This lesson shows entire theory of government economics reforms like Liberalization, Privatisation and Globlisation.

1. Navratan Sharma
SMPS , Phagi
The reforms aimed at bringing in greater participation of the
private sector in the growth process of the Indian economy. ...
The reforms were aimed at attaining a high rate of economic
growth, reducing the rate of inflation, reducing the current
account deficit and overcoming the balance of payments crisis.
Main Reasons for Economic
Reforms in India
(i) Rise in Prices:
Price rise continuously in India. The inflation rate
increased from 6.7% to 16.7%.Due to inflation country’s
economic position became worse.
Main reason for inflation was rapid increase in money supply. It
was due to deficit financing Deficit financing means borrowing from
Liberalization ,
Privatization, and
Globalization

2. Reserve Bank of India by Government to meet its deficit.RBI
provides this loan by printing new currency notes. Cost of
production increases due to inflation. This affects demand for
products.
(ii) Rise in Fiscal Deficit:
Due to increase in non- development expenditure fiscal deficit of
the Govt. had been increasing. Fiscal deficit means difference
between total expenditure and total receipts minus loans. To cover
the fiscal deficit, the Govt. has to raise loans and pay interest on it.
Due to rise in fiscal deficit there was rise in public debt and interest.
In 1991 interest liability became 36.4% of total govt. expenditure.
The Govt. caught in debt trap. So Govt. has to resort to economic
reforms.
(iii) Increase in Adverse Balance of Payments:
The difference betweentotal exports and imports of a country in
called Balance of Payments. When total imports obtained from two
sources.
When foreign exchange falls short for payment otherwise total
imports exceed total exports, problem of adverse balance of
payments arise. Though incentives are given for export promotion
yet the desired results cannot be achieved. It is due to the fact that
our export goods could not compete in price and quality.
So deficit of balance of payments had been rising continuously. In
1980-81 it was Rs. 2214 crore and rose in 1990- 91 to Rs. 17,367
crores. To cover this deficit large amount of foreign loans had to be
obtained. So liability of loan and its interest paymentgoes as
increasing. It made balance of paymentsadverse.
(iv) Iraq War:
In 1990-91, war in Iraq broke, and this led to rise in petrol prices.
The flow of foreign currency from Gulf countries stopped and this
further aggravated the problem.

3. (v) Dismal Performance of PSU’s (Public Sector Undertakings):
PSU’s are enterprises wholly owned by Govt. have invested crores of
Rs. in these enterprises. These are no performing well due to
political interference and became big liability for Govt.
(VI) Fall in Foreign Exchange Reserves:
Indians foreign exchange reserve fell to low ebb in 1990-91 and it
was insufficient to pay for an import bill for 2 weeks. In 1986-87
foreign exchange reserveswere Rs. 8151 crores ad in 1989-90, it
declined to Rs. 6252 crores. Then Chandershekhar Govt. had to sell
Gold to meet the import liability. So Govt. had to think about policy
of liberalization.
Introduction to LPG
LPG stands for Liberalization, Privatization, and
Globalization. India under its New Economic Policy
approached International Banks for development of the
country. These agencies asked Indian Government to open
its restrictions on trade done by the private sector and
between India and other countries.
Indian Government agreed to the conditions of lending agencies and
announced New Economic Policy (NEP) which consisted wide range of
reforms. Broadly we can classify the measures in two groups:
1. Structural Reforms
With long-term perspective and eyeing for improvement of the
economy and enhancing the international competitiveness, reforms were
made to remove rigidity in various segments of Indian economy.

4. 2. Stabilization Measures (LPG)
These measures were undertaken to correct the inherent weakness that
has developed in Balance of Payments and control the inflation. These
measures were short-term in nature. Various Long-Term Structural
Reforms were categorized as:
 Liberalization
 Privatization and
 Globalization
Collectively they are known by their acronym LPG. The balance of
Payment is the systemof recording the economic transactions of a
country with the rest of the world over a period of one year. When the
general prices of goods and services are increasing in an economy over
a period of time, the same situationis called Inflation. Let’s understand
each terminology in detail
Liberalization
The basic aim of liberalization was to put an end to those restrictions
which became hindrances in the development and growth of the nation.

5. The loosening of government control in a country and when private
sector companies’ start working without or with fewer restrictions and
government allow private players to expand for the growth of the
country depicts liberalization in a country.
Objectives of Liberalization Policy
 To increase competition amongst domestic industries.
 To encourage foreign trade with other countries with
regulated imports and exports.
 Enhancement of foreign capital and technology.
 To expand global market frontiers of the country.
 To diminish the debt burden of the country.
Economics reforms in different sectors
Many sectors were impacted during the course of Liberalization. They
were:
 Industrial Sector Reforms
 Financial Sector Reforms
 Tax Reforms / Fiscal Reforms
 Foreign Exchange Reforms / External Sector Reforms
1. Industrial Sector Reforms
I. Abolition of Industrial Licensing
The government abolished the licensing requirements of all industries,
except for five industries, which are:

