The basic aim of liberalization was to put an end to those restrictions which became hindrances in the development and growth of the nation. The loosening of government control in a country and when private sector companies’ start working without or with fewer restrictions and government allow private players to expand for the growth of the country depicts liberalization in a country.
Objectives of Liberalization Policy
Economic Reforms during Liberalization
Many sectors were impacted during the course of Liberalization. They were:
1. Industrial Sector Reforms
A number of reformative steps were taken to deregulate the industrial sector. Like,
I. Abolition of Industrial Licensing
The government abolished the licensing requirements of all industries, except for five industries, which are:
II. Contraction of Public Sector
A number of public sector industries which were earlier reserved under governmental control reduced from 17 to 8 in the count. Presently these companies are only 3 in number. Public sector undertaking controls in the sectors mentioned below –
III. De-reservation of Production Areas
The productions areas which were earlier reserved for Small Scale Industries were de-reserved to all. This improved the land efficiency and developed more cultivation area across the country. Farmers were earlier restricted to use area owned by them. Later during privatization, many private sector organizations entered into the sector of farming. Liberalization technically increased the production per hectare and supported the growth of the nation.
IV. Expansion of Production Capacity
The producers were voluntarily allowed to expand their production capacity according to the nature of the market. They were allowed to choose their own crop or product. On the study of the market conditions related to demand and supply the producers were allowed to choose the size of land under cultivation for each crop and had a liberty to plan their production either for the domestic market or international markets.
Other products which had acceptability in international markets were allowed to manufacture. Exports were allowed for all types of crops. Import of latest technology was encouraged to develop more skills in agriculture.
V. Freedom to Import Capital Goods
To upgrade and adopt technology which is more advanced as compared to existing technology, the business houses, and production units were allowed to import capital goods from advanced countries. This helped in increasing the per-acreage cultivation across the country. Farmers and producers of other products were allowed to exchange the technological up gradation.
2. Financial Sector Reforms
Financial Sector includes various financial institutes like Commercial Banks, investment banks, stock exchange operators and foreign exchange dealers.
Following reforms were enforced and initiated in above mentioned financial institutes:
I. Reducing various ratios
II. Competition from new private banks
III. Change in the role of RBI
The ace bank of the country i.e. The Reserve Bank of India became a “facilitator”. Earlier RBI was the regulator of the financial activities in the country.
IV. De-regulation on interest rates
Banks were allowed to set their own interest rates on all business and commercial borrowings. But for saving bank deposits, the control was with the central government.
3. Tax Reforms / Fiscal Reforms
Fiscal Reforms are the policies set for the government’s taxation and public expenditure policies. All macroeconomic related issues are part of fiscal policies designed by the central government. Prior policy simplified the tax structure and taxation rates were dropped and reduced for convenience of the taxpayers.
This increased the tax revenue for the government and reduced all tax evasion strategies which taxpayers used to follow to skip tax liability. As the tax revenue and other revenues increased for the government, correspondingly government started developing all the areas which were either underdeveloped or undeveloped.
4. Foreign Exchange Reforms / External Sector Reforms
All foreign exchange policies and foreign trade policies were covered in external sector reforms. These were developed to increase international trade between countries. Various reforms were initiated in this sector to develop the foreign exchange reserves. Some of the reforms were:
I. Devaluation of Rupee
The value of the rupee was deliberately devalued to encourage exports and discourage imports. In 1991, to increase foreign exchange reserves, exports were promoted and all relevant benefits were provided to exporters.
II. Other Measures-
World Trade Organization (WTO)
The world trade organization was constituted in lieu of The General Agreement on Trade and Tariff (GATT). In 1948, GATT was established with an association of 23 countries as a global trade organization to administrate all international and multinational trade agreements by providing equal opportunities to all the countries in international markets to encourage trading between the countries. This lead to a few transactional problems.
Some functions of the WTO are,
Solved Example for You
Question: What were the economic reforms during Liberalization?
Answer: Economic Reforms during Liberalization. Many sectors were impacted during the course of Liberalization. They were: