Roman Saini is teaching live on Unacademy Plus
Effects Of Liberalization On The Indian Economy Lesson-1 Presented By: Roman Saini
In This Lesson Economic Reforms Introduction Deregulation Of Industrial Sector Financial Sector Reforms
Economic Reforms Since Independence India followed mixed economy blending the elements of market economic system with elements of planned economic(socialist) system. .This approach did not bring fruits since it resulted in variety of rules and laws, which were aimed at controlling and regulating the economy, ended up instead in hampering the process of growth and development. The country did not have a proper consumer oriented market and lacking foreign investments. . In 1980s the government took some economic reforms like abolishing restriction in many sectors, efforts to improve GDP, to increase exports and the regulations on pricing were also put off. .
Economic Reforms Situation during 1980s Even if the economic liberalization policies were undertaken, the country remained in its backward economic state. The government was spending a large share of its income on areas which do not provide immediate returns such as the social sector and defence. Hence there was a need to utilise the rest of its resources in a highly efficient manner. . The Public Sector Units were plagued and income from them were not sufficient to meet the expenditure.
Economic Reforms Hence the government expenditure exceeded its revenue. Moreover, the foreign exchange reserves declined to a level that was not adequate to finance imports for more than two weeks. . The crisis was further aggravated by rising prices of essential goods. In 1991, India met with an economic crisis with respect to its external debt-the government was unable to make repayments on its borrowings from abroad. . All these led the government to introduce a new set of policies which are collectively referred as Economic Reforms
Economic Reforms In simple terms Economic Reforms can be understood by following: O Deregulation Financial Sector Reforms Tax Reforms Reduction in procedures Foreign Exchange Reforms Trade and Investment Policy Reforms O Overall it refers to a country "opening up" to the rest of the world with respect to trade, regulations, taxation and other areas that generally affect business in the country
Economic Reforms Deregulation of Industrial Sector In India, regulatory mechanisms were enforced in several ways. Industrial licensing under which every entrepreneur had to get permission from government officials to start a firm, close a firm or to decide the amount of goods that could be produced. . private sector was not allowed in many industries. some goods could be produced only in small scale industries and controls on price fixation and distribution of selected industrial products.
Economic Reforms .The 1991 reforms removed many of these restrictions. Industrial licensing was abolished for almost all except product categories like alcohol, cigarettes, hazardous chemicals, electronic, aerospace and all types of defense equipment. The industries which are now reserved only for the public sectors are atomic energy generation and railway transport(As of 2016) . Many goods produced by small scale industries have now been dereserved. In many industries, the market has been allowed to determine the prices.
Economic Reforms Financial Sector Reforms This sector includes financial institutions such as commercial banks, investment banks, stock exchange operations and foreign exchange market. . .The financial sector in India is regulated by the Reserve Bank of India (RBI). The main aspect of 1991 reforms is to reduce the role of RBI from regulator to facilitator of financial sector. . This allowed financial sector to take decisions on many matters without consulting the RBI. .
Economic Reforms As a result of reform policies, many private sector banks as well as Indian banks were established. .Foreign investment limit in banks was raised to around 50 per cent. Banks which fulfill certain conditions were allowed to set up new branches without the approval of the RBI .Foreign Institutional Investors (FII) such as merchant bankers, mutual funds and pension funds are now allowed to invest in Indian financial markets.