Fourth Part
Q. What was the rationale for economic reforms ? What kind of economic strategy was followed till 1991 with consequences .
A. The industrial policy announced in 1991 provided following rationale for introducing economic reforms:
# to de-control the Indian industrial economy from unnecessary bureaucratic controls;
# to introduce liberalization with a view to integrate the Indian Economy with the world
economy;
# to remove the restrictions on foreign direct investment;
# to remove the restrictions of MRTP Act; and
# to shed the load of public sector enterprises which have shown a very low rate of return and incurring losses over the years.
Since the inception of planning, growth with social justice and self-reliance have remained
the central objectives of development strategy. Import-substitution, licenses and controls
coupled with dominant role of public sector in economic activities were the peculiar features
of development strategies till July, 1991. License - permit - quota raj led to widespread
corruption. The bureaucracy was the principal beneficiary of this system. The Government
officials in collusion with the political bosses earned huge money via corruption. Hence, it
was increasingly felt to dismantle the system of licensing and controls. Quite a large number
of public enterprises which played crucial role in setting up heavy and basic industries; social
and economic infrastructural development were king problem of inefficiency and high cost
of operation. Further, there was a high pressure of the World Trade Organization (WTO) to
expose Indian industry to face world competition. The performance of the Indian Economy
was not up to expectations. All these factors made the Government to introduce the
economic reforms.
Q. What do you understand by the liberalization of the economy ?
A. liberalization refers to shifting of license dominated regime to de-licensing, deregulation
& de-bureaucratization. India has taken follow. measures towards liberalizing the economy.
Removal of Industrial Licensing: Except 18 industries relating to security and strategic
concerns, social reasons, hazardous chemicals and over-riding environmental, all industrial
licensing was abolished. Subsequently, this list was reduced to a small group of five
industries.
Dereservation of SSI Items: The items earlier reserved for SSI sector are gradually being
de-reserved. In the budget 2003-04,75 items and in 2005-06, 108 items have been
de-reserved forcing the small scale industries to face competition both domestic and
international
Withdrawing MRTP Restrictions
Q. Name the various forms of privatisation .
A. Privatization in the narrow sense can take the following forms:
a) Total De-nationalization: This implies complete transfer of ownership of a public enterprise to private hands. Some examples of total de-nationalisation are: Allwyn Nissan - was handed over to Mahindra; Mangalore Chemical and Fertilizers - to UB Group and Maharashtra scooters - to Bajaj Auto (India).
b) Joint Venture: This implies partial induction of private ownership from 25 to 50 per cent or even more in a public sector enterprise depending upon the nature of the enterprise and state policy in this regard.
c) Workers' Co-operative: Transfer of ownership of a loss-making concern to the workers is another form of privatization. The basic logic of the proposal is that workers besides receiving wages for work, would also be entitled to a share in ownership dividend. Since workers' personal interest is linked to the interest of the enterprise, the workers are likely to work hard to increase productivity so that they can earn more. Such schemes were introduced in Kamani Tubes, Central Jute and Mewar textiles, etc.
d) Token Privatization: The sale of 5 per cent to 10 per cent shares of a profit-making public sector enterprise in the market is known token privatization. The objective of such privatization is to obtain revenue to reduce budget deficit. Out of the various forms of privatization, the most acceptable is the joint venture in which the share of the private sector is kept at either 49 per cent or'74 percent.
Q. Why is privatization opposed by trade unions in India?
A. In spite of having a strong case for privatization of certain PSUs, it has become increasingly difficult to push though proposals of privatization in reality due to following reasons:-
First, with the emergence of strong trade unions in India, privatization in the sense of total
de-nationalisation is not acceptable to trade unions. The trade unions of all shades - left, center and right - are all opposed to privatization of profit making PSUs. Consequently, the Government is forced to slowdown its pace of disinvestments.
Secondly, using book value of net assets in disinvestrnents by the State results in gross under valuation of assets. As a result of it, the assets are transferred to big businesses at low prices.
Third, the State's intention of encouragement of corporatization and thereby providing benefit to big business houses is also opposed. It is argued that instead Economic Reforms of total de-nationalization, the workers' cooperative forms of privatization should be adopted as was done in the case of Kamani Tubes.
Fourthly, in the privatization process, workers' retrenchment through the route of Voluntary
Retirement Scheme (VRS) in respect of sick units of PSUs is also opposed by the workers.
Lastly, the absence of a social security system in India is another major cause of opposition to privatization.
Unless the problems associated with privatization are taken care of in a proper and honest manner, the resistance to privatization will continue
Q. List the four components of globalization of the Indian economy
A. Globalization helps in removing inefficiency. In the absence of globalization prolonged protection of domestic industry has serious damaging effects on cost structure. Industries habitually fall asleep under protective umbrellas and become careless about cost.
# Globalization serves to give a boost to the long-run average growth rate of the economy by:
(i) improving the allocative efficiency of resources;
(ii) reducing the capital output ratio;
and (iii) inmasing the labour productivity.
