Chapter 3: Liberalisation, Privatisation and Globalisation: An Appraisal

Reforms were introduced in India in the year 1991 due to the following reasons:

1. To manage the economic crisis that the country was going through

2. Fiscal deficit was going through the worst phase during the period, which resulted in increased public debt.

3. India was going through a weak Balance of Payments (BOP) scenario. The fall of the erstwhile Soviet Union and the Gulf War led to borrowing from the international market. Finally, this led to the formation of a new economic policy to attain a balanced economy.

4. PSUs were established with the aim of providing employment and removing poverty. But the PSUs turned out to be loss-making units, which burdened the already weak economy of the country.

5. High level of fiscal deficit led to RBI increasing the inflation rate, which made goods more costly and led to the starting of a movement from within.

Becoming a member of WTO (World Trade Organisation) is important in many ways, as mentioned below:

1. Being a member of WTO, a member country gets equal rights as other member countries to trade in the international market.

2. It provides scope to produce more at a large scale so that it can cater to needy people across boundaries.

3. WTO work towards abolishing tariff barriers in order to encourage healthy competition among producers of different countries

4. Member countries of WTO which have a similar economic status can raise their voices to safeguard common interests.

RBI’s role prior to liberalisation was to control and regulate the financial sector, which comprises financial institutions, such as commercial banks, stock exchange, investment banking, foreign exchange or forex, as it is called now. With the liberalisation and reforms undertaken for the finance sector, RBI assumed the role of a facilitator in order to allow financial institutions to make their own decision. This led to the entry of foreign players. The main objective of financial reforms was to obtain foreign investment and participation from the private sector to increase competitiveness in the finance sector.

RBI is the authority that determines the various ratios like SLR (Statutory Liquid Ratio), Repo Rate, Cash Reserve Ratio (CRR), Reverse Repo Rate and Prime Lending Rate (PLR). It determines the rate of interest for home loans and other loans for banking sectors, and all commercial banks have to follow the same. RBI acts as the Central Bank of India and controls the money supply for the economy.

Devaluation is the reduction in the value of the currency in comparison to a foreign currency under the Fixed Rate System. Devaluation is done by the government in order to encourage more exports and reduce imports. After the devaluation, the value of the rupee is reduced with respect to the foreign currency, and more amount of goods can be purchased using one unit of that foreign currency.

Solution coming soon.

Tariffs are imposed with the purpose of raising the price of goods from imports which discourages further imports. This provides scope for domestic products to earn market share and help them survive. Any such item that is thought to be unnecessary coupled with a high cost of import will be a burden on forex reserves.

It refers to clearly defined limits and quotas on the physical commodities that can be exported or imported during a specific time period. Limits can be made on a selective basis based on varying limits of goods as per country or destination. Quantitative restrictions have a greater protective effect as compared to tariff measures and result in distorting free trade. When quantitative restrictions are used by a trading partner, export cannot be done beyond the quota that is set.

A profit-earning PSU is that which generates revenue for the government, while a PSU is regarded as loss-making if the same PSU is inefficient and puts an undue burden on the government. Such loss-making entities should be privatised and can lead to more efficient business. Core areas of business, such as Railways and Water, should not be privatised as it is created for the welfare of the people, as it will impact the welfare of the people. Instead of privatising profit-making PSUs, they can be granted a greater degree of autonomy in their operating activities, which will increase their efficiency and productivity and make them more competitive with their private counterparts.

Yes, it is good for India. The following points will help in justifying that:

1. For a country like India, which is developing, employment generation is a concern, and outsourcing provides a solution for generating employment opportunities.

2. It enables the transfer of knowledge about processes and technology from developed countries to developing countries.

3. By providing outsourcing services, India makes itself credible in the international market, and it will help in bringing international investment to India.

4. Outsourcing opens up avenues across service sectors and helps the educated youth in getting skills which will result in human capital formation

5. Jobs will help in the building of society by reducing poverty and also pave the way for education, which will build the nation as a whole.

Developed countries oppose outsourcing as it leads to the outflow of jobs from developed countries to developing countries; it leads to the outflow of investment and revenue and helps develop the weaker country, but results in job scarcity for the developed countries.