Liberalisation Privatisation and Globalisation Model (LPG) The LPG Model
The LPG model of development which was introduced in 1991 by the then Finance Minister Dr. Manmohan Singh with a big bang was intended to charter a new strategy with emphasis on liberalisation, privatisation and globalisation. (LPG) Several major changes at the domestic level were introduced. Firstly, areas hitherto reserved for the public sector were opened to private sector. The Government intended to transfer the loss-making units to the private sector, but it failed because there were no takers for them. Instead, the Government started disinvestment of the highly profit-making Public Sector Units (PSUs) and the proceeds were used to reduce fiscal deficits. Thus, due to various social constraints the Government could not carry forward its programme of privatization. Though it did succeed in liberalizing the economy to the private sector – both domestic and foreign. Secondly, by permitting the private sector to set up individual units without taking a licence, the Government removed certain shackles which were holding back or delaying the process of private investment. Thirdly, by abolishing the threshold limit of assets in respect of Monopolies for Restrictive Trade Practices (MRTP) companies and dominant undertakings, the Government freed the business houses to undertake investment without any ceiling being prescribed by the MRTP Commission. Obviously, considerations of promoting growth were more dominant with the Government and such issues as concentration of economic power were assigned a back seat. Fourthly, with a view to facilitate direct foreign investment, the Government decided to grant approval for direct foreign investment upto 51 percent in high priority areas. The Government could also consider proposals involving more than 51 percent equity, but such proposals would require prior clearance of the Government. No permission was required for hiring foreign technicians, foreign testing of indigenously developed technologies, etc. Fifthly, chronically sick public sector enterprises were referred to the Board for Industrial and Financial Reconstruction (BIFR) for the formulation of revival/rehabilitation schemes. A social security mechanism was introduced to protect the interests of workers likely to be affected by such rehabilitation packages. Sixthly, to improve the performance of public sector enterprises, greater autonomy was given to PSU managements and the Boards of public sector companies were made more professional. Lastly, the economy was opened to other countries to encourage more exports. To facilitate the import, of foreign capital and technology and other allied imports, reduction in import duties and other barriers were brought about. LPG Model of development emphasises a bigger role for the private sector. It envisages a much larger quantum of foreign direct investment to supplement our growth process. It aims at a strategy of export led growth as against import substitution practised earlier, it aims at reducing the role of the State significantly and thus abandons planning fundamentalism in favour of a more liberal and market driven pattern of development. Critics have pointed out certain fundamental weaknesses of the LPG Model of Development. (a) This has a very narrow focus since it largely concentrates on the corporate sector which accounts for only 10 percent of GDP. (b) The model bypasses agriculture and agro based industries which are a major source of generation of employment for the masses. It did not delineate a concrete policy to develop infrastructure. Financial and technological support, particularly the infrastructural needs of agro-exports. (c) By permitting free entry of the multinational corporations in the consumer goods sector, the model has hit the interests of the small and medium sector engaged in the production of consumer goods. There is danger of labour displacement in the small sector if unbridled entry of MNCs is continued. (d) By facilitating imports, the Government has opened the import window too wide and consequently, the benefits of rising exports are more than offset by much greater rise in imports leading to a larger trade gap. (e) Finally the model emphasises a capital intensive pattern of development and there are serious apprehensions about its employment-potential. It is being made out that it may cause unemployment in the short run but will take care of it in the long run. But how long the long-run is not specified. Moreover, an economy in which the growth of labour force is taking place at the rate of about 1.8 percent per annum, the implications of the model in terms of slowing down the rate of growth of employment are of serious nature. Some have argued that the LPG Model has followed the East Asian Miracle which was demonstrated by Japan, South Korea, Taiwan and to some extent Indonesia, Malaysia and China. This is not correct. Japan did not follow the IMF-World Bank Model based on free market economy, open door policies and liberalisation. Japan, in fact, practiced limited operation of market mechanism with the State playing an active role in guiding the economy for the welfare of the community. This independent path followed by Japan was imitated by South Korea and Taiwan.
Malaysia and Indonesia also succeeded on this path for a few years. The Chinese growth model, for instance, is rooted in its own traditions and its decision to globalize is motivated by the desire to use foreign markets as an instrument to resolve numerous internal bottlenecks. China still follows the path of selfreliance, though it is not a closed economy. For China self-reliance is the ‘motor of growth’, and China has experimented a simple balanced two-way flow of goods and services and capital with the rest of the world. Chinese Model, therefore, cannot be classified as a neo-classical liberalisation model. It is a model of its own kind which combines an open economy with self-reliance and avoids an excessive dependency syndrome. LPG Model has followed the IMF-World Bank prescription of stabilisation and structural adjustment. When considered in the light of the experience of Latin America, Africa and East Asian Countries, it raises serious doubts in the minds of the people whether we are following the correct path of development. Dudley Seers has rightly suggested three parameters by which the stage of development of a country can be measured. They are: what has been happening to poverty? to unemployment? And to inequality? The experience of a decade or more of LPG Model does not provide conclusive evidence of substantial improvement of these parameters. Rather some of them have become worse.