# Globalisation helps to restructure the production and trade pattern in favour of labour-intensive goods and labour-intensive techniques.
# Foreign capital is attracted to exploit the professional export opportunities along the above lines. With the entry of foreign capital, updated technology also enters the country.
# with the entry of foreign cooperation and the removal of import tariff barriers, domestic industry will be subject to price reducing and quality-improving effects in the domestic economy.
# Uneconomic import substitution will slowly disappear and cheaper imports, particularly of capital goods, will reduce the capital-output ratio in manufacturing. Lower prices of manufactured goods will improve the terms of trade in favour of agriculture.
# The main effect of globalization is felt in the consumer goods industries. As there is a large domestic demand for these goods, employment opportunities would expand and over a period of time, the trickle down effect will operate and the proportion of people below the poverty line will go down.
# It is also believed that the efficiency of banking and financial sectors will increase with the opening up of these areas to foreign capital and foreign banks.
Q. What are the disadvantages of globalization on Indian economy.
A. # Globalization process is in essence a tremendous redistribution of economic power at the world level. This will increasingly translate into redistribution of economic power. Economically weak nations my be dominated by economically powerful nations.
# Globalization process challenges some familiar assumptions. Until now, for instance, it was
conventional wisdom that technological change and increases in productivity would translate into more jobs and higher wages. But in the last few years, technological changes have eliminated more jobs than they have created.
# It is becoming harder in the industrially developed democratic countries to ask the public to go through the pains and uncertainties of structural adjustment for the sake of benefits yet to come.
# Globalization has sounded the death-knell of village and small industries. These cannot stand up to competition against the well-organised MNCs.
Q. What were the measures taken towards globalization of the Indian economy.
A. Automatic approval for direct foreign investment up to 5 1 per cent foreign equity ownerships in a wide range of industries. Earlier, all foreign investments were limited to 40 per cent.
2) Automatic permission for foreign technology agreements royalty payments up to 5 percent of domestic sales or 8 per cent of export sales or lump sum payment of Rs. 10 million. Automatic approval for all other royalty payments will also be given if the projects can
generate internally the foreign exchange
3) With a view to provide access to international markets, majority foreign equity holdings
up to 51 per cent equity would be allowed for trading companies primarily engaged in
export activities.
4) As apart of shift in policy orientation from import substitution export promotion, tariff rates were reduced and quantitative controls over imports were removed. Quantitative restrictions were replaced by price-based system. Other measures include setting up of special economic zones, aligning EXIM procedures with WTO norms, removal of.disincentives, export promotion through import entitlement.
Q. What was the rationale for economic reforms ? What kind of economic strategy was followed till 1991 with consequences .
A. The industrial policy announced in 1991 provided following rationale for introducing economic reforms:
# to de-control the Indian industrial economy from unnecessary bureaucratic controls;
# to introduce liberalization with a view to integrate the Indian Economy with the world
economy;
# to remove the restrictions on foreign direct investment;
# to remove the restrictions of MRTP Act; and
# to shed the load of public sector enterprises which have shown a very low rate of return and incurring losses over the years.
Since the inception of planning, growth with social justice and self-reliance have remained
the central objectives of development strategy. Import-substitution, licenses and controls
coupled with dominant role of public sector in economic activities were the peculiar features
of development strategies till July, 1991. License - permit - quota raj led to widespread
corruption. The bureaucracy was the principal beneficiary of this system. The Government
officials in collusion with the political bosses earned huge money via corruption. Hence, it
was increasingly felt to dismantle the system of licensing and controls. Quite a large number
of public enterprises which played crucial role in setting up heavy and basic industries; social
and economic infrastructural development were king problem of inefficiency and high cost
of operation. Further, there was a high pressure of the World Trade Organization (WTO) to
expose Indian industry to face world competition. The performance of the Indian Economy
was not up to expectations. All these factors made the Government to introduce the
economic reforms.
Q. What do you understand by the liberalization of the economy ?
A. liberalization refers to shifting of license dominated regime to de-licensing, deregulation
& de-bureaucratization. India has taken follow. measures towards liberalizing the economy.
Removal of Industrial Licensing: Except 18 industries relating to security and strategic
concerns, social reasons, hazardous chemicals and over-riding environmental, all industrial
licensing was abolished. Subsequently, this list was reduced to a small group of five
industries.
