Unit 1

Chapter 3 LPG

Introduction

The set of policies adopted by the Indian government prior to 1991 were very controlling and rigid.
These hampered the growth and development of the economy. In 1991, India met with an economic
crisis relating to its external debt resulting in rising prices and fall in foreign exchange reserve. All this led
the government to introduce a new set of policy measure which changed the direction of our
developmental strategies.

Beginning of NEP/Economic Reforms

The government was not able to generate sufficient revenues from internal sources such as taxation.
The income from PSUs was also not very high. There were 6 reasons why India introduced NEP. (not in
syllabus, read just for information.)

1. Fiscal Deficit
Prior to 1991, Fiscal deficit increased due to non-development expenditure like expenditure on
administration and non-plan expenditure i.e. expenditure on flood victims. Revenues were low due to
low tax rates. Income from Government enterprises were low
To curb deficit, govt. was forced to borrow leading to high public debt and interest payments falling into
a debt trap.

2. Adverse BOP
Balance of Payments is the difference between inflow of foreign exchange and outflow of foreign
exchange. When outflow>inflow of foreign exchange, BOP is in deficit
Exports (source of inflow of foreign exchange) were less due to poor quality of domestic goods and
imports were more despite tariff and quotas (source of outflow of foreign exchange).

3. Fall in foreign exchange reserves

Foreign Exchange Reserves (foreign currencies and assets) were used to meet developmental projects.
There was not sufficient foreign exchange to pay interest on borrowings to international moneylenders.
Also, no country or international funders were willing to lend in India
Exports (source of inflow of foreign exchange) were less due to poor quality of domestic goods and
imports were more despite tariff and quotas (source of outflow of foreign exchange).

4. Rise in prices/ Inflation

Inflation is consistent rise in general price level due to low AS.
The major reason for inflation was: Deficit Financing by RBI:- Printing of money led to more AD
unmatched with AS thereby increasing prices. Inflation rate was 16.7% in 1990-91 which reduced
demand Indian goods in domestic and foreign markets.
5. Poor Performance of PSUs
PSUs were still operating in areas that could be shifted to private sectors. Many PSUs were incurring
losses but continued operating because it was difficult to shut them.

6. Inefficient Management esp. in 1980

Government’s Expenditure was more than its revenue.
Due to faulty management, the rules and laws which aimed at controlling and regulating the economy
ended up hampering the process of growth and development.
There was lack of finances, defective policies and inefficient administration.
NEP

India approached International bank for Reconstruction and Development (IBRD), also called World
Bank and the International Monetary Fund (IMF) to receive $7 billion as loan to manage the crisis. For
availing the loans, these international agencies expected India to liberalize and open up the economy by
removing restrictions on private sector, reduce role of government and remove trade restrictions with
ROW. India agreed to the conditions of World Bank and IMF and announced the NEP in July 1991.

The set of policies were classified into:-

1. Stabilization measures:-
These are short term measures intended to:-
1. Correct weakness of BOP by maintaining sufficient foreign exchange reserves
2. Keep inflation under control
2. Structural measures:-
These are long term measures intended to:-
1. Improving efficiency of the economy
2. Increasing international competitiveness by removing rigidities in various segments of the economy.
Liberalization

Liberalization is the lessening of government regulations and restrictions in an economy in exchange for
greater participation by private entities.

The following reforms were initiated under liberalization

1. INDUSTRIAL SECTOR REFORMS

Industrial sector reforms were initiated by introducing industrial policy in July 1991. Under this, there
were various measures undertaken

i) Abolition of industrial licensing

• Prior to 1991, every entrepreneur had to get permission from government to start a firm, close
a firm or to decide the amount of goods that could be produced.
• According to NEP, Industrial licensing was abolished for almost all products except for some
industries which are of strategic importance for a nation like alcohol, cigarettes, hazardous
chemicals, industrial explosives, aerospace and drugs and pharmaceuticals.
ii) Decrease in the role of public sector
• Prior to 1991, private sector was not allowed in many industries as the major control was
exercised by the government.
• It was felt that the government cannot control everything so private sector was allowed to
participate in growth object of the country and now the only industries which are reserved for
the public sector ( number of industries reduced from 17 to 3) are defense equipment’s, atomic
energy and railway transport.

iii) De reservation of production by small scale industries

• Prior to 1991, some goods could be produced only in small scale industries.
• But now many goods produced by small scale industries have been de reserved.
• The investment limit on plant and machinery for small scale industries has been increased to
rupees 5 crore.

iv) Monopolies and Restrictive trade practices act (MRTP act) of 1969
• The act aims to prevent concentration of economic power, provide for control of monopolies
and protect consumer interest.
• To ensure that the operation of the economic system does not result in the concentration of
power in the hands of few, this act was implemented.
• It was replaced by Competition Act of 2002.

v) Import of capital goods

• Prior to 1991, there were restrictions on import of certain industrial (capital) goods.
• But now there is freedom to import capital goods and technology in order to develop strong
infrastructural base of the country.

