Public Administration Challenges: Liberalisation, Privatisation & Globalisation PDF

# Chapter 7: Public Administration Challenges: Liberalisation, Privatisation and Globalisation ## Need for Liberalisation * India's performance in the global market has been very dismal, with no more than 1% global market presence. * Despite vast natural resources, extensive manpower and tremendou...

# Chapter 7: Public Administration Challenges: Liberalisation, Privatisation and Globalisation ## Need for Liberalisation * India's performance in the global market has been very dismal, with no more than 1% global market presence. * Despite vast natural resources, extensive manpower and tremendous potentiality, India's contribution to the world trade was a mere 0.53% in 1992. * The planned economic growth backed by control has achieved some reconstruction in the last five decades. Despite this, India still remains underdeveloped with: * Low NNP * Chronic unemployment * Low per capita income * A considerable percentage of the population under the poverty line * Low capital formation * Marginal exports * Increasing imports, resulting in an increasing trade deficit * Acute decline of foreign exchange reserve * Mounting foreign debts * High debt service cost * Low level of technological base * Grave internal economic situation * Poor external economic image * Insignificant innovations. * The vicious circle of underdevelopment will remain for many years to come unless appropriate solutions are found for these problems. * Liberalisation was identified as a primary step to finding solutions. ## Public Administration Challenges: Liberalisation, Privatisation and Globalisation * Former Prime Minister Narasimha Rao, and former Finance Minister Dr. Manmohan Singh initiated this policy change. * The immediate driving factors for this policy change include: * Global change * The state of the Indian economy * The trade deficit ## Global Change * The tremendous changes that occurred globally in the past decades, particularly during the last decade, made it necessary for every nation to adapt its economy to this rapidly changing environment. * Countries started thinking in terms of the global economy and the global market. * The European Economic Community became the largest single market in the world, while the Gulf War opened up a door for increased cooperation and integration between the EEC community and America. * The United States and Canada formed an integrated trade zone. * Japan, despite its large trade surplus, is still accepted as America's strong trading partner, while the United States granted the 'Most Favoured Nation' status to China. * A global philosophy of business is emerging, allowing no country to resist the forces of globalisation. * The Asia-Pacific block is emerging and an Asian Common Market philosophy is gaining popularity. * The countries of Japan, Singapore, South Korea, Taiwan, and Hong Kong have enjoyed successful business operations. * India needs to adopt a policy to adapt itself to the emerging global market. * Economic liberalisation in China, which showed tremendous results in under a decade, has been an eye-opener for India. * Any country wanting to operate in the global market needs to liberalise its economy and foster a global approach to boost its market business, as a global business and market philosophy is emerging. * Countries are gradually relaxing their controls and regulatory measures, and privatisation of business is becoming the order of the day. * Companies need to be prepared to adopt a global corporate philosophy and update their capability to compete or remain complementary or ancillary to survive. * India recognised this fact and initiated liberalisation due to: * Fast-changing business globally * Technological changes * Social, political, environmental, cultural, geographic, and most importantly, economic changes. ## Position of the Indian Economy * India has faced grave economic crises and external pressure for foreign exchange, alongside an internal debt trap that began in 1986. * The NRS took back about 1.4 billion US dollars, the country faced an internal and external debt trap, and the foreign exchange situation was disastrous. * Dr. Manmohan Singh, the then Union Finance Minister, had the task of introducing ways and means to recover the ailing monetary system. * The changing of exchange rate structure was the first weapon. * While foreign exchange reserves were not sufficient enough even for a few weeks, imports of essential goods were unavoidable. * Developing an industrial base and increasing the industrial production was required to combat the declining economic trend. * The country was also in need of: * A latest technology base * Greater innovation * Capital formation * Greater employment opportunities for its