Dereservation of SSI Items: The items earlier reserved for SSI sector are gradually being
de-reserved. In the budget 2003-04,75 items and in 2005-06, 108 items have been
de-reserved forcing the small scale industries to face competition both domestic and
international
Withdrawing MRTP Restrictions
Q. Name the various forms of privatisation .
A. Privatization in the narrow sense can take the following forms:
a) Total De-nationalization: This implies complete transfer of ownership of a public enterprise to private hands. Some examples of total de-nationalisation are: Allwyn Nissan - was handed over to Mahindra; Mangalore Chemical and Fertilizers - to UB Group and Maharashtra scooters - to Bajaj Auto (India).
b) Joint Venture: This implies partial induction of private ownership from 25 to 50 per cent or even more in a public sector enterprise depending upon the nature of the enterprise and state policy in this regard.
c) Workers' Co-operative: Transfer of ownership of a loss-making concern to the workers is another form of privatization. The basic logic of the proposal is that workers besides receiving wages for work, would also be entitled to a share in ownership dividend. Since workers' personal interest is linked to the interest of the enterprise, the workers are likely to work hard to increase productivity so that they can earn more. Such schemes were introduced in Kamani Tubes, Central Jute and Mewar textiles, etc.
d) Token Privatization: The sale of 5 per cent to 10 per cent shares of a profit-making public sector enterprise in the market is known token privatization. The objective of such privatization is to obtain revenue to reduce budget deficit. Out of the various forms of privatization, the most acceptable is the joint venture in which the share of the private sector is kept at either 49 per cent or'74 percent.
Q. Why is privatization opposed by trade unions in India?
A. In spite of having a strong case for privatization of certain PSUs, it has become increasingly difficult to push though proposals of privatization in reality due to following reasons:-
First, with the emergence of strong trade unions in India, privatization in the sense of total
de-nationalisation is not acceptable to trade unions. The trade unions of all shades - left, center and right - are all opposed to privatization of profit making PSUs. Consequently, the Government is forced to slowdown its pace of disinvestments.
Secondly, using book value of net assets in disinvestrnents by the State results in gross under valuation of assets. As a result of it, the assets are transferred to big businesses at low prices.
Third, the State's intention of encouragement of corporatization and thereby providing benefit to big business houses is also opposed. It is argued that instead Economic Reforms of total de-nationalization, the workers' cooperative forms of privatization should be adopted as was done in the case of Kamani Tubes.
Fourthly, in the privatization process, workers' retrenchment through the route of Voluntary
Retirement Scheme (VRS) in respect of sick units of PSUs is also opposed by the workers.
Lastly, the absence of a social security system in India is another major cause of opposition to privatization.
Unless the problems associated with privatization are taken care of in a proper and honest manner, the resistance to privatization will continue
Q. List the four components of globalization of the Indian economy
A. Globalization helps in removing inefficiency. In the absence of globalization prolonged protection of domestic industry has serious damaging effects on cost structure. Industries habitually fall asleep under protective umbrellas and become careless about cost.
# Globalization serves to give a boost to the long-run average growth rate of the economy by:
(i) improving the allocative efficiency of resources;
(ii) reducing the capital output ratio;
and (iii) inmasing the labour productivity.
# Globalisation helps to restructure the production and trade pattern in favour of labour-intensive goods and labour-intensive techniques.
# Foreign capital is attracted to exploit the professional export opportunities along the above lines. With the entry of foreign capital, updated technology also enters the country.
# with the entry of foreign cooperation and the removal of import tariff barriers, domestic industry will be subject to price reducing and quality-improving effects in the domestic economy.
# Uneconomic import substitution will slowly disappear and cheaper imports, particularly of capital goods, will reduce the capital-output ratio in manufacturing. Lower prices of manufactured goods will improve the terms of trade in favour of agriculture.
# The main effect of globalization is felt in the consumer goods industries. As there is a large domestic demand for these goods, employment opportunities would expand and over a period of time, the trickle down effect will operate and the proportion of people below the poverty line will go down.
# It is also believed that the efficiency of banking and financial sectors will increase with the opening up of these areas to foreign capital and foreign banks.
Q. What are the disadvantages of globalization on Indian economy.
A. # Globalization process is in essence a tremendous redistribution of economic power at the world level. This will increasingly translate into redistribution of economic power. Economically weak nations my be dominated by economically powerful nations.
# Globalization process challenges some familiar assumptions. Until now, for instance, it was
conventional wisdom that technological change and increases in productivity would translate into more jobs and higher wages. But in the last few years, technological changes have eliminated more jobs than they have created.
# It is becoming harder in the industrially developed democratic countries to ask the public to go through the pains and uncertainties of structural adjustment for the sake of benefits yet to come.
# Globalization has sounded the death-knell of village and small industries. These cannot stand up to competition against the well-organised MNCs.
Q. What were the measures taken towards globalization of the Indian economy.
A. Automatic approval for direct foreign investment up to 5 1 per cent foreign equity ownerships in a wide range of industries. Earlier, all foreign investments were limited to 40 per cent.
2) Automatic permission for foreign technology agreements royalty payments up to 5 percent of domestic sales or 8 per cent of export sales or lump sum payment of Rs. 10 million. Automatic approval for all other royalty payments will also be given if the projects can
generate internally the foreign exchange
3) With a view to provide access to international markets, majority foreign equity holdings
up to 51 per cent equity would be allowed for trading companies primarily engaged in
export activities.
4) As apart of shift in policy orientation from import substitution export promotion, tariff rates were reduced and quantitative controls over imports were removed. Quantitative restrictions were replaced by price-based system. Other measures include setting up of special economic zones, aligning EXIM procedures with WTO norms, removal of.disincentives, export promotion through import entitlement.
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