2) FINANCIAL SECTOR REFORMS

It includes financial institutions such as commercial banks, investment banks, stock exchange operations
and foreign exchange markets. This sector is controlled by RBI. Reforms in this sector aimed at providing
greater autonomy to the financial institutions.
The various reforms are:
i) Role of RBI
• Prior to 1991, RBI’s role was a role of regulator. As a regulator RBI used to fix interest rate
structure. Also, commercial banks were supposed to consult RBI on almost all financial matters.
• Now with NEP, one of the major aims of financial sector reforms was to reduce the role of RBI
from regulator to facilitator of financial sector. This means that the financial sector may be
allowed to take decisions on many financial matters without consulting RBI.

ii) Establishment of private sector banks

• Prior to 1991, private sector banks were not encouraged, as public sector banks were given
more importance in government policies.
 • But in the reform policies led to the establishment of private sector banks, Indians as well as
foreign which increased the size of competition and provided better services to the consumers
• In 1969, 14 banks were nationalized while 6 more banks were nationalized in 1980.

iii) Foreign Investments

• Prior to 1991, foreign investments in Indian financial markets were restricted.
• With the reforms, now foreign investment limits in banks was raised to around 50 percent.
Foreign Institutional Investors (FII) such as merchant bankers, mutual funds and pension funds
are now allowed to invest in Indian financial markets under strict guidelines of RBI.

iv) Setting up new branches

• Prior to 1991, approval of RBI was required to set up new branches by the banks.
• Now, these banks which fulfill certain conditions are given freedom to set up new branches
without RBI’s approval and rationalize their existing branches.

3) FISCAL REFORMS/ TAX REFORMS

Tax reforms are concerned with the reforms in government revenue and expenditure policies which are
collectively known as fiscal policy.
The following measures have been taken in this regard:
i) Reduction in Direct Taxes
• Prior to 1991 there has been continuous increase in direct taxes i.e. the taxes on incomes of
individuals (income tax) and profits of business enterprises (corporate tax)
• With economic reforms, it was felt that high rates of income tax were responsible for tax
evasion. Therefore, since 1991, there has been a continuous reduction in taxes on individual
incomes and corporation tax.

ii) Reform in Indirect taxes

• Prior to 1991 there were complexities in imposing the indirect taxes and recovering them.
• Now efforts are made to reform the indirect taxes. With the implementation of GST, it has
become simple to pay tax.

iii) Simplification of tax-paying procedure

• Prior to 1991 it was very complex procedure to make tax payment in terms of long distance,
fixed time period etc.
• Now in order to encourage better compliance on the part of tax payers many procedures have
been simplified.

iv) Goods and Services Tax (GST)

• Recently, the parliament passed a law. GST Act 2016, to simplify and introduce a unified indirect
tax system in India.
• This law came into effect from July 2017. This is expected to generate additional revenue for the
government, reduce tax evasion and create ‘one nation, one tax and one market.’
 4) FOREIGN EXCHANGE REFORMS

This was the first important reform in the external sector to bring reforms in foreign exchange market.
The measures are:-
i) Devaluation of Rupee
Devaluation refers to reduction in the value of domestic currency in relation to foreign currency by the
government. For example: 1$= Rs.70 initially. Now devaluation means 1$= Rs.75.
• In 1991, India was very badly hit by BOP crisis. In other words, outflow of foreign exchange was
more than inflow of foreign exchange.
• But, devaluation would encourage exports and discourage imports. This led to increase in the
inflow of foreign exchange.

ii) Determination of foreign exchange rate

• Prior to 1991, determination of foreign exchange rate (determination of rupee value in the
foreign exchange market) was controlled by the government.
• Now the government allowed market forces (demand and supply of foreign exchange
currencies) to determine foreign exchange rate.

