Short notes on the Impact of Liberalisation

Although it is too early to draw a definite conclusion on the impact of industrial liberalisation certain trends may be observed.

1. The foreign direct investments approved from July 1991 till April 1998 are about 1, 60,255.44 crore of which Rs. 36,420.71 crore have already come in. The direct foreign investment has been increasing continuously as it was Rs. 534.11 crore in 1991; Rs. 8,859.33 crpre in 1993; Rs. 32,071.72 crore in 1995, Rs. 54,891.35 crore in 1997 and Rs. 131, 385 crore in 2004-05. This exhibits gradual increase in the amount of foreign direct investment (FDI). Yearly direct foreign investment, after eco­nomic liberalisation, has been of high magnitude if compared to any one year investment during the 1980’s. Foreign institutional investments in 1994 had crossed a billion dollars against no investment before 1991. The economy had responded well to the reforms. There is acceleration in the rate of growth in GDP from 0.9 per cent in 1991-92 to 4.3 per cent in 1992-93, 5.3 percent in 1994-95 and 7.5 percent in 1996-97.

2. The industrial recession in India which began in 1991 has been partially over due to liberali­sation. There are clear signs of industrial recovery in 1994. The overall index of industrial production, having declined marginally in 1991 -92, has increased by 2.3 per cent in 1992-93 and by 4 percent in 1993- 94.

Indian industry witnessed an impressive growth of about 8 per cent in 1994-95 and has crossed 12 per cent in 1995-96 (cf. 7.1% in 1996-97) on account of massive investment in modernisation, expansion and setting up of very many new schemes. Industries like automobiles, textile machinery, auto compo­nents, petrochemicals and consumer electronics have undergone 20 per cent growth in 1994. Other indus­tries like fertilisers, crude oil, tires, tubes, construc­tion and electric power generation are recording more than 10 per cent growth rates.

3. According to the Ministry of Industry over 17,000 letters of intent have been issued to both Indian and foreign industrial entrepreneurs, involv­ing a huge amount of 100 billion dollars (Rs. 300,000 crores). It has been estimated that this investment would generate employment to about 32 lakh per­sons. Out of 17,000 industrial entrepreneurial memo­randa, 2,000 memoranda belong to foreign investors which will bring a total inflow of 6 billion dollars. Of this about 1.5 billion dollars have already arrived. There is no denying the fact that the executions are slow. Hence, only 7-8 percent of industrial entrepre­neurial memoranda have translated commissioned projects.

4. After liberalisation the items which at­tracted the foreign entrepreneurs comprise telecom­munication, textile, gas, electricity generation, food processing, road construction, software, sport goods, steel plants, coal mining, metal, automobiles, etc. During 1994 highest foreign investment was made in fuel sector (Rs.2, 137.14 crore), followed by trans­port (Rs. 1,178.52 crore), chemicals excluding ferti­lisers (Rs. 1,122.12 crore) and services (Rs. 1,956.76 crore).

5. There is a spectacular rise in exports by 29.91 per cent to Rs.69, 748.85 crore in 1993-94 from Rs. 53,688.26 crore in 1992-93. Between 1993- 94 and 1994-95 the exports increased by Rs. 12,924.55 crore showing a gain of 8.53 per cent. Another phenomenal increase in the value of exports was witnessed in 1995-96 when it recorded an increase of 28.64 per cent over the previous year. This posi­tive increase in exports is continuing in recent yean (10.5 per cent between 1995-96 and 1996-97 and 7.45 per cent between 1996-97 and 1997-98).

There has been dramatic improvement in the balance of trade, estimated at Rs. 3,352.16 crore in 1993-94 as compared to Rs. 9,686.25 crore in 1992-93. But a major constraint to the economic reform has been the further rise of India’s trade deficit which has risen to Rs. 25,267.76 crore by 1997-98 with phe­nomenal rise in imports. Similar increase of coun­try’s external debt servicing liability is another set­back.

It is likely to go from $ 10.8 billion in 1994-95 to $ 12.3 billion in 1995-96 and 14.5 billion dollars ‘ in 1996-97. In this context it is noteworthy that the balance of payments situation is well under control due to rise in foreign exchange reserves. The foreign exchange reserve in foreign currency which was 5.63 billion US dollars in 1991-92 rose to 15.068 billion dollars in 1993-94; 20.809 billion dollars in 1994-95 and 25.975 billion dollars up to March 1998. Hence the pressure on balance of payments position has been considerably minimised.