people * Latest know-how to suit the global market * Inflow of foreign capital. * Foreign investors were unwilling to invest in India without appropriate liberalisation. ### The effect of increasing the inflow of foreign capital included: * Increased production and export of goods. * Increased production of substitution goods for imports. * Reduced external debts. * Improving the quality base of goods and services to global standards. * Increased overall economic activities in the country. * Indian had high expectations from its public sector units in the past, but many of these units turned themselves to be white elephants, exerting pressure on the exchequer and accumulating losses. * The situation called for steps to make these units viable or to disinvest them. ## The Path of Liberalisation * The Government of India needed to: * dismantle the restrictive walls imposed by the bureaucrats. * Establish a different image (a market-oriented economy) in the eyes of foreign governments and investors. * Maintain a private-sector friendly image within the country. * Check the twin problems of unemployment and inflation. * The objective was two-fold: * To gain the confidence of foreign investors. * To appease the Indian public's fears about the entry of foreign investors into India. * The LPG model of development was introduced in 1991 by Dr. Manmohan Singh, the then Finance Minister. ### Key changes at the domestic level included: * Opening of sectors previously reserved for the public sector to the private sector. * Transferring loss-making units to the private sector, which failed due to the lack of takers. * The Government started the disinvestment of highly profit-making PSUs and used the money to reduce fiscal deficits. * Several social constraints prevented the Government from pursuing its privatisation plan. * The government succeeded in liberalizing the economy to the private sector - both domestic and foreign by: * Permitting the private sector to set up individual units without a license. * Abolishing the threshold limit of assets in respect of MRTP companies and dominant undertakings. * Granting approval for direct foreign investment up to 51% in high priority areas. * Allowing foreign investment proposals involving more than 51% equity with prior government clearance. * Lifting restrictions on hiring foreign technicians. * Enabling foreign testing of indigenously developed technologies. * Referring chronically sick public sector enterprises to the Board for Industrial and Financial Reconstruction to formulate revival / rehabilitation schemes. * Introducing social security measures to protect the interests of workers affected by the rehabilitation packages. * Granting autonomy to PSU managements and making the Boards of public sector companies more professional. * Encouraging the export of goods and reducing import duties and other barriers. * The LPG Model gave a bigger role to the private sector and envisaged a much larger quantum of foreign direct investment. * It focused on export-led growth instead of import substitution and aims at reducing the role of the State significantly. ## Criticisms of the LPG Model of Development * The LPG Model's focus on the corporate sector (which accounts for only 10% of GDP) was too narrow. * The model bypassed agriculture, agro-based industries, and major employment generators. * It did not clearly define a policy to develop infrastructure, particularly the infrastructural needs of agro-exports. * Allowing multinationals free entry into the consumer goods sector could hurt the interests of small and medium sector enterprises engaged in the production of consumer goods. * It could lead to labor displacement in the small sector due to the unbridled entry of MNCs. * Facilitating imports opened the import window too widely, exceeding the benefits of rising exports and leading to a larger trade gap. * The capital-intensive approach of the model has raised concerns about its employment potential. * Some argue that it may cause unemployment in the short run, but it will take care of it in the long run. However, the length of "the long run" is unspecified. * This model is not applicable to the East Asian Miracle— Japan, South Korea, Taiwan, Indonesia, Malaysia, and China. * Japan did not follow the IMF-World Bank Model, based on free market economy, open door policies, and liberalisation. Japan practiced a limited market mechanism with the state playing an active role. * South Korea and Taiwan emulated Japan's approach. * Malaysia and Indonesia also followed this path for several years. * China's model of growth is rooted in its traditions, and its decision to globalise is motivated by the desire to use foreign markets to solve internal bottlenecks. * China follows a path of self-reliance, combining an open