brief essay on liberalisation

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• Globalization
• Liberalization
• Privatization

All about liberalization, privatization, and globalization

This article is written by Sambit Rath , a B.A. LL.B. student of Dr. Ram Manohar Lohiya National Law University, Lucknow. In this article, the author aims to discuss LPG, i.e., liberalization, privatization, and globalization in detail, including the positive and negative effects of the reforms.

It has been published by Rachit Garg.

Table of Contents

Introduction 

In the 1980s, India was facing an economic crisis. It was a slow but gradual fall in the country’s economy. By the end of the decade in 1990, the BOP (Balance of Payment) crisis hit India. The rising fiscal deficit and increasing overvaluation led to this chaos. The invasion of Kuwait by Iraq took place in the same year, which led to a sharp increase in oil prices and falls in remittances from Indian workers working abroad. Purchasing oil became costly and net factor income from abroad decreased rapidly. 

In addition to this, the uncertain political situation in the country only added fuel to the fire. There were three Prime Ministers, namely Vishwanath Pratap Singh (December 1989 – November 1990), Chandra Shekhar (November 1990 – June 1991), and P. V. Narasimha Rao (June 1991 – May 1996) within the span of one and a half years. An unstable government meant that there were no proper strategies in place to handle the situation. This led to India approaching the IMF (International Monetary Fund) and the World Bank for emergency lending. But the lending was not so easy as certain conditions were placed before the government that had to be fulfilled. These were structural reforms that had to be made in order to revive the economy. The then finance minister, Dr. Manmohan Singh, along with Prime minister P.V. Narasimha Rao, unveiled a game-changing industry policy that removed restrictions that hindered the industries. These reforms included structural changes and stabilization measures. Liberalization, Privatization, and Globalization (LPG) were part of the stabilization measures undertaken by the government under the New Economic Policy. Let’s look at these in detail.

Liberalization, privatization, globalization and the New Economic Policy, 1991 

The country was facing an economic crisis by the late 1980s. Several reforms were introduced in order to revive the economy. Due to the international and national issues we’ve talked about in the previous section, money started flowing out of the economy. At that time, India did not have the resources or the technical know-how to substitute the goods it was importing. This led to a gradual reduction in reserves. India could no longer pay its external debt. 

This downfall in the economy reached its lowest point in 1990. The Prime Minister of that time, Mr. Narasimha Rao had his hands full within the first year of his 5-year tenure. He needed the help of some great minds to tackle this dicey situation. Fortunately, there was a man capable of pulling off something big. Dr. Manmohan Singh was the finance minister at the time and was hence entrusted with the huge task of economic revival. Emergency funding was the first requirement to deal with depleting reserves. The International Monetary Fund and other organisations provided the required funds on a conditional basis, which included the opening of India’s economic borders. This is how the New Economic Policy 1991 came into existence. It was designed to make structural changes and stabilize the economy. Stabilization measures are short-term policies and these included a slew of fiscal reforms and inflation control strategies. Structural measures are long-term policies and these drastically affect the economy in the long run. These included liberalization, privatization, and globalization. 

And as anyone could have guessed, these reforms did the magic. Foreign Direct Investment started flowing into the economy as a result of increased private sector participation. Multinational companies started setting up offices in India at various locations which led to increase in employment. India became one of the biggest exporters of engineering goods, auto parts, IT software, and textile. Due to stabilization measures, inflation was kept in control. 

But it wasn’t a full-proof plan. One policy cannot solve all the problems of the economy. There are so many factors responsible for running the economy. Agriculture was and is the largest sector in terms of percentage of the population employed. It gives livelihood to more than 40% of the population. Back then this figure was around 60%. This drop of 20% can be attributed to these reforms which in itself is a good thing. But it wasn’t just because of modernisation that led to the transfer of the workforce. It was also a lack of growth in the agricultural sector during this reform period. People could find better opportunities in other sectors and saw no future in the agricultural sector. It was as if this sector was completely sidelined and this is the biggest failure of the policy. Other failures include uneven growth in the industrial sector. The shift in the workforce in India was from the agricultural sector to the service sector. The industrial sector could not absorb the flow of the workforce due to a lack of proper infrastructural growth. Whereas when we compare the reform period in China, the shift was from agriculture to industry and then to the service sector. 

Local industries also took a hit owing to increased competition from private and international players. Some say it resulted in economic colonialism. Lastly, the inflow of international commodities and services led to the erosion of culture. 

What is liberalization 

Liberalization is the removal of restrictions on something, typically in an economic context. After Independence, the government decided to take a protective approach and closed the economy to the outside world. This was done because the new industries weren’t strong enough to compete with international companies and would eventually be pushed away by them.

The arrival of liberalization marked the end of this era. India opened its economic borders to other countries in a gradual manner by reducing restrictions. This also allowed foreign investors and the private sector to invest in domestic companies. It led to a free market system where there were reduced restrictions and interference by the government.

Objectives of liberalization

• In order to test the competitiveness of domestic businesses, economic borders were opened.
• The imbalance of BOP had to be corrected since the imports were way more than the exports. 
• It was also done to unlock the economic potential of the economy by allowing the private sector to participate in economic activities.
• Allowing multinational companies to set up their businesses in the country to boost India’s economic growth.

Impact of liberalization on the economy

There were positive as well as negative outcomes of liberalization. 

Positives –

• Flow of Capital – Measures such as the removal of trade restrictions, tax reforms, etc., led to the free flow of capital in the economy. The private sector and foreign investors were able to invest with ease which led to the injection of money as well as overall capital growth in the economy. 
• Investor Portfolio Diversification – Removing restrictions meant that investors could invest in a diverse class of assets. An increase in options attracted investors to park their money in several classes of assets, reducing their investment risk.
• Stock Market Appreciation – Increasing number of investors and foreign capital led to the growth of the stock market. 

Negatives – 

• Excessive competition – The entry of private players and international companies led to the decline of small traders as they couldn’t catch up with the technological advancement that resulted from Liberalization. 
• Mergers and Acquisitions – Big private entities could acquire a majority stake in smaller companies. This led to employees of the smaller firm losing their jobs if they couldn’t upskill themselves to hold their positions.
• Brazil’s Economic Liberalization in 1990,
• China’s Economic Liberalization in 1978,
• India’s Economic Liberalization in 1991. 

What is privatization 

Earlier, the companies were all state-owned as the leaders at that time thought of India as a socialist country, working for social welfare. State-owned entities used to provide products at very affordable rates, keeping in mind the overall poor economic status of the people at that time. The government-controlled the prices and regulated everything. In order to open up the economy, this had to change. Along with liberalization came privatization. 

Privatization is the process of transferring ownership, management, and control of public sector companies by the government to private entities. It is also known as disinvestment because it includes selling off shares of a company, which is the opposite of investment. Privatization can be done by either transferring ownership and management through the outright sale of a public sector company or through disinvestment. There are four types of privatization. These include:

• Complete Privatization – In this type of privatization, there is the outright sale of government assets to the private sector. It also includes the transfer of management of the Public Sector Undertakings (PSU).
• Privatization of Operations – This type of privatization includes the transfer of managerial and operational responsibilities of PSUs to private firms. In this case, the firms use government assets to generate revenue. This kind of privatization can be seen in sports leagues that make use of government-owned stadiums.
• Contracting out – Under this, a private sector firm is paid by the government for its services.
• Open competition – In this type of privatization, private firms are allowed to compete within governmental jurisdiction. This can be seen in the telecom sector.

In India, a combination of complete privatization, open competition, and contracting was used to achieve the goal of privatization.

Objectives of privatization

• Privatization was done primarily to reduce the control of the government over several industries. 
• Disinvestment would help the government raise funds by selling off stakes in PSUs.
• It was done to reduce the workload of the government. 
• It would also provide the management of PSUs with more autonomy to make decisions. 
• These would help create an environment of healthy competition among firms and, at the same time increase their efficiency.

Impact of privatization 

Positives – .