6. Prof. Jagdish Bhagwati, the leading econo­mist of Columbia University argues that gains of reforms are not apparent immediately due to poor structural reform, excess domestic spending, high budget deficit and low literacy rates.

It is likely to generate more employment and revenue in near future which can be used to support and expand the antipoverty programme (Shanker, 1995). During this interim period both the government and busi­ness sources have a major responsibility to develop the country in regard to social infrastructure.

7. Although the economic reforms, started in 1991, have given boost up to the Indian economy but it has not been successful in reducing regional dis­parities in industrial development. New industries are being located in developed states like Maharashtra, Gujarat, West Bengal, Andhra Pradesh, Tamil Nadu and Karnataka. In 1994 Maharashtra topped the States in terms of approved foreign direct invest­ment (Rs.3, 744.71 crore), followed by West Bengal (Rs.2, 844 crore). Ghum and Ghuman (1994) on the basis of investment on hand, foreign investment, and power projects to be set up by the foreign and private companies during the post liberalisation period have identified four industrial regions.

The first region consisting of Maharashtra and Gujarat is likely to gain maximum from liberalisation. Andhra Pradesh, Tamil Nadu, Karnataka, Madhya Pradesh and Orissa form second industrial region. The third region in­cludes Haryana, West Bengal and Rajasthan. States like Uttar Pradesh, Punjab, Kerala, Himachal Pradesh, Uttaranchal and Bihar etc. are in the list of minimum gainer. Hence, liberalisation is likely to perpetuate regional inequalities in the industrial landscape of the country.

The uneven industrial development caused by economic liberalisation can be seen on infrastructural front too. Out of 33 coal, gas, lignite and hydel power projects with aggregate capacity of 22,767 MW and a total outlay of Rs.70,000 crore cleared up to February 1994 Orissa has 6 projects followed by Karnataka (5), Tamil Nadu (3), Andhra Pradesh (3), Maharashtra (3), Haryana (2), West Bengal (2) and Arunachal Pradesh (2). Till that date there were no proposals for Madhya Pradesh, Uttar Pradesh, Bihar, Mizoram, Nagaland and Delhi.

The number of proposals from the private sector to up power plants continue to rise and have now reached 195, involving an investment of Rs.2,86,403 crore for a total capacity of 77,699 MW. Forty-three of these proposals have come from foreign investors including NRI for a capacity of 32,100 MW and an investment of Rs. 1,25,095 crore.

8. Economic liberalisation in a developing country like India where cottage/small scale and medium industrial units are of vital significance to generate employment and contribute production, there is a fear that these would be swept up by the multinational companies with vast capital and latest technological skill. Hence, some sort of protection is must for these units by providing technical access, infrastructural as well as export network, to help competition with global units.

9. The foreign investors are more inclined to portfolio investment rather than direct investment. The former may be withdrawn at will at the slightest of hurdles giving a jolt to the country’s economy.

10. Most of the foreign investment is attracted to white goods and not the wage goods sector. Hence it may not be fruitful in improving the high priority sector and bringing in the latest technology. This will be counterproductive and detrimental to our industrial structure.

11. The large influx of foreign money without investment and higher growth may create more problems than solving them. In India where there is low capacity utilization and sluggish investment this can undo the competitive advantage of exchange rate at a time when export take off appears to be the centre piece of reform strategy (Krishna, S.1994).

12. It has been observed that along with export import is also increasing at a faster rate creating wide trade deficit and problem of balance of payment. This is not a healthy sign which may create Mexico like situation in the country.

13. In the enthusiasm of liberalisation and attracting more and more foreign exchange there is a fear of gradual handing over the whole economy to the multinationals. This will affect our economic as well as political freedom.

14. Along with liberalisation there is a need for strict budget deficit control measures through greater revenue generation, inflation control meas­ure, higher fund mobilisation and control of govern­ment expenditure (Singh, M.B. and Singh, V.K., 1997, pp. 15-19). There is also a need to take certain harsh measures to strengthen the economy. India is a peculiar country in the world where there is neither reward for profit nor punishment for failure. There is hardly any government institution which has been closed down due to non-performance or failure.