Liberalization

LIBERALIZATION

CONTENTS  INTRODUCTION  COMPONENTS OF LIBERALIZATION  Industrial Sector Reforms  Trade Sector Reforms  Financial Sector Reforms  Fiscal Sector Reforms  IMPACT OF LIBERALIZATION

INTRODUCTION Liberalization of the economy means to free it from direct or physical controls imposed by the government. Economic reforms were based on the assumption that market forces could guide the economy in a more effective manner than government control. Examples of one of other undeveloped countries like Korea, Thailand, Singapore, etc. that had achieved rapid economic development as a result of liberalization were kept in consideration.

Brief History After Independence, India adhered to socialist policies. The extensive regulation was sarcastically dubbed as the "License Raj" The slow growth rate was named the "Hindu rate of growth". The Indian currency, the rupee, was inconvertible and high tariffs and import licensing prevented foreign goods reaching the market The central pillar of the policy was import substitution, the belief that India needed to rely on internal markets for development, not international trade

What made India to be liberalize A Balance of Payments crisis in 1991which pushed the country to near bankruptcy. IMF bailout, gold was transferred to London as collateral. the Rupee devalued and economic reforms were forced upon India. India central bank had refused new credit and foreign exchange reserves had reduced to the point that India could barely finance three weeks’ worth of imports

Key players in the battle field of economy reforms Dr. Man Mohan Singh, a professional economist and an economic administrator, was appointed Finance Minister. Man Mohan Singh is undoubtedly the architect of the most far reaching reforms in India since independence in 1947. Government economists such as Dr. Arvind Virmani took upon themselves the task of clarifying the goals, objectives and methods of the reform package along with:C. Rangarajan, Montek Singh Ahluwalia, Shankar Acharya and Y. Venugopal Reddy.

Reforms taken during liberalization Abolition of industrial licensing and registration Liberalizing the MRTP act Freedom for expansion and production Increase in the investment limit of the small industries Freedom to import capital goods Freedom to import technology Free determination of interest rates

Impact of these reforms Annual growth in GDP per capita has accelerated from just 1¼ per cent in the three decades after Independence to 7½ per cent currently. A rate of growth that will double average income in a decade Rapid Growth in all sectors like… communications, insurance, asset management and information technology. Exports of information technology enabled services particularly strong. The private sector has proven to be extremely effective and growth has been phenomenal

COMPONENTS OF LIBERALIZATION

Trade Liberalization Industrial Liberalization

Fiscal Sector Reforms Financial Liberalization

1. Industrial Liberalization Industrial Sector was among the first sectors to be liberalized in India in a series of measures. Industrial licensing has been abolished except in a small number of sectors where it has been retained on strategic considerations. The industrial policy reforms have substantially reduced the industrial licensing requirements removed restrictions on expansion facilitated easy access to foreign technology and, foreign direct investment.

Foreign Direct Investment in India Foreign investment is more than 24% in the equity capital of units manufacturing items reserved for the small scale industries. Foreign collaborator has a previous venture/tie-up in India. Acquisition of shares in an existing Indian company in favor of a Foreign Foreign Investment Promotion Board (FIPB) is a competent body to consider and recommend foreign direct investment (FDI

2. Trade Liberalization Trade policy allowing domestic providers (of goods and/or services) to compete more freely in world markets and foreign providers to compete more freely in domestic markets. Trade liberalization promotes growth. As the first generation of trade reforms, consisting mainly of easing of border restrictions to merchandize trade and liberalization of foreign exchange markets, have been or are being implemented by the majority of developing countries The provision of greater access to markets, for both goods and service providers plays an equally major role in stimulating the access to foreign markets

3. Financial Liberalization Financial liberalization (FL) refers to the deregulation of domestic financial markets and the liberalization of the capital account. In one view, it strengthens financial development and contributes to higher long-run growth. In another view, it induces excessive risktaking, increases macroeconomic volatility and leads to more frequent crises. FL leads to more rapid economic growth in middle-income countries (MIC), but does not have the same effect in lowincome countries (LIC) In LIC liberalization does not lead to higher growth because their financial systems are not sufficiently developed so as to permit significant increases in leverage and financial flows

Financial Liberalization and Common Currency Area (CCA) Facilitate migration of capital in the long-run Greater access to international financial markets for financing of balance of payments imbalances in the short run Risk sharing through international portfolio diversification

Financial Market Integration in East Asia

Causes of Foreign Dominance Financial Globalization Underdevelopment of Capital Markets Lack of Harmonization of legal, regulatory, and tax systems. Saving-Investment Profiles Intermediation through International financial market.

