Liberalisation , Privatization & Globalisation
Introduction:-
1991 Economic Crisis - Which changed the Indian Economy.
Five year plan was taken from Russia, a Socialistic pattern society which has a major drawback - as of now replaced by "NITI AAYOG- a US based Capitalistic Federalism -
Think Tank ."
With India’s forex reserves at $1.2 billion in January 1991 got depleted by half in June, which lasted for roughly 3 weeks of essential imports. So the government of India took a Emergency loan of $2.2billions from World Bank and IMF to secure and withholding the Economy by devaluating the rupee and pledging the reserved Gold through airlift by RBI.
Causes for the Economic Crisis
Gulf war, fiscal deficit of the government, currency overvalution, forex reserves, depreciation and MRTP acts , trade and licensing policies......
Government of India's immediate response was to secure an emergency loan of $2.2 billion from the International Monetary Fund by pledging 67 tons of India's gold reserves as collateral security. The Reserve Bank of India had to airlift 47 tons of gold to the Bank of England and 20 tons of gold to the Union Bank of Switzerland to raise around $600 million.
RBI devaluated Indian Rupee by 9% and by a further of 11% on 3 July
This resulted to the liberalisation of the Indian Economy because of the conditions by World Bank and IMF.
SDR--->RTP--->by LMF
In June ,1991. P.M. PV Narasimha Rao and FM Dr.Manmohan Singh reformed the Economy.
In July 1991,India has taken a series of measures to structure the economy and improve the BOP
position. The new economic policy introduced
changes in several areas.
BOP- Balance of Payment
To calculate the BOP, you need to calculate the sum of the country's exports and imports. Exports are written as a credit entry while imports are written as a debit entry. ... If the numbers were reversed and the number of exports exceeded the number of imports, then the country would have a trade surplus.
INDIA REPORTED A TRADE OF FISCAL SURPLUS IN THE YEAR FY20-21 DURING THE PANDEMIC BECAUSE OF SUPPLY CHAIN DISRUPTION AND LOCKDOWN
***India’s current account deficit (CAD) at US$ 14.3 billion (2.0 per cent of GDP)
in Q1 of 2019-20 narrowed from US$ 15.8 billion (2.3 per cent of GDP) in Q1
of 2018-19 but was higher than US$ 4.6 billion (0.7 per cent of GDP) in the
preceding quarter.
What is the reason for implementing LPG???
Excess of consumption and expenditure over
revenue resulting in heavy govt. borrowings.
Growing inefficiency on the use of resources.
Over protection to industries.
Mismanagement of the firm and the
economy.
Increase in losses for public sector
enterprises.
Various distortion like poor technological
development, shortage of foreign exchange
and borrowing from abroad.
Low foreign exchange reserves.
Inflation
The policy have salient feature which are: -
1.Liberalisation (internal and external)
2.Extending Privatization
3.Globalisation of the economy
Which are known as “LPG”.
(liberalisation privatisation globalisation)
Liberalisation:-
relaxation of the previous government restriction usually in area of social and economic policies.
**Relief for foreign investors
• Devaluation of Indian rupees
• New industrial Policy
• New trade policy
• Removal of import Restrictions
• Liberalization of NRI remittances
• Freedom to import technology
• Encouraging foreign tie-ups
• MRTP relaxation(Monopolies and Restrictive Trade Practices Act 1970) {which was now replaced by CompetitionAct, 2002- Competition Commission of India- from 2009.}
• Privatization of public sector
Advantages:-
*Industrial licensing
• Increase the foreign investment.
• Increase the foreign exchange reserve.
• Increase in consumption and Control over
price.
• Check on corruption.
• Reduction in dependence on external commercial borrowings
Disadvantages:-
**Increase in unemployment.
• Loss to domestic units.
• Increase dependence on foreign nations
• Unbalanced development
Privatization:-
Transfer of ownership and/or
management of an enterprise from the public
sector to the private sector .It also means the
withdrawal of the state from an industry or sector partially or fully.
