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FROM COMMAND AND CONTROL ECONOMY TO LPG: CRITICAL

APPRAISAL OF INDIAN ECONOMIC REFORM POLICIES

HIDAYATULLAH NATIONAL LAW UNIVERSITY

RAIPUR (C.G)

POLITICAL SCIENCE PROJECT

ON

FROM COMMAND AND CONTROL ECONOMY TO LIBERALIZATION,


PRIVATIZATION AND GLOBALIZATION: A CRITICAL APPRAISAL OF
THE INDIAN ECONOMIC REFORMS POLICY

SUBMITTED

TO

DR. AVINASH SAMAL

BY

AHMAD IBRAHIM

SEMESTER VI

SECTION- A

ROLL NO.10

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APPRAISAL OF INDIAN ECONOMIC REFORM POLICIES

DECLARATION

I hereby declare that the project work entitled From Command and Control Economy to
Liberalization, Privatization & Globalization: A Critical Appraisal of the Indian Economic
Reforms Policy submitted to HNLU, Raipur, is a record of an original work done by me under
the guidance of Dr. Avinash Samal Sir, Faculty Member, HNLU, Raipur.

Ahmad Ibrahim,
Semester VI,
Roll no. 10

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ACKNOWLEDGEMENT

I feel highly elated to work on the topic From Command and Control Economy to
Liberalization, Privatization & Globalization: A Critical Appraisal of the Indian Economic
Reforms Policy. The practical realization of this project has obligated the assistance of many
persons. I express my deepest regard and gratitude to my teacher, Dr. Avinash Samal Sir, for his
unstinted support. His consistent supervision, constant inspiration and invaluable guidance have
been of immense help in understanding and carrying out the nuances of the project report. I take
this opportunity to also thank the University and the Vice Chancellor for providing extensive
database resources in the Library and through Internet.

Ahmad Ibrahim,
Semester VI,
Roll no. 10

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CONTENTS

1. Declaration 1

2. Acknowledgement 2

3. Abbreviations 4

4. Introduction 5

5. Research Methodology 6

6. The concept of LPG 8

7. The Impact of LPG 11

8. Economic Policies preceeding the LPG 20

9. Present Scenario in India 23

10. Conclusion 26

11. References 28

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ABBREVIATIONS

LPG Liberalization, Privatization and Globalization

No. Number

& And

Ed. Edition

i.e That is

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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. The primary objective of this model was to make the economy of India
the fastest developing economy in the globe with capabilities that help it match up with the
biggest economies of the world. The series of reforms undertaken with respect to industrial
sector, trade as well as financial sector aimed at making the economy more efficient.

Prior to the policy reforms of 1991 which brought in LPG in India, the economy in India can be
aptly said to be a command and control economy as there were too many restrictions and the
interference of the government in every sphere.

With the onset of reforms to liberalize the Indian economy in July of 1991, a new chapter has
dawned for India and her billion plus population. This period of economic transition has had a
tremendous impact on the overall economic development of almost all major sectors of the
economy, and its effects over the last decade can hardly be overlooked. Besides, it also marks the
advent of the real integration of the Indian economy into the global economy.

This era of reforms has also ushered in a remarkable change in the Indian mindset, as it deviates
from the traditional values held since Independence in 1947, such as self reliance and socialistic
policies of economic development, which mainly due to the inward looking restrictive form of
governance, resulted in the isolation, overall backwardness and inefficiency of the economy,

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amongst a host of other problems despite the fact that India has always had the potential to be on
the fast track to prosperity.

OBJECTIVES OF STUDY

To understand the concept of LPG.

To analyze whether the LPG reforms brought about any substantial change or not.

To trace the origin of the Economic Reforms in India.

To explore the issues, challenges which were faced by the LPG.

To provide a critical appraisal of the Policies of Economic Reforms in India.

SCOPE OF STUDY

The project titled From Command and Control Economy to Liberalization, Privatization &
Globalization: A Critical Appraisal of the Indian Economic Reforms Policy consists of a
detailed discussion about what were the economic reforms brought about by the LPG and how
has it affected the Indian Economy. Moreover, the shift from the command and control economy
to a more liberal policy reform has been discussed. An attempt is made to provide a critical
appraisal on the tenability of the scheme.

RESEARCH METHODOLOGY

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The type of research methodology used in the project is doctrinal i.e. the report is based on
analytical and descriptive Research Methodology. Secondary and Electronic resources have been
largely used to gather information and data about the topic. Books and other reference articles as
guided by faculty have been primarily helpful in giving this project a firm structure. Websites,
dictionaries and articles have also been widely referred.

SOURCES OF DATA

This Project is made on the basis of secondary sources of information, which include:

1) Books, and

2) Information from the internet.

ORGANIZATION OF STUDY

The project has been bifurcated into various sections, each having a separate chapter and is as
follows:

Section 1: The first section includes the introduction of my project report with the research
methodology and objectives.

Section 2: The second section of the project report includes the first chapter which discusses the
concept of LPG and also the Important Reform Measures(steps towards LPG)

Section 3: The third section of the project report consists of the second chapter which deals with
the LPG implementation on the basis of the Narsimha Rao Committee Report and the impact of
Liberalization, Privatization, Globalization.

Section 4: the fourth section of the project deals with the economic reforms which were brought
before LPG and how it was unstable.

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Section 5: the fifth section of the project shows the scenario of India after the Application of
LPG in India and how successful has it been.

An attempt is also made to provide a critical appraise the shift from command and control
economy to LPG in India.