5) TRADE AND INVESTMENT POLICY REFORMS

Liberalization of trade and investment policy was initiated to increase efficiency and competitiveness in
the international market and to increase foreign investment and technology in the Indian economy. The
aim was to promote the efficiency of the local industries and the adoption of modern technologies.
The reforms undertaken were:
i) Dismantling of quantitative restrictions on imports and exports
• Prior to 1991, India followed a policy of quantitative restrictions on imports and exports. This
was done through rigid control over imports and by keeping the tariffs very high. These policies
reduced efficiency and competitiveness which led to slow growth of manufacturing sector.
• Now liberalization aimed at removal of quantitative restrictions on imports and exports.
Quantitative restrictions on imports of manufactured consumer goods and agricultural products
were also fully removed from April 2001.

ii) Reduction of tariff rates

• There were high tariff imposed on imports to favor the policy of protection, prior to 1991.
• Now tariff on imports was reduced to enhance the domestic trade and achieve economic
growth.

iii) Removal of licensing procedures for imports

• Prior to 1991, there were huge restrictions to obtain import license in order to keep strict
control over imports.
• Now import licensing was abolished except in case of hazardous and environmentally sensitive
industries.

iv) Removal of export duties

 • Earlier, there were heavy export duties imposed to encourage domestic production for domestic
demand only.
• Now export duties have been removed to increase the competitive position of India goods in the
International markets.

PRIVATIZATION

It implies shedding of ownership or management of a government owned enterprise. It means removal

of rigid control over private sector and giving it freedom to take necessary decisions. Prior to 1991,
public sector was accorded greater degree of priority and importance but the desired result could not be
achieved.

The NEP aims at expanding private sector by removing strict controls over it and making it free to
innovate and progress.

Thus:

➢ Privatization refers to transfer of ownership, management and control of government sector

enterprises to the private sector.
➢ It is done to improve efficiency and increase competitiveness of the private sector.
➢ Government also tried to improve efficiency of PSUs by giving them autonomy in taking
managerial decisions. For example, some public sector companies by granting them special
status as Maharatnas, Navratnas and Miniratnas. These were given greater managerial and
operational autonomy in various decisions to run the company efficiently.

A few examples of public enterprises with their status are as follows:

• (i) Maharatnas – (a) Indian Oil Corporation Limited, and (b) Steel Authority of India Limited,
Total= 7 in number
• (ii) Navratnas – (a) Hindustan Aeronautics Limited, (b) Mahanagar Telephone Nigam Limited;
Total= 9 in number and
• (iii) Miniratnas – (a) Bharat Sanchar Nigam Limited; (b) Airport Authority of India and (c) Indian
Railway Catering and Tourism Corporation Limited.
Total= 73 in number

Privatization can be done in two ways:-

i) By withdrawal of the government from ownership and management of public sector companies and,
or
ii) By outright sale of public sector companies

The purpose of the sale, according to the government, was mainly to:
1) Improve financial discipline and facilitate modernization.
2) It was also envisaged that private capital and managerial capabilities could be effectively utilized to
improve the performance of the PSUs.
3) The government envisaged that privatization could provide strong impetus to the inflow of FDI.
4) The government has also made attempts to improve the efficiency of PSUs by giving them
independence in taking managerial decisions. For instance, some PSUs have been granted special status
as maharatnas, navratnas and miniratnas

➢ Privatization of the public sector undertakings selling off part of the equity of PSUs/PSEs to the
private sector is known as disinvestment.
➢ The purpose of privatization is to improve financial discipline and facilitate modernization by
encouraging private sector to invest and participate in economic development with their
administrative efficiency.

Positive Impact of Privatization

The arguments in favor of Privatization are:-
i) Improve the efficiency of management
Privatization supports managerial efficiency as there would be no political pressure and unnecessary
formalities. It will make the entrepreneurs free to make quick decision without interference by the
government.

ii) Financial Discipline

Privatization maintains financial discipline by regular supply of funds. There were undue delays in
sanctioning of funds prior to 1991 due to complexities in administrative setup.

iii) Reduction in Deficit

In the late 1980s government’s expenditure began to exceed its revenue by larger amounts causing
deficit in government budget. Privatization reduced this financial burden of the government as it does
not have to spend on non-developmental expenditure. Rather by earning sufficient profits it can support
the government by paying taxes.

iv) Competitiveness
Privatization targeted that private capital and managerial capabilities could be effectively utilized to
improve the performance. This would further encourage competitiveness (required for the development
of the economy) in domestic as well as Indian markets.

v) Diversification of production
Private sector will function efficiently to satisfy the unlimited wants of consumers in order to create a
market for its production. It will result in diversification and expansion of production. It will also
promote consumer sovereignty.

