Article 6: Liberalisation, Privatisation and Globalisation

Article – 5: Trade and Related Concepts
December 5, 2018
Article 7: International Financial institutions
December 9, 2018

Current Affairs for Engineering Service Exam

Article 6: Liberalisation, Privatisation and Globalisation

Video Lectures and Test Series for ESE 2019

Contents

  1. Liberalisation
  2. Privatisation
  3. Globalisation
  4. Public Sector
  5. Classification of PSUs
  6. Public Private Partnership
  7. Quiz

A.LIBERALISATION

  • The rules and laws which were aimed at regulating the economic activities became major hindrances in growth and development.
  • Liberalisation was introduced to put an end to these restrictions and open various sectors of the economy.

Liberalisation in India

It was brought in 1991 economic reforms:

1.Deregulation of Industrial Sector:

  • Industrial licensing was abolished for almost all but product categories — alcohol, cigarettes, hazardous chemicals, industrial explosives, electronics, aerospace and drugs  and pharmaceuticals.
  • The only industries which are now reserved for the public sector are a part of defence equipment, atomic energy generation and railway transport.
  • Many goods produced by small-scale industries have now been dereserved.
  • In many industries, the market has been allowed to determine the prices.

2.Financial Sector Reforms:

  • One of the major aims of financial sector reforms is to reduce the role of RBI from regulator to facilitator of financial sector.  
  • The financial sector may be allowed to take decisions on many matters without consulting the RBI.
  • The reform policies led to the establishment of private sector banks, Indian as well as foreign.
  • Foreign Institutional Investors (FII), such as merchant bankers, mutual funds and pension funds, are now allowed to invest in Indian financial markets.

3.Tax Reforms:

  • There has been a continuous reduction in the taxes on individual incomes as it was felt that high rates of income tax were an important reason for tax evasion.
  • The corporation tax  has been gradually reduced
  • Efforts have also been made to reform the indirect taxes, taxes levied on commodities
  • Many tax procedures have been simplified and the rates also substantially lowered.

4.Foreign Exchange Reforms:

  • To resolve the balance of payments crisis, the rupee was devalued against foreign currencies.
  • To free the determination of rupee value in the foreign exchange market from government control.
  • Markets  determine exchange rates based on the  demand and supply of foreign exchange.

5.Trade and Investment Policy Reforms:

  • Dismantling of  quantitative restrictions on imports and exports
  • Reduction of tariff rates
  • Removal of licensing procedures for imports
  • Import licensing was abolished except in case of hazardous and environmentally sensitive industries.
  • Quantitative restrictions on imports of manufactured consumer goods and agricultural products were also fully removed.
  • Export duties have been removed to increase the competitive position of Indian goods in the international markets.

B.PRIVATISATION

  • It implies shedding of the ownership or management of a government owned enterprise.
  • Government companies are converted into private companies in two ways
  1. by withdrawal of the government from ownership and management of public sector companies and or
  2. by outright sale of public sector companies.

Advantages:

  • Private companies have a profit incentive to cut costs and be more efficient.
  • Lack of political interference
  • Private firm has pressure from shareholders to perform efficiently
  • Policies to allow more firms to enter the industry and increase the competitiveness of the market.
  • Government will raise revenue from the sale
  • Autonomy in decision making
  • Latest Technology upgradation
  • More capital infusion whenever required
  • Effective managerial control

Disadvantages:

  • A natural monopoly occurs when the most efficient number of firms in an industry is one.
  • Government loses out on potential dividends
  • Private interest
  • Problem of regulating private monopolies
  • Fragmentation of industries
  • Short-termism of private firms

Disinvestment:

  • Privatisation of the public sector enterprises by selling off part of the equity of PSEs to the public is known as disinvestment
  • The purpose of the sale, according to the government, was mainly to improve financial discipline and facilitate modernisation.
  • It was also envisaged that private capital and managerial capabilities could be effectively utilised to improve the performance of the PSUs.

C.GLOBALISATION

  • It is an integration of the economy of the country with the world economy.
  • It is turning the world into one whole or creating a borderless world.

MNCs and Outsourcing:

  • In outsourcing, a company hires regular service from external sources, mostly from other countries, which was previously provided internally or from within the country.
  • With the help of modern telecommunication links including the Internet, the text, voice and visual data in respect of these services is digitised and transmitted in real time over continents and national boundaries.
  • Most multinational corporations, and even small companies, are outsourcing their services to India where they can be availed at a cheaper cost with reasonable degree of skill and accuracy.