economy with self-reliance and avoiding excessive dependency. * The Chinese model cannot be classified as a neo-classical liberalisation model. * The LPG Model followed the IMF-World Bank prescription of stabilisation and structural adjustment. * Considering the experience of Latin America, Africa, and East Asian countries, there is a need to question the model's effectiveness. * Dudley Seers suggested three parameters to measure a country's developmental stage: poverty, unemployment, and inequality. * The experience of the LPG Model does not provide conclusive evidence of substantial improvement in these parameters. However, some have become worse. ## The Impact of Liberalisation, Privatisation, and Globalisation (LPG) on Life Insurance Corporation of India (LIC) * The nationalization of insurance business resulted in the establishment of the Life Insurance Corporation of India in 1956 as a wholly-owned corporation of the Government of India. ### Objectives of LIC * Spreading life insurance more widely in rural areas and to socially and economically backward classes. * Reaching all insurable persons in the country and providing them with adequate financial coverage against death at a reasonable cost. * Maximizing the mobilization of people's savings by making insurance-linked savings adequately attractive. * Investing funds to the best advantage of the investors as well as the community as a whole, keeping in view national priorities and the obligation of attractive returns. * Meeting the various life insurance needs of the community that would arise in the changing social and economic environment through its family schemes and group insurance schemes. * Overcoming challenges and establishing strategies to overcome these challenges and issues faced by the Indian life insurance industry. * Achieving steady growth despite factors that affect its abnormal growth and progress: * High illiteracy percentage * Improper awareness among the general public regarding savings * Least percentage of employment opportunities * Low wage and salary pattern The LIC has achieved relatively little compared to life insurance industries in developed foreign countries due to: * A lack of quality strategies. * Lack of standard education and awareness about savings. * Low capital per income. * Lack of employment opportunities. The introduction of the new economic policy in 1991 has transformed the Indian life insurance industry. Many private players have entered the industry, challenging competitors with new strategies. ## Research Methodology * The research design is descriptive. * Data is collected from secondary sources such as textbooks, national and international objects, dailies, and annual reports of LIC. * Statistical tools include the method of least squares and linear trends. ## Objectives * Comparing the overall performance of the LIC between pre- and post-LPG era. * Examining the current status, volume of competition, and challenges faced by the LIC. ## Limitations * Data is secondary. * Analysis is based on information rendered by LIC alone. * Suggestions may not be extended to other agencies with similar programs as LIC. ## Status and Position of India Life Insurance Industry in the Pre-LPG Era * Life insurance was introduced in 1818 with the formation of Oriental Life Insurance Company in Calcutta. * The company was established mainly to help widows of European kins. * In 1868, 285 companies were doing insurance business in India. * 174 companies ceased to exist after the enactment of the Insurance Act 1870 by the British parliament. * Indian lives were insured at substandard rates with premiums 15-20 % higher. ## First Indian Company * The pioneering efforts by Raja Ram mohan Ray, Dwarakanath Tagore, Ramatam Lahiri, Rustomji Cowasji, and others led to the inclusion of Indians in the insurance business. * The first Indian insurance company, called the Bombay Life Insurance Society, started operations in 1870. * Oriental Government Security Life Insurance Company, with Sir Phirozshah Mehta as one of its founder directors, was established in 1874. * Bombay Life Assurance Society replaced Oriental Government Security Life Insurance Company in 1870. ## Pre-independence Scenario * The patriotic movement led to the entry of many Indian companies into the insurance arena. * Eminent figures like Mahatma Gandhi and Pandit Nehru encouraged Indians to enter the fray. * From 1914 to 1940, the number of companies grew from 44 to 195 and the insurance business in force from 22.44 crores to 304.03. * The Life Fund grew from 6.36 crores to 62.41 crores. * The Insurance Act 1938 heavily regulated the life insurance industry. * The life insurance business was steady except for a setback in 1947-1948. * There were 209 life insurance companies in 1948 with 712.76 crores