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UNIT
UNIT

II
III

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ECONOMIC REFORMS
SINCE 1991

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After forty years of planned development, India

has been able to achieve a strong industrial base
and became self-sufficient in the production of food
grains. Nevertheless, a major segment of the
population continues to depend on agriculture for
its livelihood. In 1991, a crisis in the balance of
payments led to the introduction of economic
reforms in the country. This unit is an appraisal of
the reform process and its implications for India.

LIBERALISATION, PRIVATISATION

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AND

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GLOBALISATION: AN APPRAISAL

After studying this chapter, the learners will

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understand the background of the reform policies introduced in India

in 1991
understand the mechanism through which reform policies were
introduced
comprehend the process of globalisation and its implications for India
be aware of the impact of the reform process in various sectors.

There is a consensus in the world today that economic development is not all
and the GDP is not necessarily a measure of progress of a society.
K.R. Narayanan

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You have studied in the previous

chapter that, since independence,
India followed the mixed economy
framework by combining the
advantages of the capitalist economic
system with those of the socialist
economic system. Some scholars argue
that, over the years, this policy resulted
in the establishment of a variety of
rules and laws, which were aimed at
controlling and regulating the
economy, ended up instead in
hampering the process of growth and
development. Others state that India,
which started its developmental path
from near stagnation, has since been
able to achieve growth in savings,
developed a diversified industrial
sector which produces a variety of
goods and has experienced sustained
expansion of agricultural output
which has ensured food security.
I n 1 9 9 1 , I n d i a m e t w i t h an
economic crisis relating to its external
debt the government was not
able to make repayments on its
borrowings from abroad; foreign
exchange reserves, which we
generally maintain to import petrol
and other important items, dropped
to levels that were not sufficient for
even a fortnight. The crisis was
further compounded by rising prices
of essential goods. All these led the
government to introduce a new set of

policy measures which changed the

d i r e c t i o n o f o u r d e v e l o p m e nt al
strategies. In this chapter, we will
look at the background of the crisis,
measures that the government has
adopted and their impact on various
sectors of the economy.

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3.1 INTRODUCTION

3.2 B ACKGROUND

The origin of the financial crisis can

be traced from the inefficient
management of the Indian economy
in the 1980s. We know that for
implementing various policies and
i t s g e ner al ad m i ni s t r ati o n, t he
government generates funds from
various sources such as taxation,
running of public sector enterprises
etc. When expenditure is more than
income, the government borrows to
finance the deficit from banks and
also from people within the country
and from international financial
institutions. When we import goods
like petroleum, we pay in dollars
which we earn from our exports.
Development policies required that
e ve n tho u gh t he r ev e nue s we r e
v er y lo w , t he g o v er nm ent had
to overshoot its revenue to meet
problems like unemployment, poverty
and p op u l at i o n e x pl o s io n. T he
continued spending on development
programmes of the government did not
generate additional revenue. Moreover,
t he g o ve r nme nt w as no t ab l e t o

LIBERALISATION, PRIVATISATION AND GLOBALISATION: AN APPRAISAL

39

ed

and received $7 billion as loan to

manage the crisis. For availing the
loan, these international agencies
expected India to liberalise and open
u p t he e c o no m y b y r e m ov i ng
restrictions on the private sector,
reduce the role of the government in
m an y a r e as an d r e m o v e t r ad e
restrictions between India and other
countries.
India agreed to the conditionalities
of World Bank and IMF and
announced the New Economic Policy
(NEP). The NEP consisted of wide
r angi ng ec onom i c re fo r ms . The
thrust of the policies was towards
c r e at i ng a m o r e c o m p e t i t i v e
environment in the economy and
removing the barriers to entry and
growth of firms. This set of policies
can broadly be classified into two
groups: the stabilisation measures
and the structural reform measures.
Stabilisation measures are shortterm measures, intended to correct
some of the weaknesses that have
developed in the balance of
payments and to bring inflation
under control. In simple words, this
means that there was a need to
maintain sufficient foreign exchange
reserves and keep the rising prices
under control. On the other hand,
structural reform policies are long-term
measures, aimed at improving the
efficiency of the economy and increasing
its international competitiveness by
removing the rigidities in various
segments of the Indian economy. The
government initiated a variety of
policies which fall under three heads

