Economic liberalisation in india PDF

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Economic Liberalisation in India and the recent developmentsLiberalization (or liberalisation) of the economy means to free it from direct or physical controls imposed by the government. This may be similar to deregulation. Economic liberalization is often associated with privatization, which is the...

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Economic Liberalisation in India and the recent developments

Liberalization (or liberalisation) of the economy means to free it from direct or physical controls imposed by the government. This may be similar to deregulation. Economic liberalization is often associated with privatization, which is the process of transferring ownership or outsourcing of a business, enterprise, agency, public service or public property from the public sector to the private sector. For example, the European Union has liberalized gas and electricity markets, instituting a competitive system. Some leading European energy companies such as France's EDF and Sweden's Vattenfall remain partially or completely in government ownership. Liberalized and privatized public services may be dominated by big companies, particularly in sectors with high capital, water, gas, or electricity costs. In some cases they may remain legal monopolies, at least for some segments of the market like consumers. Liberalization, privatization and stabilization are the Washington Consensus's trinity strategy for economies in transition. There is also a concept of hybrid liberalization as, for instance, in Ghana, cocoa crops can be sold to competing private companies, but there is a minimum price for which it can be sold and all exports are controlled by the state There is a distinct difference between liberalization and democratization. Liberalization can take place without democratization like China, and deals with a combination of policy and social change specialized to a certain issue, such as the liberalization of government-held property for private purchase. Democratization is politically specialized; it can arise from a liberalization but works on a broader level of governmental liberalization.

The economic liberalisation in India refers to the economic liberalisation, initiated in 1991, 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. Specific changes include a reduction in import tariffs, deregulation of markets, reduction of taxes, and greater foreign investment. Liberalisation has been credited by its proponents for the high economic growth recorded by the country in the 1990s and 2000s. Its opponents have blamed it for increased poverty, inequality and economic degradation. The overall direction of liberalisation has since remained the same, irrespective of the ruling party, although no party has yet solved a variety of politically difficult issues, such as liberalising labour laws and reducing agricultural subsidies. There exists a lively debate in India as to what made the economic reforms sustainable.

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Indian economic policy after independence was influenced by the colonial experience (which was seen by Indian leaders as exploitative in nature) and by those leaders' exposure to Fabian socialism. Policy tended towards protectionism, with a strong emphasis on import substitution, industrialisation 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. Five-Year Plans of India resembled central planning in the Soviet Union. Steel, mining, machine tools, water, telecommunications, insurance, and electrical plants, among other industries, were effectively nationalised in the mid-1950s. Elaborate licences, regulations and the accompanying red tape, commonly referred to as Licence Raj, were required to set up business in India between 1947 and 1990. Before the process of reform began in 1991, the government attempted to close the Indian economy to the outside world. The Indian currency, the rupee, was inconvertible and high tariffs and import licensing prevented foreign goods reaching the market. India also operated a system of central planning for the economy, in which firms required licences to invest and develop. The labyrinthine bureaucracy often led to absurd restrictions—up to 80 agencies had to be satisfied before a firm could be granted a licence to produce and the state would decide what was produced, how much, at what price and what sources of capital were used. The government also prevented firms from laying off workers or closing factories. The central pillar of the policy was import substitution, the belief that India needed to rely on internal markets for development, not international trade—a belief generated by a mixture of socialism and the experience of colonial exploitation. Planning and the state, rather than markets, would determine how much investment was needed in which sectors. Attempts were made to liberalise the economy in 1966 and 1985. The first attempt was reversed in 1967. Thereafter, a stronger version of socialism was adopted. The second major attempt was in 1985 by prime minister Rajiv Gandhi. The process came to a halt in 1987, though 1967 style reversal did not take place. In the 80s, the government led by Rajiv Gandhi started light reforms. The government slightly reduced Licence Raj and also promoted the growth of the telecommunications and software industries. The Chandra Shekhar Singh government (1990–1991) took several significant steps towards the much needed reforms and laid its foundation.

