LPG

what are the steps that government has taken to make Indian economy be adjustable with LPG and how India is affected by LPG

1. U nit-2 Liberalization, Privatization Globalization -BY: PROF. Rucha Thadeshwar SPKM Educational Campus, Jetpur

2. Introduction The economy of India had undergone significant policy shifts in the beginning of the 1990s. This new model of economic reforms is commonly known as the LPG or Liberalization, Privatization and Globalization model.

3. Reasons for LPG policy Fiscal deficit was 5.4% of gross domestic product in 1981-82 which rose up to 8.4% in the year 1990-01. In 1991 amount of interest liabilities rose further to 36.4% of total government expenditure. Country was moving towards debt trap. Mounting “Adverse balance of payment(BOP)” Fall in foreign exchange reserve Rise in prices.

4. Poor performance of public sector undertakings. First Gulf war caused spikes in oil prices which caused a major balance-of –payment crisis for India. India asked for $1.8 billion bailout loan from IMF, in return demanded reforms. This New Economic Policy was inaugurated by former prime minister P.V. Narasimha Rao under the guidance his FM Manmohan Singh.

5. Liberalisation Liberalisation befalls when something which was forbidden is no longer forbidden or when government laws are loosened.  Liberalization refers to relaxation of government restrictions in areas of economic policies. Thus, when government liberalizes trade it means it has removed the tariff, subsidies and other restrictions on the flow of goods and service between countries.

6. Meaning of liberalisation Dismantling of industrial licensing system built over the previous four decades. Reduction in physical restrictions on imports and reduction also in the rate of import duties. Reform of the financial system. Reduction in the levels of personal and corporate taxation. Reduction in restriction on foreign investment.

7. Opening up of areas hitherto reserved for public sector. Partial privatization of public sector units. Softening of MRTP (monopolies and restrictive trade practice act) regulations and Making various sectors of the Indian economy competitive on the global economic platform by making them produce quality goods in a cost effective manner

8. The Path of liberalization • Relief for foreign investors • Devaluation of Indian rupees • New trade policy • Removal of import Restrictions • Liberalization of NRI remittance (payment /transfer of funds) • Freedom to import technology • Encouraging foreign tie-ups • MRTP relaxation • Privatization of public sector

9. Privatization

10. Arguments in favour of privatisation 1 . Dismal Performance of PSEs: PSEs in India are over controlled and overregulated causing inefficiency to grow upwards. Accountability of PSE enterprises is minimal and no one is held responsible for the ineffective functioning of these enterprises. Political interference also has a telling effect on the performance of the PSEs . Most PSEs operate with manager having less or no expertise on the affairs of the concern . Decision-making again is a lengthy process. In fact, managerial inefficiency is one of the greatest banes of the PSEs.

11. 2. Lack of political interference: It is argued governments make poor economic managers. They are motivated by political pressures rather than sound economic and business sense. The government may be reluctant to get rid of the workers because of the negative publicity involved in job losses. Therefore, state-owned enterprises often employ too many workers increasing inefficiency.

12. 3. Accountability of the Private Sector Raises Efficiency Privatisation will usher in an improvement in efficiency and as improved performance is concerned with ‘profit-oriented’ decision-making strategy Accountability is strictly ensured in a private sector enterprises and some people are held responsible for any failure. Accountability and responsibility will definitely tone up the efficiency and greater output of the private sector.

13. 4. Development of Social and Economic Infrastructures by the Government: Government resources for keeping up PSEs may be utilised for the purposes of social sector development as this sector is starved of financial resources. Modern governments should spend more on this sector as well as economic infrastructures as these are the two essential pillars of growth.

14. 5. LPG against Anti-Competitive Behaviour : Indian private industrialists performed in a sheltered market and remained insulated from any kind of external competition. This made Indian private sector an inefficient one. Goods produced by this sector were far below international standards. Privatisation will promote private sector culture by introducing competition so that Indian industrialists can compete with their foreign counterparts and, hence, generate greater output and improved efficiency. All these trigger a chain of favourable movements in many direct and indirect directions.

15. 6. Absence of Governmental Interference Indian PSEs are subject to too much governmental and political interference thereby making them operationally in­efficient. Private sector is free from such unavoidable interference .