4. Fiscal Sector Reforms India's fiscal sector reforms help to raise the rate of savings and investment in India. This further helps to enhance the productivity of public expenditures India has established itself as one of the fastest growing economies in the world. India is also advancing towards the economical growth and improvement in literacy. During 1999-2000, India's domestic savings and investment was estimated to grow by 23% and Indian economy was expected to grow by 6.4% although the average growth rate declined to 6.0% in comparison to earlier year.

In the first five year plan (1951-1979), India had attained an average annual growth rate by 3.5%. Indian economy showed an average growth rate of 6.4%, which was 5.9% in the 80's. At the end of the 8th Five Year Plan, the annual growth rate of India reached 6.9 percent. During the period from 1991-92 the Indian economy passed through a tough time. The overall economic growth in this period declined to 1.1% and the total fiscal deficit became 8% of the GDP.

Wide Ranging Reform Measures Complexity and inter-linkages Administrative structure Rigidities of expenditure pattern Democratic limitations Political uncertainties Late start of State level reforms

Emerging Issues Increasing cost of oil Skills shortages Environmental matters New technology security issues Pandemic influenza Infrastructure congestion capacity building These issues must be taken into account when developing approaches

Challenges Ahead 1.

Governance  Need for elimination of large number of Rules & Regulations in the books  Sharply reducing the number of implementing agencies  Moving towards single window clearance

1.

Infrastructure: A Challenge and an opportunity Investments required upto 2012 – US$ 334 billion  Power Generation - US$ 143 billion  Power Transmission & Distribution – US$ 116 billion  Roads – US$ 40 billion  Ports – US$ 20 billion  Railways – US$ 15 billion

Indian Foreign Exchange Reserves: a steady rise after liberalization F o r e ig n e x c h a n g e r e s e r v e s ( U S $ b illio n ) 150

1 1 8 .3

100

5 4 .1 50

2 .2

7 5 .4

1 7 .0

0 1 9 9 0 - 9 11 9 9 5 - 9 6 2 0 0 1 - 0 22 0 0 2 - 0 32 0 0 3 - 0 4

Foreign Investments after liberalization

18000 16000 14000 12000 10000 8000 6000 4000 2000 0

T o ta l F o r e ig n In v e s tm e n t (U S $ m illio n ) U S $ m il li o n 1 5 ,8 7 2

5 ,1 3 8 5 ,3 8 5

6 ,7 8 9

8 ,1 5 2 5 ,6 3 9

103 1 9 9 0 - 9 11 9 9 4 - 9 51 9 9 7 - 9 82 0 0 0 - 0 12 0 0 1 - 0 22 0 0 2 - 0 32 0 0 3 - 0 4

Import duty Reductions after liberalization R e d u c tio n in P e a k C u s to m s D u tie s o n M a n u fa c tu r e d ite m s 160 140

in per cent

120

150

100

110

80 60 40

50

20

42

3 8 .5 3 0

25

20

0 1991

M a r -9 2

M a r -9 5

M a r -9 7

M a r -0 0

M a r -0 2

M a r -0 3 w . e . f M a r c h 2004

Rising share of India’s external trade after liberalization Total Exports in 2003-04 - US$ 61.8 Bn; Imports – US$ 75.2 Bn.  Assume target for exports for 2009 - US$150 Bn

in per cent

S h a r e o f e x te r n a l tr a d e in GD P 35 30 25 20 15 10 5 0

1 8 .1

2 3 .1

2 5 .5

2 6 .9

3 0 .3

2 8 .9

3 1 .6

32

19 9 1- 9 219 9 4 - 9 519 9 7 - 9 8 19 9 9 - 2 0 0 0 - 0 12 0 0 1- 0 22 0 0 2 - 0 32 0 0 3 - 0 4 2000

PHARMACEUTICALS INDUSTRY AFTER LIBERALISATION  India is world's 4th largest pharmaceuticals producer with 8% share of global production.  3 New Molecules discovered by Indian companies - 12 more in the final stages.  Over 100 Indian formulations have received United States FDA approval

BIOTECH AFTER LIBERALISATION  More than 900 companies involved in traditional biotech products  Biopharma products – 35 new MNC companies set up in past 5 years.  R&D and commercialization of products on agricultural biotechnology is the latest trend.  Opportunities for fresh investment in Indian biotech sector in next 5-7 years - US$ 1.5 – 2 billion

AGRI & FOOD PROCESSING AFTER LIBERALISATION

India is looking for investment in infrastructure, packaging and marketing.  India - One of the largest food producers of the world  The Indian scientific and research talent had boomed up after liberalization because of various MNC are investing big money in R&D.

AUTO & AUTO COMPONENTS AFTER LIBERALISATION  2nd largest small car market in the world.  Largest motorcycle manufacturer in the world.  2nd largest scooter and tractor manufacturer in the world.  Many international auto majors are manufacturing in India – Daimler Chrysler, General Motors, Toyota, Ford, Honda, Hyundai, Volkswagen, Suzuki etc  Most of them are also outsourcing their components from India as a hub.