vi) Increase in FDI (foreign direct investments)

Privatization provides strong impetus to the inflow of FDI as financial discipline improves in the country
due to the capital invested by the private sector. Other countries would like to invest because of
expanded domestic market.
 Negative Impact of Privatization
i) Neglect of social interest
Private sector functions mainly with the objective of profit maximization which may be done at the cost
of social welfare of people. Thus socialistic pattern of society may just be a dream reality as social
welfare is not the primary objective of the private sector.

ii) Highly priced goods

Privatization functions on the basis of market mechanism. When prices rise, demand by those who
cannot pay this price, would fall. If it continues, this may become a major problem of inflation. If
inflation is not controlled, it may affect the majority adversely.

iii) Monopolistic control

Privatization if remains uncontrolled may turn into monopoly, where private owners may have
monopoly control over market. This situation may also be characterized by concentration of power in
hands of few.

iv) Hindrance in achieving the objective of full employment

Privatization does not work towards achieving the objective of full employment as it is guided by profit
motive in order to cut down cost, it may cause retrenchment and consequent unemployment.
Privatization in many PSUs resulted in voluntary retirement of many workers because of unsatisfactory
job conditions led by private sector.
Globalization

Globalization is the outcome of the policies of liberalization and privatization. Globalization aims at
turning the world into one whole or creating a borderless world. It refers to free interactions among all
the countries of the world in various fields like trade, technology, loans, investment, outsourcing etc.

Thus:

• It is defined as a system related to increasing interaction, growing economic interdependence

and widening economic integration in the world economy.
• It encourages integration of the economy of the country with the world economy.
• It is an outcome of the set of various policies that are aimed at transforming the world towards
greater interdependence and integration.
• It involves creation of networks and activities transcending economic, social and geographical
boundaries.

POLICY MEASURES UNDERTAKEN UNDER GLOBALIZATION

i) Rise in equity limit participation of foreign investment

Prior to 1991, foreign equity limit was restricted by lot of formalities regarding approvals, sanctions and
constraints. This limit has been raised from 40% to 51%. Approvals, sanctions and constraints on foreign
investments have been relaxed after economic reforms.

ii) Devaluation of rupee

At the end of 1991, BOP situation was adverse, implying lack of foreign exchange reserves as outflow of
foreign exchange was more than inflow. Rupee was devalued in July 1991 by nearly 20%. It had
encouraged exports and discouraged imports.

iii) Convertibility of Indian rupee

It refers to purchase and sale of foreign currencies at a price determined by the market. Partial
convertibility of rupee was allowed by the government in 1992-92 budget and full convertibility of rupee
was allowed in 1993-94 budgets in current account. It was allowed for import and export of goods and
services, payment of interest etc.

iv) Removal on controls of foreign trade

A new 5 year foreign trade policy was announced to establish the framework of the trade with rest of
the world. It removed almost all the restrictions on external trade. Open competition has been
encouraged. All sorts of goods can be traded except some goods which are of strategic importance to
the country.

v) Modification of tariffs
In conformity with new economic policy, custom duties and tariffs imposed on imports and exports have
been gradually reduced. The ones which are still prevailing have been modifies to encourage
competitiveness and promote international trade.

vi) Modification in technology agreements

Prior to 1991, there were restrictions for hiring foreign technology or foreign technicians. According to
NEP, all foreign collaborations concerning higher technology have been made easy by the government.
No permission is required now for testing domestically developed technology abroad.

Positive Impact Globalization

i) Borderless world
Globalization has been able to establish links in such a way that the happening (advancement) in India
can be influenced by events happening miles away or the ROW rest of the world.

ii) Global markets

Globalization has been able to turn the world into one whole or creating a borderless world as it
provides easy access to global markets.

iii) Exposure to advanced technology

Globalization has helped in exposure to advanced technology and firms are able to develop indigenous
production in the international markets.

iv) Increased Competition

Globalization should be seen as an opportunity in terms of greater access to global markets and
increased possibility of large industries of developing countries to become important players in the
international areas.

Negative Impact of Globalization

i) Favors developed countries
Globalization is a strategy of the developed countries to expand their markets in other countries
especially in the developing or under developed countries.

ii) Widened economic disparity

Market driven Globalization has widened the economic disparities among nations and people. Big
entrepreneurs and developed countries were the most benefited.

iii) Reduced welfare of poor

Globalization compromised the welfare and identity of people belonging to poor countries.