Need of the Model
In 1947 when India got freedom, the main problem before the government was to develop economic conditions of country and how to increase economic growth. Economic condition of India in that time was not good, we did not have proper resources for the development of underdeveloped sector. Thus our government adopted the path of economic planning that was on the basis of priorities the different ‘Five year plans’ were developed. Under the dogma of the socialistic pattern of society, India had practiced a number of restrictions ever since the introduction of the first industrial policy resolution of 1948. Hence it was necessary on the part of Government withdraw these restrictions to provide conditions of undeterred economic activities, when we decided to globalize our economy. Under the process of liberalisation, India has moved in that direction by withdrawing some of the impeding restrictions, and introducing certain conditions to ease the cord of restrictions, so that business firms and individuals from other countries may be induced to operate their business in India, while Indians can operate abroad. As a result of the restrictions in the past, India’s performance in the global market has been very dismal, we have never reached even the 1 percent mark in the global market. Despite the existing tremendous potentiality, vast natural resources, and extensive trained manpower, our contribution in the world trade in1992 has been 0.53 percent, much below the level of even Thailand, and we are listed among the poor countries in the world. Though the planned economic growth backed by control could achieve some amount of economic reconstruction in the last five decades, India still remains underdeveloped with low NNP, chronic unemployment, low per capita income, a considerable percentage of population under the poverty line, low capital formation, marginal export backed by increasing import resulting in increasing trade deficit, acute decline of foreign exchange reserve, mounting foreign debts and high debt service cost, low level of technological base, grave internal economic situation, Poor external economic image and insignificant innovations, unless appropriate solutions are not found for all these problems, the vicious circle of underdevelopment will remain for many years to come. As a primary step to find solutions to these problems, liberalisation has been identified. The Government under Former Prime Minister Narasimha Rao and former Finance Minister Dr. Manmohan Singh chose the Path of liberalisation. Immediate factors which backed this policy change include (i) Global change, (ii) Position of Indian Economy and (iii) Trade deficit.
doc_831316866.doc
The LPG model of development which was introduced in 1991 by the then Finance Minister Dr. Manmohan Singh with a big bang was intended to charter a new strategy with emphasis on liberalisation, privatisation and globalisation. (LPG) Several major changes at the domestic level were introduced. Firstly, areas hitherto reserved for the public sector were opened to private sector. The Government intended to transfer the loss-making units to the private sector, but it failed because there were no takers for them. Instead, the Government started disinvestment of the highly profit-making Public Sector Units (PSUs) and the proceeds were used to reduce fiscal deficits. Thus, due to various social constraints the Government could not carry forward its programme of privatization. Though it did succeed in liberalizing the economy to the private sector – both domestic and foreign. Secondly, by permitting the private sector to set up individual units without taking a licence, the Government removed certain shackles which were holding back or delaying the process of private investment. Thirdly, by abolishing the threshold limit of assets in respect of Monopolies for Restrictive Trade Practices (MRTP) companies and dominant undertakings, the Government freed the business houses to undertake investment without any ceiling being prescribed by the MRTP Commission. Obviously, considerations of promoting growth were more dominant with the Government and such issues as concentration of economic power were assigned a back seat. Fourthly, with a view to facilitate direct foreign investment, the Government decided to grant approval for direct foreign investment upto 51 percent in high priority areas. The Government could also consider proposals involving more than 51 percent equity, but such proposals would require prior clearance of the Government. No permission was required for hiring foreign technicians, foreign testing of indigenously developed technologies, etc. Fifthly, chronically sick public sector enterprises were referred to the Board for Industrial and Financial Reconstruction (BIFR) for the formulation of revival/rehabilitation schemes. A social security mechanism was introduced to protect the interests of workers likely to be affected by such rehabilitation packages. Sixthly, to improve the performance of public sector enterprises, greater autonomy was given to PSU managements and the Boards of public sector companies were made more professional. Lastly, the economy was opened to other countries to encourage more exports. To facilitate the import, of foreign capital and technology and other allied imports, reduction in import duties and other barriers were brought about. LPG Model of development emphasises a bigger role for the private sector. It envisages a much larger quantum of foreign direct investment to supplement our growth process. It aims at a strategy of export led growth as against import substitution practised earlier, it aims at reducing the role of the State significantly and thus abandons planning fundamentalism in favour of a more liberal and market driven pattern of development. Critics have pointed out certain fundamental weaknesses of the LPG Model of Development. (a) This has a very narrow focus since it largely concentrates on the corporate sector which accounts