PUBLIC SECTOR

  • The public sector is that portion of an economic system that is controlled by national, state or provincial, and local governments
  • Types of public sector enterprises in India:
  1. CPSEs (Central Public Sector Enterprises) – Companies where the direct holding of the Central Government or of other CPSEs is 51% or more
  2. PSBs (Public Sector Banks) – Banks where the direct holding of the Central/State Government or other PSBs is 51% or more
  3. SLPEs (State Level Public Enterprises) – Companies where the direct holding of the State Government or other SLPEs is 51% or more

Role of Public Sector in India

  • Employment generation
  • Share in National Income
  • Share in Capital Formation
  • Improving standard of living of people
  • Producing goods needed by general public at large
  • National Integration
  • Revenue to the government
  • Growth of Ancillary Industries
  • Use of Natural and National resources

Problems in Public Sector

  • Heavy losses
  • Influence of political factors.
  • Work delays.
  • Over-capitalisation.
  • Pricing policy
  • Use of Manpower Resources.
  • Control over employees.
  • Inefficient Management.
  • Higher capital intensity leading to lower-employment generation
  • Capacity underutilization

Suggestions to Improve the Performance

  • Controlling the cost at every level of public sector enterprises.
  • Increase the production
  • Reforms in capital base
  • Increase the standard of public sector enterprises to manage the competition from both domestic and foreign competitors.
  • Identifying redundant manpower and dealing with it through means a retraining, redeployment and encouraging self-employment etc.
  • Technology upgradation

Classification of CPSEs based on performance:

1.Maharatna companies

  • The “Maharatna” category for CPSEs was introduced in 2009 with objective to empower mega CPSEs to expand their operations and emerge as global giants or become Indian Multinational Companies (MNCs)
  • At present, there are seven Maharatna companies — Bharat Heavy Electricals (BHEL), Coal India (CIL), GAIL (India), Indian Oil Corporation, NTPC, Oil and Natural Gas Corporation (ONGC) and Steel Authority of India (SAIL).

Criteria for Maharatna status:

  • Having Navratna status.
  • Average annual turnover of more than Rs. 25,000 crore, during last 3 years.
  • Average annual net worth of more than Rs. 15,000 crore, during last 3 years.
  • Average annual net profit after tax of more than Rs. 5,000 crore, during last 3 years.
  • Should have significant global presence and international operations.
  • Listed on Indian stock exchange with minimum prescribed public shareholding limit under SEBI regulations.

The powers:

  • To incur capital expenditure on purchase of new items or for replacement, without any monetary ceiling
  • To enter technology joint ventures (JVs) or strategic alliances
  • To obtain technology and know-how by purchase or other arrangements
  • To effect organizational restructuring including establishment of profit centre, opening of offices in India/abroad, creating new activity centres etc.
  • To create below Board level posts up to E-9 level and to wind up all below Board level posts.
  • To structure and implement schemes related to personnel and human resource management and training
  • To raise debt from the domestic capital markets and international markets, the latter being subject to the approval of RBI/Department of Economic Affairs
  • To make equity investment to establish financial JVs and wholly owned subsidiaries and undertake mergers and acquisitions (M&As) in India or abroad.

2.The Navratnas

  • Under this scheme, the Government has delegated higher powers to CPSEs having a comparative advantage and the potential to become global players.
  • Presently there are 17  the Navratna CPSEs are in India.

Criteria for Navratna status:

The Miniratna Category – I and Schedule ‘A’ CPSEs, which have obtained ‘excellent’ or ‘very good’ rating under the Memorandum of Understanding system in three of the last five years, and have composite score of 60 or above in the six selected performance parameters, namely,

  • Net profit to net worth
  • Manpower cost to total cost of production/services
  • Profit before depreciation, interest and taxes to capital employed
  • Profit before interest and taxes to turnover
  • Earning per share and
  • Inter-sectoral performance.

The powers:

  • To incur capital expenditure on purchase of new items or for replacement, without any monetary ceiling
  • To enter into technology joint ventures or strategic alliances
  • To obtain by purchase or other arrangements, technology and know-how
  • To effect organisational restructuring including establishment of profit centers, opening of offices in India and abroad, creating new activity centres, etc.
  • Creation and winding up of all posts including and upto those of non Board-level Directors
  • To further delegate the powers relating to Human Resource Management (appointments, transfer, posting etc) of below Board level executives to sub-committees of the Board or to executives of the CPSE, as may be decided by the Board of CPSE.
  • To raise debt from the domestic capital markets and for borrowings from international market, which would be subject to the approval of RBI/Department of Economic Affairs as may be required and should be obtained through the administrative ministry.