Outsourcing (short note)

This is one of the important outcomes of the globalization process. It is an emerging business activity. As
information technology is growing faster, outsourcing has become an important need of the present
times in the international arena.

• In outsourcing a company hires regular services from the external sources, mostly from other
countries. These services used to be previously provided internally or from within the country
like legal advice, computer service, advertisement, security- each provided by respective
department of the company.
• It is a form of economic activity, which has intensified in present times because of the growth of
communication, specifically the growth of IT sector.
• Most multinational companies and even small companies are outsourcing their services to India
because these can be availed at a cheaper cost with reasonable degree of accuracy and skill.
• The main services which are being outsourced to India by the other countries are voice based
business processes (known as BPO), record keeping, accountancy, banking services, film editing,
book transcription, clinical advice or even teaching.
• With the help of modern telecommunication links including the internet, the text, voice and
visual data regarding these services is digitized and transmitted in real time over continents and
national boundaries.
• India has become a destination for global outsourcing in the post-reform period because of:-
a) low wage rate
b) availability of skilled manpower
WTO (World Trade Organization)
The world trade organization was founded in 1995 as the successor organization to the General
Agreement on Trade and Tariff (GATT). GATT was established in 1948 with 23 countries as the global
trade organization to administer all multilateral trade agreements by providing equal opportunities to all
countries in the international market for trading purposes.

Functions performed by WTO:-

1. WTO establishes a rule based trading regime in which nations cannot place arbitrary restrictions
on trade.
2. In addition, its purpose is also to enlarge production and trade of services, to ensure optimum
utilization of world resources and to protect the environment.
3. The WTO agreements cover trade in goods as well as services to facilitate international trade
(bilateral and multilateral) through removal of tariff as well as non-tariff barriers.
4. It helps in providing greater market access to all member countries as it provides equal
opportunities to all countries in the international market.

• As an important member of WTO, India has been in the forefront of framing fair global rules,
regulations and safeguards and advocating the interests of the developing world.
• India has kept its commitments towards liberalization of trade, made in the WTO, by
removing quantitative restrictions on imports and reducing tariff rates.
• Owing to globalization, you might find many Indian companies have expanded their wings to
many other countries.
For example,
1. ONGC Videsh, a subsidiary of the Indian public sector enterprise, Oil and Natural Gas
Corporation (disinvestment done in ONGC) engaged in oil and gas exploration and
production has projects in 16 countries.
2. Tata Steel, a private company established in 1907, is one of the top ten global steel
companies in the world which have operations in 26 countries and sell its products in 50
countries. It employs nearly 50,000 persons in other countries.
3. HCL Technologies, one of the top five IT companies in India has offices in 31 countries and
employs about 15,000 persons abroad.
4. Dr. Reddy's Laboratories, initially was a small company supplying pharmaceutical goods to
big Indian companies, today has manufacturing plants and research centres across the world.
Critical Appraisal of LPG

Arguments in favor of NEP

1) Increase in rate of economic growth:
In economics, the growth of an economy is measured by the Gross Domestic Product.
India witnessed a rapid growth in GDP on a continual basis for two decades. The growth of GDP
increased from 5.6 per cent during 1980–91 to 8.2 per cent during 2007–12. During the reform
period, the growth of agriculture has declined. While the industrial sector reported fluctuation,
the growth of the service sector has gone up.
This indicates that this growth is mainly driven by growth in the service sector.

2) Inflow of foreign investment:

The opening of the economy has led to a rapid increase in foreign direct investment and foreign
exchange reserves.
The foreign investment, which includes foreign direct investment (FDI) and foreign institutional
investment (FII), has increased from about US $100 million in 1990-91 to US $ 36 billion in
2016-17.

3) Rise in foreign exchange reserves:

There has been an increase in the foreign exchange reserves from about US $ 6 billion in 1990-91
to about US $ 321 billion in 2014-15.
India is one of the largest foreign exchange reserve holders in the world.

4) Rise in exports:
India is seen as a successful exporter of auto parts, engineering goods, IT software and textiles in
reform period.

5) Control on inflation:
Prior to 1991, general price level was rising. Gulf crises hit the Indian economy hardly and there
was continuous increase in price level.
Due to LPG policy, Rising prices have also been kept under control.

6) Structural changes:
It refers to shift of contribution from primary sector to secondary sector and tertiary sector
During the reform period it was noticed that growth rate of about 8% is mainly driven by growth
in service sector.

7) Control of fiscal deficit:

Fiscal deficit which adversely affected the Indian economy prior to 1991 now started recovering
after the economic reforms.