• Reducing the burden – Privatization reduces the burden of the government as it no longer has to pay attention to many companies. This helps the government to focus its efforts on other important things.
• Improves decision-making – The increased autonomy given to managers would help them make better decisions thereby improving their decision-making skills.
• Reviving sick units – Transferring ownership, management, and control to private players helps the loss-making PSUs go through a restructuring process, thereby increasing their chances of revival.
• Monopoly – Having major private players is risky as they have the funds required to acquire competing firms. This would reduce the number of sellers in the market. 
• Lack of welfare activities – Private sector is not obligated to serve the country and work towards public welfare. Hence, they can choose to focus on making profits and not serve the underprivileged people in need.

Examples 

Some of the examples of PSUs that were privatized include:

• Bharat Aluminium Company Limited (BALCO),
• Hindustan Zinc Limited (HZL),
• Hotel Corporation of India Limited (HCI).

What is globalization 

The Government kept the economy closed from the rest of the world, and this disconnected India from the global economy. To ensure the participation of foreign companies, integrating the country’s economy with the world economy was the next step. 

Globalization is the integration of a country’s economy with the world economy. The attempt here is to create a borderless world in which goods, services, and people move seamlessly across borders. This has been achieved using the latest technologies that enable people to connect with each other from parts of the world. Globalization is the last step that is made possible by the implementation of liberalization and privatization. It includes opening the boundaries for multinational companies to start manufacturing and retailing in the country. It also allows domestic companies to grow and reach international levels in terms of business. The focus was on foreign trade and investment. 

India has been a member of the World Trade Organization (WTO) since January 1995. According to the WTO , members receive a guarantee that their exports will be treated fairly by other members, and each member promises to do the same with imports. India, being a member of the General Agreement on Tariffs and Trade (GATT), which was the predecessor of the WTO, had to take affirmative actions to contribute to trade liberalization. Its motto was free trade, and the members had to globalize their economies by reducing tariffs on various commodities. This was done to benefit the developing nations, which had to compete with developed nations in international trade. Finally, in 1991, globalization was adopted as one of the reforms, and India lifted trade restrictions to enable easy export and import.

Objectives of globalization 

• One of the main objectives was to reduce customs duties and tariffs. This was done in order to ease the importing and exporting of goods. Fewer taxes meant that companies could import materials or products at cheaper rates. 
• Removal of restrictions on foreign trade was another objective that had to be undertaken. 
• Increasing the equity limit for foreign investment was important to let foreign investors invest more in domestic companies. 

Impact of globalization 

• One of the most important outcomes of this step was outsourcing. It is the practice of hiring professionals from another country in order to get work done cheaply. The low cost of labour is not the only motivation behind outsourcing. If a skill is rare and is found only in specific areas, outsourcing becomes an effective way of getting that work done. Marketing, legal advice, technical support, IT, etc. are some of the major services that get outsourced. India, with its cheap but effective workforce, has made it an attractive option for organizations in developed countries to avail of its services. 
• Foreign Exchange Regulation Act (FERA), 1973 was liberalized in 1993 and later the Foreign Exchange Management Act (FEMA), 1999 was passed to start transactions in foreign currency.
• Disproportionate growth – Globalization can lead to disproportionate growth within the country. The states or cities that have the infrastructure that is developed in order to enable ease of trade usually reap the most benefits arising from increased trade. This causes some states or cities to grow faster than other cities. It also results in migration as people move from underdeveloped states to look for better opportunities in these states. 
• Increased competition – The influx of goods from other countries increases the competition in the domestic market. Although this competition is considered healthy, after a certain limit it could affect the domestic players negatively, thereby driving them out of competition. This also affects the GDP of the country.

Need for liberalization, privatization, and globalization

As we have discussed in the introduction, the country was going through economic turmoil during the 1980s. The reasons that led to this will be discussed in this section. 

• Since the government was involved in everything, there were unnecessary rules and regulations, especially in business. The permit license raj system was the product of this, and it led to problems for the private sector in setting up industries. Basically, the government wanted to control every aspect of the industry as per the Industrial Development and Regulation Act, 1951 . According to this, the private sector had to get licenses for setting up industrial units. It became really difficult for companies to get permission on time and this led to financial loss. 
• The public sector companies weren’t doing so well either. By 1991, there were 246 PSUs and most of them were making huge losses. A lot of resources were used to set up these PSUs but they couldn’t make profits.
• Poor fiscal management was one of the main reasons for the economy’s downfall. The government spent more than what it was earning in the 1980s, which led to declining foreign reserves. Most of the funds were used for developmental activities that did not create any revenue. 
• A sharp fall in the forex reserve meant that India was no longer able to pay for imports of essential goods. Imports had increased by 2.3% of GDP, while exports had increased by a mere 0.3% of GDP. This resulted in a trade deficit of 3.2 % of GDP in the 1980s.
• The current account deficit was steadily increasing, and to cover this deficit, the government had to take loans such as external commercial borrowings, NRI deposits, etc. India had just enough to finance three weeks of imports.
• Finally, the government had to secure an emergency loan of 2.2 billion dollars from the International Monetary Fund and 600 million dollars from the Bank of England and Union Bank of Switzerland.

Effect of liberalization, privatization, and globalization on the Indian economy 

Modern-day India we are noticing today is the product of some smart decisions that were taken to handle the 1990 economic crisis. The resultant effects of these decisions were both positive as well as negative.

Effect on sectors

Impact on small-scale industries 

The small-scale industries were affected a lot due to LPG. Earlier, some items were reserved for them exclusively to produce. But after liberalization, big private players started producing better and cheaper substitutes for these goods. Gradually, these small-scale industries lost their charm and are currently fighting to survive in the market.

Impact on agriculture

The agricultural sector did not see much of an impact after these reforms were introduced. People dependent on agriculture are still around 55%. The government still controls various aspects of this sector. Commodity prices keep fluctuating due to the import of certain agricultural goods into the market.

Impact on the Services Sector 

This sector saw the biggest gains from LPG. It created numerous jobs and enabled a technological revolution in the country. The IT industry, banking, stock markets, and telecom sector reaped the benefits of this reform. The introduction of private players improved the overall industry, and this led to the growth in GDP. It was the fastest-growing sector during this period. The education and health sectors did not see much growth, and this has been a point of criticism. These are essential services, and people can afford them up to a limit. Here, the government is solely responsible for welfare activities, as private players will only work for a profit. 

Positives effects 

• Increase in GDP growth rate – India started growing as the participation of private companies and multinational companies increased. LPG led to increasing foreign direct investment and forex reserves. Both the public and private sectors created a strong base for the economy due to which the growth rate of GDP shot up to 8% per annum.
• Growth of industries – LPG has led to an increase in the number of industries and, at the same time, strengthened the existing ones. The IT industry grew the most, and as a result of this, many multinational companies set up offices in India and also outsourced IT-related work to Indian firms.
• Controlling inflation – As reserves were declining and demand for them grew, inflation spiralled. One of the main objectives of LPG was to put a check on inflation. Hence, when the economy opened up, money started flowing into the economy, and the supply of commodities in the market increased. This corrected the demand-supply imbalance and reduced inflation.
• Reducing fiscal deficit – The increasing fiscal deficit was the reason India had to borrow money from international banks. Liberalization eased up imports and exports, which led to an inflow of dollars due to an increase in exports. It can also be attributed to the fact that the rupee was devalued in order to make importing goods from India more attractive.
• Reducing poverty – Increase in the number of industrial units led to the growth of job opportunities. The demand for skilled and unskilled labour grew, which led to the growth of jobs in the country. As a result, the standard of living improved and people started coming out of poverty.

Negatives effects

• Uneven growth – The agricultural sector was one of the sectors that was sidelined in the process. There was growth in support services but nothing much was done that affected this sector directly.
• The disparity between rich and poor – The economic growth was more favourable for the rich than it was for the poor. This led to an increase in the disparity between the rich and poor. The rich became richer and the poor either stayed the same or became poorer. It is important to note that not everyone from the poor had their lives improved due to the reforms and the majority of them didn’t feel the changes like the middle class or the rich did.
• Heath and Education sectors – The health and education sectors did not see significant changes like the other sectors did after the reforms. Since most of the focus was on reviving the economy quickly, social sectors like these did not get the benefits of LPG reforms. 