of business in force. * The life fund grew to 150.39 crores. ## Nationalisation of Life Insurance * Despite the mushroom growth of many insurance companies and a business in force of 30,16,000 policies, India faced challenges including: * Extremely low per capita insurance (8.00 in 1944). * Involvement of some companies in malpractices. * Several companies going into liquidation. * Big industrial houses controlling the insurance and banking business. * Interlocking of funds between banks and insurance companies. * The nation under the leadership of Pandit Jawaharlal Nehru was moving towards socialism with the aim of spreading life insurance to rural areas and channeling life insurance funds to national-building activities. * The government of India nationalized the life insurance industry in January 1956, merging about 250 corporations and forming the Life Insurance Corporation of India. ## Post Nationalisation Trend * After completing the integration of about 250 life insurance companies, the LIC of India achieved various objectives of nationalization. * The table shows the LIC's achievements in 40 years: | S/No | Particulars | 1957 | 1999 | |---|---|---|---| | 1 | Annual Business | 336.3 Crores | 459201 Crores | | | Sum assured | 8,00,000 | 91726000 | | | Policies | 14 Crores | 16136 Crores | | | First year premium | 75606 Crores | 14857000 | | 2 | Business in force | 1477 Crores | 4171 Crores | | | Sum assured | 5,686,000 | 21671000 | | | Policies | 74 Crores | 127389.06 Crores | | | Renewal premium | 5.29 Crores | 41040 Crores | | 3 | Group business in force | 69558 Crores | 21671000 | | | Sum assured | 4.28 Crores | 3010 crores | | | No. of lives | 4.58 Crores | 177970 Crores | ## Setting-up of IRDA and the Entry of Private Insurance Companies * The government and public were not completely satisfied with the LIC's progress. * The government signed the GATT accord, becoming committed to opening the insurance sector to private, local, and global operators. * A committee led by R. N. Malhotra was appointed to look into the aspects of the insurance industry, finding that: * Only 22% of the insurable population was insured by LIC. * The monopoly lacked sensitivity towards policy holders and lacked scope for product innovation and service improvement. * The committee recommended several measures to revamp the LIC and four subsidiaries. * The Insurance Regulatory and Development Authority Act, 1999, was enacted, allowing outside insurance companies to operate in India with an Indian partner. * Foreign insurance companies can enter into the insurance sector in India as a joint venture with an Indian partner, with a maximum contribution of 26% of the joint venture capital. ## Progress of the Indian Life Insurance Industry in the Post-LPG Era * The Life Insurance Industry of India witnessed a marvelous growth. * LIC introduced several new schemes and products to meet the stiff competition from private insurance companies. * Private insurance companies offered attractive schemes and products to gain a share of the market. * LIC, with its powerful network, conducted regular awareness programs to attract clients. * Private life insurance companies were also increasing their coverage. * This healthy competition motivated more investment in insurance. * Pre- and post-LPG era have shown significant growth, efficiency, and progressiveness in Indian life insurance business. ## Table: New Business of LIC in Crores of Rupees | Year | Business in India | Business outside India | Total business | |---|---|---|---| | 1957 | 277.67 | 5.40 | 283.07 | | 1963 | 734.72 | 11.24 | 745.96 | | 1970 | 1025.80 | 10.28 | 1036.08 | | 1974 | 2575.01 | 11.32 | 2586.33 | | 1975 | 3100.70 | 11.73 | 3112.43 | | 1976 | 5,373.02 | 12.32 | 5385.34 | | 1980 | 7998.16 | 11.22 | 8009.38 | | 1981 | 8787.26 | 14.41 | 9801.67 | | 1984 | 11917.20 | 18.30 | 11945.50 | | 1985 | 13033.38 | 22.64 | 13056.02 | | 1989 | 33473.96 | 45.74 | 33519.70 | | 1990 | 43,490.34 | 100.00 | 43,590.34 | | 2000 | 80560.85 | 199.07 | 80754.95 | | 2001 | 203049.39 | 179.01 | 230228.40 | | 2002 | 288503.80 | 212.69 | 288716.49 | | 2003 | 292544.83 | 298.00 | 292842.83 | | 2004 | 330819.33 | 341.56 | 330160.89 | | 2005 | 304472.12 | 405.33 | 304877.45 | | 2006 | 465514.87 | 416.10 | 465930.97 | | 2007 | 514227.66 | 432.78 | 514660.45 | ## Analysis and Interpretation * The expected LIC business in India for the year 2012 is 714014.354 crores, indicating an increasing trend. * The expected LIC business outside India for the year 2012 is 690.90 crore, also indicating an increasing trend. * The expected total LIC business for the year 2012 is 695276.73 crores, also indicating an increasing trend. ## Conclusion * The LPG Model of Development is having a positive influence on the performance of the LIC of India.