8) Reduction in deficit in BOP:

Prior to 1991 the outflow of forex was more than its inflow. Due to introduction of LPG policy, the
deficit in BOP (Current Account Deficit) is reduced.

Limitations/Criticism of Economic reforms/ Arguments against NEP

The reform process has been widely criticized for not being able to address some of the
basic problems facing our economy especially in areas of employment, agriculture,
industry, infrastructure development and fiscal management.

1) Growth and Employment:

Though the GDP growth rate has increased in the reform period, but the reform-led growth has
not generated sufficient employment opportunities in the country.
Unemployment occurred because Public sector started retrenchment of workers because of their
low performance and over staffing.
The private sector terminated employees because of modernization and technological
advancement.

2) Reforms in Agriculture:
Reforms have not been able to benefit agriculture, where the growth rate has been decelerating.
Public investment in agriculture sector especially in infrastructure, which includes irrigation,
power, roads, market linkages and research and extension (which played a crucial role in the
Green Revolution), has fallen in the reform period.
Further, the removal of fertilizer subsidy has led to increase in the cost of production, which has
severely affected the small and marginal farmers.
This sector has been experiencing a number of policy changes such as reduction in import duties
on agricultural products, removal of minimum support price and lifting of quantitative restrictions
on agricultural products. These have adversely affected Indian farmers as they now have to face
increased international competition.
Moreover, because of export oriented policy strategies in agriculture, there has been a shift from
production for the domestic market towards production for the export market focusing on cash
crops in lieu of production of food grains. This puts pressure on prices of food grains.

3) Reforms in Industry:
Industrial growth has also recorded a slowdown. This is because of decreasing demand of
industrial products due to various reasons such as cheaper imports, inadequate investment in
infrastructure etc.
In a globalized world, developing countries are compelled to open up their economies to greater
flow of goods and capital from developed countries and rendering their industries vulnerable to
imported goods. Cheaper imports have, thus, replaced the demand for domestic goods. Domestic
manufacturers are facing competition from imports. The infrastructure facilities, including power
supply, have remained inadequate due to lack of investment.
Globalization is, thus, often seen as creating conditions for the free movement of goods and
services from foreign countries that adversely affect the local industries and employment
opportunities in developing countries. Moreover, a developing country like India still does not
have the access to developed countries’ markets because of high non-tariff barriers. For example
although all quota restrictions on exports of textiles and clothing have been removed in India, USA
has not removed their quota restriction on import of textiles from India and China.

4) Disinvestment:

Every year, the government fixes a target for disinvestment of PSEs. For instance, in 1991-92, it was
targeted to mobilize Rs.2500 crore through disinvestment. The government was able to mobilize `
3,040 crore more than the target. In 2017 – 18, the target was about `1,00,000 crore, whereas, the
achievement was about ` 1,00,057 crore. ( do not learn data)

Critics point out that the assets of PSEs have been undervalued and sold to the private sector. This
means that there has been a substantial loss to the government.

Moreover, the proceeds from disinvestment were used to offset the shortage of government
revenues rather than using it for the development of PSEs and building social infrastructure in the
country.

5) Reforms and Fiscal Policies:

Economic reforms have placed limits on the growth of public expenditure, especially in social sectors.
The tax reductions in the reform period, aimed at yielding larger revenue and curb tax evasion, have
not resulted in increase in tax revenue for the government. Also, the reform policies, involving tariff
reduction, have cut the scope for raising revenue through custom duties.

In order to attract foreign investment, tax incentives were provided to foreign investors which
further reduced the scope for raising tax revenues. This has a negative impact on developmental and
welfare expenditures.

6) Increase in inequalities:

Globalization is believed to be a strategy of the developed countries to expand their markets in other
countries. It has compromised the welfare and identity of people belonging to poor countries.
Market-driven globalization has widened the economic disparities among nations and people.

Viewed from the Indian context, some studies have stated that the crisis that erupted in the early
1990s was basically an outcome of the deep-rooted inequalities in Indian society and the economic
reform policies initiated as a response to the crisis by the government, with externally advised policy
package, further aggravated the inequalities.

Further, it has increased the income and quality of consumption of only high-income groups and the
growth has been concentrated only in some select areas in the services sector such as
telecommunication, information technology, finance, entertainment, travel and hospitality services,
real estate and trade, rather than vital sectors such as agriculture and industry which provide
livelihoods to millions of people in the country.
REFER TO DEMONITISATION AND GST TOPICS FROM ANY BOOK