LPG

(UNIT-IV)
Economic environment is also called business environment and are used
interchangeably. In order to solve the economic problem of our country, the
government has taken several steps including control by the State of certain
industries, central planning and reduced importance of the private sector.
Accordingly, the main objectives of Indias development plans set were to:
a. Initiate rapid economic growth to raise the standard of living, reduce the
widespread unemployment and poverty stalking the land;
b. Become self-reliant and set up a strong industrial base with emphasis on heavy
and basic industries;
c. Achieve balanced regional development by establishing industries across the
country;
d. Reduce inequalities of income and wealth;
e. Adopt a socialist pattern of development based on equality and prevent
exploitation of man by man.
With the above objectives in view, the Government of India as a part of economic
reforms announced a new industrial policy in July 1991.
The broad features of this policy were as follows:

1. The Government reduced the number of industries under compulsory licensing

to six only.
2. Disinvestment was carried out in case of many public sector industrial
enterprises.
3. Policy towards foreign capital was liberalized. The share of foreign equity
participation was increased and in many activities 100 per cent Foreign Direct
Investment (FDI) was permitted.
4. Automatic permission was now granted for technology agreements with foreign
companies.
5. Foreign Investment Promotion Board (FIPB) was set up to promote and
channelise foreign investment in India.
There were three major initiatives taken by the Government of India to introduce
the much debated and discussed economic reforms to transform Indian economy
from closed to open market economy. These are generally abbreviated as LPG, i.e.
Liberalization, Privatization and Globalization.
Meaning: - Liberalisation is the process of liberating the economy from various
regulatory and control mechanisms of the state and of giving greater freedom to
private enterprise.

Definition: - Liberalisation can be defined as, Unilateral or multilateral reductions

in
tariffs
and
other
measures
that
restrict
trade

NEED FOR LIBERALISATION

Bring flexibility in the operations of business organisations.

Paves the way for globalisation
Helps companies to compete with other companies at international level.
Saves time, efforts and money of business enterprises.
reduces cost of production and distribution
Increase efficiency, productivity and profitability of business organisations.
Liberalization of the Indian economy contained the following features:

a. The economic reforms that were introduced were aimed at liberalizing the Indian
business and industry from all unnecessary controls and restrictions.
b. They indicate the end of the license-permit-quota raj.
c. Liberalization of the Indian industry has taken place with respect to:
(i) Abolishing licensing requirement in most of the industries except a short list,
(ii) Freedom in deciding the scale of business activities i.e., no restrictions on
expansion or contraction of business activities,
(iii) Removal of restrictions on the movement of goods and services,
(iv) Freedom in fixing the prices of goods and services,
(v) Reduction in tax rates and lifting of unnecessary controls over the economy,
(vi) Simplifying procedures for imports and exports, and
(vii) Making it easier to attract foreign capital and technology to India.

Privatisation:
In the event of globalization privatisation has become an order of the day.
Privatisation can be defined as the transfer of ownership and control of public
sector units to private individuals or companies. It has become inevitable as a
result of structural adjustment programmes imposed by IMF.

Objectives of Privatisation:
To strengthen the private sectors.
Government to concentrate on areas like education and infrastructure.
In the event of globalization the government felt that increasing inefficiency on the
part of public sectors would not help in achieving global standards. Hence a
decision was taken to privatise the Public Sectors.

Privatization was characterized by the following features:

a. The new set of economic reforms aimed at giving greater role to the private
sector in the nation building process and a reduced role to the public sector.

b. To achieve this, the government redefined the role of the public sector in the
New Industrial Policy of 1991.
c. The purpose of the same, according to the government, was mainly to improve
financial discipline and facilitate modernization.
d. It was also observed that private capital and managerial capabilities could be
effectively utilized to improve the performance of the PSUs.
e. The government has also made attempts to improve the efficiency of PSUs by
giving them autonomy in taking managerial decisions.