LIBERALIZATION, PRIVATIZATION AND GLOBALIZATION

Liberalization refers to the slackening of government regulations. The economic liberalization in


India denotes the continuing financial reforms which began since July 24, 1991.It basically refers
to the relaxation of previous government restrictions usually in the areas of social and economic
policy. Economic liberalization is a very broad term that usually refers to fewer government
regulations and restrictions in the economy in exchange for greater participation of private
entities; the doctrine is associated with neo-liberalism. The arguments for economic
liberalization include greater efficiency and effectiveness that would translate to a "bigger pie"
for everybody. In developing countries, economic liberalization refers more to liberalization or
further "opening up" of their respective economies to foreign capital and investments. Three of
the fastest growing developing economies today; Brazil, China and India, have achieved rapid
economic growth in the past several years or decades after they have "liberalized" their
economies to foreign capital.

Privatization refers to the participation of private entities in businesses and services and transfer
of ownership from the public sector (or government) to the private sector as well. It basically
refers to the transfer of assets or service function from public private ownership or control and
opening of the hitherto closed areas to private sector entry. It can be achieved by leasing,
contracting and franchising. In developing countries, economic liberalization refers more to
liberalization or further opening up of their respective economies to foreign capital and

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investments. Three of the fastest growing developing economies today; Brazil, China and India,
have achieved rapid economic growth in the past several years or decades after they have
"liberalized" their economies to foreign capital.

Globalization stands for the consolidation of the various economies of the world thus, integrating
domestic economy with the world economy. The term globalization means International
Integration. Opening up of world trade, development of advanced means of communication,
internationalization of financial markets, growing importance of MNC's, population migrations
and more generally increased mobility of persons, goods, capital, data and ideas. It is a process
through which the diverse world is unified into a single society.
The Important Reform Measures (Step Towards liberalization privatization and
Globalization)

Indian economy was in deep crisis in July 1991, when foreign currency reserves had plummeted
to almost $1 billion; Inflation had roared to an annual rate of 17 percent; fiscal deficit was very
high and had become unsustainable; foreign investors and NRIs had lost confidence in Indian
Economy. Capital was flying out of the country and we were close to defaulting on loans. Along
with these bottlenecks at home, many unforeseeable changes swept the economies of nations in
Western and Eastern Europe, South East Asia, Latin America and elsewhere, around the same
time. These were the economic compulsions at home and abroad that called for a complete
overhauling of our economic policies and programs.1 Major measures initiated as a part of the
liberalization and globalization strategy in the early nineties included the following:
Devaluation: The first step towards globalization was taken with the announcement of the
devaluation of Indian currency by 18-19 percent against major currencies in the international
foreign exchange market. In fact, this measure was taken in order to resolve the BOP crisis.

Disinvestment: In order to make the process of globalization smooth, privatization and


liberalization policies are moving along as well. Under the privatization scheme, most of the
public sector undertakings have been/ are being sold to private sector.

1 Tanveer Malik, Impact of globalization on Indian economy- An overview, ( October 6, 2014),


http://www.fibre2fashion.com/industry-article/8/738/impact-of-globalization1.asp

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Dismantling of The Industrial Licensing Regime: At present, only six industries are under
compulsory licensing mainly on accounting of environmental safety and strategic considerations.
A significantly amended locational policy in tune with the liberalized licensing policy is in place.
No industrial approval is required from the government for locations not falling within 25 kms of
the periphery of cities having a population of more than one million.

Allowing Foreign Direct Investment (FDI) across a wide spectrum of industries and
encouraging non-debt flows. The Department has put in place a liberal and transparent foreign
investment regime where most activities are opened to foreign investment on automatic route
without any limit on the extent of foreign ownership. Some of the recent initiatives taken to
further liberalize the FDI regime, inter alias, include opening up of sectors such as Insurance
(upto 26%); development of integrated townships (upto 100%); defense industry (upto 26%); tea
plantation (upto 100% subject to divestment of 26% within five years to FDI); enhancement of
FDI limits in private sector banking, allowing FDI up to 100% under the automatic route for
most manufacturing activities in SEZs; opening up B2B e-commerce; Internet Service Providers
(ISPs) without Gateways; electronic mail and voice mail to 100% foreign investment subject to
26% divestment condition; etc. The Department has also strengthened investment facilitation
measures through Foreign Investment Implementation Authority (FIIA).

Non Resident Indian Scheme: the general policy and facilities for foreign direct investment as
available to foreign investors/ Companies are fully applicable to NRIs as well. In addition,
Government has extended some concessions especially for NRIs and overseas corporate bodies
having more than 60% stake by NRIs.

Throwing Open Industries Reserved For The Public Sector to Private Participation. Now
there are only three industries reserved for the public sector.

Abolition of the (MRTP) Act, which necessitated prior approval for capacity expansion

The removal of quantitative restrictions on imports.

The reduction of the peak customs tariff from over 300 per cent prior to the 30 per cent rate
that applies now.

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Wide-ranging financial sector reforms in the banking, capital markets, and insurance sectors,
including the deregulation of interest rates, strong regulation and supervisory systems, and the
introduction of foreign/private sector competition.

