Liberalisation, Privatisation and Globalisation: An Appraisal — notes

Before 1991: licences for industry, many industries reserved for the public sector, import quotas and high tariffs, limits on foreign investment, interest rates largely set by the RBI.

The 1991 crisis:

• Fiscal side: the government spent more than its revenue for years; borrowing grew and so did interest payments.
• External side: imports outpaced exports; the oil price jump of 1990 added to the import bill; foreign-exchange reserves fell to roughly two weeks of imports.
• Response: India borrowed from the IMF and the World Bank, which asked for reforms in return.

New Economic Policy (1991): two groups of measures — stabilisation (short term: reserves, balance of payments, inflation) and structural reform (long term: efficiency, competitiveness).

Removing government controls in five areas.

1. Industry: licensing abolished except for a short list (alcohol, cigarettes, hazardous chemicals, industrial explosives and a few more); only a few strategic areas (such as atomic energy and railway operations) reserved for the public sector; goods de-reserved from small-scale industry.
2. Finance: private Indian and foreign banks allowed to grow; foreign institutional investors permitted; the RBI moves from regulator to facilitator.
3. Tax: lower, simpler personal and corporation tax rates; reform of indirect taxes towards a common market.
4. Foreign exchange: rupee devalued in 1991; later a largely market-determined rate.
5. Trade and investment: quotas removed, tariffs cut, export duties removed, higher FDI limits.

Privatisation reduces state ownership or management: outright sale, or disinvestment (selling part of the government's equity). Aims: efficiency, financial discipline, resources for the government. Efficient public enterprises received Maharatna, Navratna or Miniratna status, giving them more autonomy.

Globalisation integrates the economy with the world.

• Outsourcing: firms abroad buy services (call centres, accounting, software, medical transcription) from Indian firms; helped by cheap telecom and a skilled, English-speaking workforce.
• WTO (1995): succeeded GATT (1948); covers goods, services and intellectual property; aims at rule-based trade and fewer barriers. India is a founder member.

Generally seen as gains: faster GDP growth, led mainly by services; foreign-exchange reserves rose many times over; growth of services exports; wider consumer choice and better quality.

Agriculture: slower growth; public investment in irrigation, power, roads, markets and research did not keep pace; some shift to export cash crops; prices more exposed to world markets.

Industry: easier entry, imported technology and foreign investment; but import competition for small units, costly infrastructure and limited access to some foreign markets made growth uneven.

Employment: many appraisals note that output grew faster than good-quality jobs — "jobless growth" — because the fastest-growing activities employ relatively few, highly skilled workers.

Fiscal policy: tax-rate cuts did not always raise revenue quickly; tight budgets can limit spending on health, education and welfare. Disinvestment raised funds, but critics argued that some assets were undervalued and proceeds used for routine spending rather than new assets.

Balanced view: the reforms ended the 1991 emergency and raised growth, while the benefits reached some regions, sectors and people more than others. Policies on farm investment, skills and infrastructure are often suggested to spread them.

Demonetisation: announced on 8 November 2016; the old ₹500 and ₹1,000 notes ceased to be legal tender and could be deposited or exchanged for a limited period. Stated objectives: curb black money and corruption, remove counterfeit notes, cut terror financing, promote digital payments. Effects observed: acute cash shortage and hardship for cash-based activity in the short run; a rise in digital payments and bank deposits. Economists continue to debate how far the objectives were met.

GST: in force from 1 July 2017; an indirect tax on the supply of goods and services that replaced many central and state taxes (central excise, service tax, state VAT and others). CGST + SGST within a state, IGST between states; rates recommended by the GST Council (Union Finance Minister and state finance ministers). Input tax credit removes the cascading of tax on tax. Objectives: a common national market ("one nation, one tax"), lower cascading, a wider tax base.