Changing Role of State: Liberalization,

Privatization, Globalization

 Initial
Role Played by the State
 Need for Economic Reforms
 Role during the post-reform period

1
 LPG - Indian Economy

 The background
 Assessment of LPG
 Suggestions to carry forward reforms

2
 Rationale
 Perfection of an economic policy is time-
specific
 Most macroeconomic economic
policies become obsolete or
irrelevant over time
 Changes in the economic conditions turn
existing policies ineffective
 Hence fine-tuning or replacing of policies
inevitable

3
Indian Economy : initial years
 India’s economic development strategy
immediately after Independence
 Mahalanobis model, which gave preference
to the investment goods industries sector,
with secondary importance accorded to the
services and household goods sector
 For example, the Mahalanobis model placed
strong emphasis on mining and
manufacturing (for the production of
capital goods) and infrastructural
development (including electricity
generation and transportation).
4
Indian Economy : initial years
 The Mahalanobis model downplayed the role
of the factory goods sector because it was
more capital intensive and therefore would
not address the problem of high
unemployment in India.
 Any increase in planned investments in India
required a higher level of savings than that
existed in the country.
 Government had to impose restrictions on the
growth of consumption expenditures to step
up savings (since low income)

5
Development Strategy
 strategy of economic development in India
meant (1) direct participation of the
government in economic activities such as
production and
 selling and
 (2) regulation of private sector economic
activities through a complex system of
controls.
 the Indian economy was sheltered from
foreign competition through use of both the
“infant industry argument” and a binding
foreign exchange constraint.
6
Restrictions
 India became a relatively closed
economy, permitting only limited
economic transactions with other
countries.
 Domestic producers were sheltered
from foreign competition not only from
abroad but also from within India itself.

7
1950s and 1960s
 Over time, India created a large number of
government institutions to meet the objective
of growth with equity.
 The size of the government grew substantially
as it played an increasingly larger role in the
economy in such areas as investment,
production, retailing, and regulation of the
private sector.
 In the late 1950s and 1960s, the government
established public sector enterprises in such
areas as production and distribution of
electricity, petroleum products, steel, coal,
and engineering goods. 8
1970s
 In 1970, to increase foreign exchange
earnings, it designated exports as a
priority sector for active government
help
 Encouraged 100 per cent export-
oriented entities to help producers
export

9
1980s
 Finally,from the late 1970s through the
mid-1980s, India liberalized imports
such that those not subject to licensing
as a proportion to total imports grew
from five per cent in 1980-1981 to
about 30 per cent in 1987-1988.
 However, this partial removal of
quantitative restrictions was
accompanied by a steep rise in tariff
rates.
10
Technology Missions
 Sam Pitroda, Advisor to PM Rajiv Gandhi in
the 1980s headed six technology missions
related to telecommunications, water, literacy,
immunisation, dairy, and oil seeds.
 He was also the founder and first chairman of
India's Telecom Commission.

11
Technology Missions
 He is chairman of India's National
Knowledge Commission, reporting to
the Prime Minister.
 The commission's mandate is to offer a
series of recommendations on how to
leverage India's knowledge strengths to
help it become a knowledge economy.
 Pitroda holds close to 100 worldwide
patents

12
Outcomes of Controlling
 This active and dominant participation by
the government in economic activities
resulted in the creation of a protected,
highly-regulated, public sector-
dominated economic environment.
 A dramatic increase in corruption in the
economy.
 A number of serious sectoral
imbalances, with shortages in some
sectors and surpluses in others.
13
Liberalization

 Deregulation AND DE-LICENSING

 Simplification of procedures

14
Privatization
 Ownership structure

 Reasons for creating & strengthening Public

Sector

 Problems of PSE

 PSE ownership to be transferred to Private

sectors

15
 How Important is Globalization?
 Buzz word of the decade
 Used by policy makers, business persons,
academics, journalists to signify:
 Something (man-made) is happening/
emergence of new
 Economic

 Political

 Cultural order

16
 Globalization: Meaning
 Fundamental shift in the National economies

 (self-contained entities, isolated,barriers of trade,

distance, time zone differences, Govt regulation,
culture, transportation, telecom, technology)

