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ECONOMIC REFORMS

MEANING OF ECONOMIC REFORM

The term economic reform broadly indicates necessary structural adjustments to external events. It include the function of country’s spending to the level parallel to its income and thereby reducing fiscal deficits. This requires gradual reduction in import and increase in export. These adjustments also requires market change in order to make economy flexible.

THE CRISIS OF JUNE 1991

The present process of economic reforms was born out of the crisis in the economy, which climaxed in 1991. The crisis compelled the government to adopt a new path-breaking economic policy under which a series of economic reform measures were initiated with the objective to deal with the crisis and to take the economy on a high-growth path.

NEED OF ECONOMIC REFORMS

Increase in Fiscal Deficit Increase in adverse balance of Payment Gulf Crisis Fall in foreign Exchange Reserve Rise in Prices Poor Performance of Public Sector

EARLY CRISIS MANAGEMENT MEASURES AS TREND SETTERS TO THE REFORM PROCESS

The top and immediate priority of the government was to stabilize the economy, bring the growth of the economy to its normal track and to win back confidence of masses in the country and the international financial community. The crisis management measures focussed largely on fiscal correction, industrial decontrol and balance of payments.

MAIN FEATURES OF ECONOMIC REFORMS

ECONOMIC REFORMS

LIBERALISATION

PRIVATISATIONGLOBALI

SATION

LIBERALISATIONIt means to free the economy from direct or physical controls imposed by the government. Prior 1991, government had imposed several types of controls on Indian economy e.g. industrial licensing system, price control or financial control on goods, import license, foreign exchange control, restriction on investment by big business houses, etc. These controls leads to fall in economy growth. Economic reforms were based on the assumption that market forces could guide the economy in a more effective manner than government control.

MEASURES TAKEN FOR LIBERALISATION Abolition of industrial licensing and

Registration : According to new industrial policy , with the exception of 6 sectors, industrial licensing has been removed.

Concession from MRTP Act Freedom from Expansion and Production

to Industries Increase in the Investment Limit of the

Small Industries: It has been raised to Rs 1crore & Investment limit has been raised to Rs 25 lakh.

MEASURES TAKEN FOR LIBERALISATION Freedom to import capital goods Freedom to import technology Action plan for information Technology

and software development.

PRIVATISATIONPrivatisation means allowing the private sector to set up more and more of industries that were previously reserved for public sector.

It can take in three in forms:a. Change in ownership: Degree of

privatisation judged by the extent of ownership transferred from public to private sector. This can have four forms:

i) Total Nationalisationii) Joint Venture

PRIVATISATIONiii) LiquidationIV) Workers Co-operativeb. Organizational Measures: It includes

variety of measures to limit state control.

i) A holding Company Structureii) Leasingc. Operational Measures: Autonomy to the

operators of the enterprise.

OBJECTIVES OF PRIVATISATION

To increase efficiency & competitive power of the enterprises

To strengthen industrial management. To earn more & more Foreign currency. To make optimum use of resources To achieve rapid industrial development

of the country.

ADVANTAGES OF PRIVATISATION

Reduction in economic burden Increase in efficiency Reduction in sense of irresponsibility Scientific Management Reduction in Political Interference Encouragement of new Inventions

DISADVANTAGES

Lack of social welfare Class struggle Increase in inequality Increase in unemployment Exploitation of weaker section

MEASURES ADOPTED FOR PRIVATISATION

Contraction of Public sector Disinvestment Sale of shares of public enterprises Increase in private sector Conversion of loans into shares is not

necessary Sick industries Memorandum of understanding

PUBLIC SECTOR REFORMS & DISINVESTMENT PROGRAMME

Public sector in India includes all activities or institutions funded out of the government’s budget whether at centre or states. Public sector includes the following:

Govt. Dept. & Govt. Companies Irrigation & power projects Railways, post & telegraphs Banking, insurance, financial and other

services

GROWING SECTOR AGAINST THE PUBLIC SECTOR

Conflict between the financial and social objectives

Problem of losses or low rate of return on investment

Lack of professionalism in management Time & cost overruns in new projects Underutilization of capacity Operational inefficiency

PUBLIC SECTOR REFORMS

PSU Refocussing Memorandum-of-Understanding (MOU)

System of PSE Financial & operational autonomy Restructuring of sick units Privatisation through disinvestment Protection of PSU workers’ Interest

DISINVESTMENT The disinvestment programme towards

greater privatization of the economy was launched in the year 1991-1992 with the announcement of the new industrial policy in August 1991 and is an ongoing process even today. It involves sale of minority stake in a few PSU, strategic sales, initial public offering and rights offer. Between August 1991 and March 2003, in all 48 companies underwent the disinvestment process.

ISSUES RELATED TO DISINVESTMENT

Valuation of public sector unit Method of disinvestment The extent of disinvestment Issues concerning labour

GLOBALISATION

It is defined as a process associated with increasing openness, growing economic independence and Deeping economic integration in the world economy.

Reduction of trade barriers Free flow of capital Free flow of technology Free movement of technology

PROCESS OF GLOBALISATION Stage I: Domestic company exports to foreign countries

through the dealers or distributors of home country.

Stage II: The domestic company exports to foreign countries directly on its own.

Stage III: The domestic company becomes an international company by establishing production and marketing operations in various key foreign countries.

Stage IV: The company replicates a foreign company in the foreign country by having all the facilities including R&D, full fledged human resources, etc.

Stage V: The company becomes a true foreign company by serving the needs of foreign customers just like the host country’s company serves.

TYPES OF GLOBALISATION

Globalisation of markets Globalisation of Production Globalisation of Technology Globalisation of Investment

MEASURES TAKEN FOR GLOBALISATION

Reduction of import duties Encouragement of foreign

investment Reducing custom duty Devaluation of currency Partial convertibility