6.  Liquor
 Cigarettes
 Defense equipment
 Industrial Explosives
 Dangerous Chemicals, drugs, and pharmaceuticals
I. Contraction of Public Sector
A number of public sector industries which were earlier reserved under
governmental control reduced from 17 to 8 in the count. Presently these
companies are only 3 in number. Public sector undertaking controls in
the sectors mentioned below –
 Railways
 Atomic Energy
 Defense
III. De-reservation of Production Areas
Theproductions areas which were earlier reserved for Small Scale
Industries werede-reservedto all. This improvedtheland efficiency
and developed more cultivation area across the country.
IV. Expansion of Production Capacity
Theproducerswerevoluntarilyallowed to expand theirproduction
capacityaccordingto thenatureofthe market.
V. Freedom to Import Capital Goods
To upgrade and adopt technology which is more advanced as
compared to existing technology, the business houses, and

7. production units were allowed to import capital goods from
advanced countries.
2. Financial Sector Reforms
Following reforms were enforced and initiated in above mentioned
financial institutes:
I. Reducing various ratios
 Statutory Liquidity Ratio (SLR) was lowered from 38.5% to 25%.
 Cash Reserve Ratio (CRR) was lowered from 15% to 4.1%.
II. Competition from new private banks
 The banking sector emerged in the private sector and many players
grabbed the opportunity to compete with public sector banks.
III. Change in the role of RBI
The ace bank of the country i.e. The Reserve Bank of India became a
“facilitator”. Earlier RBI was the regulator of the financial activities in
the country.
IV. De-regulation on interest rates
Banks were allowed to set their own interest rates on all business and
commercial borrowings. But for saving bank deposits, the control was
with the central government.
3. Tax Reforms / Fiscal Reforms
Fiscal Reforms are the policies set for the government’s taxation and
public expenditure policies. All macroeconomic related issues are part
of fiscal policies designed by the central government. Prior policy

8. simplified the tax structure and taxation rates were dropped and reduced
for convenience of the taxpayers.
4. Foreign Exchange Reforms / External Sector Reforms
I. Devaluation of Rupee
The value of the rupee was deliberately devalued to encourage exports
and discourage imports. In 1991, to increase foreign exchange reserves,
exports were promoted and all relevant benefits were provided to
exporters.
Impacts of Liberalization in India
Positive impacts of liberalization in
India
Negative impacts of liberalisation in
India
Free flow of capital: Liberalization has
improved flow of capital into the
country which makes it inexpensive for
the companies to access capital from
investors. Lower cost of capital enables
to undertake lucrative projects which
they may not have been possible with
a higher cost of capital pre-
liberalization, leading to higher growth
rates.
Destabilization of the
economy: Tremendous redistribution
of economic power and political power
leads to Destabilizing effects on the
entire Indian economy.
Stock Market
Performance: Generally, when a
country relaxes its laws, taxes, the
stock market values also rise. Stock
Impact of FDI in Banking
sector: Foreign direct investment
allowed in the banking and insurance
sectors resulted in decline of

9. Markets are platforms on which
Corporate Securities can be traded in
real time.
government’s stake in banks and
insurance firms.
Political Risks
Reduced: Liberalization policies in the
country lessens political risks to
investors. The government can attract
more foreign investment through
liberalization of economic policies.
These are the areas that support and
foster a readiness to do business in the
country such as a strong legal
foundation to settle disputes, fair and
enforceable laws.
Threat from Multinationals: Prior to
1991 MNC’s did not play much role in
the Indian economy. In the pre-reform
period, there was domination of public
enterprises in the economy. On
account of liberalization, competition
has increased for the Indian firms.
Multinationals are quite big and
operate in several countries which has
turned out a threat to local Indian
Firms.
Diversification for Investors: In a
liberalized economy, Investors gets
benefit by being able to invest a portion
of their portfolio into a diversifying
asset class.
Technological Impact: Rapid
increase in technology forces many
enterprises and small scale industries
in India to either adapt to changes or
close their businesses.
Impact on Agriculture: In the area of
agriculture, the cropping patterns has
undergone a huge modification, but the
impact of liberalisation cannot be
properly measured. It is observed that
there are still all-pervasive government
controls and interventions starting from
production to distribution for the
produce.
Mergers and
Acquisitions: Acquisitions and
mergers are increasing day-by-day. In
cases where small companies are
being merged by big companies, the
employees of the small companies
may require exhaustive re-skilling. Re-
skilling duration will lead to non-
productivity and would cast a burden

10. on the capital of the company.
Privatization
This is the second of the three policies of LPG. It is the increment of the
dominating role of private sector companies and the reduced role of
public sector companies. In other words, it is the reduction
of ownership of the management of a government-owned enterprise.
Government companies can be converted into private companies in two
ways:
 By disinvestment
 By withdrawal of governmental ownership and management of
public sector companies.
Forms of Privatization
 Denationalization or Strategic Sale: When 100% government
ownership of productive assets is transferred to the private sector
players, the act is called denationalization.
 Partial Privatization or Partial Sale: When private sector owns more
than 50% but less than 100% ownership in a previously construed
public sector company by transfer of shares, it is called partial
privatization. Here the private sector owns the majority of shares.
Consequently, the private sector possesses substantial control in the
functioning and autonomy of the company.
 Deficit Privatization or Token Privatization: When the government
disinvests its share capital to an extent of 5-10% to meet the deficit
in the budget is termed as deficit privatization.