IMPACT OF LPG AND THE ECONOMIC REFORM POLICY OF INDIA

Following its freedom on August 15, 1947, the Republic of India stuck to socialistic economic
strategies. In the 1980s, Rajiv Gandhi, the then Prime Minister of India, started a number of
economic restructuring measures. In 1991, the country experienced a balance of payments
dilemma following the Gulf War and the downfall of the erstwhile Soviet Union. The country
had to make a deposit of 47 tons of gold to the Bank of England and 20 tons to the Union Bank
of Switzerland. This was necessary under a recovery pact with the IMF or International
Monetary Fund. Furthermore, the International Monetary Fund necessitated India to assume a
sequence of systematic economic reorganizations. Consequently, the then Prime Minister of the
country, P V Narasimha Rao initiated groundbreaking economic reforms. However, the
Committee formed by Narasimha Rao did not put into operation a number of reforms which the
International Monetary Fund looked for.2
Dr Manmohan Singh, the ex- Prime Minister of India, was then the Finance Minister of the
Government of India. He assisted. Narasimha Rao and played a key role in implementing these
reform policies.
Narasimha Rao Committee's Recommendations

2 Liberalization, Privatization and Globalization in India, ( October 7, 2014),


http://business.mapsofindia.com/india-policy/liberalization-privatization-globalization.html

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The recommendations of the Narasimha Rao Committee were as follows:


Bringing in the Security Regulations (Modified) and the SEBI Act of 1992 which
rendered the legitimate power to the Securities Exchange Board of India to record and
control all the mediators in the capital market.

Doing away with the Controller of Capital matters in 1992 that determined the rates and
number of stocks that companies were supposed to issue in the market.

Launching of the National Stock Exchange in 1994 in the form of a computerised share
buying and selling system which acted as a tool to influence the restructuring of the other
stock exchanges in the country. By the year 1996, the National Stock Exchange surfaced
as the biggest stock exchange in India.

In 1992, the equity markets of the country were made available for investment through
overseas corporate investors. The companies were allowed to raise funds from overseas
markets through issuance of GDRs or Global Depository Receipts.

Promoting FDI (Foreign Direct Investment) by means of raising the highest cap on the
contribution of international capital in business ventures or partnerships to 51 per cent
from 40 per cent. In high priority industries, 100 per cent international equity was
allowed.

Cutting down duties from a mean level of 85 per cent to 25 per cent, and withdrawing
quantitative regulations. The rupee or the official Indian currency was turned into an
exchangeable currency on trading account.

Reorganisation of the methods for sanction of FDI in 35 sectors. The boundaries for
international investment and involvement were demarcated.

The outcome of these reorganisations can be estimated by the fact that the overall amount of
overseas investment (comprising portfolio investment, FDI, and investment collected from
overseas equity capital markets ) rose to $5.3 billion in 1995-1996 in the country) from a
microscopic US $132 million in 1991-1992. Narasimha Rao started industrial guideline changes

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with the production zones. He did away with the License Raj, leaving just 18 sectors which
required licensing. Control on industries was moderated.

Impact of liberalization on Indian Economy

Liberalization is commonly known as free trade. It implies removal of restrictions and barriers to
free trade. India has taken many efforts for liberalization which are as follows:
.Objectives of the new economic policy 1991 were;
To achieve higher economic growth rate.
To reduce inflation
To rebuild foreign exchange reserves.

Foreign exchange Regulation Act 1973 was repealed and Foreign exchange Management Act
was passed. The enactment has incorporated clauses which have facilitated easy entry of MNCs.
Joint ventures with foreign companies. E.g.: TVS Suzuki.

Reduction of import tariffs.

Removal of export subsidies.

Full convertibility of Rupee on current account.

Encouraging foreign direct investments.

The effect of liberalization is that the companies of developing countries are facing a tough
competition from powerful corporations of developed countries. The local communities are
exploited by multinational companies on account of removal of regulations governing the
activities of MNCs.

The low annual growth rate of the economy of India before 1980, which stagnated around 3.5%
from 1950s to 1980s, while per capital income averaged 1.3%.At the same time, Pakistan grew
by 5%, Indonesia by 9%, Thailand by 9%, South Korea by 10% and in Taiwan by 12%. Only

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four or five licenses would be given for steel, power and communications. License owners built
up huge powerful empires. A huge public sector emerged. State-owned enterprises made large
losses. Infrastructure investment was poor because of the public sector monopoly. License Raj
established the "irresponsible, self-perpetuating bureaucracy that still exists throughout much of
the country" and corruption flourished under this system.

Impact of Privatization on Indian Economy

The main advantages of Privatization are:


It frees the resources for a more productive utilization.

Private concerns tend to be profit oriented and transparent in their functioning as


private owners are always oriented towards making profits and get rid of sacred cows
and hitches in conventional bureaucratic management.

Since the system becomes more transparent, all underlying corruptions are minimized
and owners have a free reign and incentive for profit maximization so they tend to get
rid of all free loaders and vices that are inherent in government functions.

Gets rid of employment inconsistencies like free loaders, or over employed


departments reducing the strain on resources.

Effectively minimizes corruption and optimizes output and functions.

Private firms are less tolerant towards capitulations and appendages in government
departments and hence tend to right size the human resource potential befitting the
organization's needs and may cause resistance and disgruntled employees who are
accustomed to the benefits as government functionaries

Permit the private sector to contribute to economic development.

Development of the general budget resources and diversifying sources of income.

