Economic liberalization in India - Policy Regimes, Indian Economy | Indian Economy - B Com PDF Download

The economic liberalization in India initiated in 1991 refers to the economic liberalization of the country’s economic policies, with the goal of making the economy more market oriented and expanding the role of private and foreign investment. Specific changes include a reduction in import tariffs, deregulation of markets, reduction of taxes and greater foreign investment. Liberalization has been credited by its proponents for the high economic growth recorded by the country in the 1990s and 2000s. Its opponents have blamed it for increased poverty, inequality and economic degradation. There exists lively debate in India as to what made the economic reforms sustainable.
Indian Government coalitions have been advised to continue liberalization. Before 2015 India grew at slower pace than China which has been liberalizing its economy since 1978. But in the year 2015 India outpaced China in terms of GDP growth rate. The Mckinsey Quarterly states that removing main obstacles “would free India’s economy to grow as fast as China, at 10% a year”.
We have seen landmark shift in Indian Economy since the adoption of new economic policy in 1991. This had far reaching impacts on all spheres of life in India. There can be no concrete conclusion about their impact on Indian people. This turns out to be more of an ideological debate like Capitalism vs. Socialism. But there is no doubt in the fact that those reforms were un-avoidable and very compelling. There was in fact, similar wave all across the globe after disintegration of USSR and end of the Cold War. Many Post – Colonial democratic regimes, which were earlier sheltered by USSR, lost their umbrella. They had no option, but to fall in the line to new unipolar world order dictated by USA. Even China in late 1980s adopted Open Door Policy “through which it liberalized its economy by shedding communist mentality completely. South East Asian economies also reformed their economy and started engaging more with global economy. These along with China, pursued export led growth whereas Indian economy still relies almost wholly on domestic consumption.

Reasons Behind Economic Reforms

Before the process of reform began in 1991, the government attempted to close the Indian economy to the outside world. The Indian currency, the rupee, was convertible and high tariffs and import licensing prevented foreign goods reaching the market. India also operated a system of central planning for the economy, in which firms required licenses to invest and develop.
The labyrinthine bureaucracy often led to absurd restrictions-upto 80’s agencies had to be satisfied before a firm could be granted license to produce and the state would decide what was produced, how much, at what price and what source of capital were used. The government also prevented firms from laying off workers or closing factories.
The central pillar of the policy was import substitution, the belief that India needed to rely on internal markets for development, not international trade – a belief generated by a mixture of socialism and the experience of colonial exploitation. Planning and the State, rather than markets, would determine how much investment was needed in which sectors.

Crisis

The assassination of Prime Minister Indira Gandhi in 1984, and later of her son Rajiv Gandhi in 1991, crushed international investor confidence on the economy that was eventually pushed to the brink by the early 1990s.
As of 1991, India still had a fixed exchange rate system, where the rupee was pegged to the value of a basket of currencies of major trading partners. India started having balance of payments problem since 1985, and by the end of 1990, it was in a serious economic crisis.
The Government was close to default, its central bank had refused new credit and foreign exchange reserves had reduced to the point that India could barely finance three weeks’ worth of imports.
A balance of payments crisis in 1991 pushed the country to near bankruptcy. In return for an IMF bailout, gold was transferred to London as collateral, the Rupee devalued and economic reforms were forced upon India that low point was the catalyst required to transform the economy through badly needed reforms to unshackle the economy.
Controls started to be dismantled, tariffs, duties and taxes progressively lowered, state monopolies broken, the economy was opened to trade and investment, private sector enterprise and competition were encouraged and globalization was slowly embraced.
The reforms process continues today and is accepted by all political parties but the speed is often held hostage by coalition politics and vested interests.

Reforms

The Government of India headed by Narasimha Rao decided to usher in several reforms that are collectively termed as liberalization in the Indian media. Narasimha Rao appointed Manmohan Singh as special economic advisor to implement liberalization.
The reforms progressed furtherest in the areas of opening up to foreign investment, reforming capital markets, deregulating domestic business, and reforming the trade regime. Liberalization has done away with the license regime (investment, industrial and import licensing) and ended many public monopolies, allowing automatic approval of foreign direct investment (FDI) in many sectors.
Introducing SEBI Act of 1992 and Securities Laws (Amendment) which gave SEBI the legal authority to register and regulate all security market intermediaries. Starting in 1994 of the National Stock Exchange as a computer – based trading system which served as an instrument to leverage reforms of India’s other stock exchanges. The NSE emerged as India’s largest stock exchange by 1996. Reducing tariffs from an average of 85 percent to 25 percent and rolling back quantitative controls (the rupee was made convertible on trade account).

Encouraging foreign direct investment by increasing the maximum limit on share of foreign capital into joint ventures from 40 to 51 percent with 100 percent foreign equity permitted in priority sectors.

Stream lining procedures for FDI approvals, and in at least 35 industries, automatically approving projects within the limits for foreign participation. Opening up in 1992 of India’s equity markets to investment by foreign institutional investors and permitting Indian firms to raise capital on international markets by issuing Global Depository Receipts (GDRs). Marginal tax rates were reduced. Privatization of large, inefficient and loss-inducing government corporations was initiated.
The United Front (UF) government continued with privatization, reduction of taxes, a sound fiscal policy aimed at reducing deficits and debts and increased initiatives for public works.

The UF Government attempted a progressive budget that encouraged reforms, but the 1997 Asian financial crisis and political instability created economic stagnation.
Cities like Gurgaon, Bangalore, Hyderabad, Pune and Ahmedabad have risen in prominence and economic importance, became centres of rising industries and destination for foreign investment firms.

Annual growth in GDP per capita has accelerated from just 1 1/4  percent in three decades after independence to 7 1/2  percent currently, a rate of growth that will double average income in a decade.

Effects of Liberalization

Industrial Growth Rate

India has transitioned to be a service led economy, directly from an agrarian one. Foreign companies get free access to Indian markets and made domestic products un-competitive.

Impact on Agriculture

Worldwide implicit compulsion to develop Food Processing Industry is another landmark effect of globalization. Information technology being incorporated into agriculture to facilitate farming.

IT Industry

Software, BPO, KPO, LPO industry boom in India has helped India to absorb big chunk of demographic dividend, which otherwise could have wasted.

Banking

Private banks such as ICICI, HDFC, Unit Linked Insurance plans, Travel Insurance, etc. have contributed significantly.

Impact on small scale in India

Colonization can be considered as first wave of globalization. With liberalization list of reserved items was substantially curtailed and many new sectors were thrown open to big players.