ROLE AND IMPACT OF LPG POLICY ON INDIAN ECONOMY FOR SUSTAINABLE DEVELOPMENT
ABSTRACT
In order to acquire a seat at the highest table and to deal with a severe balance of payment crisis, India began a process of economic liberalization in 1991. The liberalization process has impacted the conditions of Indian economy in different organized and unorganized sectors, we have seen landmark shift in Indian Economy since the adoption of new economic policy in 1991. This had far reaching impacts on all spheres of life in India. There can be no concrete conclusions about their impact on Indian people. This turns out to be more of an ideological debate like capitalism vs Socialism. But there is no doubt in the fact that those reforms were unavoidable and very compelling. There was in fact, similar wave all across the globe after disintegration of USSR and end of the Cold War. Many Post-colonial democratic regimes, which were earlier sheltered by USSR, lost their umbrella. They had no option, but to fall in line to new unipolar world order dictated by USA. Even China in late 1980’s adopted ‘Open Door Policy’ through which it liberalized its economy by shedding communist mentality completely. South East Asian economies also reformed their economy and started engaging more with global economy. These along with China, pursued export led growth whereas Indian economy still relies almost wholly on domestic consumption.
This paper studies the Impact of Liberalization, Privatization and Globalization on Indian economy from the last 26 years i.e. 1991-2017. The Economic Reforms that made by government by New Economic Policy in 1991made significant impact on the Indian Economy. In terms of Increasing GDP, per capita Income, Increase in Foreign Direct Investment, Stock Market and employment pattern. The study also covers some negative impact of LPG policy on Indian Economy like Increase in Competition, growing personal disparities, excessive Privatisation has negative impact on MSME industries, gradually decline share of agriculture in GDP etc. So, this study is important to understand real impact of LPG on Indian Economy.
Keywords: Impact on Liberalization, Indian Economy, Economic Reforms, FDI, GDP, Employment.
Introduction:
By 1991, India still had a fixedexchange ratesystem, where the rupee was pegged to the value of a basket of currencies of major trading partners. India opened up the economy in the early nineties following a major crisis that led by a foreign exchange crunch that dragged the economy close to defaulting on loans. After independence in 1947, Indian adhered to socialist policies. Attempts were made to liberties the economy in 1966 and 1985. The first attempt was reversed in 1967. Thereafter a stronger version of socialism was adopted. The second major attempt was in 1985 by Prime Minister Rajiv Gandhi. The process came to a halt in 1987, through 1966 style reversal did not take place. The country ran out of foreign exchange reserves. India started havingbalance of paymentsproblems since 1985, and by the end of 1990, the state of India was in a seriouseconomic crisis. The government was close to default,its central bank had refused new credit andforeign exchange reserveshad reduced to the point that India could barely finance three weeks’ worth of imports. It had to pledge 20 tonnes of gold to Union Bank of Switzerland and 47 tonnes to Bank of England as part of a bailout deal with the International Monetary Fund (IMF). Most of the economic reforms were forced upon India as a part of the IMF bailout. To face this crisis situation, the government decided to bring about major economic reforms to revive Indian economy. These reforms were popularly known as 'structural adjustments' or liberalization' or 'globalization’. The government announced a New Economic Policy on July 24, 1991.This new model of economic reforms is commonly known as the LPG or Liberalization, Privatisation and Globalisation model. Liberalisation refers to process of making policies less constraining of economic activity and also reduction of tariff or removal of non-tariff barriers. The term “Privatisation” refers to the transfer of ownership of property or business from a government to a private owned entity. Globalisation refers to the expansion of economic activities across political boundaries of nation states. More importantly perhaps it refers economic interdependence between countries in the world economy. Prime Minister of the country, P V NarasimhaRao initiated ground breaking economic reforms Dr. Manmohan Singh was the Finance Minister at that time he assisted NarasimhaRao and played a key role in implementing these reform policies. The fruits of liberalization reached their peak in 2007, when India recorded its highest GDP growth rate of 9%, with this India became the second fastest growing major economy in the world, next only to China. The growth rate has slowed significantly in the first half of 2012. OECD report states that the average growth rate 7.5% wills double the average income in a decade, and more reforms speed up the pace. There has been significant debate, however, around liberalization as an inclusive economic growth strategy. Since 1992 income inequality has depended in India with consumption among the poorest staying stable while the wealthiest generate consumption growth. As India’s GDP growth rate became lowest in 2012-13 over a decade, growing merely at 5.48% more criticism of India’s economic reforms surfaced, as it apparently failed to address employment growth, nutritional solutes in terms of food intake in calories and also export growth and there by leading to worsening level of current account deficit compared to the prior to the reform period. The reforms did away with the License Raj, reduced tariffs and interest rates and ended many public monopolies, allowing automatic approval of foreign direct investment in many sectors. The primary objective of this model was to make the economy of India the fastest developing economy in the globe with capabilities that help it match up with the biggest economies of the world. (Kumar, 2014)The new economic policy 1991 welcomed the thought of lower taxes, less red tape, less paperwork, more space to work and less government interference.