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As a part of privatisation of Public Sector Units (PSUs) disinvestment of equity was started in
December 1991 and a Disinvestment Commission was set up during 1991 -92 for identifying
PSUs for equity disinvestment and for suggesting modalities of disinvestment The pace of
disinvestment was not so satisfying during the first decade of reforms with realised revenues
from sale of public equity being modest (roughly 35% of the target of Rs. 78,300 crores were
realised in the period 1991-92 to 2002-03).The successful privatization of Bharat Aluminium
Company Limited (BALCO), particularly its affirmation by the Supreme Court after it was
challenged, changed the climate for privatization for the better. Although a good number of PSUs
had been disinvested either by the sale of equity or through strategic sale, the political
disagreements in disinvesting high profile PSUs such as Indian Airlines, Air India etc. suggest
that the political economy considerations are still unfavourable to large scale disinvestment in
our country.

Privatisation in infrastructure sector began with the amendment of relevant legislation to permit
private enterprises to enter power generation in October 1991. But not much headway was
created in this sector even after a decade and a half, whereas reforms have been much successful
in telecommunications sector. Value added services were opened to private sector in 1992,
followed by the enunciation of the National Telecom Policy in 1994-95 which opened up basic
telecom services to competition. Foreign equity participation up to 49% was permitted in case of
a joint venture between an Indian and a foreign firm.

The Telecom Regulatory Authority of India (TRAI) was established in 1997. In order to separate
the service-providing function of publicly owned telecom enterprises and policy-making
function, both of which were initially with the Department of Telecommunications, a separate
Department of Telecom Services was set up in 1999- 2000. The two public sector service
providers were corporatized in 2000-01. International long-distance business, which was a public
sector monopoly, was opened to unrestricted entry in 2002-03.3

3 Shelly Shah, Overall Impact of Privatisation on Indian Economy, ( October 7,2014),


http://www.sociologydiscussion.com/economics/overall-impact-of-privatisation-on-indian-economy/1199

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The Universal Service Support Policy came into effect in April 1, 2002, under which a universal
service levy (USL) at 5% of adjusted gross revenue of all telecom carriers (except pure value
added service providers) has been fixed. The Universal Service Fund, financed by the levy, will
subsidies access to public and community phones in villages as well as individual household
phones in net high cost rural/remote areas. The two basic goals of reforms are: delivering low-
cost voice telephony to the largest possible number of individuals, and delivering low-cost high-
speed computer networking to the largest number of firms.

Roads sector is another field of in infrastructure reforms. A key reform was the creation of a
major new source of funding for national, state and rural road construction, called the Central
Road Fund (CRF) under the Central Road Fund Act of 2000. The National Highway
Development Project financed by the CRF is one of the largest single highway projects in the
world. It includes the nearly 6,000 km of Golden Quadrilateral (GQ) connecting the four
metropolitan cities of Chennai, Delhi, Kolkata and Mumbai and 7,300 km of North-South and
East-West Corridor.

Indian Railways (IR) has undertaken several reforms to improve their functioning. The
government has approved restructuring of four metro airports (Chennai, Delhi, Kolkata and
Mumbai) to make them world class and approval in principle has been granted for setting up new
international airports in Bangalore, Hyderabad and Goa with private sector participation.

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Impact of globalization on business in India


Multilateral agreements in trade, taking on such new agendas as environmental and social
conditions.

New multilateral agreements for services, Intellectual properties, communications, and


more binding on national governments than any previous agreements.

Market economic policies spreading around the world, with greater privatization and
liberalization than in earlier decades.

Growing global markets in services. People can now execute trade services globally --
from medical advice to software writing to data processing , that could never really be
traded before.

India has a consumer base of 1.14 billion people.

India is the 3rd largest global telecom market. The mobile subscriber base has grown
from 0.3 Million in 1996 to over 250 million currently.

India is likely to add over 200 shopping malls by 2010 and 715 malls by 2015.

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India is the worlds:


2nd largest two-wheeler market,
4th largest commercial vehicle market
11th largest passenger car market.

Growing Indian Economy


2010 2008 2006
GDP USD 1.36 trillion GDP USD 1.16 trillion GDP USD 590 billion
GDP growth rate 9% GDP growth rate 9.5% GDP growth rate 9%

Services contribution Services contribution 60% Services contribution 54%


60-65%

Investment goal Investment goal Investment goal


USD 370 billion USD 305 billion USD 250 billion

Consequences of FDI and Globalization of Financial Market


Foreign Direct Investment (FDI) is money invested in production by a foreign party rewarded
with part-ownership of production. Of the three important aspects of liberalisation finance,
trade and investment financial liberalisation has been the most pronounced.
During this globalisation era there has been progressive and extensive liberalisation of controls
on financial flows and markets leading to economic globalisation. Economic globalisation and
financial liberalisation centres on the movement of capital of which FDI was a major form.
From the beginning of the 1980s, FDI flows have grown much faster than the world output or
trade or domestic fixed investment. The growth of FDI in the 1990s was enormous. The initial
burst of FDI in the late 1980s was almost entirely in developed countries (over 80% of the total)
and predominantly from five leading developed countries (over two thirds). In the 1990s
developing countries began to attract substantial FDI and there has been genuine geographical