16. 7. Production of Non-Priority Items by PSEs Lacks Reasoning Over the years, the Indian PSEs have branched out in all directions, as their operations must not only consider economic objectives, but also social welfare objectives . In the name of enlarging public sector enterprises, the government has moved into the production of many unimportant consumer goods (producing food products like bread, fruit juice, entertainment business, and so on). No economic logic is forwarded for producing these commodities.

17. Arguments against Privatisation 1. Private Sector is Inefficient too : There are some good number of PSEs that are not loss-making enterprises; instead, some of them generate revenues. If PSEs are allowed to grow in an independent way, managers of these enterprises are expected to respond according to the changed requirements. Further, there is no evidence that can suggest that the Indian private sector performs satisfactorily. Private sector is inefficient too .

18. During 1950-1990, India’s private industrialists functioned under the protective umbrella without putting much effort in increasing factor productivity. These industrialists felt no urgency in modernising their industries; they used old and obsolete technology which made this sector an inefficient one. There is no statistical evidence that can show a positive relationship between ownership and performance. In fact, performance is not be related to the ownership of industries. What is needed is the competitive environment in which any sector public sector and private sector can grow.

19. 2. Financial burden: There are so many private industries that are lying sick. Sometimes, private industrialists deliberately make their organisations ‘sick’—so that they can receive financial help from public sector institutions to tide over the crisis.

20. 3. Infrastructures may not grow in Abundance: Economic growth crucially depends on the growth of infrastructures. Infrastructures both economic and social and economic growth are positively linked to each other. Since infrastructure investments are lumpy in character, private capital shies away from such investments and thrives on state- support infrastructures. Therefore, move to­wards greater and greater privatisation means country’s slow and haphazard growth of infrastructural facilities.

21. 4. Public interest: There are many industries which perform an important public service, e.g., health care, education and public transport. In these industries, the profit motive shouldn’t be the primary objective of firms and the industry. For example, in the case of health care, it is feared privatising health care would mean a greater priority is given to profit rather than patient care.

22. 5. Problem of regulating private monopolies Privatisation creates private monopolies, such as the water companies and rail companies. These need regulating to prevent abuse of monopoly power. Therefore, there is still need for government regulation, similar to under state ownership.

23. 6. Peripheral Social Responsibility Private sector is completely guided by the profit motive. This sector will invest in those areas that yield quick return the low priority industries. Above all, social responsibility or welfare objective of business is side-lined by the private industrialists.

24. 7. Danger of Employment Loss Employment loss seems to be another argument against privatisation as far as present employment scenario is concerned. In the name of more and more profit, private industrialists have adopted ‘hire and fire’ policy of employment as well as labour -saving technologies. Further, private businessmen exploit workers in many forms (like extending working hours or increasing work load, sabotaging the power of the workers to negotiate with the employers, etc.). All these impact on wages. Income inequality, thus, gets widened.

25. Privatization in India In 2002,all other industries were allowed to be privatized except only 3 In public sector, disinvestment was initiated Token privatization some % of shares of public sector is sold to private sector Deficit privatization public sector is sold to reduce fiscal deficit From 1991-’92 to 2007-’08 only 8.9% disinvestment has been done. Gov. has privatized 9 profit making private sector that are: IOC,ONGC,HPCL,BPCL,IPCL,VSNL,BHEL,SAIL,NTPC

26. DEVELOPMENT OF BUSINESS AND INDUSTRIES IN ORGANISED SECTOR ( taking 1993-94 as a base year,so 1993-94=100) Sr no. Sector 2002-03 Index 2006-07 Index Increase 1 Manufacturing sector 189 268 79 2 Capital goods 177.4 314.2 136.8 3 Consumer goods 187.5 276.8 87.3 4 Ready made cloths 190.3 285 94.7 5 Chemical and related products 191.8 283.4 91.6

27. DEVELOPMENT OF BUSINESS AND INDUSTRIES IN UNORGANISED SECTOR Sector which is not regulated by rules and regulation of government. It includes hawkers, retail traders, lariwallahs , artisans and many others who do not have any specific line of trade. Due to liberalization and privatization their activities have also proliferated. They get credit facility easily on a liberal terms due to this there is a development of unorganized sector

28. Globalization Globalization means the speedup of movements and exchanges (of human beings, goods, and services, capital, technologies or cultural practices) all over the planet. One of the effects of globalization is that it promotes and increases interactions between different regions and populations around the globe.