Prevailing situation during 1980s ● The low annual growth rate of the economy of India before 1980, which stagnated around 3.5% from 1950s to 1980s, while per capita income averaged 1.3%. At the same time, Pakistan grew by 5%, Indonesia by 9%, Thailand by 9%, South Korea by 10% and Taiwan by 12%. ● Only four or five licences would be given for steel, electrical power and communications. Licence owners built up huge powerful empires. ● A huge private sector emerged. State-owned enterprises made large losses. 2

● Income Tax Department and Customs Department became inefficient in checking tax evasion. ● Infrastructure investment was poor because of the public sector monopoly. ● Licence Raj established the "irresponsible, self-perpetuating bureaucracy that still exists throughout much of the country" and corruption flourished under this system.

“No power on earth can stop an idea whose time has come,” said then finance minister Manmohan Singh quoting Victor Hugo while presenting the Union Budget on 24 July 1991. And with these words started the long and painful process of economic liberalisation in India.

The fruits of liberalisation reached their peak in 2006, when India recorded its highest GDP growth rate of 9.6%. With this, India became the second fastest growing major economy in the world, next only to China. The growth rate has slowed significantly in the first half of 2012. An Organisation for Economic Co-operation and Development(OECD) report states that the average growth rate 7.5% will double the average income in a decade, and more reforms would speed up the pace. The economy then rebounded to 7.3% growth in 2014–15. In response, Prime Minister Narasimha Rao, along with his finance minister Manmohan Singh, initiated the economic liberalisation of 1991. The reforms did away with the Licence Raj, reduced tariffs and interest rates and ended many public monopolies, allowing automatic approval of foreign direct investment in many sectors. Since then, the overall thrust of liberalisation has remained the same, although no government has tried to take on powerful lobbies such as trade unions and farmers, on contentious issues such as reforming labour laws and reducing agricultural subsidies. By the turn of the 21st century, India had progressed towards a free-market economy, with a substantial reduction in state control of the economy and increased financial liberalisation. This has been accompanied by increases in life expectancy, literacy rates and food security, although urban residents have benefited more than rural residents.

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Salient Features of Economic Reforms in India

The salient features of new economic policy are liberlisation, privatisation and globalisation of the economy (LPG policy). (1) Liberalisation:

Simply speaking liberalisation means to free to economy from the controls imposed by the Govt. Before 1991, Govt. had put many types of controls on Indian economy. These were as follows: (a) Industrial Licensing System (b) Foreign exchange control (c) Price control on goods (d) Import License. Due to all these controls, the economy became defective. The entrepreneurs were unwilling to establish new industries. Corruption, undue delays and inefficiency rose due to these controls. Rate of economic growth of the economy came down. Economic reforms were introduced to reduce the restrictions imposed on the economy. Steps taken for Liberalization: The following steps have been taken for liberalization: (i) Independent determination of interest rate: Under the policy of liberalisation interest rate of the banking system will not be determined by RBI rather all Banks are independent to determine the rate of interest. (ii) Increase in the investment limit of the Small Scale Industries: Investment limit of the small scale industries has been raised to Rs. 1 crore. So that they can modernize their industry. (iii) Freedom to import capital goods:

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Indian industries will be free to buy machines and raw materials from foreign countries to expand their business. (iv) Freedom to import Technical know-how: Under new economic policy the entrepreneurs are free to import technical know-how and develop modernisations. The main aim of the policy is to develop computers and electronies. (v) Freedom for expansion and production to Industries: Industries are free to expand and produce under the policy of liberalisation. Previously, the govt. used to fix the maximum limit of production capacity. No industry could produce beyond that limit. Now the industry can produce freely. Also they can produce anything depending on the demand. (vi) Freedom from Monopolies Act: According to Monopolies and Restrictive Trade Practices (MRTP) Act, all those companies having assets worth Rs. 100 crore or more were called MRTP firms and were subjected to several restrictions. Now these firms have not to obtain prior approval of the Govt. for taking investment decision. (vii) Removal of Industrial Licensing and Registration: Previously private sector had to obtain license from Govt. for starting a new venture. In this policy private sector has been freed from licensing and other restrictions. Industries licensing is necessary for following industries: (i) Liquor (ii) Cigarette (iii) Defence equipment (iv) Industrial explosives (v) Drugs (vi) Hazardous chemicals.