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broadening of FDI. Since early 1990s, FDI flows to the developing countries have raised
relatively averaging 32% of the total in 1991-1995 compared to the 17% in 1981-1990.4
This was due to the liberalisation of foreign investment policies in most of the developing
countries during the 1990s. Private capital flows for direct investment and portfolio investment
for developing countries have grown from $ 25 billion in 1990 to $150 billion in 1997. Also,
during this period there have been qualitative and quantitative changes in the world of
international integration of global markets through the medium of FDI.
The FDI explosion of the 1980s characterised by the investment inflows within the triad of EU,
Japan and North America shifted in the 1990s to the non-OECD (Organisation of Economic Co-
operation and Development) countries as well. The flows were accounted by Asian countries
(China, Singapore, Malaysia, Thailand, and Indonesia), Latin American countries (especially
Mexico, Chile, Argentina and Brazil) and Eastern European countries. There had also been a
growth of major corporate alliances at global level during this period. FDI remained mainly
market driven and they dominated service sector.
However, the flow of FDI even among developing nations was not uniform. Much of this FDI
has centred on only a few developing countries. Least developed countries in particular were
receiving only very small FDI despite having liberalised their policies. There were some negative
impacts of these private capital flows. There was a general and increasing concern about the
fragility and vulnerability of the system due to the interconnectedness of financial markets and
systems and the vast amounts of financial flows.
These were the risk of a breakdown in some critical parts or in the general system itself, as a
fault developing in one part of the world or in the system can have widespread repercussions.
These concerns were heightened by the East Asian financial crisis that began in the second half
of 1997 and spread to Russia, Brazil and other countries, causing the worst financial turmoil and
economic recession in the post-World War II period. Nonetheless in the 1990s a consensus
gradually emerged around the globe that foreign capital, if utilised properly, can contribute
significantly to economic development.

4 Consequences of FDI and Globalisation of Financial Market on Indian Economy, ( October 8, 2014),
http://www.sociologydiscussion.com/economics/consequences-of-fdi-and-globalisation-of-financial-market-on-
indian-economy/1013

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The same was true with India. The largest proportion of FDI approvals in India has been in the
infrastructure and core sectors such as power, telecommunications, energy exploration, and
chemical and metallurgical industries. India followed a case-by-case approach in approving FDI.
FDI in India depends on the assessment of India relative to other countries on several fronts.
The main considerations are the political stability and credibility of reforms, the state of the
infrastructure, especially power, transport and communication, national policy regime, speed and
transparency in implementation of government policies, labour market conditions and the
intellectual property rights issue.
FDI in India is permitted under the following forms of investments:
Through financial collaboration;

Through joint ventures and technical collaboration;

Through the capital market via Euro issues;

FDI is not a one-way process. In the open market system Indian companies are also going global
through joint ventures abroad. Indias export in the year 2001 -02 was to the extent of 32,572
million. Many Indian companies have started becoming respectable players in the international
scene. Agricultural products, marine products, cereals, oilseeds, tea, and coffee are some
prominent products that India has been exporting.

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ECONOMIC POLICIES BEFORE LPG REFORMS

Some skeptics of the LPG policy in India have been repeatedly stating that the 1991 reforms did
not do any wonder, but the nation was able to grow on its own. But, the fact is that, the growth
spurt prior to 1991 was fragile and volatile. There was a jump in the growth rate during 1977-79,
massive decline in 1979-80, a jump again in 1980-82, return to the stagnant declining rate during
1982-88 except 1983-84, climb up again in 1988-91 and crisis in 1991-92. 5 This volatility in the
growth pattern itself raises doubts about the sustainability of a 5 percent plus growth rate over
long haul. The 1991 crisis only confirmed the fundamental weakness of the underlying forces ex
post.

In contrast, growth during 1990s has been more robust, exhibiting far less volatility. Whereas in
the late 1980s, many observers of India were betting on a crisis any time, there are few takers of
such a bet today. Despite well-known vulnerabilities resulting from fiscal deficits that are as
large today as in the late 1980s and slow pace of banking reforms, few pundits are predicting an
external crisis today. The external-debt-to-GDP ratio has been declining and foreign-exchange
reserves at approximately $90 billion exceed the currency in circulation. Indeed, in a recent
careful examination of Indias vulnerability to external crises, Montek Singh Ahluwalia points to
several key weaknesses in fiscal and banking areas and emphasizes the urgency of tackling them
but he stops well short of predicting a crisis.6 Since reforms have continued in spite of many
hiccups and are likely to continue in the future and since the dynamic, fast-growing information

5 Economic Survey, 2002-03

6Ahluwalia, Montek, 2002a, Economic reforms in India since 1991: Has Gradualism Worked?, Journal of
Economic perspectives 16(3), 67-88.

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technology sector is poised to grow into a sizable proportion of the economy in the coming
years, long-term-growth prospects can get only better.7

At the same time, significantly higher average rate of growth during the 1980s relative to that in
the preceding decades was not achieved without important policy changes. In contrast to the
isolated ad hoc policy measures taken to release immediate pressures prior to 1980s, the
measures in the last half of 1980s, taken as a whole, constituted a significant change and an
activist reform program. For example, by 1990, approximately 20 percent of the tariff lines and
30 percent of the imports had come under OGL with significant exemptions on tariffs accruing to
the OGL products. This compares with an additional 45 percent tariff lines being freed from
import licensing and the highest tariff brought down from to 150 percent. As regards
industrial licensing, 31 sectors had already been freed from it by 1990 with 27
sectors remained subject to it. The 1991 reform abolished industrial licensing for
all except a select list of hazardous and environmentally sensitive industries.
Prior to 1990, significant liberalizing steps had also been taken towards freeing
up the large-sized firms by raising the asset limit defining the MRTP firms five-
fold and opening a number of avenues for the license-free entry of MRTP firms in
many sectors. The 1991 reform did away with the MRTP restrictions altogether.
Seen this way, the 1980s reforms and their success provided crucial first-hand
evidence to policy makers that gradual liberalization can deliver faster growth
without causing disruption. In turn this evidence gave policy makers confidence
in taking somewhat bolder moves in the July 1991 budget.