Brief Literature Review:
Mali([2005)observed that small and medium enterprises (SMEs) and micro enterprises have to face increasing competition in the present scenario of globalization, they have to specifically improve themselves in the fields of management, marketing, product diversification, infrastructural development, technological up gradation. Moreover, new small and medium enterprises may have to move from slow growth area to the high growth area and they have
to form strategic alliance with entrepreneurs of neighboring countries. Data bank on industries to guide the prospective entrepreneurs including investors from abroad is also needed.
Bala Subrahmanya(2006) investigated the impact of economic reforms on small scale industries. He mentioned that small scale sector has faced constraints in term of growth of units, employment, output and exports. He recommended that small scale industries in India should improve the technology and financial infrastructure thereby
this sector can compete at the international level.
Mukesh kumar(2014) in their paper entitled “ Impact of Economic reforms on India” made study with objective to find out the impact of Globalization on India and also study Performance of the corporate sector after 1991. Finding shows that during the 11-year period 1995-2006 India’s merchandise exports increased at the rate of 13.3 percent per annum and corporate sectors growth rate in sales and net profits is increased.
Chetan Agrawal (2013) in their paper entitled “The Effects of Liberalization on the Indian Economy A Labour Force Perspective” made study with objective to carry out a comparative study of the conditions of Indian labour in the pre- and post-liberalization era and to study the claim made by the Indian government regarding the effect of Liberalisation on the Indian workforce. The comparative study shows the drastic change by the introduction of Liberalisation policy in the mindset and the condition of Indian labour was improved with regard to wages, productivity and industrial disputes. However, disappointment was expressed by the respondents with regard to labour welfare, social security, employment growth, human resources development and management and trade union membership.
DR.Meenu (2013) in their paper entitled “Impact of Globalisation and Liberalisation on Indian Administration” study was made with objective to analyse the impact of globalisation and liberalisation on different aspects of Indian administration and changes introduced at different levels in Indian administration due to globalisation and liberalisation
VaghelaDhariniIshvarsinh(2014) in their paper entitled “New Economic Policies: Liberalization, Privatization, Globalization ” made study on new economic policy of India under this descriptive study made on basis of secondary data he had given conceptual study of Liberalization, Privatization and Globalization concepts and advantages and disadvantages of those concepts.
Objective of the Study:
· To study the impact of new economic policy 1991 from inception to present (1991 - 2017).
· To elaborate the negative impact by introduction of new economic policy.
Hypothesis:
Ho: There is no significant difference between pre and post liberalisation period on impact of Indian economy.
H1: There is significant difference between pre and post liberalisation period on impact of Indian economy.
Research Methodology: For the sake of the study the whole research paper is based on the descriptive study.
Data Collection: The data has been collected for the completion of the study from the various secondary sources i.e. Journals, Magazine, newspapers and different institutional websites.
Limitation of the Study: The Study was purely based on secondary data only.
Economic Reform Policy 1991: Economic environment is also called business environment and are used interchangeably. The economic reform policy is commonly known as LPG (Liberalisation, Privatisation, and Globalization).
Liberalization: Liberalization refers to slackening of government regulation in area of economic policies. Thus when government liberalize trade it means it has removed the tariff, subsidies and other restriction on the flow of goods and services between countries.
