Hello, students, welcome to the beautiful world of economics with our beautiful lesson – Globalization and the Indian Economy. So let us begin with this lesson.

Dear students, we all know that in 1947 India achieved independence. This lesson is all about India’s journeys from 1947 to this day, wow, and in this journey we shall briefly halt in the year 1991. India before 1991 was a black and white country, and India after 1991 is a colourful and vibrant country. What led to this transformation?

Before we understand all about this, first let us visit the early 20^th century world, and find out what the world economy was then. During the early 20^th century, production was largely organized within the countries. What this meant was countries like USA and Europe concentrated on the production of machinery and technology. Countries like Brazil specialized in the production of coffee, South Africa was well known for its gold and diamonds. Australia well known for its dairy products, and India specialized in the production of agro based commodities.

Most countries were closed economies, this means these economies had minimum trade relation with the outside world. So we had limited imports and limited exports, except for essential goods we kept our contact with the rest of the world to a bare minimum. Trade was the main channel connecting the distant countries. Colonies like India which were under the British rule exported raw materials and food stuffs and imported finished goods.

Then came India’s independence and the post independent stage. After independence India adopted the mixed economy. In mixed economy the public and the private sector co-exist. The public sector is owned and run by the government. The private sector is owned and managed by the private individuals. The strategic and basic industries were controlled by the public sector, for example, industries like the defence and telecommunication, the railways. The other industries were controlled by the private sector. The private sector was not allowed in the industries reserved with the public sector. Also the government protected its own industries from the private sector and the foreign investment feeling that these industries were more into the profit motive than the welfare of the people. The public sector in the meantime was in dire needs of additional capital as well as modern technology. Most public sector companies needed to increase their profit margins.

Then in 1991 came the critical financial situation of India. From 1947 to 1991, India’s import bills were very high and our export earnings were very low. Our imports majorly consisted of oil from the Middle East countries. And another big import was machinery and technology from USA and Europe. Our exports consisted of raw materials and food grains. Before 1991 our biggest export partner was USSR. But post 1991, USSR disintegrated into Russia and 14 different countries. So our export earnings fell.

In 1990, Iraq invaded Kuwait for the control on oil wells. In 1991 US began an aerial raid to drive back the Iraqi troops. Our primary sellers, Iraq, Kuwait and USA were at war with each other.  And this definitely impacted the Indian economy because our oil bills escalated. By January 1991 our forex reserves were only at $1.2 billion and this depleted to half by June. Our forex was barely enough to last roughly for three weeks of essential imports.

Dear students, summing up India’s economy in the pre 1991 era. Number one, we had losses in the public sector companies. We had restrictions on the private sector as well as on foreign trade as well as restrictions on foreign investments. Also we had a problem of low forex reserves. India approached the World Bank to bail us out. And we asked the World Bank for a loan. The World Bank agreed but on the condition that India open up her markets for foreign trade and foreign investment. And India agreed to open up for foreign trade as well as foreign investments, and how did we do this. In 1991 July 24, the government of India introduced the new economic policy keeping in mind three objectives. The objective number one was L, the second objective was P and the third objective was G. L stands for Liberalization, P stands for privatization and G stands for Globalization.

In the coming modules of the lesson we shall understand each one of them beautifully.