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generate sufficiently from internal

sources such as taxation. When the
government was spending a large
share of its income on areas which do
not provide immediate returns such as
the social sector and defence, there was
a need to utilise the rest of its revenue
in a highly ef ficient manner. The
i nc o m e
f r om
p ub l i c
s e ct o r
undertakings was also not very high to
meet the growing expenditure. At
t im e s , o u r f o r eign ex c h an g e ,
borrowed from other countries and
international financial institutions,
was spent on meeting consumption
needs. Neither was an attempt made to
reduce such profligate spending nor
sufficient attention was given to boost
exports to pay for the growing imports.
In the late 1980s, government
e xp endi tu re b eg an to e xc ee d it s
revenue by such large margins that
meeting the expenditure through
borrowings became unsustainable.
Prices of many essential goods rose
sharply. Imports grew at a very high
rate without matching growth of
exports. As pointed out earlier, foreign
exchange reserves declined to a level
that was not adequate to finance
imports for more than two weeks.
There was also not sufficient foreign
exchange to pay the interest that needs
to be paid to international lenders.
Also no country or international funder
was willing to lend to India.
India approached the International
Bank for R econs truct ion and
Development (IBRD), popularly
known as Wo rl d B an k and the
International Monetary Fund (IMF),
40

INDIAN ECONOMIC DEVELOPMENT

3.3 LIBERALISATION

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As pointed out in the beginning,

rules and laws which were aimed at
regulating the economic activities
became major hindrances in growth
and development. Liberalisation was
introduced to put an end to these
restrictions and open up various
sectors of the economy. Though a few
liberalisation measures were
introduced in 1980s in areas of
industrial licensing, export-import
policy, technology upgradation,
fiscal policy and foreign investment,
reform policies initiated in 1991 were
more comprehensive. Let us study
some important areas such as the
industrial sector, financial sector, tax
reforms, foreign exchange markets
and trade and investment sectors
which received greater attention in
and after 1991.

The reform policies introduced in

and after 1991 removed many of
t he s e r e s t r i c t i o n s . I nd u s t r i a l
licensing was abolished for almost all
but product categories alcohol,
cigarettes, hazardous chemicals,
industrial explosives, electronics,
aerospace and drugs and p harm aceuticals. The only industries which
are now reserved for the public sector
are defence equipments, atomic
e ne r g y g e n e r a t i o n a nd r a i l w a y
transport. Many goods produced by
small scale industries have now been
dereserved. In many industries, the
m ar k e t h as b e e n al l o w e d t o
determine the prices.

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viz. liberalisation, privatisation and

globalisation.

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Deregulation of Industrial Sector: In

India, regulatory mechanisms were
enforced in various ways (i) industrial
licensing under which every entrepreneur
had to get permission from government
officials to start a firm, close a firm
or to decide the amount of goods
that could be produced (ii) private
sector was not allowed in many
industries (iii) some goods could be
produced only in small scale industries
and (iv) controls on price fixation and
distribution of selected industrial
products.

Financial
Sector
Reforms:
Financial sector includes financial
institutions such as commercial
banks, investment banks, stock
exchange operations and foreign
exchange market. The financial
sector in India is controlled by the
Reserve Bank of India (RBI). You may
be aware that all the banks and other
financial institutions in India are
controlled through various norms
and regulations of the RBI. The RBI
decides the amount of money that
the banks can keep with themselves,
fixes interest rates, nature of lending
to various sectors etc. One of the
major aims of financial sector reforms
is to reduce the role of RBI from
regulator to facilitator of financial
sector. This means that the financial
s e c t o r m ay b e a l l o w e d t o t ak e
decisions on many matters without
consulting the RBI.

LIBERALISATION, PRIVATISATION AND GLOBALISATION: AN APPRAISAL

41

very high earlier, has been gradually

reduced. Efforts have also been made
indirect taxes, taxes
levied on commodities, in order to
facilitate the establishment of a
c o m m o n n at i o n al m a r k e t f o r
goods and commodities. Another
component of reforms in this area is
simplification. In order to encourage
better compliance on the part of
taxpayers many procedures have
been simplified and the rates also
substantially lowered.
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The reform policies led to the

es tabl ishm ent of priv ate sect or
banks, Indian as well as foreign.
Foreign investment limit in banks
was raised to around 50 per cent.
Those banks which fulfil certain
conditions have been given freedom
to set up new branches without the
approval of the RBI and rationalise
their existing branch networks.
Thoug h banks have bee n giv en
permission to generate resources
from India and abroad, ce rtain
managerial a s p e c t s h av e b e e n
retained with the RBI to safeguard
t he i n t e r e s t s o f t h e ac c o u nt holders and the nation. Foreign
Institutional Investors (FII) such
as merchant bankers, mutual funds
and pension funds are now allowed
to invest in Indian financial markets.