There is a tendency on the part of the analysts such as Das to ignore the
changes made in the 19980s and attribute them to the July 1991 reform 8.
When one considers the facts that 20 percent of the tariff lines were already
under OGL, that another 30 plus percent tariff lines including all consumer

7Ahluwalia, Montek, 2002b, Indias Vulnerability to External Crises, in Ahluwalia, M., Y. V. Reddy and S. S.
Tarapore, Macroeconomics and Monetary Policy: Issues for a reforming Economy, New Delhi: Oxford university
Press, Chapter 9, 183-214.

8 Das, Gurchuran, 2000, India Unbound: A Personal Account of a Social and Economic Revolution (New York:
Knopf: 037541164X).

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and agricultural goods were not freed until the end of 1990s and the top
tariff line was still 110 percent, the July 1991 reform was not as sweeping as
it may seem. While the changes in the 1980s were undoubtedly small in
relation to those in the 1990s, they were quite significant when compared with
the regime prevailing until the 1970s. In part, this fact explains why the
economy, particularly industrial growth, exhibited such as strong response. A
key message of the theory of distortions is that the larger the initial distortion,
the greater the benefit from its relaxation at the margin.

Therefore, the large response to limited reforms is quite consistent with at least
the static theory of distortions. One suspects that under plausible assumptions,
this result would translate into larger growth responses to larger initial
distortions in the endogenous growth models. In this respect, DeLongs
observation that the elasticity of growth to reforms was higher in the 1980s than
in the 1990s is not altogether inconsistent with theory, though it must be
acknowledged that the response would have been short-lived in the absence of
more concerted reforms.9

DeLongs contention that we lack hard evidence to support the view that rapid
growth of the second half of the 1980s could not be sustained without the
second wave of reforms in the 1990s is untenable. 10 Pre-1991 growth was itself
fragile and sporadic. And even then, it ended in a balance of payments crisis.
The scenario of the second half of 1980s involving large amounts of external
borrowing could not have been sustained. Absent that, more substantial reforms
that improved efficiency, brought foreign investment to the country and allowed
sectors such as information technology to grow constituted the only way to
avoid the return to the Hindu rate of growth of the first 30 years of
independence.

9 DeLong, J. Bradford, 2001, "India Since Independence: An Analytic Growth Narrative," in Dani Rodrik, ed.,
Modern Economic Growth: Analytical Country Studies (forthcoming).

10 ibid

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Hence, we can say that the economic policies in the 80s were not stable and
the 1991 economic reforms in India also known as the LPG reforms paved the
way for a stable economy in India.

The unstable pattern of growth in India before the LPG reforms are attached with
the project in the end.

SCENARIO AFTER LPG POLICY

The Indian economy was sheltered and protected with very little competition until around July
1991, due to the serious financial crisis as also the then emerging trends in developed and
developing countries all over the world, India chose to introduce economic reforms with a view
to opening up its economy. The opening up of the Indian economy has posed numerous
challenges and has also provided Indian organizations enormous possibilities of an unlimited
global market.

Liberalization was aimed at easing barriers to entry and exit of businesses and other sectors of
economy through deregulation of market and doing away with the "license raj" in the early 90s.
Before economic reforms it was the government that decided what people would eat, drink or
drive. Gone are the days when the consumer was left with little or no choice. De-regulation now

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APPRAISAL OF INDIAN ECONOMIC REFORM POLICIES

lets the consumer decide on what will sell. A favourable climate for foreign direct investment
minus the license hassles has helped create a better business environment. Domestic firms also
have made entry in variety of economic sectors and in sizeable numbers. Deregulated markets
have contributed to lowering of prices and quality improvement particularly in consumer
products and services.

Privatisation meant transfer of assets of public sector undertakings by the govern-ment to private
hands through the process of outright sale or disinvestment of equity by the government. In
keeping with the spirit of socialism public ownership of the means of production and
.distribution became an important objective of the national policy in India. According to the
latest estimates available, a total investment of over rupees two lakh thirty thousand one hundred
forty crores (Rs. 2,330,140 crores) at the end of March 1999 in the public sector, the overall rate
of return on capital employed (net profit to capital employed was only 4.8% in 1998-99. This
poor profitability has thus not contributed to developing a vibrant economy but has also imposed
severe budgetary strains on the government.

It is in this context that privatisation of public sector undertakings by different means including
disinvestment acquires legitimacy as one of the options for revitalising the Indian economy.
Management of these enterprises in private hands will not only usher in changes in the business
perspective but will also generate surplus essential for growth of business and contribute to the
development of the economy. The government has already initiated the process of transferring
ownership through disinvestment in the joint sector of Maruti Udyog Ltd. and in the public
sector in ITDC, BPCL and many are in the offing. With the change in the patterns of ownership,
the organisations will have to reorient themselves to function in a competitive environment, reset
their priorities and work towards benchmarking themselves with the best in the industry globally.

Globalization entailed removing trade and tariff barriers so as to facilitate foreign direct
investment, entry of multi-national corporations and opportunities for Indian organizations to
conduct their businesses and operate in global market. No doubt globalization brings with it its
share of disadvantages. The environment is becoming competitive, complex and is rapidly

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APPRAISAL OF INDIAN ECONOMIC REFORM POLICIES

changing. There is a pressure on companies to meet the international standards of performance in


parameters like productivity, cost, quality, delivery and service and continuous innovation. For
example, high labour cost in the US has inspired them to set up call center operations in India
where labour is cheaper and technically qualified.