Conclusion 

The New Economic Policy was implemented to deal with the economic crisis of 1990. India was in a very dicey situation with meagre resources to fulfil the basic needs of the country. It was important to act swiftly as the situation was only going to worsen from that point on. Increasing corruption was a negative outgrowth of this crisis and had to be dealt with. Fortunately, the government at that time was able to foresee the consequences of these negative developments and acted quickly. The conditions placed upon India while lending it emergency funds acted as a boon for the country. Signs of recovery started showing up gradually, and the India we see today is the result of this comeback made possible by some great minds at that time. 

Frequently Asked Questions (FAQs)

What are the economic effects of economic liberalization .

The economic effects include an increase in the supply of money, goods, services, and human resources. The stock market in the country also sees appreciation as people have extra funds to invest in shares. The prices of some goods tend to decrease as there are lesser restrictions like high taxes, etc. So the demand-supply situation of the country improves.

What are the benefits of globalization to developing countries? 

Globalization helps integrate the world economy with the country’s economy. It is achieved by reducing tariffs and ensuring ease of investment for foreign investors. Growth in GDP, jobs, the spread of new technology, improved standard of living, and better products are some of the benefits a developing country can get by globalizing.

What are the LPG reforms? 

The LPG reforms include Liberalization, Privatization, and Globalization. These are measures undertaken to improve the economic condition of a country. These reforms were initiated by the Indian government in 1991 under the New Economic Policy.

Which sector had the greatest impact from Liberalization?

The service sector had the greatest impact from Liberalization. As restrictions were removed, the entry of private players improved the whole sector, leading to faster growth as compared to other sectors. Services such as banking and telecom saw major improvements after Liberalization.

• Introduction to LPG – Conditions, Elements, Positive and Negative Impact
• New Economic Policy 1991: Features & New Policy Reforms Of NEP (testbook.com)
• New Economic Policy (NEP) 1991 – Indian Economy Notes (prepp.in)
• wp_cris9091.pdf (niti.gov.in)
• The Economic Crisis, 1990-1991 – IAS Current
• In the early 1990s, India’s economic reforms triggered high growth rates for the long term | D+C – Development + Cooperation  

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Economic Synopses

Trade liberalization and economic development.

Both developed and developing countries have substantially reduced trade barriers in recent decades, triggering a rapid integration of world goods markets. Yet, while economists and policymakers have often touted trade liberalization as an attractive policy, it is not well understood whether the impact of trade liberalization depends on a country's level of economic development.

This essay investigates the extent to which trade liberalization affects developed and developing countries differently. In particular, we examine whether exports respond differently to changes in trade barriers in rich and poor countries. 

To identify trade liberalizations, we measure the average foreign import tariffs charged on a country's exports by each destination market. We use cross-country data from the World Bank, Organisation for Economic Co-operation and Development (OECD), and United Nations (U.N.) Comtrade over the period 1980-2006.

To illustrate our approach, consider the foreign import tariffs on U.S. exports. First, we measure the average import tariffs charged by each country that imports U.S. goods. We then weight the foreign import tariffs by the share of aggregate U.S. exports imported by each country. 

Next, we identify episodes of trade liberalization based on a rapid decline in the average foreign import tariffs on a country's exports. In particular, we say that a country experiences a trade liberalization in a given year if the average foreign import tariffs on its exports declines at least 0.75 percentage points over the subsequent three years. 1  

Finally, we classify countries into two groups based on their level of economic development in the trade liberalization year : (i) low-income countries, those with real GDP per capita (in 2011 U.S. dollars) below $5,000, and (ii) middle/upper-income countries, those with real GDP above that threshold. 2  

Figure 1 shows the average foreign import tariffs on the exports of each income group in trade liberalization episodes. The figure plots the change in average foreign import tariffs relative to the trade liberalization period (year 0) over the 5 years before and 10 years after trade liberalization episodes. The figure reports averages across a balanced panel of 19 middle/upper-income countries and 9 low-income countries.

First, observe that average foreign import tariffs on exports decrease during the first three years after trade liberalization in both income groups. This is true by construction, since we define a trade liberalization as a drop in tariffs. More importantly, tariffs are roughly flat in both groups in the period leading up to the trade liberalization. We interpret this change in the trend as evidence of the success of our strategy to identify trade liberalization episodes.

We also observe that low- and middle/upper-income countries experience trade liberalization of different magnitudes. In particular, average tariffs decline roughly 1 percentage point more in low-income countries than in middle/upper-income countries in the first 10 years after trade liberalization begins.  

Figure 2 plots the export-to-GDP ratio for each income group from 5 years before to 10 years after trade liberalization episodes. The figure indicates that the dynamics after trade liberalization differ based on a country's level of economic development. The export-to-GDP ratio increases by 13 percentage points for middle/upper-income countries but only by 2.5 percentage points for low-income countries over the period; this is despite the fact that average foreign import tariffs declined more in low-income countries than in middle/upper-income countries (see Figure 1).

This evidence suggests that the impact and potential gains from trade liberalization may differ based on a country's level of economic development. We speculate that financial underdevelopment, limited infrastructure, or limited human capital, among other characteristics, might hinder low-income countries and prevent them from scaling up production to sell internationally and take more rapid advantage of trade liberalization. Answering this important question will require further research, however.

Understanding the differential responses to trade liberalization across income groups is important for designing effective policies that allow low-income countries to fully benefit from openness to international trade.

1 We focus on at least 0.75-percentage-point changes in average foreign import tariffs to ensure we observe a sufficient number of episodes to conduct our empirical analysis. If a country experiences multiple such episodes, we use the first episode.

2 Our findings are robust to alternative classifications of countries by level of economic development.

© 2018, Federal Reserve Bank of St. Louis. The views expressed are those of the author(s) and do not necessarily reflect official positions of the Federal Reserve Bank of St. Louis or the Federal Reserve System.

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liberalization

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liberalization , the loosening of government controls. Although sometimes associated with the relaxation of laws relating to social matters such as abortion and divorce , liberalization is most often used as an economic term. In particular, it refers to reductions in restrictions on international trade and capital. Liberalization is often treated as synonymous with deregulation —that is, the removal of state restrictions on business. In principle the two are distinct (in that liberalized markets can still be subject to government regulations—for example, to protect consumers), but in practice both terms are generally used to refer to the freeing of markets from state intervention.

The second half of the 20th century saw a significant shift toward both liberalization and deregulation. The liberalization of trade progressed through the signing of a succession of free trade agreements such as the General Agreement on Tariffs and Trade (GATT) in 1947, the Single European Act in 1986, and the North American Free Trade Agreement (NAFTA) in 1992. By the 1970s free trade had extended to most Organisation for Economic Co-operation and Development (OECD) countries, and many developing countries followed suit from the 1980s on (including the postcommunist regimes of central and eastern Europe and, later, the People’s Republic of China). Another shift occurred toward the removal of foreign investment regulations: according to United Nations Conference on Trade and Development (UNCTAD) figures, between 1991 and 1996, 95 percent of the 599 national foreign direct investment (FDI) regulations across the world were in the direction of further liberalization. Financial markets too have been freed from state interference. The foreign exchange market was the first financial market to liberalize, in the mid-1970s, followed by the deregulation of domestic stock markets in the 1980s (for the advanced industrial nations) and the 1990s (for the newly industrializing countries).

Liberalization and deregulation played a central role in stimulating the massive rise in international trade (which grew at an average rate of 6 percent per annum between 1948 and 1997), FDI (for which stocks and inflows exceeded the rise in world trade), and foreign exchange and portfolio capital (with the average daily turnover of foreign exchange markets reaching the trillions of dollars). Liberalization and deregulation are thus both seen to have contributed to the globalization of the world economy.

There is significant controversy about the benefits of liberalization and deregulation. Both are central tenets of the “Washington consensus”—a set of market-oriented policy prescriptions advocated by neoliberal economists for developing countries to achieve economic growth . Yet critics of the Washington consensus have argued that in practice such policies are being used by corporations from wealthier countries such as the United States to exploit workers from the poorer countries. This is not least because—as activists and scholars alike have noted—markets are, in reality, neither free nor fair. For example, generous subsidies paid to cotton producers in the United States and the European Union artificially drive down prices, threatening the livelihoods of African cotton farmers. For many critics, the problem is therefore not so much the freeing of markets per se but, rather, that the wealthier countries are effectively cheating at the game they are exporting to the rest of the world.

