Economic Liberalization in India

Introduction

“The economic liberalisation in India refers to the liberalisation of the country's economic policies with the goal of making the economy more market and service-oriented and expanding the role of private and foreign investment”.

For the developing countries, liberalisation has opened economic borders to foreign companies and investments. Earlier, the investors had to encounter difficulties to enter countries with many barriers. These barriers included tax laws, foreign investment restrictions, acco`unting regulations, and legal issues. Economic liberalisation reduced all these obstacles and waived a few restrictions over the control of the economy to the private sector. The reforms have also been criticised for worsening rural living standards and unemployment and for increasing inequality and concentration of wealth.

Background

• Indian economic liberalisation was part of a general pattern of economic liberalisation occurring across the world in the late 20th century.
• Indian economic policy after independence was influenced by the colonial experience and by those leaders', particularly
• The policy tended towards protectionism, with a strong emphasis on import substitution industrialization under state monitoring, state intervention at the micro level in all businesses especially in labour and financial markets, a large public sector, business regulation, and central planning.
• Although some attempts at liberalisation were made in 1966 and the early 1980s, a more thorough liberalisation was initiated in 1991.
• The reform was prompted by a balance of payments crisis that had led to a severe recession and also as per structural adjustment programs for taking loans from IMF and World Bank.

Features of liberalization

Starting phase of liberalization

• Pre-liberalization policies: Licence Raj established an "irresponsible, self-perpetuating bureaucracy" and corruption flourished under the system.
  • Only four or five licences would be given for steel, electrical power and communications, allowing license owners to build huge and powerful empires without competition. 
  • A huge public sector emerged, allowing state-owned enterprises to incur record losses without being shut down.
• 1966 liberalisation attempt: In 1966, due to rapid inflation caused by an increasing budget deficit accompanying the Sino-Indian War and severe drought, the Indian government was forced to seek monetary aid from the International Monetary Fund (IMF) and World Bank.
  • Pressure from aid donors caused a shift towards economic liberalisation, wherein the rupee was devalued to combat inflation and cheapen exports and the former system of tariffs and export subsidieswas abolished.
• Economic reforms during 1980s: As it became evident that the Indian economy was lagging behind its East and Southeast Asian neighbours, the governments of Indira Gandhi and subsequently Rajiv Gandhi began pursuing economic liberalisation.
  • The governments loosened restrictions on business creation and import controls while also promoting the growth of the telecommunications and software industries.
  • Reforms under lead to an increase in the average GDP growth rate from 2.9 per cent in the 1970s to 5.6 per cent, although they failed to fix systemic issues with the Licence Raj.

Major reform of Liberalisation in 1991

• Commercial banks were given the freedom to determine interest rates. Previously, the Reserve Bank of India used to decide this.
  • The investment limit for small scale industries was raised to Rs. 1 crore.
• Indian industries were given the freedom to import capital goods like machinery and raw materials from foreign countries.
  • Previously, the government used to fix the maximum production capacity of industries. Now, the industries could diversify their production capacities and reduce production costs. Industries are now free to decide this based on market requirements.
• Abolition of restrictive trade practices: Previously, companies with assets worth more than Rs.100 crore were classified as MRTP firms (as per Monopolies and Restrictive Trade Practices (MRTP) Act 1969), and were subject to severe restrictions. These were lifted.
• Industrial licensing and registration were removed: as per this, the private sector is free to start a new venture of business without obtaining licenses except for the following sectors;
  • Cigarette
  • Liquor
  • Industrial explosives
  • Defence equipment
  • Hazardous chemicals
  • Drugs

Impacts of liberalization

• On Small Scale in India: After independence, government attempted to revive small scale sector by reserving items exclusively for it to manufacture. With liberalization list of reserved items was substantially curtailed and many new sectors were thrown open to big players.
• On Service sector: In this case liberalization has been boon for developing countries and bane for developed ones. Due to historic economic disparity between two groups, human resources have been much cheaper in developing economies.
• This was further facilitated by IT revolution and this all culminated in exodus of numerous jobs from developed countries to developing countries.
• Other Impacts are;
  • Increased foreign direct investment.
  • Reduced the monopoly of the public sector.
  • Increased employment opportunities.
  • Increased international competitiveness of industrial production.
  • Reduced rates of interest and tariffs.
  • Development in technology due to use of foreign technology in industrial applications
  • Decreased the debt burden of the country.
  • Increased dependence on other nations for forex, technology etc

Consequences

• Effected small producers: Liberalizationincreased competition in the Indian market between foreign companies and domestic companies. Some small producers were decimated due to global competition.
• Several industries like the manufacturing of batteries, plastic toys, tyres, MSMEs, etc were shut down, which led to joblessness.
• Indian manufacturing sector as a whole suffered but the services sector benefitted.
• Low employment generation: Reform led growth has not created sufficient employment and though growth is substantial, employment generation has not been in commensuration with growth.
• Public investment in the agriculture sector mainly especially in infrastructure like irrigation, power, roads, market linkages, R&D was reduced in the reform period and this was the biggest drawback of economic reforms.
• Lead to Farmer Suicides: Small and marginal farmers have been affected adverselydue to which there has been increasing incidence of suicides of cotton farmers in the Deccan part of country.
• Industrial sector also suffered because products that were manufactured in India were not world class and cheaper imports replaced the demand for domestic goods.
• Protectionist policies adopted by developed countries have not resulted in level playing fieldand affected the export income of developing countries like India.
• Because of the reduction in tariff and because of the pressure from multilateral lending institutions, overall there is the negative impact on development and welfare expenditure.

Present situation

• The World Economic Outlook Report 2021, states that the Indian economy is expected to grow by 5% in 2021 and 6.9% in 2022.
• However, the pandemic has massive unemployment in the informal sector and poverty is increasing after decades of decline.
• The social sectors of health and education have lagged behind and not kept pace with our economic progress.
• Too many lives and livelihoods have been lost that should not have been, during the pandemic.
• Inspector Raj is set to make a comeback through the policy for e-commerce entities.
• India is back to the old habits of borrowing excessively or extracting money (in form of dividends) from the RBI to finance the fiscal deficit.
• The migrant labour crisis has laid bare the gaps in the growth model.
• India foreign trade policy is again suspecting trade liberalisation, as India has already decided to opt-out of the 16-nation Regional Comprehensive Economic Partnership (RCEP) trade deal.

Way forward

• Making Bussiness friendly Policies: the Bussiness will flourish only when there are policies supporting them.
• Provide adequate Infrastructure: lack of proper infrastructure leads to
• Take help of civil societies: Intervention of NGOs can make liberalization awareness to rural areas and small bussinesses and industries can be benefitted.
• Conserve local culture: India has a diverse cultural attachment with their people hence the growth is so associated with it. Liberalization can lead to effect Indian handicrafts market by intervention of foreign goods.
• Financial support to local artisans can make their industry grow.
• Laws and regulations: Legal backing to restore Indian market is necessary for GDP growth.
• Making special economic zones: Special economic zones are better alternative for industrial sector, where government should provide them facilities for establishment.

Conclusion

The focus on self-reliance and lack of investment in R&D acted as obstacles to technological development and hence led to the production of inferior quality of goods. There is strong belief that foreign merchandises are superior to Indian goods is still predominant in Indian society. It is well established that the condition of the nation after two centuries of exploitation and a shocking separation must be kept in mind before evaluating the progress of the continual industrial policy. Many factors like lack of tactical skills, low literacy levels, unskilled labour, and absence of technology were significant aspects of Indian economy before independence. It is said that, Industrial plans and policies and their revival has vital role for the economic growth of any country.