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T ax R ef o r m s : T ax r ef o r ms ar e
c o nc e r ne d w i t h t h e r e f o r m s i n
governments taxation and public
e x p e nd i t u r e p o l i c i e s w hi c h ar e
collectively known as its fiscal
policy. There are two types of taxes:
direct and indirect. Direct taxes
c o ns i s t o f t ax es o n i nco m e s o f
individuals as well as profits of
business enterprises. Since 1991,
t he r e ha s b e e n a c o nt i nu o u s
reduction in the taxes on individual
incomes as it was felt that high rates
of income tax were an important
reason for tax evasion. It is now
widely accepted that moderate rates
of income tax encourage savings and
voluntary disclosure of income. The
rate of corporation tax, which was
42

Foreign Exchange Reforms: The

first important reform in the external
sector was made in the foreign
exchange market. In 1991, as an
immediate measure to resolve the
balance of payments crisis, the rupee
w a s d e v a l u e d ag ai n s t f o r e i g n
currencies. This led to an increase in
the inflow of foreign exchange. It also
set the tone to free the determination
o f r u p e e v a l u e i n t he f o r e i g n
exchange market from government
control. Now, more often than not,
markets determine exchange rates
based on the demand and supply of
foreign exchange.
T r a d e a n d I n v es t m en t Po l ic y
Reforms: Liberalisation of trade and
investment regime was initiated to
increase international competitiveness
of industrial production and also
foreign investments and technology
into the economy. The aim was also
to promote the efficiency of the local
i ndu s t ri e s and t he ad o pt i o n o f
modern technologies.

INDIAN ECONOMIC DEVELOPMENT

ed

of tariff rates and (iii) removal of

licensing procedures for imports.
Import licensing was abolished
except in case of hazardous and
environmentally sensitive industries.
Quantitative restrictions on imports of
manufactured consumer goods and
agricultural products were also fully
removed from April 2001. Export
duties have been removed to increase
the competitive position of Indian
goods in the international markets.

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In order to protect domestic

industries, India was following a
regime of quantitative restrictions
on imports. This was encouraged
through tight control over imports
and by keeping the tariffs very high.
These policies reduced efficiency and
competitiveness which led to slow
growth of the manufacturing sector.
The trade policy reforms aimed at (i)
dismantling of quantitative restrictions
on imports and exports (ii) reduction
Work These Out

Give an example each of nationalised bank, private bank, private foreign

bank, FII and a mutual fund.

Visit a bank in your locality with your parents. Observe and find out the
functions it performs. Discuss the same with your classmates and prepare
a chart on it.

Classify the following as direct and indirect taxes: sales tax, custom duties,
property tax, death duties, VAT, income tax.
Find out from your parents if they pay taxes. If yes, why do they do so and
how?
Do you know that for a very long time countries used to keep silver and gold
as reserves to make payments abroad? Find out in what form do we keep
our foreign exchange reserves and find out from newspapers, magazines
and the Economic Survey how much foreign exchange reserves we have
today. Also find the foreign currency of the following countries and its rupee
exchange rate
Country

Currency

Value of 1(one) unit of foreign

currency in Indian rupee

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U.S.A.
U.K.
Japan
China
Korea
Singapore
Germany

LIBERALISATION, PRIVATISATION AND GLOBALISATION: AN APPRAISAL

43

Privatisation of the public sector

undertakings by selling off part of the
equity of PSUs to the public is known
as disinvestment. The purpose of the
sale, according to the government,
was mainly to improve financial
discipline and facilitate modernisation.
It was also envisaged that private
capital and managerial capabilities
could be effectively utilised to
improve the performance of the PSUs.

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It implies shedding of the ownership

or management of a government
o w n e d e n t e r p r i s e . G o v e r nm e n t
companies are converted into private
c o m p a n i e s i n t w o w a y s ( i) b y
withdrawal of the government from
o w ne r s h i p an d m an ag e m e n t o f
public sector companies and or (ii) by
o u t r i g ht s a l e o f p u b l i c s e c t o r
companies.