Economic Liberalization: Impact, Insight and Issues

• First Online: 10 March 2021

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• Piya Mahtaney 2  

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This puts into perspective the empirical literature and economic experience in space sofar as in globalization and trade liberalization is concerned. It begins by explaining that despite the tirade against globalization, reversing it is an untenable proposition. The chapter will conclude with an enumeration of the main insights and lessons as it were that emanates from empirical evidence spanning 50 years in the context of liberalization. One of the main insights elucidated by this chapter is that globalization is a deeply embedded feature, and it is clearly an outcome of economic evolution over the preceding century and a half. What we are currently witnessing is the end of a finance led globalization and the beginning of another phase, one that is sometimes described as development led globalization.

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An analysis of the underpinning of globalization as it worked some years ago has been presented in chapter 18 titled Globalization: Vision and Reality of India China and Globalization, Piya Mahtaney Springer 2007 . Some of the observations made at that point in time continue to apply, as amatter of fact I dare say are resonant.

India China and Globalization, Springer, 2007.

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Home » Political Theory » Liberalism: A Political Ideology Explained

Liberalism: A Political Ideology Explained

Definition of liberalism.

Liberalism is a political ideology that emphasizes individual rights , liberty, and limited government. It is based on the idea that individuals have certain inherent rights, such as the right to life, liberty, and property, and that the role of government is to protect these rights. Liberalism also emphasizes free markets and free trade, and advocates for the rule of law and limited government intervention in economic and social affairs. Liberalism has had a significant influence on the development of modern democratic systems, and it is often associated with ideas like individualism, progress, and the Enlightenment .

Brief History of Liberalism

The origins of liberalism can be traced back to the Enlightenment era in the 18th century, a period of intellectual and philosophical ferment in Europe. During this time, a number of influential thinkers emerged who laid the foundations for liberal thought.

John Locke, an English philosopher, argued that individuals have natural rights to life, liberty, and property, and that the role of government is to protect these rights. Locke’s ideas had a profound influence on the American Revolution and the development of the United States Constitution.

Adam Smith , a Scottish economist, is often referred to as the “father of capitalism.” In his influential work “The Wealth of Nations,” Smith argued that free markets, guided by the “invisible hand” of competition, would lead to economic growth and prosperity.

The French Revolution , which began in 1789, was a key moment in the spread of liberal ideas. The revolution overthrew the monarchy and established a constitutional monarchy in its place, and it also inspired similar movements in other countries. The Declaration of the Rights of Man and of the Citizen, which was adopted by the National Assembly in 1789, enshrined the principles of liberty , equality , and fraternity and became an important influence on liberal thought.

Liberalism became a dominant force in European and North American politics in the 19th and early 20th centuries, and it continues to be a major influence on political thought and policy today. However, it has faced various criticisms and challenges over the years, including from rival ideologies such as conservatism and socialism.

The Core Tenets of Liberalism

The main ideas and principles of liberalism include:

• Individual rights and liberty: Liberalism holds that individuals have inherent rights, such as the right to life, liberty, and property, and that the role of government is to protect these rights. This means that the government should not be able to dictate how people live their lives or what they can and cannot do.
• Limited government: In order to protect individual rights and liberty, liberals believe in limited government. They argue that the role of government should be restricted to certain essential functions, such as maintaining law and order, protecting property rights, and providing basic public goods like education and infrastructure. Anything beyond these core functions is seen as an unnecessary intrusion into people’s lives.
• Free markets and free trade: Liberalism emphasizes free markets and free trade, and holds that economic freedom is closely tied to political freedom. A free market system allows individuals to pursue their own economic interests and create wealth, and liberals argue that this leads to economic growth and prosperity.
• The rule of law: Liberalism places a strong emphasis on the rule of law, which means that everyone, including the government, must be subject to the same legal rules and principles. The rule of law ensures that individuals are treated fairly and that the government does not have arbitrary power to infringe on people’s rights.
• Democracy: Liberalism and democracy are often seen as closely related, and liberal principles have played a significant role in shaping modern democratic systems. In a liberal democracy, individual rights and liberty are protected, and the government is accountable to the people through regular elections and the rule of law. However, it’s important to note that democracy and liberalism are not the same thing, and there are many non-liberal democracies in the world.

Liberalism and Democracy

Liberalism and democracy are often seen as closely related, and liberal principles have played a significant role in shaping modern democratic systems. In a liberal democracy, individual rights and liberty are protected, and the government is accountable to the people through regular elections and the rule of law.

However, it’s important to note that democracy and liberalism are not the same thing, and there are many non-liberal democracies in the world. For example, some democracies have strong centralized governments that are more interventionist in economic and social affairs, while others have more decentralized systems with greater regional autonomy.

Moreover, not all liberal systems are democratic, and there are examples of liberal autocracies, in which the government is not democratically elected but still respects individual rights and liberties. Conversely, there are also examples of democratic systems that are not liberal, in which the government does not fully protect individual rights or the rule of law.

Overall, while liberalism and democracy often go hand in hand, they are not synonymous, and it is possible to have one without the other.

Liberalism has faced various criticisms and challenges over the years, including from rival ideologies such as conservatism and socialism . Some of the main criticisms of liberalism include:

• Lack of attention to social justice and equality: Some critics on the left argue that liberalism is too focused on individual rights and not enough on social justice and equality. They argue that a pure focus on individual liberty can lead to social and economic inequality, and that the government has a role to play in addressing these issues.
• Limited government intervention: Critics on the left also argue that liberalism’s emphasis on limited government intervention can be harmful, especially in cases where the market fails to address important social and economic issues. For example, they may argue that the government needs to play a more active role in addressing poverty, inequality, or environmental problems.
• Promotion of self-interest: Some critics argue that liberalism’s emphasis on individual rights and economic freedom promotes a culture of self-interest and greed, and that it is incompatible with the idea of the common good. They may argue that a more collectivist approach is needed to address societal problems.
• Critiques from the right: Critics on the right, such as conservatives, may argue that liberalism is too permissive and that it undermines traditional values and social order. They may also argue that liberalism’s emphasis on limited government is harmful, and that the government has a role to play in promoting certain moral or social values.

While liberalism has had a significant influence on political thought and policy, it is not without its detractors, and there are ongoing debates about the strengths and limitations of the ideology.

In conclusion, liberalism is a political ideology that emphasizes individual rights, liberty, and limited government. It originated in the Enlightenment era and has since become a dominant force in modern political thought.

The core tenets of liberalism include individual rights and liberty, limited government, free markets and free trade, and the rule of law. Liberalism and democracy are often seen as closely related, and liberal principles have played a significant role in shaping modern democratic systems.

However, liberalism has faced various criticisms and challenges over the years, including from rival ideologies such as conservatism and socialism. Despite these criticisms, liberalism remains an influential force in contemporary political discourse, and its ideas continue to shape political systems and policies around the world.

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Impact of Liberalisation

Liberalisation is the process or means of the elimination of control of the state over economic activities. It removes governmental involvement and gives commercial firms more autonomy in decision-making. As, it decreases governmental interference and boosts the independence of private businesses. It describes a government removing restrictions on economic or social policies that were previously put in place.

Although there were unsuccessful efforts in 1966 and 1980, India’s liberalisation project ultimately took off in 1991. One of the key elements in a country’s growth is liberalisation. India’s liberalisation was facilitated by improvements in the banking sector, the tax code, the foreign currency market, and the deregulation of the industrial sector.

A reduction or removal of governmental restrictions on trade and industry is known as economic liberalisation. Commonly referred to as supporters of free markets and free trade, economic liberalism is generally advanced by individuals who favour it. The outcome of economic liberalisation is typically a reduction in taxes, social security contributions, and unemployment benefits.

