization refers to the transfer of ownership and control of state-owned enterprises (SOEs) or assets to the private sector. This can involve selling SOEs to private investors through the sale of shares, or contracting out the management of certain public services to private companies.
Globalization refers to the increasing interconnectedness and interdependence of the world’s economies, cultures, and populations, facilitated by the exchange of goods, services, and information. This can be driven by advances in transportation, communication, and technology, as well as the liberalization of trade and investment.
The financial crisis may be traced back to the ineffective handling of the Indian economy throughout the 1980s.
- Due to substantial spending on development programmes, the government’s expenditures remained greater than its revenues (revenue) during the time in question.
- The revenue from public sector enterprises was likewise insufficient to cover the rising expenditures.
- Occasionally, India’s foreign currency, borrowed from other nations and international financial institutions, was used to fulfil consumption demands.
- Imports expanded at an exceptionally rapid rate, whereas exports grew at a slower rate.
- In the late 1980s, the gap between government expenditure and revenue widened to such a degree that it was no longer possible to finance government spending through borrowing.
- The country’s foreign exchange reserves fell to perilous levels. In addition, it became impossible for the nation to pay its consumption demands and its interest commitments.
- India contacted the International Bank for Reconstruction and Development (IBRD), also known as the World Bank and the International Monetary Fund (IMF), and got a loan of $7 billion to manage the crisis.
In exchange for the loan, these foreign organisations required India to liberalise and open its economy by lifting limitations on the private sector, reducing the government’s role in many areas, and abolishing trade obstacles between India and other nations.
India accepted the World Bank and IMF’s conditions and unveiled its New Economic Policy (NEP).
This set of policies may be generally divided into two categories:
- These were the short-term stabilisation measures aimed to address some of the imbalances in the balance of payments and bring inflation under control.
- These are the long-term strategies targeted at enhancing the economy’s efficiency and boosting its international competitiveness by reducing rigidities from various sectors of the Indian economy.
The government began a number of measures that may be categorised under three headings: liberalisation, privatisation, and globalisation.
Liberalisation was enacted to eliminate economic restraints and liberate diverse economic sectors.
Various liberalisation-related policies included the following:
- Earlier in India, the industry was regulated by methods such as industrial licencing, reserving specific sectors for the public sector, regulations allowing only small-scale enterprises in particular locations, and limitations on price fixing and distribution of certain items.
Later, the reforms underwent the following modifications:
- Except for alcohol, cigarettes, dangerous chemicals, industrial explosives, electronics, aerospace, and medications and pharmaceuticals, industrial licencing was removed for practically all product categories.
- Only defence equipment, nuclear energy generating, and rail transportation remained public sector exclusive.
- Numerous commodities produced by small-scale enterprises are currently depreciated.
- In numerous sectors, pricing have been determined by the market.
Financial Sector Restructuring
- The RBI regulates the financial sector in India, which consists of financial institutions such as commercial banks, investment banks, and foreign currency markets.
- One of the primary goals of the financial sector reform is to transform the function of the Reserve Bank of India from regulator to facilitator.
- It led to the creation of both Indian and foreign private banks in the private sector.
Additionally, Foreign Institutional Investors, such as merchant bankers, mutual funds, and pension funds, were permitted to invest in Indian financial markets.
Fiscal Reforms: Reforms of the government’s taxes and public expenditure policies, generally known as fiscal policy, are the focus of tax reforms.
Among the modifications made by tax reforms are:
As it was believed that high rates of income tax were a significant factor in tax evasion, taxes on individual income have been steadily cut. It is true that moderate income tax rates stimulate savings and voluntary income disclosure.
Initially quite high, the rate of company tax has been steadily decreased.
In order to enable the formation of a unified national market for products and commodities, efforts have also been undertaken to reform indirect taxes, i.e. taxes placed on commodities.
The Goods and Services Tax (GST) Act was approved by the Indian Parliament in 2016 to simplify and implement a single indirect tax system in India, which went into force in July 2017. This is anticipated to increase government income, eliminate tax evasion, and establish “one nation, one tax, and one market.”
In addition, to promote greater compliance on the part of taxpayers, several procedures have been streamlined and tax rates have been significantly reduced.
Foreign Exchange Reforms
- The Rupee was discounted against foreign currencies as an emergency step to combat the BOP issue. resulting in a rise in foreign exchange flows.
- Reforms also paved the way for the Rupee’s value to be established by the market rather than by the government, as was the case previously.
- Reforms to Trade and Investment Policies: It intended to increase the local industry’s productivity and worldwide competitiveness with the influx of foreign investment and technology.
The following measures were taken:
- Eliminate quantitative import and export limitations.
- Decrease in tariff rates.
- Removal of import licence requirements. However, this is not the case for industries that are ecologically sensitive.
- The elimination of export tariffs to enhance the international competitiveness of domestic products.
- In addition, all quantitative import limitations on manufactured consumer items and agricultural products were eliminated in April 2001.
Privatization is the process of transferring ownership and control of a public asset to a private party.
This can be accomplished either by withdrawing the government from management or by selling public sector firms completely.
Privatization of the public sector enterprises by selling a portion of the equity of Public Sector Enterprises (PSEs) to the public is known as disinvestment. This was done with the intention of improving financial discipline and facilitating modernization through the use of private capital and managerial expertise.
- The administration anticipated that privatisation would stimulate the influx of FDI significantly.
- In order to boost the management effectiveness of PSUs, they have been granted autonomy in decision-making, for instance by assigning them unique statuses such as Maharatnas, Navratnas, and Miniratnas.
It is the process of a country’s economy becoming integrated into the global economy.
- It is a complicated phenomenon that aims to convert the globe into greater interconnectedness and integration by establishing networks and activities that transcend economic, social, and geographical barriers, so creating a world without borders.
In the context of the UPSC CSE exam, candidates may be expected to have a thorough understanding of these concepts and their implications for domestic and international economic policy.
This could include topics such as the benefits and drawbacks of liberalization, privatization, and globalization; the role of international organizations in promoting or regulating these processes; and the potential impacts on various stakeholders such as consumers, workers, and the environment.