LIBERALISATION

WHAT IS LIBERALISATION?
Liberalisation is the process or means of the elimination of control of the state over
economic activities. It provides a greater autonomy to the business enterprises in
decision-making and eliminates government interference. Liberalization
was introduced to open up various sectors of the economy.

The economic liberalisation in India refers to the economic liberalization 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.

INTRODUCTION

▪ The economic liberalisation in India denotes the continuing financial reforms

which began since July 24, 1991.

▪ It was believed that the market forces of demand and supply would
automatically operate to bring about greater efficiency and the economy
would recover. This was to be done internally by introducing reforms in the
real and financial sectors of the economy and externally by relaxing state
control on foreign investments.

▪ Some liberalisation proposals were prefaced in the 1980s in areas of export-

import policy, technology up-gradation, fiscal policy, and foreign investment,
industrial licensing, and economic reform policies launched in 1991 were more
general.

▪ There are a few significant areas, namely, the financial sector, industrial sector,
foreign exchange markets, tax reforms, and investment and trade sectors that
gained recognition in and after 1991.

▪ 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, accounting regulations, and legal issues.

▪ This led to an increase in foreign investment and high economic growth in the
1990s and 2000s. From 1992 to 2005, foreign investment increased 316.9%,
and India's gross domestic product (GDP) grew from $266 billion in 1991 to
$2.3 trillion in 2018.
 Some of the major objectives of liberalisation in 1991 are listed
below: -

Boost competition between domestic firm

promote foreign trade and regulate import

and export
Develope a global market of a country

Reduce the debt burden of a country

OBJECTIVES Unlock the economic potential of a country by

encouraging the private sector and MNCs

reduce the role of public sector in future

industrial development

Introduce more competetion into the

economy with the aim of increasing efficiency

To improve the technology and foreign

capital

MEASURES TAKEN DURING THE REFORM: -

Following are measures in particular sector that were taken in during

liberalisation in 1991: -

Fiscal stabilisation: Fiscal stabilisation is an essential precondition for the success of

economic reforms. A reduction in the Central Government’s fiscal deficit was therefore
critical for the reforms to take off which had reached to 8.4% in 1990-91. The following
steps were taken to reduce the fiscal deficit.

1. Abolition of export subsidies in 1991-92 and the partial restructuring of

fertilizer subsidy in 1992-93.
2. Budget support to loss making public-sector units in the form of
government loans to cover their losses was progressively phased out.
3. Certain development expenditure was restructured including expenditure
on social an economic infrastructure.
De-licensing of items reserved for MSME Sector: Since 1991, the ministry of
Commerce and industry was progressively de-licensing the items reserved for MSME
sector through a forward looking-policy. Over the years since 1991, the list of item
manufacturing by MSME sector was reduced from over 800 to nil by April 2015. The
items which were reserved consisted of pickles & chutney, mustard oil (except solvent
extracted), groundnut oil wooden fixtures, exercise books and registers, wax candles,
laundry soaps, glass bangles, steel almirah, rolling shutters, steel chairs, and tables,
padlocks, stainless steel and aluminium utensils, etc.

Foreign investment: Before 1991, India’s policy towards foreign investment was very
selective and was widely perceived as being unfriendly. The percentage of ownership
allowed to foreign investors was generally restricted to 40% except in certain high
technology areas and foreign investment was generally discouraged in consumer
goods sector unless supported by strong export commitments. The new policy was
much more actively supportive of foreign investment in a wide range of activities.
Permission is automatically granted for foreign equity investment up to 51% in a large
list of 34 industries and for more than 51% Govt. approval was required.

Trade and Exchange Rate Policy: The complex import control regime earlier
applicable to import raw materials, other inputs, capital goods were virtually
dismantled. Now all raw material, other input required for production and capital good
can be freely imported except for a relatively small negative list. Import of certain
consumer goods were allowed against special import licenses which were given to
certain categories of exporters as incentives. The exclusion of consumer goods from
trade liberalisation was a restrictive element in a trade policy which the government
promised will be gradually liberalized, but for all other sectors, quantitative restriction
on imports were largely eliminated. The removal of quantitative restrictions on imports
was accompanied by a gradual lowering of custom duties.