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3.4 PRIVATISATION

Box 3.1: Navratnas and Public Enterprise Policies

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You must have read in your childhood about the famous Navratnas or Nine
Jewels in the Imperial Court of King Vikramaditya who were eminent persons
of excellence in the fields of art, literature and knowledge. In order to improve
efficiency, infuse professionalism and enable them to compete more effectively
in the liberalised global environment, the government identifies PSUs and
declare them as maharatnas, navratnas and miniratnas. They were given greater
managerial and operational autonomy, in taking various decisions to run the
company efficiently and thus increase their profits. Greater operational,
financial and managerial autonomy has also been granted to profit-making
enterprises referred to as miniratnas.
In 2011, about 90 public enterprises were designated with different status.
A few examples of public enterprises with their status are as follows:
(i) Maharatnas (a) Indian Oil Corporation Limited, and (b) Steel Authority of
India Limited, (ii) Navratnas (a) Bharat Heavy Electricals Limited,
(b) Mahanagar Telephone Nigam Limited; and (iii) Miniratnas (a) Bharat
Sanchar Nigam Limited; (b) Airport Authority of India and (c) Indian Railway
Catering and Tourism Corporation Limited.
Many of these profitable PSUs were originally formed during the 1950s
and 1960s when self-reliance was an important element of public policy. They
were set up with the intention of providing infrastructure and direct employment
to the public so that quality end-product reaches the masses at a nominal
cost and the companies themselves were made accountable to all stakeholders.
The granting of status resulted in better performance of these companies.
Scholars allege that instead of facilitating public enterprises in their expansion
and enabling them to become global players, the government partly privatised
them through disinvesment. Of late, the government has decided to retain
them in the public sector and enable them to expand themselves in the global
markets and raise resources by themselves from financial markets.

44

INDIAN ECONOMIC DEVELOPMENT

Work These Out

ed

Some scholars refer to disinvestment as the wave of privatisation spreading

all over the world to improve the performance of public sector enterprises
whereas others call it as outright sale of public property to the vested
interests. What do you think?

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Prepare a poster which contains 10-15 news clippings which you consider
as important and relating to navaratnas from newspapers. Also collect the
logos and advertisements of these PSUs. Put these on the notice board and
discuss them in the classroom.
Do you think only loss making companies should be privatised? Why?

Losses incurred by public sector undertakings are to be met out of the public
budget. Do you agree with this statement? Discuss.

The government envisaged that

privatisation could provide strong
impetus to the inflow of FDI.
The government has also made
attempts to improve the efficiency of
PSUs by giving them autonomy
in taking managerial decisions. For
instance, some PSUs have been
granted special status as maharatnas,
navratnas and miniratnas (see
Box 3.1).

3.5 G LOBALISATION

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Although globalisation is generally

understood to mean integration of the
economy of the country with the world
economy, it is a complex phenomenon.
It is an outcome of the set of various
policies that are aimed at transforming
the
world
towards
greater
interdependence and integration. It
involves creation of networks and
activities transcending economic, social
and geographical boundaries.
Globalisation attempts to establish

links in such a way that the happenings

in India can be influenced by events
happening miles away. It is turning the
world into one whole or creating a
borderless world.
Outsourcing: This is one of the
i mp o r tant
o u t co m e s
of
t he
globalisation process. In outsourcing,
a company hires regular service from
external sources, mostly from other
countries, which was previously
provided internally or from within the
country (like legal advice, computer
service, advertisement, security
e ac h pr o v id e d b y r e s pe c t iv e
departments of the company). As a
form of economic activity, outsourcing
has intensified, in recent times,
because of the growth of fast modes
of communication, particularly the
growth of Information Technology
(IT). Many of the services such as
voice-based business processes
( p op u l ar l y k no wn as BP O o r
c al l c ent r es ) , r e c or d ke e p ing ,

LIBERALISATION, PRIVATISATION AND GLOBALISATION: AN APPRAISAL

45

Box 3.2: Global Footprint!

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Owing to globalisation, you might find many Indian companies expanding their
wings to many other countries. In 2000, Tata Tea surprised the world by
acquiring the UK based Tetley, the inventor of the tea bag, for Rs 1,870 crore.
In the year 2004, Tata steel bought the Singapore-based Nat steel for Rs 1,245
crore and Tata Motors completed the buyout of Daewoos heavy commercial
vehicle unit in South Korea for Rs 448 crore. Now VSNL is acquiring Tycos
undersea cable network for Rs 572 crore, which will control over 60,000 km
undersea cable network across three continents. The Tatas also plan to invest
Rs 8,800 crore in fertiliser, steel and power plants in Bangladesh.
Source: Business Today, 22 May 2005.

acc ount ancy , banking se rvic es,

music recording, film editing, book
transcription, clinical advice or even
teaching are being outsourced by
companies in developed countries to
India. With the help of modern
telecommunication links including
the Internet, the text, voice and visual
data in respect of these services is
digitised and transmitted in real time
o ve r co nt ine nts and nat i o nal
boundaries. Most multinational
c or p o rat i ons , and ev e n s m al l
companies, are outsourcing their

services to India where they can be

avai l ed at a c he ap e r c o st w it h
r eas o nab l e d eg r e e o f s k il l and
accuracy. The low wage rates and
availability of skilled manpower in
India have made it a destination for
global outsourcing in the post-reform
period.

