Here are the notes for Chapter 3 of the Class 12 Indian Economy textbook, "Liberalisation,
Privatisation, and Globalisation: An Appraisal."
Chapter 3: Liberalisation, Privatisation, and Globalisation: An
Appraisal
This chapter examines the economic reforms introduced in India in 1991, collectively known as
the New Economic Policy (NEP). These reforms were a response to a severe economic crisis
and aimed to integrate the Indian economy with the global economy. The core of these reforms
are the policies of Liberalisation, Privatisation, and Globalisation (LPG).
Background of Economic Reforms
By the late 1980s, the Indian economy faced several challenges:
● High Fiscal Deficit: Government expenditure consistently exceeded its revenue, leading
to large borrowings.
● Adverse Balance of Payments: India's imports were significantly higher than its exports,
depleting its foreign exchange reserves.
● Inflationary Pressures: There was a rapid increase in the general price level.
● Poor Performance of Public Sector Undertakings (PSUs): Many government-owned
enterprises were incurring huge losses.
● The Gulf War: The 1990-91 Gulf War led to a sharp rise in oil prices, further straining
India's foreign exchange reserves.
Faced with a severe crisis, India approached the International Bank for Reconstruction and
Development (IBRD), popularly known as the World Bank, and the International Monetary Fund
(IMF). They provided a loan to manage the crisis, on the condition that India would adopt a new
set of economic policies. This led to the announcement of the New Economic Policy in 1991.
Liberalisation
Liberalisation refers to the process of reducing or removing government controls and restrictions
on economic activities. The aim was to unlock the economic potential of the country by
encouraging private sector participation.
Key Reforms under Liberalisation:
● Industrial Sector Deregulation:
○ Abolition of Industrial Licensing: The requirement of obtaining a license to start a
new firm, or to expand or diversify existing production, was abolished for most
industries.
○ De-reservation of Industries for the Public Sector: The number of industries
exclusively reserved for the public sector was drastically reduced.
○ Freedom to Import Capital Goods: Indian industries were given the freedom to
import capital goods to upgrade their technology.
● Financial Sector Reforms:
○ Reduced Role of RBI: The role of the Reserve Bank of India (RBI) shifted from a
regulator to a facilitator of the financial sector.
○ Emergence of Private Banks: The reform process led to the establishment of
private sector banks, both Indian and foreign.
○ Foreign Investment Limit: The limit of foreign investment in banks was raised to
around 50 percent.
● Tax Reforms:
○ There has been a continuous reduction in taxes on individual incomes and
corporate profits to encourage savings and voluntary disclosure of income.
○ The tax procedures have been simplified.
○ In 2017, the Goods and Services Tax (GST) was introduced to create a single
national market.
● Foreign Exchange Reforms:
○ Devaluation of the Rupee: In 1991, the rupee was devalued against foreign
currencies to increase the inflow of foreign exchange.
○ Market Determined Exchange Rate: The exchange rate was allowed to be
determined by the market forces of demand and supply.
Privatisation
Privatisation is the transfer of ownership, management, and control of public sector enterprises
to the private sector. This was done to improve the financial discipline and efficiency of these
enterprises.
Methods of Privatisation:
● Denationalisation or Strategic Sale: This involves the sale of more than 51% of the
government's share in a PSU to the private sector, leading to a transfer of ownership and
management.
● Disinvestment: This refers to the sale of a part of the equity of public sector enterprises
to the public. The government retains the ownership and management control.
Globalisation
Globalisation refers to the integration of the economy of the country with the world economy. It is
a multifaceted process that involves the free flow of trade, capital, technology, and people
across borders.
Key Aspects of Globalisation in India:
● Outsourcing: This is a key outcome of the globalisation process. India has become a
favorable destination for outsourcing for services like business process outsourcing
(BPO), call centers, and knowledge process outsourcing (KPO) due to the availability of
skilled manpower at lower wages.
● Increased Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII):
The opening up of the economy led to a significant increase in the inflow of foreign
capital.
● Reduction in Tariffs: Customs duties and tariffs imposed on imports and exports were
gradually reduced to encourage international trade.
● Abolition of Quantitative Restrictions: Quotas on imports were completely removed.
An Appraisal of the LPG Policies
The economic reforms of 1991 have had a mixed impact on the Indian economy.
Positive Impacts:
● A Vibrant Economy: The reforms have led to a significant increase in India's GDP
growth rate.
● Increase in Foreign Investment: The opening up of the economy has attracted
substantial foreign investment.
● Rise in Foreign Exchange Reserves: India has been able to build up a large buffer of
foreign exchange reserves.
● A Check on Inflation: The overall rate of inflation has been brought under control.
● Increase in Exports: India's share in world trade has increased.
● Consumer Sovereignty: Consumers now have a wider variety of goods and services to
choose from at competitive prices.
Negative Impacts (Criticisms):
● Neglect of Agriculture: The reform process has not been able to benefit the agricultural
sector significantly. Public investment in agriculture, especially in infrastructure like
irrigation and power, has been reduced.
● Jobless Growth: While the GDP growth rate has increased, the growth has not
generated sufficient employment opportunities.
● Increasing Income Inequalities: The reforms are believed to have widened the gap
between the rich and the poor.
● Adverse Effect on Small-Scale Industries: Small-scale industries have faced stiff
competition from imported goods and large multinational corporations.
● Weakening of the Welfare State: With the reduction in public expenditure, particularly in
social sectors like health and education, the welfare aspect of the state has been diluted.
