Major reforms and changes have been made under the policy of economic liberalisation

Economic Liberalisation

The process of opening up the economy to trade and investment with the rest of the world is known as Economic Liberalisation. In other words, it means a relaxation of government restrictions in social or economic policies. 

Simply, it refers to the reductions in government control and regulations over the previous economic policies. Examples of liberalisation are simplifications of tax structure, removing quotas and economic restrictions.

Liberalisation has played a very important role since then in the Indian economy. Liberalisation made the rules of foreign trade streamlined. Foreign exchange rules were rationalised. It became easier for Indian corporate houses to do business internationally in foreign markets.

The competition rules, the IT Act, and the Intellectual property Act organised the act of globalisation. Foreign funds began emerging in the country in the form of FDI and Foreign Direct Investment. The FII, Foreign Institutional Investors, were allowed to invest in the equity shares listed in the Indian Stocks.

The privatisation helped the government to generate a bridge of resources, and the stock markets began to list a number of PSU companies.

Why was Liberalisation a need in India?

Economic liberalisation in India was initiated in the year 1991. The concept of liberalisation started operating to achieve certain important objectives, mainly industrialisation, expansion of the private sector and increase in foreign investment, plus launching a free market. Restrictions were taken down and mostly eliminated for private companies to enter the public sector.

The main core for initiating the Economic liberalisation in India was in the year 1985. There was a huge payment crisis. This made the country helpless to pay for its required imports and pending debts. India hit rock bottom in case of bankruptcy at the time. 

Keeping all these scenarios in front, Dr Manmohan Singh, the finance minister of India at that time, introduced economic liberalisation in India, along with privatisation and globalisation. 

The primary intention of initiating liberalisation was: 

• To clear India’s previous and upcoming balance of payment crisis.
• To encourage the participation of the private sector in the development of the economy.
• Ensuring foreign direct investment (FDI) in the country’s businesses.
• For a healthy competition among the domestic businesses.
• To expand economic capability by including multinational and private companies.
• To introduce globalisation to the Indian economy.
• For regulating export and import and promoting foreign trade.

History of the Indian Economy

After independence, prior to 1991, the government had imposed many layers of control on private enterprises in the domestic economy,  including the industrial licensing system, financial control on goods, import licensing, foreign exchange control, restrictions on investment by big business houses, etc. The government realised that due to these restrictions, there have been several shortcomings in the economy.

On the other hand, there was increasing corruption, undue delays and inefficiency. The growth rate of GDP had fallen to the depth of the sea. The economy had turned into a high-cost economic system. Rather it was visualised to have a low-cost competitive economic system after independence. Economic reforms with Liberalisation as their key component were directed to place more reliance on market forces of supply and demand in place of checks and restrictions. 

Reforms made under Liberalisation

The major reforms made in the Industrial Sector, Economic Sector, Foreign Exchange and tax reforms are:

Beginning with the industrial sector reforms

• Termination of need for industrial licensing

In the year 1991, The government removed the requirement of a licence in the industrial sector, but for 5 industries, it is still mandatory to have a licence (for liquor, cigarette, defence equipment, dangerous chemicals and industrial explosives).

• Freedom to import the capital goods

The reform allowed the industrialists in India to import the capital goods from the international market for improving and upgrading the domestic industries. It was no longer required to get a licence or permission from the government to step into the international market.

• DeReservation of Production areas for SSIs

The production areas which were earlier reserved for small scale industries now were de-reserved. It was left upon the market forces to allocate the resources accordingly.

• Growth in production capacity

Earlier, what to produce and how to produce was a matter of concern for the government. But now, due to the removal of licence requirements, it was the producer’s choice to decide accordingly.

• Shrinking of the public sector

The industries reserved for the public sector were privatised. From 17, it was reduced to 8, and currently, the only 2 major public sector industries remaining are Atomic energy and railways, as these can’t be given into the hands of the private sector.

Secondly, the Financial sector reforms

The Financial Sector includes industries like commercial banks, stock exchange, foreign exchange, investment banks, and most importantly, the RBI.

Reforms taken into effect:

• RBI- Regulator to the facilitator

Prior to reforms, RBI was acting as the regulator in the market and fixed the interest rates for commercial banks by itself. After the reforms, it changed to a facilitator where it set the market free and allowed market forces to decide the interest rates, leading the competition to rule the market.

• Competition increased among private banks

The private sector wasn’t allowed to enter the banking industry, but liberalisation allowed the private sector to enter, hence leading to increased competition in the banking sector due to the emergence of new private banks, domestic as well as international.

• Reduction in ratios

The SLR & CRR were at very high rates i.e 38.5% & 15% respectively. Post reforms they were reduced to 25% & 4.1%.

Next,  the Fiscal Reforms

The policies made exclusively for the taxation for the government and public expenditures are known as fiscal policies. Since taxation is a major source of receipts for the government, it is essential to focus on the fiscal reforms concerning the ultimate growth of the economy. Tax rates were reduced.

And lastly, the External Sector reforms or the Foreign Exchange Reforms

These reforms were exclusively made to increase international trade between countries.

• Tariff restrictions were withdrawn or moderated for various items of export, and import
• Due to the moderation of export-import policies and quota system, competition among the domestic industries increased. The focus shifted from ‘protecting the domestic industry’ to ‘survival of the fittest’.

The objectives were overall changed from  ‘Protection’ to ‘competition’.

Conclusion

Prior to 1991, India was facing many challenges with low funds, poor investments, debt revolving around, lack of entrepreneurship among the people, deteriorating agriculture and many more. 

The then PM Dr Manmohan Singh introduced the reforms with the vision of solving all the industrial and economic issues prevailing then, and no doubt these reforms have been proved to be a good step to begin when the country was hitting rock bottom after independence.