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World Trade Organisation (WTO):

The WTO was founded in 1995 as
the successor organisation to the
General Agreement on Trade and
Tariff (GATT). GATT was established
in 1948 with 23 countries
as the global trade
organisation to administer
all multilateral trade
agreements by providing
equal opportunities to
all countries in the
international market for
trading purposes. WTO is
expected to establish a rulebased trading regime in
which nations cannot place
arbitrary restrictions on
trade. In addition, its
Fig. 3.1 Outsourcing: a new employment opportunity in big cities purpose is also to enlarge
46

INDIAN ECONOMIC DEVELOPMENT

Work These Out

ed

Many scholars argue that globalisation is a threat as it reduces the role of

the state in many sectors. Some counter argue that it is an opportunity as
it opens up markets to compete in and capture. Debate in the classroom.
Prepare a chart consisting of a list of five companies that have BPO services
in India, along with their turnover.

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Read this excerpt of a news item from a daily newspaper describing

something that is now becoming increasingly common.

On a morning, a few minutes before 7 A.M., Greeshma sat in front of

her computer with her headset on and said in accented English Hello,
Daniella. Seconds later, she gets the reply, Hello, Greeshma. The two chatted
excitedly before Greeshma said that we will work on pronouns today.
Nothing unusual about this chat except that Greeshma, 22, was in Kochi
and her student Daniella, 13, was at her home in Malibu, California. Using
a simulated whiteboard on their computers, connected by the Internet, and
a copy of Daniellas textbook in front of Greeshma, she guides the teenager
through the intricacies of nouns, adjectives and verbs. Greeshma, who grew
up speaking Malayalam, was teaching Daniella English grammar,
comprehension and writing.
How has this become possible? Why cant Daniella get lessons in her
own country? Why is she getting English lessons from India, where
English is not the mother tongue?
India is benefiting from liberalisation and integration of world markets.
Do you agree?
Is employment in call centres sustainable? What kinds of skills should people
working in call centres acquire to get a regular income?
If the multinational companies outsource many services to countries like
India because of cheap manpower, what will happen to people living in the
countries where the companies are located? Discuss.

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production and trade of services, to

ensure optimum utilisation of world
resources
and to protect the
environment. The WTO agreements
cover trade in goods as well as services
to facilitate international trade
(bilateral and multilateral) through
removal of tariff as well as non-tariff
barriers and providing greater market
access to all member countries.

As an important member of WTO,

India has been in the forefront of
framing fair global rules, regulations
and safeguards and advocating the
interests of the developing world.
India has kept its commitments
towards liberalisation of trade, made
in the WTO, by removing quantitative
restrictions on imports and reducing
tariff rates.

LIBERALISATION, PRIVATISATION AND GLOBALISATION: AN APPRAISAL

47

TABLE 3.1
Growth of GDP and Major Sectors (in %)
1980-1991

1992-2001

2002-2007

2007-2012

2012-2017 XII Plan

Target I

Target II
4.2
10.9
10.0

Agriculture
Industry
Services

3.6
7.1
6.7

3.3
6.5
8.2

2.3
9.4
7.8

3.2
7.4
8.2

4.0
9.6
10.0

Total

5.6

6.4

7.8

8.2

9.0

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Sector

9.5

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Sources: Tenth Five Year Plan; Faster, sustainable and more inclusive growth: An Approach to the 12th
Five Year Plan, Planning Commission, Government of India, 2011.

Some scholars question the

usefulness of India being a member of
the WTO as a major volume of
international trade occurs among the
developed nations. They also say that
while developed countries file
complaints over agricultural subsidies
given in their countries, developing
countries feel cheated as they are forced
to open up their markets for developed
countries but are not allowed access to
the markets of developed countries.
What do you think?

