Overview of Liberalisation in India

LIBERALISATION
Liberalisation in India
Objectives
Reforms under Liberalisation
Impact of Liberalisation

Meaning of Liberalisation
 Liberalisation (or liberalization) is any method of how a
state raises limitations on some private individual
ventures. Liberalisation befalls when something which
was forbidden is no longer forbidden or when
government laws are loosened.
 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.
Jyoti Rastogi (Assistant Professor) 2

Liberalisation in India
 Since the adoption of the New economic strategy in 1991,
there has been a drastic change in the Indian economy.
With the arrival of liberalisation, the government has
regulated the private sector organisations to conduct
business transactions with fewer restrictions.
 For developing countries, liberalisation has opened
economic borders to foreign companies and investments.
Earlier, Investors has to encounter difficulties to enter
countries with many barriers.
 These barriers included tax laws, foreign investment
restrictions, accounting regulations, and legal issues. The
economic liberalisation reduced all these obstacles and
waived few restrictions over the control of the economy to
the private sector.

Objectives of Liberalisation
 To boost competition between domestic businesses
 To promote foreign trade and regulate imports and exports
 Improvement of technology and foreign capital
 To develop a global market of a country
 To reduce the debt burden of a country
 To unlock the economic potential of the country by
encouraging the private sector and multinational
corporations to invest and expand.
 To encourage the private sector to take an active part in the
development process.
 To reduce the role of the public sector in future industrial
development.
 To introduce more competition into the economy with the
aim of increasing efficiency.

Reforms under Liberalisation
 Deregulation of the Industrial Sector
 Financial Sector Reforms
 Tax Reforms
 Foreign Exchange Reforms
 Trade and Investment Policy Reforms
 External Sector Reforms
 Foreign Exchange Reforms
 Foreign Trade Policy Reforms

Positive Impact of Liberalisation
in India
 Free flow of capital: Liberalisation has enhanced the flow
of capital by making it affordable for businesses to reach
the capital from investors and take a profitable project.
 Diversity for Investors: The Investors will be benefitted
by investing a portion of their business into a diversifying
asset class.
 Impact on Agriculture: In this area, the cropping designs
have experienced a huge change, but the impact of
liberalisation cannot be accurately measured. Government
restrictions and interventions can be seen from
production to distribution of the crop.

Negative Impact of Liberalisation
in India
 The weakening of the economy: Enormous restoration
of political power and economic power will lead to
weakening the entire Indian economy.
 Technological Impact: Fast development in technology
allows many small scale industries and other businesses
in India to either adjust to changes or shut their
businesses.
 Mergers and Acquisitions: Here small businesses are
merging with big companies, therefore, the small
companies employees may need to enhance their skilled
and technologically advanced. This enhancing of skill and
the time it might take may lead to non-productivity and
can be a burden to the company’s capital.

Reforms
Taken During
Liberalisation
Financial
Sector
Industrial
Sector
Trade
Sector
Fiscal
Sector

Implications of Liberalisation
 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:
 Liquor
 Cigarettes
 Defence equipment
 Industrial Explosives
 Dangerous Chemicals, drugs, and pharmaceuticals

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 –
 Railways
 Atomic Energy
 Defence

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
 Statutory Liquidity Ratio (SLR) was lowered from 38.5%
to 25%.
 Cash Reserve Ratio (CRR) was lowered from 15% to 4.1%.
II. Competition from new private banks
 The banking sector emerged in the private sector and
many players grabbed the opportunity to compete with
public sector banks.
 This lead to the creation of positive competition and
expansion of the service sector for the consumers.

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-
 The quota system was abolished. Especially on imports
 All import related policies were trashed
 Duties on various imported goods were reduced
 All export duties were withdrawn

THANKS

Overview of Liberalisation in India

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