AGRICULTURE

• Only 15% of the country’s GDP is made up now by agriculture. Nevertheless, 55% of the population still relies on agriculture. The impacts of liberalisation cannot be precisely assessed, despite the fact that crop patterns have changed significantly.
• From the point of production to the point of distribution, there are still numerous widespread government rules and interventions, as we discovered through agricultural television programmes. India is mostly self-sufficient in its premium, distinctive goods, such as basmati rice, which are in great demand across the world. In this context, India is often better prepared to handle the problems of globalisation. It will significantly boost the whole economy if executed in a fair and sustainable manner.
• Trade liberalisation is one of the fundamental tenets of the WTO. Countries were required to liberalize their economies, commerce, particularly trade in agriculture. Particularly developing nations are being pushed to liberalize their agricultural commerce to maximise available food and foreign exchange revenues for their continuously expanding populations.
• By encouraging the growth of agribusinesses, food processing companies, and associated sectors, liberalisation increased job prospects in the agriculture sector. As a result, there is now a greater need for professional labour in fields like marketing, distribution, logistics, and the development of agri-infrastructure.
• Another advantage of globalisation is farm mechanization, which includes the use of tractors, combines, electronic/solar pumps, etc. subsequently agriculture is now using digital technologies to streamline farming. The adoption of cutting-edge techniques and technology in agriculture was made easier by liberalisation. Increased productivity, increased crop yields, and improved farm management were made possible by access to better equipment, irrigation systems, and agricultural practices. The advancement of technology has also supported environmentally friendly agricultural practices including organic and precision farming.
• The Indian government launched a number of programmes to promote agriculture in reaction to liberalisation like the Integrated Scheme for Agricultural Marketing (ISAM), and the Soil Health Card. These included efforts to construct new infrastructure, agricultural finance programmes, crop insurance plans, and regulatory improvements. The government took steps to improve farmer welfare, advance agricultural research and development, and foster an atmosphere that would encourage agricultural entrepreneurship. ‘Pradhan Mantri Kisan SAMPADA Yojana (PMKSY)’, PLISFPI Scheme, and Operation Greens Short Term Intervention are a few of the Schemes primarily undertaken in Agricultural Marketing and Food Processing in India.
• The industrial sector in India has been transformed as a result of liberalisation. In addition to stimulating economic development and industry diversification, it attracted international investment. Importing sophisticated technology and equipment aided technological breakthroughs. Opportunities for employment expanded in a number of fields. Transportation, power, and communication networks were all boosted through infrastructure development.
• Trade prospects and participation in global supply chains have increased as a result of global integration. Because of lowered obstacles and encouragement of entrepreneurship, small and medium-sized businesses (SMEs) have prospered. Special economic zones (SEZs) and industrial clusters drew capital and promoted collaboration. The competitiveness of the product was increased by adherence to international quality standards.
• Liberalisation increased global integration, helped SMEs, encouraged innovation, broadened industries, generated employment, and improved infrastructure. It also improved product quality. WTO plays an important role in the liberalization in India liberalising their agricultural commerce in order to maximize the amount of available food and foreign exchange revenues for their continuously expanding population.
• Various industrial sectors now have more job chances thanks to liberalisation. New employment, both skilled and unskilled, was produced as a result of the development and expansion of industries. This helped lower unemployment rates and gave a significant portion of the workforce jobs. Automation and mechanization have also impacted employment by increasing productivity, creating new jobs, and improving working conditions.
• Modernizing the industry’s technology was made easier by liberalisation, which also made it easier to import cutting-edge technology. Industries updated manufacturing procedures, incorporated cutting-edge technology, and embraced contemporary machinery. Increased productivity, efficiency, and worldwide market competitiveness were the results of this.
• The Indian government also launched a number of programmes to assist and promote the sector in reaction to liberalisation, such as Make in India and StartUp India, Market Promotion & Development Scheme (MPDA), Revamped Scheme of Fund for Regeneration of Traditional Industries (SFURTI), Coir Vikas Yojana (CVY) . These initiatives included measures to facilitate corporate regulatory reform, encourage industrial expansion, and draw in foreign investment. To assist infrastructural development and promote industrial growth, the government has built specialized industrial zones, such as special economic zones (SEZs).
• India’s service industry also underwent a radical transformation after liberalisation. The service industry significantly expanded and underwent diversification as a result of the economy being opened to competition and international investment. Financial services, tourism, business process outsourcing, information technology, and healthcare were among the sectors that prospered, creating jobs and advancing the nation’s economy as a whole.
• The liberalisation initiatives promoted technical development, enhanced the caliber of services, and boosted service delivery effectiveness. With the help of investments, innovation, and positioning as a centre for several service-based businesses, the service sector has emerged as a significant contributor to India’s economic growth. The services sector of India remains the engine of growth for India’s economy and contributed 53% to India’s Gross Value Added at current prices in FY21-22 (as per advance estimates). India’s services sector GVA increased at a CAGR of 11.43% to Rs. 101.47 trillion (US$ 1,439.48 billion) in FY20, from Rs. 68.81 trillion (US$ 1,005.30 billion) in FY16. With the fastest growing (9.2%) service sector globally, the sector accounts for 66% share in India’s GDP and generates about 28% of the total employment in India.
• Liberalisation of the service industry greatly impacted the number of job prospects. Many skilled and unskilled employees were able to find employment as a result of the expansion of sectors like information technology and business process outsourcing. A sizable section of the labour force was absorbed by the service industry, which became a substantial source of employment.
• Liberalisation made it easier for the service industry to use cutting-edge technology. Digitalization, automation, and state-of-the-art IT infrastructure were welcomed by industries, which improved service delivery, improved customer experience, and boosted efficiency. Modernization of technology was essential in modernizing the service industry and maintaining its competitiveness on a worldwide scale.
• Numerous programmes were put in place by the Indian government to encourage and advance the service industry such as Pradhan Mantri Jan Dhan Yojana (PMJDY), production-linked incentive (PLI), Mahatma Gandhi National Fellowship, PM Ayushman Bharat Health Infrastructure Mission. These programmes included measures to entice foreign investment, relax rules, and offer incentives for the expansion of the service sector. In addition, the government promoted programmes for talent development, improved digital infrastructure, and encouraged entrepreneurship in the service industry. The government of India also has launched the National Broadband Mission with an aim to provide Broadband access to all villages by 2022.

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Indian Economy: Liberalization, Privatisation, and Globalization (LPG) reforms

Introduction

India initially embraced a mixed economy post-independence, integrating aspects of capitalism and socialism. In 1991, an economic crisis, marked by external debt challenges and declining foreign reserves, prompted a pivotal shift. The government initiated Liberalization , Privatisation , and Globalization (LPG) reforms , redirecting India towards a new developmental trajectory.

Overview of Indian Economy Prior 1991

• Pre-20th century, production was mostly national, with global trade centered on raw materials, food, and finished goods, i.e colonial areas like India primarily exported raw materials and imported finished products.
• Government funds were generated through taxation , public sector enterprises , and borrowing when expenditures exceed income.
• Despite low revenues, increased government spending on unemployment , poverty , and population issues , with developmental programs failing to generate sufficient revenue, 
• It was compounded by inadequate internal generation and reliance on non-immediate return areas , leading to a deficit as public sector undertakings’ income fell short of escalating expenditures.
• Late 1980s: Widening gap between government revenue and expenditure, unsustainable borrowing, uncontrolled consumption-led use of foreign exchange, soaring essential goods prices, and a precarious depletion of foreign exchange reserves due to imbalanced imports and exports.
• Deepening crisis: Plummeting foreign exchange reserves prompt India to seek a $7 billion loan from the World Bank and IMF, contingent on economic liberalization, reduced government intervention, and trade restriction abolishment.

New Economic Policy (NEP) Introduction

• Complying with the international agencies’ conditions, India announced the New Economic Policy (NEP) .
• Stabilisation Measures: Short-term measures to rectify balance of payments discrepancies and control inflation by maintaining adequate foreign exchange reserves
• Structural Reform Measures: Long-term measures to augment the economy’s efficiency and international competitiveness by eliminating rigidities in various segments of the Indian economy. 
• Liberalization: It is the direction of reforms. 
• Privatisation: It is path to the reforms.
• Globalisation: It is the ultimate aim of reforms.