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Fig. 3.2 IT Industry is seen as a major contributor

to Indias exports

3.6 INDIAN ECONOMY DURING

R EFORMS : AN A SSESSMENT

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The reform process has completed

one and a half decades since its
48

introduction. Let us now look at the

performance of the Indian economy
during this period. In economics,
growth of an economy is measured by
the Gross Domestic Product. Look at
Table 3.1. The growth of GDP
increased from 5.6 per cent during
1980-91 to 8.2 per cent during
2007- 10 1 2 . D u ri ng t he r e f or m
period, the growth of agriculture has
declined. While the industrial sectors
reported fluctuation, the growth of
service sector has gone up. This
indicates that the growth is mainly
driven by the growth in the service
sector. The Twelfth Plan (2012-2017)
envisages the GDP growth rate at
9 or 9.5 per cent. In order to achieve
s uc h a hi gh g ro w t h r ate , the
agriculture, industrial and service
sectors have to grow at the rates of
4 t o 4. 2 , 9 . 6 t o 10 . 9 and 1 0
percentage points, respectively.
However, some scholars raise
apprehensions over the projection of
such high rates of growth as
unsustainable.
The opening up of the economy has
led to rapid increase in foreign direct
investment and foreign exchange
reserves. The foreign investment,

INDIAN ECONOMIC DEVELOPMENT

ed

reform period. Rising prices have

also been kept under control.
On the other hand, the reform
process has been widely criticised
for not being able to address some
of the basic problems facing our
economy esepecially in the areas of
employment, agriculture, industry,
infrastructure development and fiscal
management.

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which includes foreign direct

investment(FDI) and foreign
institutional investment(FII), has
increased from about US $ 100 million
in 1990-91 to US $ 400 billion in
2010-11. There has been an increase
in the foreign exchange reserves from
about US $ 6 billion in 1990-91 to
about US $ 400 billion in 2011-12.
India is one of the largest foreign
exchange reserve holders in the world.
India is seen as a successful
exporter of auto parts, engineering
goods, IT software and textiles in the

Growth and Employment: Though the

GDP growth rate has increased in the
reform period, scholars point out that the

Work These Out

In the previous chapter, you might have studied about subsidies in various
sectors including agriculture. Some scholars argue that subsidy in agriculture
should be removed to make the sector internationally competitive. Do you
agree? If so, how can it be done? Discuss in class.
Read the following passage and discuss in class.

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Groundnut is a major oilseed crop in Andhra Pradesh. Mahadeva, who

was a farmer in Anantpur district of Andhra Pradesh, used to spend Rs 1,500
for growing groundnut on his plot of half an acre. The cost included expenditure
on raw materials (seeds, fertilisers etc.), labour, bullock power and machinery
used. On an average, Mahadeva used to get two quintals of groundnut, and
each quintal was sold for Rs 1,000. Mahadeva, thus, was spending Rs 1,500
and getting an income of Rs 2,000. Anantpur district is a drought-prone area.
As a result of economic reforms, the government did not undertake any major
irrigation project. Recently, groundnut crop in Anantpur is facing problems
due to crop disease. Research and extension work has gone down due to lower
government expenditure. Mahadeva and his friends brought this matter
repeatedly to the notice of the government officials entrusted with this
responsibility, but failed. Subsidy was reduced on materials (seeds, fertilisers)
which increased Mahadevas cost of cultivation. Moreover, the local markets
were flooded with cheap imported edible oils, which was a result of removal of
restriction on imports. Mahadeva was not able to sell his groundnut in the
market as he was not getting the price to cover his cost.
What could be done to farmers like Mahadeva from incurring losses?
Discuss in the class.

LIBERALISATION, PRIVATISATION AND GLOBALISATION: AN APPRAISAL

49

tt

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Reforms in Agriculture: Reforms have

not been able to benefit agriculture,
where the growth rate has been
decelerating.
Public investment in agriculture
sector especially in infrastructure,
which includes irrigation, power, roads,
market linkages and research and
extension (which played a crucial role
in the Green Revolution), has been
reduced in the reform period. Further,
the removal of fertiliser subsidy has led
to increase in the cost of production,
which has severely affected the small
and marginal farmers. This sector has
been experiencing a number of policy
changes such as reduction in import
duties on agricultural products,
removal of minimum support price and
lifting of quantitative restrictions on
agricultural products; these have
adversely affected Indian farmers as
they now have to face increased
international competition.
Moreover, because of exportoriented policy strategies in agriculture,
there has been a shift from production
for the domestic market towards
production for the export market
focusing on cash crops in lieu of
production of food grains. This puts
pressure on prices of food grains.

