📝 Chapter Notes & Revision

Liberalisation, Privatisation and Globalisation

🏫 MP BoardClass 11Economics

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Quick Revision Notes: Liberalisation, Privatisation and Globalisation (LPG)

Class 11 Economics (MP Board)

Introduction

In 1991, India faced a severe economic crisis characterized by high inflation, depleting foreign exchange reserves, a huge fiscal deficit, and a balance of payments crisis. To overcome this, the Government of India announced a new economic policy known as the New Economic Policy (NEP) or LPG Policy (Liberalisation, Privatisation, and Globalisation).

1. Economic Reforms of 1991 (LPG)

The economic reforms can be broadly classified into two categories:

  1. Stabilization Measures: Short-term measures intended to correct weaknesses in the balance of payments and bring inflation under control.
  2. Structural Reform Policies: Long-term measures aimed at improving the efficiency of the economy and international competitiveness by removing rigidities. These are grouped under LPG:
    • L - Liberalisation
    • P - Privatisation
    • G - Globalisation

2. Liberalisation (उदारमीकरण)

Definition:

Liberalisation means the removal of entry and growth restrictions on the private sector and freeing the economy from direct or physical controls imposed by the government.

Key Measures of Liberalisation:

  • Industrial Sector Reforms:
    • Abolition of industrial licensing except for a few hazardous or strategic industries (like alcohol, cigarettes, industrial explosives, defense equipment, and hazardous chemicals).
    • Reduction in the role of the public sector (Reservation of industries for the public sector was reduced).
  • Financial Sector Reforms:
    • Reforms related to commercial banks, stock exchanges, and foreign exchange markets.
    • Establishment of private sector banks (both Indian and foreign).
    • Setting up of the SEBI (Securities and Exchange Board of India) in 1992 to regulate the stock market.
  • Tax Reforms (Fiscal Reforms):
    • Reduction in direct and indirect taxes to encourage compliance and investment.
  • Foreign Exchange Reforms:
    • Devaluation of the Indian Rupee against foreign currencies to increase exports.
    • Determination of exchange rates freely by market forces (demand and supply).
  • Trade and Investment Policy Reforms:
    • Removal of quantitative restrictions on imports and exports.
    • Reduction in import tariffs (customs duties).

3. Privatisation (निजीकरण)

Definition:

Privatisation is the process of transferring ownership, management, and control of public sector enterprises (PSEs) to the private sector.

Methods of Privatisation:

  1. Outright Sale: Selling off a part or whole of government enterprises to the private sector.
  2. Disinvestment (विनिवेश): Selling a part of the equity of Public Sector Undertakings (PSUs) to the public or private sector.
  3. Outsourcing: Contracting out non-core business activities to third-party providers.

Advantages of Privatisation:

  • Improves efficiency and productivity of enterprises.
  • Reduces the financial burden on the government.
  • Encourages foreign direct investment (FDI).
  • Enhances competitive spirit in the market.

4. Globalisation (वैश्वीकरण)

Definition:

Globalisation refers to the integration of the economy of a country with the world economy through the flow of goods and services, technology, capital, and labor across national borders.

Key Features and Measures:

  • Outsourcing (BPO): A major outcome of globalisation where companies hire regular services from external sources (often from developing countries like India due to cheap and skilled labor).
  • Reduction in Trade Barriers: Lowering custom duties and import restrictions to facilitate free trade.
  • World Trade Organization (WTO): Establishment in 1995 (successor to GATT) to provide a platform for member countries to frame trade rules and resolve disputes globally.

5. Arguments For and Against the LPG Policy

Arguments in Favor (Pros):

  • Vibrant Economy: Increased competition led to a better variety of goods and services for consumers.
  • Inflow of Foreign Capital: Boosted Foreign Direct Investment (FDI) and foreign exchange reserves.
  • Technological Advancement: Access to modern technology improved industrial efficiency.
  • Growth of Service Sector: Especially IT, communication, and financial services.

Arguments Against (Cons / Criticisms):

  • Neglect of Agriculture: Growth rate in agriculture slowed down during the reform period.
  • Urban-Centric Growth: Benefits of reforms largely concentrated in urban areas and industrial hubs, increasing regional disparities.
  • Economic Colonialism/Dependency: Domestic industries struggled to compete with cheap multinational goods.
  • Jobless Growth: Industrial output increased without a proportional increase in employment opportunities due to automation.

Important Terms to Remember for Exams

  • NEP (New Economic Policy): Introduced in July 1991 under Prime Minister P.V. Narasimha Rao and Finance Minister Dr. Manmohan Singh.
  • FDI (Foreign Direct Investment): Investment made by a company or entity based in one country into a business or corporation located in another country.
  • Disinvestment: Dilution of government stake in public sector enterprises.
  • Outsourcing: Process of getting work done from outside agencies rather than internal employees.
  • Tariff: Tax imposed on imported goods.