Downsizing Organisations in developed as well as developing economies are under presssure to


reduce cost and improve quality of their products and services. Doing more with less and less,
i.e. maximum output with minimum input is a trend towards that end. It is imperative for
organisation to downsize all their resources including manpower in order to remain competitive.
A wide variety of methods are being used by organisations such as reducing the cost of input
material, process improvement, low inventory, controlling wastages, eliminating wasteful
practices and cutting down expenses11. The downsizing of manpower has led to massive lay off, a
trend that is likely to continue with the introduction of automation and high technology for
increased efficiency. While in the US thousands of employees have been laid off in various
sectors like Airlines and Information Technology, Indian organisations have also followed suit in
order to bring productivity level to global standards so that they remain competitive. This has
been achieved through a variety of methods like Voluntary Retirement Scheme, attrition,,
relocation in subsidiaries and units and redeployment, reduction in manpower has resulted in
remarkable gains for the organizations.
Outsourcing Trade barriers are being dismantled, entry restrictions have been done away with,
the world is moving towards creating a boundary less economic order. It is natural, for
organisations therefore to look for green pastures for accessing cheaper and high quality products
and services. Why own if you can buy has emerged as an approach to surviving in a hyper
competitive environment. Organisations therefore are outsourcing a number of business
processes, product or sub parts and services to organisations which are able to provide low cost
and high quality service with speed.

For developed countries India is an attractive destination for outsourcing Information


Technology related services. This trend is increasingly being adopted by practically all public

11 Indian Environment: The Changing Scenario, http://www.arunk.com/pdf/study%20material/Unit-1.pdf

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and private sector organisations in India also. For example, automobile majors like Maruti and
Hyundai outsource a wide number of automobile parts like wind-shield, wipers, etc% to other
organisations. In public sector undertakings, usually the canteen, transport, maintenance, security
jobs are being outsourced. The trend is going to grow at a faster pace as the pressure of global
competition becomes more intense.

The IT revolution in wake of the nineties has changed the global business scenario drastically
placing new demands on organisation to innovate, reform and restructure with emphasis on
quality, design and flexibility. Improved communication systems have ensured greater control
over activities and have contributed to immense improvements in factors of effectiveness
including lead times, inventory and quality standards. A direct link has been established between
the company and the consumer. This change has come about due to increased speed, high
accessibility and networking. The focus is now on information and knowledge. This would
necessitate seeing the businesses differently.

There is a need to constantly acquire new skills and expertise without which one would be left
behind in the Information Technology Revolution. The emphasis is on information sharing and
knowledge management. The Indian economy has shown remarkable recovery during the last
decade in terms of Macro Economic Indicators including the Foreign Direct Investments. Several
Indian organisations are in the process of transforming them-selves into multi-nationals and are
on the path of becoming formidable global players.

CONCLUSION

The dynamism shown by India in the last 15 years is phenomenal


-Paul Wolfowitz, Ex-President, World Bank.

After 23 years of the LPG reforms, India is getting a global recognition and slowly moving
towards to become a major economic and political strength. Though the development is
progressing rapidly, still many basic problems like rural poverty, corruption and political
instability remained unsolved. Thus we can say that the LPG policy had a positive impact on

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APPRAISAL OF INDIAN ECONOMIC REFORM POLICIES

Indian Economy but there are same basic problems like poverty, corruption etc that needs to be
addressed.

Under the phenomenal growth of information technology which has shrunk space and time and
reduced the cost of moving information, goods and capital across the globe, thus the lpg policy
has brought unprecedented opportunities for human development for all, in developing as well as
developed countries. Under the commercial marketing forces, it has been used more to promote
economic growth to yield profits to some countries and to some groups within a country.

India should pay immediate attention to ensure rapid development in education, health, water
and sanitation, labor and employment so that under time-bound programmes the targets are
completed without delay. A strong foundation of human development of all people is essential
for the social, political and economic development of the country.

Though at present India appears to be dominant in some fields of development as in IT-ITES,


this prosperity may be challenged by other competing countries which are equipping themselves
with better standards of higher education. As detailed earlier, our progress in education has been
slow and superficial, without depth and quality, to compete the international standards.

The government should take immediate steps to increase agricultural production and create
additional employment opportunities in the rural parts, to reduce the growing inequality between
urban and rural areas and to decentralize powers and resources to the panchayati raj institutions
for implementing all works of rural development. Steps should be taken for early linking of the
rivers, especially in the south-bound ones, for supply of the much-needed water for irrigation.

It should be remembered that without a sustainable and productive growth of the agricultural
sector, the other types of development in any sphere will be unstable and illusory. Despite the
concerted development in manufacturing and service sectors, despite the remarkable inflow and
overflow of foreign reserves, agriculture is still the largest industry providing employment to
about 60 per cent of the workforce in the country.

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APPRAISAL OF INDIAN ECONOMIC REFORM POLICIES

Mere growth of the GDP and others at the macro level in billions does not solve the chronic
poverty and backward level of living norms of the people at the micro level. The growth should
be sustainable with human development and decent employment potential. The welfare of a
country does not percolate from the top, but should be built upon development from the bottom.