Liberalization

• Liberalization in 1991: Launched to remove governmental restrictions, granting businesses freedom in import-export decisions.
• Comprehensive Impact: Policies extended to industrial, financial, taxation, foreign exchange, trade, and investment sectors.
• Pre-1991 Regulatory Mechanisms: Stringent regulations included industrial licensing, limited private sector involvement, small-scale industries reservations, and controls on price and distribution.
• Post-1991 Reforms: Industrial licensing was abolished for most categories (exceptions for alcohol, hazardous chemicals).
• De-reservation of goods previously restricted to small-scale industries.
• Introduction of market-determined prices in most industries.
• Pre-1991 Financial Sector Regulation: Under stringent regulation by the Reserve Bank of India (RBI), covering commercial banks, investment banks, stock exchanges, and the foreign exchange market.
• Transitioned RBI’s role from regulator to facilitator , allowing the financial sector autonomy in decision-making.
• Facilitated establishment of private sector banks (Indian and foreign) with increased foreign investment limits (around 74%).
• Banks meeting certain conditions could establish branches and rationalize networks without RBI approval, while retaining some managerial aspects with RBI for stakeholder safeguarding.
• Foreign Institutional Investors (FIIs) like merchant bankers, mutual funds , and pension funds permitted to invest in Indian financial markets.

Tax Reforms

• Reduction in Income and Corporation Taxes:
• Witnessed a continuous reduction in individual income taxes and corporation tax rates post-1991.
• Aimed At: promoting savings , voluntary income disclosure , and compliance .
• Efforts made to reform indirect taxes on commodities.
• The goal was to establish a common national market for goods and commodities.
• In 2016, efforts culminated in the establishment of a unified indirect tax system through the Goods and Services Tax Act 2016.
• Effective from July 2017, aimed at simplifying tax procedures and reducing evasion.
• 1991 Balance of Payments Crisis Response: Immediate devaluation of the rupee to address the crisis, boosting foreign exchange inflow.
• Initiated market-determined exchange rates post-1991.
• Based on foreign exchange demand and supply, reducing government control over the rupee’s value.
• Aimed at enhancing international competitiveness and attracting foreign investments and technology infusion.
• Dismantling Pre-Reform Policies: Abolished high tariffs and tight control over imports that hindered manufacturing sector growth and efficiency.
• Abolished import licensing (excluding hazardous and environmentally sensitive industries).
• Removed quantitative restrictions on imports and exports.
• Reduced tariff rates .
• Objectives:
• Boost competitive stance of Indian goods in international markets.
• Foster efficiency and modern technology adoption in local industries.

Privatisation

• Meaning: Privatisation denotes the transition from government ownership or management to private sector control of enterprises. 
• By the government relinquishing ownership and management of public sector companies.
• By the outright sale of such companies.
• This can be achieved through the sale of shares on stock exchanges or by directly selling shares to interested buyers. 
• Minority Disinvestment: The government maintains a majority stake in the company, typically greater than 51% , ensuring that it retains management control .
• Majority Divestment: Control of the company is transferred to the acquiring entity, but the government retains some stake, allowing for continued involvement.
• Complete Privatisation: The entire 100% control of the company is transferred to the buyer, resulting in complete privatization.
• Disinvestment Process in India: In India, the Department of Investment and Public Asset Management (DIPAM) , under the Ministry of Finance, oversees the disinvestment process. 
• National Investment Fund (NIF): To channelize the proceeds from the disinvestment of Central Public Sector Enterprises, the government established the National Investment Fund (NIF) in 2005 .
• Facilitating Foreign Direct Investment (FDI) : Privatisation was envisaged as a catalyst for increasing the inflow of Foreign Direct Investment (FDI), thereby contributing to economic growth and modernisation.
• This autonomy was manifested through the conferment of special statuses like Maharatnas, Navratnas, and Miniratnas on certain PSUs, empowering them with greater managerial discretion.

Globalization

• Globalization is broadly perceived as the integration of a nation’s economy with the global economy, fostering greater interdependence and integration. 
• It is the ultimate aim of LPG reforms .

Indian Economy During Reforms: An Assessment

• As the reform process in India completes three decades, an assessment of the Indian economy reveals a mixed scenario. 
• Growth is primarily gauged by the Gross Domestic Product (GDP) .
• GDP Growth and Sectoral Performance

• However, the agriculture sector saw a decline in growth, while the industrial sector showed fluctuations.
• Despite a setback in growth rates across sectors during 2012-15, the service sector continued to thrive, notably with a 9.8% growth rate in 2014-15.
• The reform era ushered in a significant increase in foreign direct investment (FDI) and foreign exchange reserves, with FDI and foreign institutional investment (FII) rising from about US $100 million in 1990-91 to US $30 billion in 2017-18.
• Foreign exchange reserves surged from about US $6 billion in 1990-91 to about US $413 billion in 2018-19 (In October 2021 and , making India one of the largest foreign exchange reserve holders globally.
• India emerged as a successful exporter of auto parts , pharmaceutical goods , engineering goods , IT software , and textiles post-1991.

• India’s shift from a mixed economy to embracing globalization post-1991 has brought both opportunities and challenges. 
• Key reforms aimed at attracting foreign investment and integrating India with the global economy yielded mixed outcomes. 
• While urban consumers and certain sectors like IT benefited , the agrarian sector and small producers faced hurdles. The chapter underlines the need for a balanced approach to ensure ‘fair globalization’, safeguarding the interests of the less privileged while fostering inclusive growth. 

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Which state has the lowest women literary rate in India (2001 census)?

Discuss the negative impact of globalisation.

The negative impact of globalisation:

(i) The experiences of globalisation so far, particularly in the Third World countries is not positive. It has given rise to serious risks for these countries because most of them are unable to become internationally competitive. The negative consequences of globalisation are more dominant compared to its positive consequences. Increased trade, new technologies, foreign investment and expending internet connections have no doubt, led to substantial economic growth in the world today but the gains of economic growth are not evenly distributed among different countries. There are many problems emanate from this basic weakness.

(ii) The economic process under globalisation is connected with market expansion. Open competitive markets may guarantee efficiency, but not necessarily ensure equity. Therefore, great reliance on the ‘invisible hand’ of the market is pushing the world towards unsustainable levels of inequality.

(iii) It has rightly been said that “markets are neither the first nor the last word in human development. There are many activities and goods, which are important for human development, but now-a-days they are overlooked in the rush to integrate with the global market. It is evident in areas where market frontier has moved in recent decades such as in Asia and Africa.

(iv) Globalisation has migration to western countries, old couples are feeling increase due to far aware their children. The rural people are moving to big cities, the anomalies in urban life, the collapse of the extended family and the replacment of sentiments by money as the basis of human motivation.

(v) Global capitalism is relatively free from regulations. But it enjoys the full support of powerful capitalist countries. A number of international economic institutions such as the International Monetary Fund (IMF), the World Bank and the World Trade Organisation (WTO) reinforce the ideology of global capitalism. These countries and institutions create the political and legal conditions for the global market. Their effects of structural adjustment policies in Asia, Africa and the South Pacific imposed by the IMF and the World Bank have been no less than disastrous. They have decreased the access to education, health and decreased the access to education, health and nutrition to the underprivileged sections of the population.

Of course, it has extended these facilities mainly to the most privileged groups. Even in Europe, where the welfare state was born, there has been severe reduction in there useful facilities.

(vi) At present, for developing countries, globalisation has created more risks and challenges than the advantages and opportunities. The most direct impact has been on jobs. For example, unemployment rates doubled in Asian countries where the depression of 1997-98 was worst.

(vii) Wages and salaries in the current labour market are generally low. Intense competition for employment means that workers have low capacity to bargain in most countries. The real wages throughout Latin America and Africa have yet to return to levels considered normal twenty years ago.

(viii) Failure to create sufficient employment has undermined the prospects for poverty reduction. The number of people living in poverty fell in mid-1990s but then began to rise again in almost all countries. This is not because the world as a whole has been getting poorer but because the benefits of growth are not evenly spread. In reality, there has been a remarkable increase inequality over the past decades. In the developing countries, the rich can easily adjust to the new environment, but the poor are becoming poorer.

(ix) The globalisation is problematic not only because it complicates economic relationships between nations but also, because it concentrates economic power in the hands of the MNCs such a concentration of economic power leads to convergence of political and social power.

(x) Globalisation curtails social and economic rights of common citizens. It adversely effects social policy and reduces the role of state activities for the benefits and welfare of the common people.