29. Four parameters of Globalisation 1.Reduction of trade barriers to permit free flow of good and services across national frontiers. 2. Creation of an environment in which free flow of capital can take place. 3. Creation of an environment permitting free flow of technology among the nation states. 4.Creation of an environment in which free movement of labour can take place in different countries of the world.

30. Steps towards goblization 1.exchange rate adjustment and rupee convertibility In 1991, India made its currency fully convertible i.e. allow it to determine its own exchange rate in international market without official intervention. IMF insisted on 13% ‘real devaluation’ Government fixed the target rate of inflation 9% So, nominal devaluation required was 22% FM did this in two phased manner on 1, july 1991 and 3,july 1991 By this first condition laid down by IMF for grant was met.

31. Government of India progressively move forward towards full convertibility. Budget of 1992-93 introduced dual exchange rate system implying partial convertibility of rupee. Budget of 1993-94 introduced full convertibility On August,19,1994 india achieved full convertibility full convertibility on current account can be defined as freedom to buy or sell foreign exchange All payments due in connection with foreign trade Payment due as interst on loan Payments of moderate amount of amortization of loan or for depreciation Moderate remmitances for family living expenses

32. 2. Import liberalization The world bank had advocated for redesigning of trade policy so that there is only one negative list for import. Lowering of import tariffs n all goods and free entry to capital goods, intermediate goods raw materials and consumer goods into Indian economy On remaining item there was a phased duty reduction from 1993 to 1997 Import duty 255% 150% 110% 85% 65% 50% 40%

33. 3.Opening up for foreign capital Government of India has thrown open doors for FDI to foreign investors by offering various facility and incentive to foreign investors and non resident Indian. In 1991 government has announced permission for automatic route as following FII have been allowed to Invest in Indian capital market subject to registration with SEBI No of companies Foreign equity 9 74% 3 50% 13 51% 35 51% 48 51%

34. Effect of globalization GDP and poverty ratio Impact on external sector Impact on employment Impact on agriculture sector Impact on industrial sector Disadvantage from various agreement Impact on MNCs Increase in economic inequalities Neglect of informal sector.

35. 1. GDP and poverty ratio GDP POVERTY 1992-2002 6% 1993-94 36% 10 TH PLAN (2002-07) 7.6% 2004-05 27% 11 TH PLAN (2007-12) 7.9% 12 TH PLAN 2012-2017) 8.2%

36. 2. Impact on external sector Our export doesn’t show any significant increase even after adoption of globalization. But due to liberalization and openness of economy , our import increases. One positive side of liberalization and globalization is that our self reliance has increased and now our export finance 60% of our import. INDIA’S SHARE IN WORLD TRADE 1990 0.54% 2004 0.8% 2008 1.68%

37. 3. Impact on employment Due to globalization, there is structural changes in job market. Though GDP was more during globalization, the employment growth rate reduced. Another reason for declining growth rate is increasing population @2.84%.

38. Employment in organized sector was marginally increased from 267 lakhs to 287 lakhs. Globalization has increased jobs in the sectors where special skills are required. But it reduced the job into consumer goods industries( detergent , soap) due to entry of MNCs. So globalization results into jobless growth in India.

39. 4. Impact on Agriculture sector Globalization has favorable impact on our agrarian economy because of removal of restriction on food import by developed countries But due care should be taken in patent right of our agrarian items like basmati, neem etc

40. 5. Impact on industrial sector It was assumed that competition with MNCs will make Indian economy more cost conscious and quality conscious But before globalization Indian companies were operating in quiet closed and completely sheltered market and that had not make them capable to face the competition. Positive side is that import gave wide range of choice to the customer

41. 6. Disadvantage from various agreement India has entered into agreement with WTO like TRIPs ( Trade related intellectual property rights) and TRIMs ( Trade related investment measure) TRIPs result into legalization of monopoly whereas TRIMs protects rights of foreign investor in developing country.

42. 7. Impact on MNCs Entry of MNC has result into unequal competition between giant and weak Domestic companies feel like target and victim and expect level playing field.

43. 8. Increase in economic inequalities Fact is out of 185 countries 80countries peer capita income has declined as compare to their per capita income decade back. Only few sectors are linked to globalization

44. 9. Neglect of informal sector. Informal sector provides GDP 60%employment 93% But globalization has focused mainly on organized sector.