Posted 23 December 2009 - 04:40 PM

[Economy for newbies] LPG - Liberalisation, privatization,

Globalisation | Structural Reform | New Economic Policy
LPG =Liberalisation, privatization, Globalisation
Other names
Structural Reforms
New Economic Policy (NEP)
[h1]What is it?[/h1]
in 1990-91-, Govt. was very low on cash, so they changed their
economic policy, that's called LPG.
[h1]Why should I learn it?[/h1]
Economy worth 100+M in Mains GS
International Relations worth 100+ Marks (GS paper 2 in Mains)
Whenever You want to understand india's Diplomatic relations with
other nations, you've to see it pre & post cold war. same way
India's economic relation with others, you need to understand from pre
& post LPG phase. that's why LPG is imp for international relation
questions as well.
[h1]Why Govt. was low on cash?[/h1]
First Gulf War = High crude oil prices
Fall of USSR (no one to help/ protect us)
Loss making Public sector undertakings (PSU)

 Govt. was investing heavily in PSU, Development schemes,

defence sectors.
these areas need lot money and it takes long gestation period after
you see the recovery / benifit of that invested money.
+ the usual Licence-Quota-Inspector raj. (explained later)
[h1] Govt. has to borrow a lot from inside and outside the nation to run
itself.
[/h1]
We were so much out of money, that we could buy only 7 day's crude oil
for the nation !
[h1]How did we get through it.[/h1]

We borrowed 7 billion Dollars from IBRD (Internation board of

reconstruction & Development ) aka world bank
But for that, we had to obey World bank's conditions - they wanted
us to change our economic policies.
thus came the LPG.
so LPG is one thing?
No its 3 different things
[h1]Liberalization [/h1]
what does that mean?

to put end on rules / Regulation to control economy

Open up various sectors of Economy

wasn't our economy opened before LPG?

No we had Licence-Quota-Inspector Raj.

[h2]what is Licence Raj?[/h2]

you want to open a new mobile phone making company you need
to get licence from Govt..
[h2]Quota Raj[/h2]
.

even after you get the licence, you can't produce as many phones
as you wish, you'll be given a quota

say 1000 mobiles per month - you can't manufacture more than
that.
[h2]Inspector Raj[/h2]

there will be a factory inspector, who will come and check how
many phones you actually made,
he gives you the certification only then you can take out your
phones from warehouse to retail shops!
so when all 3 combine -its heavy delay, red tape and corruption.
[h1]Methods for Liberalisation .(Govt. used following)[/h1]
[h2]End of Licence Raj (Libzn Method #1) [/h2]
no more licence required for

starting factory
closing it or,
deciding amount of production (= end of Quota Raj)

However you still need license for starting

Wine
Cigar
Hazardous Chem
Explosive
Drug-Pharma
Electronic
Aerospace
Dereservation of many things produced by Small scale industries
sectors reserved for PSU -are now only limited to
Defence
Atom
Railways
= means pvt players can't open machine gun making factory.
[h2]Finacial Sector Reformed (Libzn method #2) [/h2]
RBI role reduced from regulator to facilitator
Financial institutions (Stock market, Forex market etc) can take decision
with out consulting RBI like

freedom to setup new Branches

generate resources from India- Abroad
Result = introduction of
pvt Sector Banks,
Foreign Institutionl investors

 Merchant Bankers
Mutual / Pension Funds
[h2]Tax Reform (Libzn method #3) [/h2]

Earlier income tax was high, so people used every trick to evade it.
Now tax rates were reduced, more people came in Tax net.
Method to collect indirect Taxes - also simplified.

[h2]Forex Reform (Libzn method #3) [/h2]

to solve BOP Crisis

Rupee was Devalued = increased inflow of Forex
Market to Determine Exchange Rate based on supply & demand of
foreign currency. (earlier RBI was doing that)

[h2]Trade investment reform[/h2]

Quota barriers removed

you don't have to pay high taxes on imported luxery items (gold
watches / perfumes) like you had to do previously.
no more import licence required except for Harardous materials.
[h1]Privatisation ( the 'P' of LPG) [/h1]
Means Sheeding of Ownership / Management of Govt. owned
companies.
How? = by Disinvestment = Privatization of PSU
by Govt. ,Selling of part of Equity to Public
[h2]Benifit of privatization [/h2]

 increased finacial discipline

modernisation
increased performance of PSU by
pvt Capital
Managerial tech.
FDI incoming
[h2]Problem[/h2]
instead of making Navaratna a Global Player,
income generated from Disinvestment used to fill Revenue deficit
[h2]NavRatna[/h2]

[h1] profit making PSUs were given Nav ratna statuts [/h1]
they get more autonomy in their work
(Govt. doesn't interfere much when they're buying raw material or
taking other decisions.)
[h1]Globalisation (the 'G' Of LPG) [/h1]
its result of L+P
e.g. Outsourcing = Co. hires regular service from External Source
(country ) due to Cheap - Skilled Labour Force
Globalisation is facilitated via WTO
[h2]What is the use of WTO?[/h2]
to administrater Multilateral Trade Agrement
provide Equal opportunity to all in international market
Govt.s can't put arbitrary restriction on imports.
[h2]Criticism of Globalization / WTO[/h2]

 Major volume of International trade betn Developed Nations

3rd World has to open up for 1st world but their products can't get
access to 1st world.
[h1]How LPG changed India's international relations?[/h1]

Before LPG we were doing 'Import Substitution' strategy.

Means Govt. would either prevent entry of foreign players in our
local market or put so much tax on imported items that we can't
afford to buy it.
Import substitution is when we'll (or have to) buy Bajaj Scooter
even when Japanese Honda (foreigner) has a cheaper / better
vehicle to offer. (but Honda prevented by Govt. using above
methods.)
this sounds great from patriotic point of view,but citizens are
denied all luxeries of life, even when they want to enjoy it.
Result of Import Substion strategy was that we were not importing
any luxery electronic items , walkman, VHS players, Stereos, cars
etcs from Japan, Taiwan, America, etc.
thus we didnot have any high business relations with ASEAN or
any other nation.
After LPG, our market was flooded with cheap electronic goodies.
Our trade relations with Japan, Singapore, ASEAN, & America
improved.
Once Established, the Economic ties are harder to break than
diplomatic / military pacts.
Thus more economic relations we have with the world= more
friends we make.

[h1]How LPG changed your life?[/h1]

Today you're able to surf internet, buy computer, mobile phones,

have dozens of toothpastes, cars, bikes to select from...

all that thanks to LPG.