Globalization:
The term globalization can be used in different contexts. The general usages of the
term Globalization can be as follows:
i. Interactions and interdependence among countries.
ii. Integration of world economy.
It refers to a process whereby there are social, cultural, technological exchanges
across the border.
The term Globalization was first coined in 1980s. But even before this there were
interactions among nations. But in the modern days Globalization has touched all
spheres of life such as economy, education. Technology, cultural phenomenon,
social aspects etc. The term global village is also frequently used to highlight the
significance of globalization.

Effect of Globalization on India:

Globalization has its impact on India which is a developing country. The impact of
globalization can be analysed as follows:
1. Access to Technology:

Globalization has drastically, improved the access to technology. Internet facility

has enabled India to gain access to knowledge and services from around the world.
Use of Mobile telephone has revolution used communication with other countries.
2. Growth of international trade:
Tariff barriers have been removed which has resulted in the growth of trade among
nations. Global trade has been facilitated by GATT, WTO etc.
3. Increase in production:
Globalization has resulted in increase in the production of a variety of goods.
MNCs have established manufacturing plants all over the world.
4. Employment opportunities:
Establishment of MNCs have resulted in the increase of employment opportunities.
5. Free flow of foreign capital:
Globalization has encouraged free flow of capital which has improved the
economy of developing countries to some extent. It has increased the capital
formation.
OR

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Negative effect of globalization:

Globalization is not free from negative effects. They can be summed up as follows:
1. Inequalities within countries:
Globalisation has increased inequalities among the countries. Some of the policies
of Globalization (liberalisation, WTO policies etc.) are more beneficial to
developed countries. The countries which have adopted the free trade agenda have
become highly successful. E.g.: China is a classic example of success of
globalization. But a country like India is not able to overcome the problem.
2. Financial Instability:
As a consequence of globalization there is free flow of foreign capital poured into
developing countries. But the economy is subject to constant fluctuations. On
account of variations in the flow of foreign capital.
3. Impact on workers:

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Globalization has opened up employment opportunities. But there is no job

security for employees. The nature of work has created new pressures on workers.
Workers are not permitted to organise trade unions.
4. Impact on farmers:
Indian farmers are facing a lot of threat from global markets. They are facing a
serious competition from powerful agricultural industries quite often cheaply
produced agro products in developed countries are being dumped into India.
5. Impact on Environment:
Globalization has led to 50% rise in the volume of world trade. Mass movement of
goods across the world has resulted in gas emission. Some of the projects financed
by World Bank are potentially devastating to ecological balance. E.g.: Extensive
import or export of meat.
OR.

Globalisation of the Indian economy contained the following characteristics:

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a. Globalization is the outcome of the policies of liberalisation and privatization

already initiated by the Government.
b. Globalisation is generally understood to mean integration of the economy of the
country with the world economy. It is a complex phenomenon to understand and
apply into practice.
c. It is an outcome of the set of various policies that are aimed at transforming the
world towards greater interdependence and integration.
d. It involves creation of networks and activities transcending economic, social and
geographical boundaries.
e. Globalisation involves an increased level of interaction and interdependence
among the various nations of the global economy.
f. Physical geographical gap or political boundaries no longer remain barriers for a
business enterprise to serve a customer in a distant geographical market across the
globe.
What is disinvestment?
In business, disinvestment means to sell off certain assets such as a
manufacturing plant, a division or subsidiary, or product line. Disinvestment is
sometimes described as the opposite of capital expenditures. Some people use the
term divestiture,
or to
divest when
discussing
disinvestment.
For example, an electric generator manufacturer might sell off its consumer
generator product lines and manufacturing facilities in order to raise money that
can be used to expand its industrial generator product line.