This is because of decreasing demand

of industrial products due to
various reasons such as cheaper
imports, inadequate investment in
infrastructure etc. In a globalised
world, developing countries are
compelled to open up their economies
to greater flow of goods and capital
from developed countries and
rendering their industries vulnerable
to imported goods. Cheaper imports
have, thus, replaced the demand
for domestic goods. Domestic
manufacturers are facing competition
from imports. The infrastructure
facilities, including power supply, have
remained inadequate due to lack of
investment. Globalisation is, thus,
often seen as creating conditions for
the free movement of goods and
services from foreign countries that
adversely affect the local industries
and employment opportunities in
developing countries.
Moreover, a developing country
like India still does not have the access
to developed countries markets
because of high non-tariff barriers. For
example, although all quota
restrictions on exports of textiles and
clothing have been removed in India,
U.S.A. has not removed their quota
restriction on import of textiles from
India and China.

ed

reform-led growth has not generated

sufficient employment opportunities in
the country. You will study the link
between different aspects of employment
and growth in the next unit.

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Reforms in Industry: Industrial

growth has also recorded a slowdown.
50

Disinvestment: Every year, the

government fixes a target for
disinvestment of PSUs. For instance,
in 1991-92, it was targeted to mobilise
Rs 2,500 crore through disinvestment.
The government was able to mobilise
Rs 3,040 crore more than the target.

INDIAN ECONOMIC DEVELOPMENT

ed

increase in tax revenue for the

government. Also, the reform policies
involving tariff reduction have curtailed
the scope for raising revenue through
customs duties. In order to attract
foreign investment, tax incentives were
provided to foreign investors which
further reduced the scope for raising
tax revenues. This has a negative impact
on developmental and welfare
expenditures.

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In 2010-11, the target was Rs 40,000

crore whereas the achievement was
Rs 22,850 crore. Critics point out that
the assets of PSUs have been
undervalued and sold to the private
sector. This means that there has been
a substantial loss to the government.
Mor eover, the pr oceeds fr om
disinvestment were used to offset the
shortage of government revenues
rather than using it for
the
development of PSUs and building
social infrastructure in the country. Do
you think selling a part of the
properties of government companies is
the best way to improve their
efficiency?
Reforms and Fiscal Policies:
Economic reforms have placed limits on
the growth of public expenditure
especially in social sectors. The tax
reductions in the reform period, aimed
at yielding larger revenue and to curb
tax evasion, have not resulted in

3.7 CONCLUSION

The process of globalisation through

liberalisation and privatisation policies
has produced positive as well as
negative results both for India and
other countries. Some scholars argue
that globalisation should be seen as
an opportunity in terms of greater
access to global markets, high
technology and increased possibility of
large industries of developing
countries to become important players
in the international arena.

Box 3.3: Siricilla Tragedy!

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Power Sector reforms in many Indian states led to do away with the supply of
electricity at subsidised rates and steep rise in power tariff. This has affected
workers engaged in small industries. Powerloom textile industry in Andhra
Pradesh is an example. Since the wages of the powerloom workers are linked
to the production of cloth, power-cut means cut in wages of weavers who
were already suffering from hike in tariff. This led to a crisis in the livelihood
of the weavers and fifty powerloom workers committed suicide in a small
town called Siricilla in Andhra Pradesh.
Do you think the power tariff should not be raised?
What would be your suggestions to revive small industries affected by
reforms?

no

LIBERALISATION, PRIVATISATION AND GLOBALISATION: AN APPRAISAL

51

ed

policies initiated as a response to the

c r is i s b y t he go v e r nme nt , wi t h
externally advised policy package,
further aggravated the inequalities.
Further, it has increased the income
and quality of consumption of only
high-income groups and the growth
ha s b e e n c o nc e n t r a t e d o n l y i n
some select areas in the services
sector such as telecommunication,
information technology, finance,
entertainment, travel and hospitality
services, real estate and trade,
rather than vital sectors such as
agriculture and industry which
provide livelihoods to millions of
people in the country.

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On the contrary, the critics argue

that globalisation is a strategy of the
developed countries to expand their
markets in other countries. According
to them, it has compromised the
w e l f a r e a nd i d e n t i t y o f p e o p l e
belonging to poor countries. It has
f u r t h e r b e e n p o i nt e d o u t t ha t
market-driven globalisation has
widened the economic disparities
among nations and people.
Viewed from the Indian context,
some studies have stated that the
crisis that erupted in the early 1990s
was basically an outcome of the
deep-rooted inequalities in Indian
society and the economic reform

Recap

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The economy was facing problems of declining foreign exchange, growing

imports without matching rise in exports and high inflation. India changed
its economic policies in 1991 due to a financial crisis and pressure from
international organisations like the World Bank and IMF.
In the domestic economy, major reforms were undertaken in the industrial
and financial sectors. Major external sector reforms included foreign
exchange deregulations and import liberalisation.
With a view to improving the performance of the public sector, there was a
consensus on reducing its role and opening it up to the private sector. This
was done through disinvestment and liberalisation measures.
Globalisation is the outcome of the policies of liberalisation and privatisation.
It means an integration of the economy of the country with the world
economy.
Outsourcing is an emerging business activity.
The objective of the WTO is to establish a rule based trade regime to ensure
optimum utilisation of world resources.
During the reforms, growth of agriculture and industry has gone down but
the service sector has registered growth.
Reforms have not benefited the agriculture sector. There has also been a
decline in public investment in this sector.
Industrial sector growth has slowed down due to availability of cheaper
imports and lower investment.