 The process by which visible shift in the above is

occurring is referred to as Globalization
(contd)

17
Globalization: Modes
 Markets Integration
 Production
 Free movement of goods, capital and
people
 Technological innovations in Finance,
transportation, communication and global
institutions
 Growing role of services

18
 Interpretations (1)
 Dominance of World Capitalistic
Economic system
 Supplanting primacy of nation state by
TNCs/ Orgnaisations
 Erosion of local cultures through global
culture
 Westernization of the world
 Increasing homogeneity

19
Interpretations (2)
 Producing diversity & heterogeneity
through increased hybridization
 Strategy for increasing corporate profits
& power
 Increase in State power
 Lever to produce positive social goods
like environment action,
democratization, humanization
 It is modernity

20
One Single meaning?
 Thus globalization is a theoretical construct
 Open to various meanings and inflections
 It can be described positively, negatively or
multivalent to describe complex and multi-
dimensional process in the economy, polity,
culture, and everyday life

21
 Global culture
 Promoting life-styles, consumption, products, and identities
 TNCs deploy advertising to penetrate local markets to sell
global products to overcome local resistance
 Private cable and satellite systems aggressively promoting
a commercial culture throughout the world
 Global homogenization and new local hybrid forms and
identities

22
What has Globalization
created?
 Dissemination of new technologies
 Time-space compression produced by
new media and communication
technologies are helping to overcome
previous barriers
 New labour markets, production centres
are getting created
 Deindustrialization or “rustbelts” created
elsewhere

23
Global Institutions
 Creation of the World Bank and the IMF
 GATT (1947) and NAFTA (1/1/1994)
 WTO (1995)
 As we look back 50 years, economic growth
has expanded five-fold, international trade
roughly twelve times and FDI 2/3rds of the
international trade
 However, there has been unevenness in the
above developments
 Economic elites benefited and LDCs could not,
and the poorer regions of LDCs became
relatively poorer

24
Globalization
 Difficulties
 Differences in tastes and preferences
 Local preferences

 Labour costs

 Supply Chain Management

 Lack of computer-based infrastructure

 High holding costs (inventory)

25
Globalization
 American drives a car
 made in Germany,
 steel from Korea,

 Tyres from Malaysia,

 fills gasoline from UK BP,

 oil pumped from a well in Africa by a

French company,
 transported to US in a ship owned by

a Greek shipping company.

 (contd)

26
The world we live in
 Globalization causing
 Sufferingof domestic industry
 Job losses, income inequalities

 Economic crisis in some countries

 Economic slowdown in the US

 Japanese stock market fall

 Reversal of reforms at times

 (contd)

27
 Global commodity
 Itis a world in which products are made from inputs that
come from all over the world
 Increased opportunities and threats
 Global markets
2 lakh small US business firms employing less than 100 had
foreign sales
 Boeing 777 has 1,32,500 major components made by 545
suppliers

28
In Defense of Globalization
 Anti-Globalization
 Globalization’s Human Face:
 Poverty

 Child Labor
 Women

 Wages and Labor Standards

 Environment

29
Making Globalization Work Better

 Appropriate Governance
 Coping with Downsides
 Accelerating the Achievements of
Social Agendas
 Managing Transitions: Optimal Not
Maximal Speed

30
New Economic Policy (NEP)
 Liberalization, Privatization, and
Globalization (LPG)
 Objective of the NEP has been to make
India a vibrant economy
 Achieve rapid rate of growth
 Increasing involvement of private
enterprise and initiative.