Conculsion – Globalisation’s negative impacts have created dissatisfaction among the masses of developing countries. The people of these countries are concerned about numerous international negotiations which are taking place on agriculture, services and patent protection. The concern is whether the developing countries would get fair deal in these agreements.

Food for work programme 1 was renamed as

Write a brief essay on liberalisation.

I. Meaning and definition of liberalisation.

The process of liberalisation is closely related to globalisation. Liberalisation is the economic content of globalisation. It is a process under which a highly regulated economy is transformed into an outward-looking economy.

After adoption of globalisation and liberalisation internal or domestic economy is liberalised through deregulation and decontrolling. The dominance of the state in most spheres of activity declines and gives way to private enterprises and companies. The privatisation of commerce and industry takes place by dismantling public sector units.

II. Philosophy and ideology behind liberalisation.

(i) The idea of liberalisation is essentially based on the thinking that the economy and society will be much better by reducing the state intervention. It is popularised by the slogan, Less State, Better State.

(ii) Liberalisation policy emphasises the efficiency aspect of economy. Private enterprises are considered more efficient than the public sector undertakings.

III. Liberalisation in India.

(i) First Phase of Liberalisation (1991 -1994)

The process of globalisation and liberalisation are more predominant in the contemporary world. Under such situation, our country is also facing challenges of these processes. A significant transformation has taken place in India since April 1991. Our country moved from a highly regulated and inward-looking to an outward-looking economy. The dominance of the state in most spheres of activity is giving way to private enterprises.

The system of regulations, licences, permits etc. declined. The quota permit raj is ending since 1991 day by day. From 1991 numerous structural changes have been introduced in economy. The first phase of reforms (1991-1994) focussed on the dismantling of controls and regulations in trade and industry. Taxes and tariffs were lowered. All these steps created a conducive climate for private investments both domestic and foreign.

(ii) Second Phase of Liberalisation in India.

The process of liberalisation and privatisation has further been accelerated in

India during the second phase of reforms. Two major developments in this phase are encouraging more to this process.

(a) More and more foreign direct investment in India and

(b) Downsizing the public (or government owned) sector.

From 1 April, 2001, all quantitative restrictions have been removed and the market is now open for imported products. Disinvestment in public sector undertaking has not only been inititated, but several corporations have already been sold to private enterprises.

IV. Evaluation of liberalisation in India.

(i) Bright side or positive results.

(a) Our country has now completed the first post liberalisation decade with satisfactory growth rates.

(b) Inflation has been contained in the post-liberation period.

(c) Industry is no longer protected from external forces.

(d) More recently, the breakthrough in Information Technology (IT) sector has proved skills of Indian professionals who are in great demand in developed countries of the world. It is expected than IT-related services would give boost to the economy in the years to come.

(ii) Dark Side or Negative Results

(a) Poverty continues to be one of almost important challenges in after 13-14 years of the beginning of liberalisation in India. Around 26.10 percent of the population is still below the poverty line.

(b) Unemployment is still a burning problem before India. In fact, situation with regard of employment continued to be grim. During the past 14-15 years, more retrenchment from jobs has taken place because companies have reduced their size or merged to face the rigour of competition. This is happening when the Indian economy is not able to generate suffcient jobs.

(c) In the era of liberalisation full employment, universal literacy, primary education (free and compulsory for all), health care and rising the quality of life for all citizens are equally challenging tasks to accomplish.

(d) Handicrafts and household industries are adversely being affected due to liberalisation. Economic liberalisation has affected this sector, which is threatened because of the entry of mechanised products and mass producers of these items in the local markets.

(e) Privatisation is affecting women in several ways. It has already started reducing employment opportunities due to introduction of sophisticated technology both in agriculture and industry.

As a result of Green Revolution, which foodgrains had a reduced percentage in total foodgrains production?

Cereals and Pulses

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• Liberalization, Privatization and Globalization

Introduction to LPG

Liberalisation, Privatisation, and Globalisation are the three elements of the new economic model of the country. Liberalisation ensures a relaxation from severely strict laws and opinions which may include certain rules and regulations of the government. Privatisation is the complete transfer of roles and operations of publicly owned means to private ownership. This means a property or business of the government being taken by a private owner with an aim to function and discipline well. Globalisation is the next step forward to increase the network of trade and culture interconnecting the whole of the world. It ensures no trade, services or technology are bounded by borders thus connecting and integrating the whole world together. They are often togetherly referred to as LPG. They aim to develop the economy of the country fast so that it can compete and complement the world’s economy.

What is LPG?

LPG refers to Liberalisation, Privatisation, and Globalisation. When India under its New Economic Policy approached the International Banks for developing the country, they suggested that the government should open towards restrictions on trade which is mostly done by the private sectors in between India and other countries. After the suggestion put forward by the International Banks, the Indian Government announced New Economic Policy or NEP. This policy consisted of an extensive range of reforms. These measures are broadly classified into two groups- structural reforms and stabilisation measures. 

The objective of structural measures was to develop international competitiveness. Moreover, the measures aimed to eliminate the rigidity in various sections of the country's economy. In stabilisation measures, the aim was to rectify and correct the existing weakness developed in controlling the inflation and balance of payments. Both sets of measures were taken for a short-term period. 

The stabilisation measure included Liberalisation, Privatisation, and Globalisation. Under this measure, the balance of payment was enabled to record all forms of economic transactions of a country with the rest of the world in a year. In such a scenario, inflation refers to the growth of prices in goods and services over a particular period. 

Liberalisation

The objective of liberalisation was to put an end to those rigidities and restrictions that were acting as a hindrance to the growth of the country. Further, in this approach, the Government was expected to be flexible with its regulation in the nation. 

The objectives of this policy were to enhance the competition among the domestic industries and encourage international trade with planned imports and exports. Moreover, it aimed at increasing international technology and capital. Also, this policy was expected to expand the international market frontier of the nation and reduce the burden of debt in the country. 

Privatisation

The second policy of the stabilisation measure is privatisation. This policy aims to expand the domination of private sector companies and reduce the control of the public sectors. Thus, the Government-owned enterprise will have less ownership. Besides these Government companies can be converted into private sector companies with two approaches. These approaches are by withdrawing the control of the Government in the public sector company and by disinvesting. There are three forms of Privatisation which are a strategic sale, partial sale, and token privatisation. In the strategic sale or denationalisation, the Government needs to deliver 100% of productive resources ownership to the owners of the private companies. 

The Partial Sale or Partial privatization owns a minimum of 50% ownership with the help of the transfer of shares. They would, therefore, own the majority of the shares and would have control of the autonomy and functioning of the company. In the token or the deficit privatisation, the Government would have to disinvest the share capital by up to 5-10% in order to meet the shortage in the budget. This policy, therefore, aims to improve the financial situation in the country and reduce the work pressure of the public sector companies. Moreover, funds could be raised from the disinvestment. With the reduced work pressure the efficiency of the public sector would automatically increase and yield better quality of goods and services for the use of consumers. 

Globalisation

In this policy, the country's economy is expected to grow with the help of the global economy. This means that the primary focus would be on foreign trade and institutional and private investments. It is the third and the last policy that is to be implemented. The objective of this phenomenon is to develop and independent the world with the implication of suitable strategies. It is the attempt to create a world where the requirements of one country can be driven and turned into one large economy. One of the major outcomes of Globalisation is outsourcing. 

Outsourcing means an enterprise can employ professionals from other countries to reach a particular goal. There is a lot of contractual work that is being outsourced in the field of Information Technology leading to its development. This has opened new avenues for a lot of private sectors and Indian skills are regarded as the most effective and vibrant across the globe. The low wage rate and dedicated employees have made India one of the constructive nations suitable for international outsourcing.

FAQs on Liberalization, Privatization and Globalization

1. What are the objectives of liberalisation?

In Spite of the fact that the government always thinks the best for the country, at times the strict rules and regulations laid by the government offer hindrance in the path of the development and hence certain relaxation in the strict rules and regulations are necessary. Liberalisation ensures the same with the following objectives as its goal.

The development of a country needs the development of domestic industries. Liberalisation ensures that by encouraging the sense of competition between the domestic industries.

It also encourages business with other countries of the world with less strict rules and regulations.

It can include foreign capital and technology for its development.

Increase the global market and improve the economy of the country.