Growth during 1980s was fragile, highly variable across years, and unsustainable. In contrast,
once the 1991 reforms took root, growth became less variable and sustainable with even a slight
upward shift in the mean growth rate. The difference between the reforms in 1980s and those
1990s is that the former were limited in scope and without a clear roadmap whereas the latter
were systematic and systemic. This said the reforms in 1980s must be viewed as precursor to
those in 1990s rather than a part of the isolated and sporadic liberalizing actions during1960s and
1970s, which were often reversed within a short period. The 1980s reforms proved particularly
crucial to building internal support for future liberalization and imparting confidence to
politicians in the ability of policy changes such as devaluation, trade liberalization and de-
licensing of investment to spur growth without disruption.

REFERENCES

Bhagwati Jagdish and Padma Desai, 1970, India: Planning for Industrialization, London:
Oxford University press.
Das, Gurchuran, 2000, India Unbound: A Personal Account of a Social and Economic
Revolution (New York: Knopf: 037541164X).
DeLong, J. Bradford, 2001, "India Since Independence: An Analytic Growth Narrative,"
in Dani Rodrik, ed., Modern Economic Growth: Analytical Country Studies
(forthcoming).

29
FROM COMMAND AND CONTROL ECONOMY TO LPG: CRITICAL
APPRAISAL OF INDIAN ECONOMIC REFORM POLICIES

Desai, Ashok, 1999, The Economics and Politics of Transition to an Open Market
Economy: India, OECD Working Papers, Volume VII, No. 100.
Srinivasan and Tendulkar, 2003, Reintegrating India with the World Economy,
Washington DC: Institute for International Economics.
Virmani, Arvind, 1997, Economic development and Transition in India. Paper
presented at the Tokyo Dialogue on Alternatives to the World Bank-IMF
http://www.sociologydiscussion.com/economics/consequences-of-fdi-and-globalisation-
of-financial-market-on-indian-economy/1013
http://www.fibre2fashion.com/industry-article/8/738/impact-of-globalization1.asp
business.mapsofindia.com/india-policy/liberalization-privatization-globalization.html
https://docs.google.com/presentation/d/1BAf51U5leQiKdN8PP19MwvcwC1gxskMtpGP
jC6PdjHk/edit#slide=id.p5
http://www.slideshare.net/saurav_mic/economics-17722740

Average Annual Growth Rates

Gross Domestic Product at Per-capita Gross Domestic


Factor Costs Product at Factor Costs
ACCORDING TO FIVE-YEAR PLANS
FIRST PLAN (1951-56) 3.6 1.8
SECOND PLAN (1956-61) 4.3 2.3
THIRD PLAN (1961-66) 2.8 0.6
THREE ANNUAL PLANS (1966-69) 3.9 1.7
FOURTH PLAN (1969-74) 3.4 1.1
FIFTH PLAN (1974-79) 4.9 2.6
ANNUAL PLAN (1979-80) -5.2 -7.7
SIXTH PLAN (1980-85) 5.6 3.5
SEVENTH PLAN (1985-90) 6.0 3.8
TWO ANNUAL PLANS (1990-92) 3.4 1.4
EIGHTH PLAN (1992-97) 6.7 4.7

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NINTH PLAN (1997-2002) 5.5 3.6

ACCORDING TO DECADES
1951-61 3.9 2.0
1961-71 3.8 1.5
1971-81 3.2 0.9
1981-91 5.6 3.5
1991-01 5.7 3.7
1951-74 3.6 1.5
1977-91 5.1 2.9
1992-02 6.1 4.1

Source: Economic Survey, 2002-03.

Average of Ten Year


Average of Five Years Ending with the
Year Actual Ending with the Year* Year**

1969-70 6.5 2.9 4.0


1970-71 5.0 4.7 3.8
1971-72 1.0 4.7 3.5
1972-73 -0.3 3.0 3.3
1973-74 4.6 3.4 3.2
1974-75 1.2 2.3 2.6
1975-76 9.0 3.1 3.9
1976-77 1.2 3.1 3.9
1977-78 7.5 4.7 3.8
1978-79 5.5 4.9 4.1
1979-80 -5.2 3.6 2.9
1980-81 7.2 3.2 3.2
1981-82 6.0 4.2 3.7
1982-83 3.1 3.3 4.0
1983-84 7.7 3.7 4.3
1984-85 4.3 5.6 4.6
1985-86 4.5 5.1 4.2
1986-87 4.3 4.8 4.5
1987-88 3.8 4.9 4.1
1988-89 10.5 5.5 4.6

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APPRAISAL OF INDIAN ECONOMIC REFORM POLICIES

1989-90 6.7 6.0 5.8


1990-91 5.6 6.2 5.6
1991-92 1.3 5.6 5.2
1992-93 5.1 5.8 5.4
1993-94 5.9 4.9 5.2
1994-95 7.3 5.0 5.5
1995-96 7.3 5.4 5.8
1996-97 7.8 6.7 6.1
1997-98 4.8 6.6 6.2
1998-99 6.5 6.7 5.8
1999-00 6.1 6.5 5.8
2000-01(PE) 4.4 5.9 5.7
2001-02 (QE) 5.6 5.5 6.1

*For example, the first entry in this column shows the average of the growth
rates over 1965-70. To calculate the averages in the first four years in this
column, growth rates from years 1965-69 have been used as appropriate but
not shown. Figures in bold type indicate growth rate for a Five-Year Plan.
** For example, the first entry in this column shows the average of the growth
rates over 1960-70. To calculate the averages in the first nine years in this
column, growth rates from years 1960-69 have been used as appropriate but
not shown. Figures in bold type indicate growth rate for decades such as the
1960s, 1970s, etc.
PE, QE: Provisional Estimate and Quick Estimate, respectively.
Source (Tables 1 and 2): Economic Survey, 2002-03,

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