Production of Automobiles (4 Wheelers) after Liberalization

4 W h e e le rs (in N o s ) 1 ,2 6 3

1400000 1200000 1000000 8 0 0 0 60 07 600000 400000 200000

1 ,9 2 8

Vehicle Exports after Liberalization Vehicle Exports 4 Wheelers (in Nos) 600000

332087

500000 In Nos.

2 and 3 Wheelers (in Nos

400000 300000 200000 100000 0

121140

146543 38230

STEEL Industry after Liberalization P r o d u c t io n a n d E x p o r t o f F in is h e d S t e e l

40 30 20

P r o d u c t io n ( in m illioEnx tpoonr nt se s( in) ' 0 0 0 t o n n e s ) 3 6 . 1 96 0 0 0 3 3 . 6 7 2 9 .7 5 2 05 00 0 0 2 3 .8 2 4 5 0 6 4000 1 4 .3 3 1 7 .8 2 3000 2000 1000 0

10 0

368 1 9 9 1 -9 2

1 9 9 4 -9 5

1 9 9 8 -9 9

2 0 0 0 -0 1

2 0 0 2 -0 3

2 0 0 3 -0 4 ( P r o v i s io n a l)

RESEARCH & DEVELOPMENT facilities after liberalization More than 100 global companies outsource R&D facilities from India  GE John F Welch Technology Centre – Company’s largest research outfit outside the US  GE Medical Systems – India as sole sourcing base for its portable ultrasound scanner  Monsanto – First non-US research facility  Eli Lilly – largest research facility in Asia and 3rd largest in the world  Texas Instruments – Digital Signal Processor developed in India – controls 50% of the world market  AVL, Austria – India as base to do R&D for the company.

IT & IT ENABLED SERVICES after Liberalization  Compounded annual growth rate (CAGR) exceeding 50 % over the last five years  IT enabled services key driver of growth. Engine for outsourcing  This segment poised to grow very rapidly, world-wide India has potential to tap 38 % of the world market.  Revenues from ITeS (remote services) showed an annual growth rate of 68.2 %.

ENTERTAINMENT industry after Liberalization  Industry growing at 15% - Total industry valued at US$ 4.267 billion in 2003  Expected to reach US$ 9.4 billion by 2008 

Largest producer of films and enterntainment content in the world - More than 1000 films produced in 2003-04

 Co-production treaties being signed with UK, Canada, China and Italy,USA (Time Warner,Universal,Goldmyn Mayor).  Animation and gaming – one of the fastest growing sectors  Animation and special effects for SPIDERMAN and GLADIATOR done in India

HEALTHCARE industry after Liberalization  Size of the Healthcare industry - over US$22 billion  Sector employs over 60 lakh people 

One of the fastest growing sectors in India - expected to grow at 12-13% per annum.



Over 80% of healthcare spending is captured by private sector & MNC.

 Investment Potential : 750,000 extra beds over the next 10 years at a cost of approximately US$30 billion.

OIL & GAS after liberalization  World’s 6th largest consumer of Energy World’s 8th largest consumer of Oil  Demand for Petroleum Products expected to be 179 MT by 200607.  Investments of US$ 150 Billion required to meet ongoing demand. More than US$ 6 Billion already committed for exploration and development work over next few years  Liberalized Govt policies on exploration, production, refining, distribution, marketing and pipelines for private sector participation.

POWER after Liberalization  By 2012 • Peak Demand (Expected) – 1,57,000 MW • Proposed Capacity Addition – 1,00,000 MW  Estimated Investment for Development – US$ 20 Billion

National

Grid

 Up-to 100% FDI allowed in projects relating to electricity generation, transmission and distribution (other than atomic reactor power plants).

AIRPORTS after liberalization  Projection 2010: International Passenger Traffic – 26 Million; Domestic Passenger Traffic – 40 Million; Cargo Movement – 1.8 Million tones.  FDI up-to 74% (up-to 100% with Special Permission) allowed in ventures for airports.  FDI up-to 49% and NRI Investment up-to 100% permitted in Domestic Airport Services.

Arguments in the favour of Liberalization Increase in rate of economic growth Increase in competitiveness of industrial sector Reduction in poverty and inequality Fall in fiscal deficit Control on prices Decline in deficit of BOP Increase in Efficiency

Arguments in the Against of Liberalization Less importance to agriculture. Pressure by IMF and World Bank. More depending on Foreign Debt. Dependence on Foreign technology. Promotion of Consumerism. Undue importance to Privatization. Problem of Unemployment.

CONCLUSION …………………… ………………… ……………………. ……………………… ……………………… ………………………….

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