2. What are the privatisations done by India in the sector of Airports?

One of the major breakthroughs in the privatisation done by India is the privatisation of airports with an aim to increase the airport capacity, efficiency in operations, and find new ways to earn revenue for local and state governments. The main aim is to earn more revenue and reduce costs. The privatisation of airports has also increased the benefits for consumers and job opportunities for many local people. Privatisation has also helped the government to clear its long-standing debts. The airport authority of India has given permission to privatise 13 airports of India including major airports of Bhubaneswar, Raipur, Indore, Varanasi, Trichy and Amritsar. The following airports have already been privatised. 

Trivandrum International Airport

Hyderabad International Airport

Delhi Airport

Mumbai Airport

Cochin International Airport

3. What are the disadvantages of privatisation?

Although privatisation brings good job opportunities, tax reduction and increased revenue to the country there are several problems with privatisation. They are as follows:

Privatisation often increases the cost for customers

Employees are not under government hence opposition from employees often take place

Often working is not proper in private sectors

It often deteriorates industrial relations

It concentrates the economic power to a certain business group only.

Often in many privatisations, there has been a great loss.

Privatisation has not been able to completely remove the burden from the government. Instead, sometimes they depend on the government for its requirements, adding more burden to the government.

4. What are the advantages of globalization?

Globalisation is the other name of development for developing countries. Through globalisation, they present and compete with the world market with an aim to complement the world market ultimately. The greatest advantages are interchange and learning new updated technologies which lead to improvement in the standard of living. Globalisation often promises better services and cheaper products resulting in the extension of the market. Contribution to the country’s GDP increases through globalisation. The development of infrastructures is also possible through globalisation only. Refer to the official website of Vedantu for a detailed explanation.

5. What is the impact of Liberalisation, Privatisation and Globalisation on the country’s governance?

These three elements for the economic development of the government have not always come with all the golden fruits as was expected though most of the time they have a remarkably good impact on the government. The following are the impacts on the country’s governance including both good and bad impacts.

A remarkable growth in GDP

Significant increase in foreign investment

Generation of employment for both skilled and unskilled professionals.

Significant growth in export due to development of infrastructure

Loss of employment due to the introduction of advanced technologies

Big setback for the small scale industries and cottage industries which are not able to compete with the foreign aided large scale industries.

Liberalization, Privatisation and Globalisation

In 1991 the Indian economy went through a dramatic change. India implemented economic reform and the result was the Liberalization, Privatisation and Globalisation of the Indian economy. Let us learn more about these concepts and their effects.

• Introduction to LPG
• Liberalization
• Indian Economy During Reforms

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Introduction to LPG: Liberalization, Privatization, Globalization, Examples

The compilation of these Liberalization, Privatisation and Globalisation  Notes makes students exam preparation simpler and organised.

Introduction to LPG

LPG stands for Liberalization, Privatization, and Globalization. India under its New Economic Policy approached International Banks for the development of the country. These agencies asked the Indian Government to open its restrictions on trade done by the private sector and between India and other countries.

Indian Government agreed to the conditions of lending agencies and announced New Economic Policy (NEP) which consisted wide range of reforms. Broadly we can classify the measures into two groups:

1. Structural Reforms With a long-term perspective and eyeing for improvement of the economy and enhancing the international competitiveness, reforms were made to remove rigidity in various segments of the Indian economy.

2. Stabilization Measures (LPG) These measures were undertaken to correct the inherent weakness that has developed in Balance of Payments and control the inflation. These measures were short-term in nature. Various Long-Term Structural Reforms were categorized as:

• Liberalization
• Privatization and
• Globalization

Collectively they are known by their acronym LPG. The balance of Payment is the system of recording the economic transactions of a country with the rest of the world over a period of one year. When the general prices of goods and services are increasing in an economy over a period of time, the same situation is called Inflation. Let’s understand each terminology in detail

Liberalization The basic aim of liberalization was to put an end to those restrictions which became hindrances in the development and growth of the nation. The loosening of government control in a country and when private sector companies start working without or with fewer restrictions and the government allow private players to expand for the growth of the country depicts liberalization in a country.

Objectives of Liberalization Policy

• To increase competition amongst domestic industries.
• To encourage foreign trade with other countries with regulated imports and exports.
• Enhancement of foreign capital and technology.
• To expand the global market frontiers of the country.
• To diminish the debt burden of the country.

Privatization This is the second of the three policies of LPG. It is the increment of the dominating role of private sector companies and the reduced role of public sector companies. In other words, it is the reduction of ownership of the management of a government-owned enterprise. Government companies can be converted into private companies in two ways:

• By disinvestment
• By withdrawal of governmental ownership and management of public sector companies.

Forms of Privatization Denationalization or Strategic Sale: When 100% government ownership of productive assets is transferred to the private sector players, the act is called denationalization.

Partial Privatization or Partial Sale: When the private sector owns more than 50% but less than 100% ownership in a previously construed public sector company by transfer of shares, it is called partial privatization. Here the private sector owns the majority of shares. Consequently, the private sector possesses substantial control in the functioning and autonomy of the company.

Deficit Privatization or Token Privatization: When the government disinvests its share capital to an extent of 5-10% to meet the deficit in the budget is termed deficit privatization.

Objectives of Privatization

• Improve the financial situation of the government.
• Reduce the workload of public sector companies.
• Raise funds from disinvestment.
• Increase the efficiency of government organizations.
• Provide better and improved goods and services to the consumer.
• Create healthy competition in society.
• Encouraging foreign direct investments (FDI) in India.

Globalization It means integrating the economy of one country with the global economy. During Globalization the main focus is on foreign trade & private and institutional foreign investment. It is the last policy of LPG to be implemented.

Globalization as a term has a very complex phenomenon. The main aim is to transform the world towards independence and integration of the world as a whole by setting various strategic policies. Globalization is attempting to create a borderless world, wherein the need of one country can be driven from across the globe and turning into one large economy.

Outsourcing as an Outcome of Globalization The most important outcome of the globalization process is Outsourcing. During the outsourcing model, a company of a country hires a professional from some other country to get their work done, which was earlier conducted by their internal resource of their own country.

The best part of outsourcing is that the work can be done at a lower rate and from the superior source available anywhere in the world. Services like legal advice, marketing, technical support, etc. As Information Technology has grown in the past few years, the outsourcing of contractual work from one country to another has grown tremendously. As a mode of communication has widened their reach, all economic activities have expanded globally.

Various Business Process Outsourcing companies or call centres, which have their model of a voice-based business process have developed in India. Activities like accounting and book-keeping services, clinical advice, banking services, or even education are been outsourced from developed countries to India.

The most important advantage of outsourcing is that big multinational corporations or even small enterprises can avail of good services at a cheaper rate as compared to their country’s standards. The skillset in India is considered the most dynamic and effective across the world. Indian professionals are best at their work. The low wage rate and specialized personnel with high skills have made India the most favourable destination for global outsourcing in the later stage of reformation.

Question: How are public sector undertaking classified with respect to their performance and professionalism? Answer: To attain professionalism and improve efficiency with positive competition the government of India identifies its public sector undertakings (PSUs) as:

• Navratnas and
• Mininavratnas

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• What Is Liberalization Privatization And Globalization

What is liberalization privatization and globalization?

In the late 1980s, government expenditure began to exceed its 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 the 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 needed to be paid to international lenders. Also, no country or international funder was willing to lend to India.

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India approached the International Bank for Reconstruction and Development (IBRD), popularly known as World Bank and the International Monetary Fund (IMF), and received $7 billion as loan to manage the crisis. For availing the loan, these international agencies expected India to liberalise and open up the economy by removing restrictions on the private sector, reduce the role of the government in many areas and remove trade restrictions between India and other countries.

So, the government initiated a variety of policies that fall under three heads viz., liberalisation, privatisation and globalisation.

Liberalisation: Liberalisation of the economy means its freedom from direct or physical controls imposed by the government.

Privatisation: It is the general process of involving the private sector in the ownership or operation of a state-owned enterprise.

Globalisation: It is a process associated with increasing openness, growing economic interdependence and deepening economic integration in the world economy.

Further Reading:

• Distribution of Major Industries in India
• Industrial Policy

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