11. Crisis of 1991 and Indian Economic Reforms
Objectives of Privatization
 Improve the financial situation of the government.
 Reduce the workload of public sector companies.
 Raise funds from disinvestment.
 Increase the efficiency of government organizations.
 Provide better and improved goods and services to the consumer.
 Create healthy competition in the society.
 Encouraging foreign direct investments (FDI) in India.
The degree of privatization in India
Following the industrial policy of 1991, the government has
adopted disinvestment, strategic sale of minority shares to private
partners and selling of loss making units to the private sector.
Some of the chronically loss making units were either sold –off, or
closed after all workers got their legitimate dues and
compensation. Selling of loss making units and strategic sale imply
full privatization as the company’s ownership is transferred to a
private entity. But the main form of inviting private participation
was disinvestment which results in transfer of minority
shareholding to the general public, at the same time the
government maintaining 51% share. The sale of minority stake to
private sector has enabled the government to inject competitive
and efficient private sector business practices in government
enterprises.

12. Advantages
Privatization is most of the time associated with improved efficiency due
to the profit incentive. Private companies will ensure they improve their
operational efficiency in order to reduce their costs and improve on
profits.
Privatization reduces the government’s political interference. The
government sometimes seems incapable of making hard decisions
especially when they impact their political footing such as layoffs and
pay cuts which are bound to attract negative publicity.
Privatization urges improvements in the company through competition.
When a state owned entity is privatized it loses its government protection
and is forced to adapt to the market by providing better services or
products in order to survive and thrive.
Disadvantages
Privatization of certain state entities such as water and electricity
authorities may just create single monopolies. These may eventually
seek to increase prices at the detriment of the consumer with no
controls.
The government loses dividends after privatization as seen with most
successful companies that are developed through privatization. These
dividends are instead channeled to wealthy individuals.
Globalization
It means to integrate the economy of one country with the global
economy. During Globalization the main focus is on foreign trade &
private and institutional foreign investment. It is the last policy of LPG
to be implemented.

13. Globalization as a term has a very complex phenomenon. The main aim
is to transform the world towards independence and integration of the
world as a whole by setting various strategic policies. Globalization is
attempting to create a borderless world, wherein the need of one country
can be driven from across the globe and turning into one large
economy.
Outsourcing as an Outcome of Globalization
The most important outcome of the globalization process is
Outsourcing. During the outsourcing model, a company of a country
hires a professional from some other country to get their work done,
which was earlier conducted by their internal resource of their own
country.
The best part of outsourcing is that the work can be done at a lower rate
and from the superior source available anywhere in the world. Services
like legal advice, marketing, technical support, etc. As Information
Technology has grown in the past few years, the outsourcing of
contractual work from one country to another has grown tremendously.
As a mode of communication has widened their reach, all economic
activities have expanded globally.
Various Business Process Outsourcingcompanies or call centers, which
have their model of a voice-based business process have developed in
India. Activities like accounting and book-keeping services, clinical
advice, banking services or even education are been outsourced from
developed countries to India.

14. There are 16 Navratna CPSEs as following:
Bharat Electronics Limited (BEL)
Container Corporation of India Limited
Engineers India Limited
Hindustan Aeronautics Limited
Hindustan Petroleum Corporation Limited
Mahanagar Telephone Nigam Limited
National Aluminum Company Limited
National Buildings Construction Corporation Limited
NMDC Limited
Neyveli Lignite Corporation Limited

15. Oil India Limited
Power Finance Corporation Limited
Power Grid Corporation of India Limited
Rashtriya Ispat Nigam Limited
Rural Electrification Corporation Limited
Shipping Corporation of India Limited
Criteria for giving Miniratna Status:
Category I: These have made profits for the last three years
continuously or earned a net profit of Rs. 30 crore or more
in one of these three years. There are 59 such companies.
Category II : These companies have made profits
continuously for the last three years and must have a
positive net worth. There are 15 such companies in this
category.
The World Trade Organization (WTO) is the only global international
organization dealing with the rules of trade between nations. At its
heart are the WTO agreements, negotiated and signed by the bulk of
the world's trading nations and ratified in their parliaments.
The main functions of WTO are discussed below:
1. To implement rules and provisions related to trade policy review
mechanism.
2. To provide a platform to member countries to decide future
strategies related to trade and tariff.

16. 3. To provide facilities for implementation,administration and
operation of multilateral and bilateral agreements of the world trade.
4. To administer the rules and processes related to dispute settlement.
5. To ensure the optimum use of world resources.
6. To assist international organizations such as, IMF and IBRD for
establishingcoherence in Universal Economic Policy determination.