Tax Reforms:

1. The maximum marginal rate of personal tax was 56% in June 1991. This was reduced
to 40%

2. Corporate income tax was reduced from 51.75% to 46% for public listed companies

3. Customs duty was considerably reduced from an average of around 200% to 65%

Public Sector Reform: Reform of the public sector is a critical element in structural
adjustment programmes all over the world and was also included on India’s reform
agenda. Instead of outright privatization, the government initiated a limited process
of disinvestment of government ownership/equity in public sector companies with
government retaining 51% of the equity and management control.
Financial Sector Reforms:

1. Banking Sector was opened up to private competition from new private banks and
several new banking licenses were granted.

2. Transparency and supervision in trading practices in capital markets. SEBI

(established in 1998 but given statutory powers in April 1992) was established as an
independent statutory authority for regulating stock exchanges and supervising the
major players in the capital markets.

3. Capital market was opened for portfolio investments and Indian companies were
allowed to access international capital markets by issuing equity/shares abroad
through Global Depository Receipts (GDR).

4. The requirement of government permission of companies issuing capital as well as

system of government control over the pricing of new equity by private companies
was abolished with the repeal of the Capital Issues Control Act in May 1992.

Abolition of the
previously existing
License Raj in the country.

Curbing monopoly of Reduction of

the public sector FEATURES OF interest rates and
from various areas of
our economy.
LIBERALISATION tariffs

Approval of foreign
direct investment in
various sectors.
Impacts Of Liberalisation:
Short Term Impact
- Inflation reduced from peak of 17% in august 1991 to about 8.5% within 2.5 years
- Forex reserves increased from $1.2 billion in June 1991 to over $ 15 billion in 1994
- GDP growth increased from 1.1% in 1991-92 to 4% in 1992-93
- Fiscal deficit reduced from 8.4% in 1990-91 to 5.7% in 1992-93
- Exports more than doubled from 1990-91 to 1993-94

Positive Impact
1) Free flow of capital:
Liberalisation has improved flow of capital into the country which makes it
inexpensive for the companies to access capital from investors. Lower cost of capital
enables to undertaking lucrative projects which they may not have been possible
with a higher cost of capital pre-liberalisation, leading to high

2) Stock Market Performance:

Generally, when a country relaxes its laws, taxes, the stock market values also rise.
Stock Markets are platforms on which Corporate Securities can be traded in real
time. Impact of FDI in Banking sector: Foreign direct investment allowed in the
banking and insurance sectors resulted in decline of government’s stake in banks
and insurance

3) Political Risks Reduced:

Liberalisation policies in the country lessens political risks to investors. The
government can attract more foreign investment through liberalisation of economic
policies. These are the areas that support and foster a readiness to do business in
the country such as a strong legal foundation to settle disputes, fair and enforceable
law

4) Diversification for Investors:

In a liberalised economy, Investors gets benefit by being able to invest a portion of
their portfolio into a diversifying asset class.

5) Impact on Agriculture:
In the area of agriculture, the cropping patterns has undergone a huge modification,
but the impact of liberalisation cannot be properly measured. It is observed that
there are still all-pervasive government controls and interventions starting from
production to distribution for the produce.
Negative Impact

1) Destabilization of the economy:

Tremendous redistribution of economic power and political power leads to
Destabilizing effects on the entire Indian economy. Threat from Multinationals:
Prior to 1991 MNC’s did not play much role in the Indian economy. In the pre-
reform period, there was domination of public enterprises in the economy. On
account of liberalisation, competition has increased for the Indian firms.
Multinationals are quite big and operate in several countries which has turned
out a threat to local Indian Firms.

2) Technological Impact:
Rapid increase in technology forces many enterprises and small-scale industries
in India to either adapt to changes or close their businesses.

3) Mergers and Acquisitions:

Acquisitions and mergers are increasing day-by-day. In cases where small
companies are being merged by big companies, the employees of the small
companies may require exhaustive re-skilling. Re-skilling duration will lead to
non-productivity and would cast a burden on the capital of the company.

4) Impact of FDI in Banking sector:

Foreign direct investment allowed in the banking and insurance sectors resulted
in decline of government’s stake in banks and insurance firms