Privatisation: Privatization is closely associated with the phenomena of globalization and liberalization. Privatization is the transfer of control of ownership of economic resources from the public sector to the private sector. It means a decline in the role of the public sector as there is a shift in the property rights from the state to private ownership. The public sector had been experiencing various problems, since planning, such as low efficiency and profitability, mounting losses, excessive political interference, lack of autonomy, labour problems and delays in completion of projects. Hence to remedy this situation with Introduction of NIP’1991 privatization was also initiated into the Indian economy. Another term for privatization is Disinvestment. The objectives of disinvestment were to raise resources through sale of PSUs to be directed towards social welfare expenditures, raising efficiency of PSUs through increased competition, increasing consumer satisfaction with better quality goods and services, upgrading technology and most importantly removing political interference.
Globalization: Globalization essentially means integration of the national economy with the world economy. It implies a free flow of information, ideas, technology, goods and services, capital and even people across different countries and societies. It increases connectivity between different markets in the form of trade, investments and cultural exchanges. The concept of globalization has been explained by the IMF (International Monetary Fund) as ‘the growing economic interdependence of countries worldwide through increasing volume and variety of cross border transactions in goods and services and of international capital flows and also through the more rapid and widespread diffusion of technology.’
The phenomenon of globalization caught momentum in India in 1990s with reforms in all the sectors of the economy. The main elements of globalization were;
1. To open the domestic markets for inflow of foreign goods, India reduced customs duties on imports. The general customs duty on most goods was reduced to only 10% and import licensing has been almost abolished. Tariff barriers have also been slashed significantly to encourage trade volume to rise in keeping with the World trade Organization (WTO) order under (GATT )General Agreement on Tariff and Trade.
2. The amount of foreign capital in a country is a good indicator of globalization and growth. The FDI policy of the GOI encouraged the inflow of fresh foreign capital by allowing 100 % foreign equity in certain projects under the automatic route. NRIs and OCBs (Overseas Corporate Bodies) may invest up to 100 % capital with repatriability in high priority industries. MNCs and TNCs were encouraged to establish themselves in Indian markets and were given a level playing field to compete with Indian enterprises.
3. Foreign Exchange Regulation Act (FERA) was liberalized in 1993 and later Foreign Exchange Management Act (FEMA) 1999 was passed to enable foreign currency transactions.
4. India signed many agreements with the WTO affirming its commitment to liberalize trade such as TRIPs (Trade Related Intellectual Property Rights), TRIMs (Trade Related Investment Measures) and AOA (Agreement on Agriculture).
Highlights of the LPG Policy
Given below are the salient highlights of the Liberalisation, Privatisation and Globalisation Policy in India:
· Foreign Technology Agreements
· Foreign Investment
· MRTP Act, 1969 (Amended)
· Industrial Licensing
· Deregulation
· Beginning of privatisation
· Opportunities for overseas trade
· Steps to regulate inflation
· Tax reforms
· Abolition of License -Permit Raj
Impact of LPG in Indian Economy
Positive Impact:
Gross Domestic Product
Source: Compiled from various annual reports of RBI and World Bank
The size of the economy can often give the first impression of the might of a country. GDP gives the total worth of the goods and services produced in a country in one particular year. India’s GDP stood at Rs 5,86,212 crore in 1991. About 26 years later, it stands at Rs.1,57,15,539 crore. In dollar terms, India’s GDP mark $2.454 trillion in 2016-17. At present the India’s nominal GDP rank stood 6th in compare to the World nominal GDP. India is tipped to be thesecond largest economy in the world by 2050.
GDP Growth Rate, YOY in %
Source: World Bank
India remained the second fastest growing economy in the world, behind China until 2017.The highest GDP growth rate mark between 2006 to 2008 i.e. 9.5%, 9.6%, 9.3% respectively marked. The cliché of lowest GDP growth rate of India after the post liberalization is1.4% in 1992. With the NDA government revising the GDP growth figures and China slowing down, India is now being billed as thefastest growing major economy in the world, with a growth rate of 7.2% in 2016-17.