for only 10 percent of GDP. (b) The model bypasses agriculture and agro based industries which are a major source of generation of employment for the masses. It did not delineate a concrete policy to develop infrastructure. Financial and technological support, particularly the infrastructural needs of agro-exports. (c) By permitting free entry of the multinational corporations in the consumer goods sector, the model has hit the interests of the small and medium sector engaged in the production of consumer goods. There is danger of labour displacement in the small sector if unbridled entry of MNCs is continued. (d) By facilitating imports, the Government has opened the import window too wide and consequently, the benefits of rising exports are more than offset by much greater rise in imports leading to a larger trade gap. (e) Finally the model emphasises a capital intensive pattern of development and there are serious apprehensions about its employment-potential. It is being made out that it may cause unemployment in the short run but will take care of it in the long run. But how long the long-run is not specified. Moreover, an economy in which the growth of labour force is taking place at the rate of about 1.8 percent per annum, the implications of the model in terms of slowing down the rate of growth of employment are of serious nature. Some have argued that the LPG Model has followed the East Asian Miracle which was demonstrated by Japan, South Korea, Taiwan and to some extent Indonesia, Malaysia and China. This is not correct. Japan did not follow the IMF-World Bank Model based on free market economy, open door policies and liberalisation. Japan, in fact, practiced limited operation of market mechanism with the State playing an active role in guiding the economy for the welfare of the community. This independent path followed by Japan was imitated by South Korea and Taiwan.
Malaysia and Indonesia also succeeded on this path for a few years. The Chinese growth model, for instance, is rooted in its own traditions and its decision to globalize is motivated by the desire to use foreign markets as an instrument to resolve numerous internal bottlenecks. China still follows the path of selfreliance, though it is not a closed economy. For China self-reliance is the ‘motor of growth’, and China has experimented a simple balanced two-way flow of goods and services and capital with the rest of the world. Chinese Model, therefore, cannot be classified as a neo-classical liberalisation model. It is a model of its own kind which combines an open economy with self-reliance and avoids an excessive dependency syndrome. LPG Model has followed the IMF-World Bank prescription of stabilisation and structural adjustment. When considered in the light of the experience of Latin America, Africa and East Asian Countries, it raises serious doubts in the minds of the people whether we are following the correct path of development. Dudley Seers has rightly suggested three parameters by which the stage of development of a country can be measured. They are: what has been happening to poverty? to unemployment? And to inequality? The experience of a decade or more of LPG Model does not provide conclusive evidence of substantial improvement of these parameters. Rather some of them have become worse.
Need of the Model
In 1947 when India got freedom, the main problem before the government was to develop economic conditions of country and how to increase economic growth. Economic condition of India in that time was not good, we did not have proper resources for the development of underdeveloped sector. Thus our government adopted the path of economic planning that was on the basis of priorities the different ‘Five year plans’ were developed. Under the dogma of the socialistic pattern of society, India had practiced a number of restrictions ever since the introduction of the first industrial policy resolution of 1948. Hence it was necessary on the part of Government withdraw these restrictions to provide conditions of undeterred economic activities, when we decided to globalize our economy. Under the process of liberalisation, India has moved in that direction by withdrawing some of the impeding restrictions, and introducing certain conditions to ease the cord of restrictions, so that business firms and individuals from other countries may be induced to operate their business in India, while Indians can operate abroad. As a result of the restrictions in the past, India’s performance in the global market has been very dismal, we have never reached even the 1 percent mark in the global market. Despite the existing tremendous potentiality, vast natural resources, and extensive trained manpower, our contribution in the world trade in1992 has been 0.53 percent, much below the level of even Thailand, and we are listed among the poor countries in the world. Though the planned economic growth backed by control could achieve some amount of economic reconstruction in the last five decades, India still remains underdeveloped with low NNP, chronic unemployment, low per capita income, a considerable percentage of population under the poverty line, low capital formation, marginal export backed by increasing import resulting in increasing trade deficit, acute decline of foreign exchange reserve, mounting foreign debts and high debt service cost, low level of technological base, grave internal economic situation, Poor external economic image and insignificant innovations, unless appropriate solutions are not found for all these problems, the vicious circle of underdevelopment will remain for many years to come. As a primary step to find solutions to these problems, liberalisation has been identified. The Government under Former Prime Minister Narasimha Rao and former Finance Minister Dr. Manmohan Singh chose the Path of liberalisation. Immediate factors which backed this policy change include (i) Global change, (ii) Position of Indian Economy and (iii) Trade deficit.
doc_831316866.doc