52

INDIAN ECONOMIC DEVELOPMENT

ed

EXERCISES

Why were reforms introduced in India?

2.

Why is it necessary to became a member of WTO?

3.

Why did RBI have to change its role from controller to facilitator of
financial sector in India?

4.

How is RBI controlling the commercial banks?

5.

What do you understand by devaluation of rupee?

6.

Distinguish between the following

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1.

(i) Strategic and Minority sale

(ii) Bilateral and Multi-lateral trade
(iii) Tariff and Non-tariff barriers.

7.

Why are tariffs imposed?

8.

What is the meaning of quantitative restrictions?

9.

Those public sector undertakings which are making profits

should be privatised. Do you agree with this view? Why?

Do you think outsourcing is good for India? Why are developed

countries opposing it?

11.

India has certain advantages which makes it a favourite outsourcing

destination. What are these advantages?

12.

Do you think the navaratna policy of the government helps in

improving the performance of public sector undertakings in India?
How?

13.

What are the major factors responsible for the high growth of the
service sector?

14.

Agriculture sector appears to be adversely affected by the reform

process. Why?

15.

Why has the industrial sector performed poorly in the reform

period?

16.

Discuss economic reforms in India in the light of social justice

and welfare.

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10.

LIBERALISATION, PRIVATISATION AND GLOBALISATION: AN APPRAISAL

53

SUGGESTED ADDITIONAL ACTIVITIES

Year

GDP Growth Rate (%)

2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11

4.3
5.5
4.0
8.1
7.0
9.5
9.6
9.3
6.7
8.6
9.3

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The table given below shows the GDP growth rate at 1993-94
prices. You have studied about the techniques of presentation
of data in your Statistics for Economics course. Draw a time
series line graph based on the data given in the table and inter pret the same.

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1.

2.

3.

Observe around you you will find State Electricity Boards

(SEBs), BSES and many public and private organisations supplying electricity in a city and states. There are private buses on
roads along side the goverment bus services and so on

(i)

What do you think about this dual system of the co-existence

of public and private sectors?

(ii)

What are the merits and demerits of such a dual system?

Discuss.

With the help of your parents and grandparents prepare a list of

multinational companies that existed in India at the time of
) mark against those which are still
growing and a ( ) against those which do not exist any more. Are
there any companies whose names have changed? Find out the
new names, the country of origin, nature of product, logo and
prepare a chart for your class.
n

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54

INDIAN ECONOMIC DEVELOPMENT

4.

Give appropriate examples for the following

Name of a Foreign Company

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Nature of Product
Biscuits
Shoes
Computers
Cars
TV and Refrigerators
Stationery

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Now find out if these companies which are mentioned above existed
in India before 1991 or came after the New Economic Policy. For this,
take the help of your teacher, parents, grandparents and shopkeepers.

5.

Collect a few relevant newspaper cuttings on meetings organised

by WTO. Discuss the issues debated in these meetings and find
out how the organisation facilitates world trade.

6.

Was it necessary for India to introduce economic reforms at the

behest of World Bank and International Monetary Fund? Was there
no alternative for the government to solve the balance of payments crisis? Discuss in the classroom.

REFERENCES

Books

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Development. Oxford University Press, New Delhi.

tt

B ARDHAN , PRANAB . 1998. The Political Economy of Development in India.

Oxford University Press, Delhi.
BHADURI , AMIT and DEEPAK NAYYAR . 1996. The Intelligent Persons Guide to
Liberalisation. Penguin, Delhi.

no

BHAGWATI, JAGDISH. 1992. India in Transition: Freeing the Economy. Oxford

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55

B Y R E S , T E R E N C E J . 1 9 9 7 . Th e S t a t e , D e v e lo p m e n t Pl a n n in g a n d
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CHELLIAH, RAJA J. 1996. Towards Sustainable Growth: Essays in Fiscal and

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DREZE , JEAN and AMAR TYA SEN. 1996. India: Economic Development and Social
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no

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