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Another example is a consumer products company selling off a profitable division

that no longer meets its long range goals.
OBJECTIVE OF DISINVESTMENT:
1.
To improve performance of units
The main argument in favor of disinvestment is the poor performance of PSUs.
For instance the average return on investment was hardly 2% during the 1980s and
1990s
2.
To reduce budgetary deficits
One of the factors of budgetary deficits is the allocation of huge amount of funds
to PSUs. Due to lack of improvement of performance in such units, these deficits
lead to rising prices which in turn affected the economy.
3.
To overcome the problem of political involvement in PSUs
There was too much political interference with respect to location of the project,
selection and promotion of top personnel, awarding important contracts etc. This
has lead to poor performance of the PSUs.
4.
Enable the government to concentrate on Social development
It is of the belief that by transferring PSUs to private players, it would enable the
government to concentrate on the government s main job i.e. social development
in areas such as primary health, primary education, law and order, family welfare
and so on.
OTHER OBJECTIVES WOULD INCLUDE

To provide better service to customers.

To ensure proper planning and execution.
To overcome the problem of corruption.
To fix the responsibility on management.
To make efficient use of disinvestment proceeds.

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Special Economic Zone

What is a SEZ?
Special economic zone or SEZ refers to a totally commercial area specially
established for the promotion foreign trade. A Special Economic Zone (SEZ) is
a geographical region that has economic laws more liberal than a country's
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typical economic laws. Usually the goal is flourishment in foreign investment. The
SEZs in India are the outcome of the present governments industrial policy
which emphasizes deregulation of Indian industry and to allow the industries to
flexibly respond to the market forces. All undertakings other than the small scale
industrial undertakings engaged in the manufacture of items reserved for
manufacture in the small scale sector are required to obtain an industrial license
and undertake an export obligation of 50% of the annual production.

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OBJECTIVES OF SEZ

The objective following an SEZ is to enhance foreign investment, increase exports,

create jobs and promote regional development .the main objectives of the SEZ are:
Generation of additional economic activity;
Promotion of exports of goods and services;
Promotion of investment from domestic and foreign sources;
Creation of employment of opportunities;
Development of infrastructure facilities
Indian SEZ policy has following features:
The zones are proposed to setup by private sector or state govt. in
association with private sector.
Private sector is also invited to develop infrastructure facilities in the
existing SEZs.
State Government has a lead role in the setting up of SEZ.
A framework is being developed by creating special windows under
existing rules and regulations of the Central and State government for
SEZ.
The main Advantages of SEZ Units in India can be summarized as promotion
of industrialization and economic growth through sustainable development.

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World Trade Organization (WTO): Objectives and

Functions
The GATT (1986-93) gave birth to World Trade Organization. The members of
GATT singed on an agreement of Uruguay round in April 1994 in Morocco for
establishing a new organization named WTO. WTO was established on 1st
January 1995 which took the place of GATT as an effective formal,
organization. GATT was an informal organization which regulated world trade
since 1948. The WTO has nearly 153 members accounting for over 97% of world
trade. Around 30 others are negotiating membership. Decisions are made by the
entire membership.
India is one of the founder members of WTO.
WTO has attempted to create various organisational attentions for regulation
of international trade.
WTO created a qualitative change in international trade. It is the only
international body that deals with the rules of trades between nations.

The key objective of WTO is to promote and ensure international trade

in developing countries
Objectives:
The important objectives of WTO are:
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1. To improve the standard of living of people in the member countries.

2. To ensure full employment and broad increase in effective demand.
3. To enlarge production and trade of goods.
4. To increase the trade of services.
5. To ensure optimum utilization of world resources.
6. To protect the environment.
7. To accept the concept of sustainable development.
Functions:
The main functions of WTO are discussed below:
1. To implement rules and provisions related to trade policy review mechanism.
2. To provide a platform to member countries to decide future strategies related to
trade and tariff.
3. To provide facilities for implementation, administration and operation of
multilateral and bilateral agreements of the world trade.
4. To administer the rules and processes related to dispute settlement.
5. Resolving trade disputes.

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