3.The Miniratnas (I and II)

  • These categories were Category I and Category II
  1. Category I CPSEs should have made profit in the last three years continuously, the pre-tax profit should have been Rs. 30 crore or more in at least one of the three years and should have a positive net worth.
  2. Category II CPSEs should have made profit for the last three years continuously and should have a positive net worth.

Criteria for Miniratna Status:

  • They have not defaulted in the repayment of loans/interest payment on any loans due to the Government
  • These public sector enterprises shall not depend upon budgetary support or Government guarantee.
  • The Boards of these CPSEs should be restructured by inducting at least three non-official Directors as the first step before the exercise of enhanced delegation of authority.
  • The administrative ministry concerned shall decide whether a public sector enterprise fulfilled the requirements of a category I/category II company before the exercise of enhanced powers.

The powers:

  • Capital Expenditure:
  1. CPSEs Category I: The power to incur capital expenditure on new projects, modernisation, purchase of equipment etc., without Government approval upto Rs. 500 crore or equal to net worth, whichever is less.
  2. CPSEs Category II: The power to incur capital expenditure on new projects, modernisation, purchase of equipment etc., without Government approval upto Rs. 250 crore or equal to 50 % of the net worth, whichever is less.
  • Joint Ventures and Subsidiaries:
  1. CPSEs Category I: The power to incur capital expenditure on new projects, modernisation, purchase of equipment etc., without Government approval upto Rs. 500 crore or equal to net worth, whichever is less.
  2. CPSEs Category II: The power to incur capital expenditure on new projects, modernisation, purchase of equipment etc., without Government approval upto Rs. 250 crore or equal to 50 % of the net worth, whichever is less.
  • The Board of Directors of these CPSEs have the powers for mergers and acquisitions, subject to the conditions.
  • The Board of Directors of these CPSEs have the powers to structure and implement schemes relating to personnel and human resource management, training, voluntary or compulsory retirement schemes, etc.
  • The Chief Executives of these CPSEs have the power to approve business tours abroad of functional directors upto 5 days, duration (other than study tours, seminars, etc) in emergency, under intimation to the Secretary of the administrative ministry.
  • The Board of Directors of these CPSEs have the powers to enter into technology joint ventures, strategic alliances and to obtain technology and know-how by purchase or other arrangements, subject to government guidelines as may be issued from time to time.

PUBLIC-PRIVATE PARTNERSHIP

  • Public-private partnership (PPP) is a funding model for a public infrastructure project such as a new telecommunications system, airport or power plant.
  • The public partner is represented by the government at a local, state and/or national level.

Models of PPP:

Traditional P3s

  • In a traditional P3 agreement, the public component of the partnership acts as a contracting officer.
  • It looks for funding and has overall control of the project and its assets.

Operation and Maintenance P3s:

  • The private component of the partnership operates and maintains the project, while the public agency acts as the owner of the project.

Design-Build P3s

  • A design-build P3 is similar to a client-contractor arrangement.
  • The private partner designs and builds the facility, while the public partner provides the funds for the project.
  • The public partner retains ownership of the project and any assets generated through its use.

Design-Build-Operate P3s

  • The public partner acts as the owner of the installation and provides the funds for construction and operation.
  • If the private partner operates the project only for a limited time before the facility is transferred to the public partner, the arrangement is known as a design-build-operate-transfer agreement.

Design-Build-Finance-Operate P3s

  • The private party provides financing and design, then builds, possesses, and operates the facility.
  • The public partner provides funding only while the project is being used or is active.

Build-Transfer-Operate P3s

  • Under a build-transfer-operate P3, the private partner builds the facility and transfers it to the public partner.
  • The public partner then leases operation of the facility to the private party under a long-term lease agreement.

Build-Own-Operate-Transfer P3s

  • The private partner builds, possesses, and operates the project for a limited time, then the facility is transferred, free of charge and including ownership, to the public agency. This may be known as a build-own-operate, transfer P3.

Build-Own-Operate P3s

  • Under a build-own-operate contract, the private contractor builds, possesses, and operates the facility and also has control over profits and losses generated by the facility.

Lease P3s

  • A lease P3 involves the public owner leasing a facility to a private firm.
  • The private company must operate and provide maintenance for the facility per specified terms, including additions or a remodeling process.

Concession P3s

  • With a concession P3, the private agency operates and maintains the facility for a specific period of time.
  • The public partner has power over the ownership, but the private partner possesses owner rights over any addition incurred while the facility is being operated under its domain

Quiz

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