(2) Privatisation: Simply speaking, privatisation means permitting the private sector to set up industries which were previously reserved for the public sector. Under this policy many PSU’s were sold to private sector. In privatisation, the Govt.’s role is only reduced it does not disappear. Literally 5

speaking, privatisation is the process of involving the private sector-in the ownership of Public Sector Units (PSU’s). The main reason for privatisation was in currency of PSU’s are running in losses due to political interference. The managers cannot work independently. Production capacity remained under-utilized. To increase competition and efficiency need of privatisation was felt. Step taken for Privatisation: The following steps are taken for privatisation: 1. Sale of shares: Indian Govt. has been selling shares of PSU’s to public and financial institution e.g. Govt. sold shares of Maruti Udyog Ltd. This was the private sector will acquire ownership of these PSU’s. The share of private sector has increased from 45% to 55%. 2. Disinvestment in PSU’s: The Govt. has started the process of disinvestment in those PSU’s which had been running into loss. It means that Govt. has been selling out these industries to private sector. Govt. has sold enterprises worth Rs. 30,000 crores to the private sector. 3. Minimisation of Public Sector:

Previously Public sector was given the importance with a view to help in industralisation and removal of poverty. But these PSU’s could not able to achieve this objective and policy of contraction of PSU’s was followed under new economic reforms. Number of industries reserved for public sector was reduces from 17 to 4. (a) Transport and railway (b) Mining of atomic minerals (c) Atomic energy (d) Defence equipment

(3) Globalization:

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Literally speaking Globalisation means to make Global or worldwide, otherwise taking into consideration the whole world. Broadly speaking, Globalisation means the establishment of relations of the economy with world economy in regard to foreign investment, trade, production and financial matters. Globalisation may be defined as integrating the economy of a country with the economies of other countries under conditions of free-flow of trade and capital and movement of persons across the borders. Economic reforms aim at close association of India economy with world economy. There will be an increased co-operation of India economy with world economies across the world. Capital and technology will flow from the developed countries of the world towards India. Steps taken for Globalisation: Following steps are taken for Globalisation: (i) Reduction in tariffs: Custom duties and tariffs imposed on imports and exports are reduced gradually just to make India economy internationally beneficial. (ii) Long term Trade Policy: Forcing trade policy was enforced for longer duration. Main features of the policy are: (a) Liberal policy (b) All controls on foreign trade have been removed (c) Open competition has been encouraged. (iii) Partial Convertibility: Partial convertibility can be defined as to sell foreign currency like dollar ($) or pound, for foreign transaction at a price determined by the market. Partial convertibility of Indian rupee was allowed to achieve the objectives of globalisation. This convertibility stood valid for following transaction: (a) Remittances to meet family expenses (b) Payment of interest

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(c) Import and export of goods and services. (iv) Increase in Equity Limit of Foreign Investment: Equity limit of foreign capital investment has been raised from 40% to 100% percent. In 47 high priority industries foreign direct investment (FDI) to the extent of 100% will be allowed without any restriction. In this regard Foreign Exchange Management Act (FEMA) will be enforced. Source: http://www.economicsdiscussion.net/articles/salient-features-of-economic-reforms-in-india/2219