Replacing government
monopolies with the competitive pressures of the
marketplace to encourage efficiency, quality and
innovation in the delivery of goods and services.
• Liberalization Approach
• Relative Share Enlargement Approach
• Association of Private Sector Management Approach
• Transfer of Minority Equity Ownership
Approach
• Transfer of Complete Ownership
Approach
Advantages:-
Privatization helps to reduce the burden on
Govt.
• It will help profit making public sector unit to modernize and diversify their business.
• It will help in making public sector unit more competitive.
• It will help to improving the quality of decision
making, because the decisions are free from any political interference.
• Privatization may help in reviving sick units which are the liability of the public sector.
• Industrial growth.
• Increase the foreign investment.
• Increase in efficiency.
Disadvantages:-
• Industrial sickness.
• Lack of welfare.
• Class struggle.
• Increase in inequality
• Opposition by employees.
• Problem of financing.
• Increase in unemployment.
• Ignores the weaker sections.
• Ignores the national importance
Example:-
Indian Petrochemicals Corporation Ltd. (IPCL)
Paid-up Capital
Rs. 249.05 crore
GoI Shareholding
Rs. 148.80 crore (59.75%)
Net worth
Rs. 2,961.02 crore
Net Profit/ Loss
Rs. 188.84 crore
No. of employees
13,543
Major activity
Production of chemicals and petrochemicals with focus on polymers
Recommendations of Disinvestment Commission (March 1998)
To offer 25% equity to a strategic buyer along with transfer of management control through a global competitive bidding, care being taken to ensure that the strategic sale does not lead to market dominance by any single player
Government decision
To offer 25% equity to a strategic buyer along with transfer of management control
Present status of implementation of Government decision
*Warburg Dillon Read (WDR) has been appointed as Advisor. Disinvestment transaction of selling 26% Government equity in favour of strategic partner, i.e. Reliance Group has been approved for an amount of Rs. 1,490 crore
Reserve Price for 26% equity (in Rs. crore)845
Approx. equivalent value of 100% equity (in Rs. crore) 3252
Approx. value per share (in Rs.) 131
*The reserve price recommended by the Evaluation Committee was based on the Discounted Cash Flow methodology, as it is the most appropriate valuation methodology for a going concern.
*The highest bid of Reliance Petroinvestments Ltd. for a price of Rs. 1,491 crore translates into a P/E of 58 based on EPS of Rs. 4 for the year 2001-02, which is much higher than the P/E multiple of peer group companies, such as Reliance Industries Ltd. (10.5) and GAIL (5.36).
**Refer
Other examples:-
- Lagan Jute Machinery Company Limited (LJMC)
- Videsh Sanchar Nigam Limited (VSNL)
- Hindustan Zinc Limited (HZL)
- Hotel Corporation Limited of India (HCL)
- Bharat Aluminium Company limited (BALCO)
Globalization
Integration of the economy of the country with the rest of the
world economy and opening up of the
economy for foreign direct investment by
liberalizing the rules and regulations and by
creating favorable socio-economic and
political climate for global business.
Features:-
Opening and planning to expand business
throughout the world.
• Erasing the difference between domestic
market and foreign market.
• Buying and selling goods and services
from/to any countries in the world.
Advantages
Free flow of capital and increase in the total capitalemployed.
* Free flow of technology.
* Increase in industrialization.
* Spread of production facilities throughout the
globe.
* Balanced development of world economies.
* Increase in production and consumption.
* Commodities at lower price with high quality.
* Increase in jobs and income.
* Higher Standard of living.
* Balanced human development
Strategies
Exporting
* Licensing/Franchising
* Contract manufacturing
* Management contract
* Assembly operations
* Fully owned manufacturing facilities
Disadvantages
• Transfer of natural resources
• Lead to commercial and political
colonism
• Widening gap between rich and poor
• Dominance of foreign institutions
Because of LPG which was scheduled under 8th five year plan , the GDP was raised to 6.5 % , while the target was only 5.7% .The main sector for development was agro based industries, in which rate of growth was raised from 3% to 4.8 %.