31
Reform Initiatives
 India received IMF Package
 We are committed to IMF to reduce the peak
tariffs (nominal) applicable on imports to about
25 percent in 10 years
 Loss-making PSUs would be disinvested/
privatised/ closed
 Private investments to be encouraged into Non-
strategic sectors
 Fiscal deficit would be lowered (FRBM Act)

32
The Background

 Foreign Currency Assets remained too

low (between US$ 1.1 to 1.7 bn)
consecutively for the first six months of
the financial year 1991-92
 Import cover of reserves stood at a very
inadequate level of 2.5 months for the
year 1990-91

33
The Background (2)
 Manufacturing sector in particular remained
highly regulated
 Very little scope for furthering competition
prior to the reforms
 Enormous delays existed due to lengthy
procedures for FDI
 The unjustifiable suppression of competition
through business lobbying with politicians

34
The Background (3)

 IndianIndustry and economy was highly

protected till pre-1991.
 High Peak tariff rates of over 300% before
1991.
 Protection was high even by 1991.
 Some of the imported goods used to attract as
high as 300 percent peak tariff rates in 1990-91

35
Assessment of reforms
Two approaches:
1)To take a stance in favour or against the
reforms and attempting to justify the
same,
2)To look at the key macroeconomic
variables and contrasting the pre and
post-reform figures with a view to trace
the direction of change.

36
 Assessment of LPG
 Review the macroeconomic variables
 Growth rate, Employment, Inflation, Structural
change of the economy, Trade openness,
Saving-Investment ratios
 FDI, forex, Exchange rate movement,
Composition of exports, Infrastructure, and
Fiscal Deficit.
 Communication sector progressed significantly
 Banking/ Insurance sectors strengthened

37
Foreign exchange reserves
 Remained between US$ 1-2 bn during
1991
 Stands at over US$ 308.52 bn
currently (July 11, 2008)
 Continuous decline in international
interest rates and the interest rate
arbitrage in India was the major factor
behind continuous rise in India’s foreign
exchange reserves
38
 Some Further Issues
1) Agriculture sector still remains the backbone of
the Indian economy in terms of employment and
output generation.
Reforms have largely contributed to distortions in
agriculture
 Union Budget 2008-09 to focus on
 Rural development
 Health
 Education

39
Some Further Issues
2) Low literacy, a very large
unorgainsed sector (93% on the basis
of employment), the government
requires to educate the masses on
the benefits from reforms and the
changing role of the State
3) Streamlining of procedures to attract
more FDI.

40
Some Further Issues

4) Pre-reform inward-looking policies to

tackle captive market by the domestic
industry
The entry of foreign players impacted
domestic industry.
 Some of the corporates in India are
trying to adapt by restructuring and
consolidating while retaining their core
strengths
41
Some Further Issues

5)Labour reforms have been lagging due

to the political differences and labour
union resistance in the organized
sector.

 Theskill sets required in the new

environment, retraining the existing
workforce in the PSEs is costly

42
Some Further Issues

6) Legal system and procedures are quite

tedious, and time-consuming
7) The success of economic reforms
depends on suitable political reforms;
Least political interference in the day-
to-day matters of business and
economy.

43
Conclusion
 No one single definition for globalization
 India initiated reforms to revitalize the
economy
 LPG Initiatives have brought in some
decisive positive effects in our economy
 Assessment and Impacts
 Some cautions

44
Some definitions
 International companies are importers and exporters, they have no
investment outside of their home country.

 Multinational companies have investment in other countries, but do

not have coordinated product offerings in each country. More focused
on adapting their products and service to each individual local market.

 Global companies have invested and are present in many countries.

They market their products through the use of the same coordinated
image/brand in all markets. Generally one corporate office that is
responsible for global strategy. Emphasis on volume, cost management
and efficiency.

 Transnational companies are much more complex organizations.

They have invested in foreign operations, have a central corporate
facility but give decision-making, R&D and marketing powers to each
individual foreign market.

45
References
 CharlieWL Hill, International Business, TMG, Delhi, 2003
 Carbaugh Robert J. : International Economics, South-
Western College Publishing, Cincinnati, US, 2000, Ch 1
 Jagadish Bhagwati, In defense of Globalization, OUP,
2004
 ANIL K. LAL & RONALD W. CLEMENT
ECONOMIC DEVELOPMENT IN INDIA: THE ROLE OF
INDIVIDUAL ENTERPRISE, Asia-Pacific Development Journal Vol. 12,
No. 2, December 2005

46