Seven Major Steps of Economic Reforms Taken by Government of India

For the attainment of the above-mentioned objectives, the government of India has taken the following major steps: (1) New Industrial Policy Under Industrial Policy, keeping in view the priorities of the country and its economic development, the roles of the public and private sectors are clearly decided. Under the New Industrial Policy, the industries have been freed to a large extent from the licenses and other controls. In order to encourage modernisation, stress has been laid upon the use of latest technology. A great reduction has been effected in the role of the public sector. Efforts have been made to encourage foreign investment. Investment decision by companies has been facilitated by ending restrictions imposed by the MRTP Act. Similarly, Foreign Exchange Regulation Act (FERA) has been replaced with Foreign Exchange Management Act (FEMA). Some important points of the New Industrial Policy have been highlighted here: (i) Abolition of Licensing: Before the advent of the New Industrial Policy, the Indian industries were operating under strict licensing system. Now, most industries have been freed from licensing and other restrictions. (ii) Freedom to Import Technology: The use of latest technology has been given prominence in the New Industrial Policy. Therefore, foreign technological collaboration has been allowed.

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(iii) Contraction of Public Sector: A policy of not expanding unprofitable industrial units in the public sector has been adopted. Apart from this, the government is following the course of disinvestment in such public sector undertaking. (Selling some shares of public sector enterprises to private sector entrepreneurs is called disinvestment. This is a medium of privatisation). (iv) Free Entry of Foreign Investment: Many steps have been taken to attract foreign investment. Some of these are as follows: (a) In 1991, 51% of foreign investment in 34 high priority industries was allowed without seeking government permission. (b) Non-Resident Indians (NRIs) were allowed to invest 100% in the export houses, hospitals, hotels, etc. (c) Foreign Investment Promotion Board (FIPB) was established with a view to speedily clear foreign investment proposals. (d) Restrictions which were previously in operation to regulate dividends repatriation by the foreign investors have been removed. They can now take dividends to their native countries. (v) MRTP Restrictions Removed: Monopolies and Restrictive Trade Practices Act has been done away with. Now the companies do not need to seek government permission to issue shares, extend their area of operation and establish a new unit. (vi) FERA Restrictions Removed: Foreign Exchange Regulation Act (FERA) has been replaced by Foreign Exchange Management Act (FEMA). It regulates the foreign transactions. These transactions have now become simpler. (vii) Increase in the Importance of Small Industries: Efforts have been made to give importance to the small industries in the economic development of the country. (2) New Trade Policy Trade policy means the policy through which the foreign trade is controlled and regulated. As a result of liberalisation, trade policy has undergone tremendous changes. Especially the foreign trade has been freed from the unnecessary controls.

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The age-old restrictions have been eliminated at one go. Some of the chief characteristics of the New Trade Policy are as follows: (i) Reduction in Restrictions of Export-Import: Restrictions on the exports-imports have almost disappeared leaving only a few items. (ii) Reduction in Export-Import Tax: Export-import tax on some items has been completely abolished and on some other items it has been reduced to the minimum level.

(iii) Easy Procedure of Export-Import: Import-export procedure has been simplified. (iv) Establishment of Foreign Capital Market: Foreign capital market has been established for sale and purchase of foreign exchange in the open market. (v) Full Convertibility on Current Account: In 1994-95, full convertibility became applicable on current account. Here it is important to clarify the meaning of current account and full convertibility. Therefore, this has been done as follows: Current Account: Transactions with the foreign countries are placed in two categories: (i) transaction with current account, for example, import-export, (ii) Capital account transactions, like investment. Full Convertibility: In short, full convertibility means unrestricted sale and purchase of foreign exchange in the foreign exchange market for the purpose of payments and receipts on the items connected with current account. It means that there is no government restriction on the sale and purchase of foreign exchange connected with current account. On the other hand, sale and purchase of foreign exchange connected with capital account can be carried on under the rates determined by the Reserve Bank of India (RBI), (vi) Providing Incentive for Export:

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Many incentives have been allowed to Export- oriented Units (EOU) and Export Processing Zones (EPZ) for increasing export trade. (3) Fiscal Reforms The policy of the government connected with the income and expenditure is called fiscal policy. The greatest problem confronting the Indian government is excessive fiscal deficit. In 1990-91, the fiscal deficit was 8% of the GDP. (It is important to understand the meaning of fiscal deficit and GDP.) (i) Fiscal Deficit: A fi...