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Liberalisation: Meaning, Economic Reforms Adopted by Indian Government and Objectives

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Liberalisation is a way to eliminate state control over economic activities. It provides business enterprises with greater autonomy in decision-making and eliminates government interference. Liberalisation was initiated to end these limitations and explore multiple areas of the economy. Though some liberalisation proposals were introduced in the 1980s in the areas of foreign investment, import-export policy, fiscal policy, industrial licensing, and technology up-gradation, the economic reform policies launched in 1991 were more general. Some significant areas that gained recognition after 1991 are the financial sector, investment and trade sectors, the industrial sector, forex markets, and tax reforms.

As per Nicola Smith, liberalisation means the loosening of government controls. Although sometimes associated with the relaxation of laws relating to social matters such as abortion and divorce, liberalisation is most often used as an economic term.

Liberalisation in India

Since the adoption of the liberalisation strategy in 1991, a drastic change has been witnessed in the Indian economy. With the introduction of liberalisation, the government allows private sector organisations to make business transactions with fewer restrictions. For developing nations, liberalisation encourages business organisations to attract foreign companies and investments. Earlier, the investors had to face various difficulties to enter foreign countries due to many barriers, namely, foreign investment restrictions, tax laws, legal issues, and accounting regulations. Economic liberalisation limits all these barriers and surrenders few restrictions over the control of the economy to the private sector.

Economic Reforms Adopted by the Indian Government under Liberalisation

1. Industrial Sector Reform

To make the required reforms in the industrial sector, the government started its new industrial policy on 24 July 1991. The various measures taken under industrial policy reforms are:

i) Reduction in Industrial Licensing

This policy eliminates the industrial licensing for all projects, except for the 5 industries namely:

  • Brewing and Distillation of alcoholic drinks
  • Cigarettes and tobacco and manufactured tobacco substitutes
  • Defence equipment and electronic aerospace
  • Dangerous chemicals
  • Industrial explosive

According to this policy, no license is required to start a new unit or expand or diversify the existing unit; however, licensing for the above-stated industries is compulsory due to environmental and safety reasons.

ii) Decrease in the Role of the Public Sector

One of the notable features was the reduction in public sector industries for the future development of industries in the country. Under this policy, the number of industries reserved under government control was reduced from 17 to 8, which was further reduced to 3 in 2010-2011. These three industries are:

  • Railways
  • Atomic energy
  • Defence equipment

iii) De-Reservation of Small Scale Industries

Most of the goods produced by small-scale industries are now de-reserved. The government has enhanced the investment ceiling on capital assets of small-scale industries to 1 crore. In some industries, prices of goods are determined by the market forces, not by the directive policy of the government.

iv) MRTP(Monopolies and Restrictive Trade Practices) Act

With the introduction of the new economic policy in 1991, the requirement for big companies to seek permission for expansion, mergers, the establishment of a new unit, etc., was abolished. The MRTP Act was replaced by the Competition Act 2002, which is more liberal compared to MRTP Act. The competition act was amended in 2007 and 2009 by the Competition (Amendment) Act.

2. Financial Sector Reforms

The financial sector includes various financial institutions like investment banks, commercial banks, forex markets, and stock exchange operations. The financial sector of the country is controlled by the central bank of the country, in India, it is the Reserve bank of India. RBI is the apex bank, as it holds the highest position in the banking system and decides the interest rates, nature of lending to various sectors, and amount of deposits a bank can keep with itself. The reforms in the financial sector are:

i) Change in Role of Central Bank

The role of the RBI was limited to a facilitator from the regulator, which allows the financial sector to take decisions on various matters without consulting the RBI. RBI used to fix interest rate structure for commercial banks as a regulator. After the change of role as a facilitator, RBI facilitates the free market forces now.

ii) Origin of Private Banks

The reform policies in the financial sector lead to the introduction of private banks, both Indian as well as foreign banks. For example, foreign banks like HSBC and Indian banks, like ICICI raise the competition and works for the benefit of consumers with their better services and lower interest rates.

iii) Increase in Foreign Investment Limit

Under the reforms policies of the financial sector, the limit of foreign investment in banks was raised to 74%. Various Financial Institutional Investors(FII) like mutual funds, pension funds, and merchant bankers are now allowed to invest in Indian financial markets. Though banks are permitted to generate resources from India and other countries, various rights have been retained by the RBI for protecting the interest of the nation’s account holders.

iv) Easy Expansion Process

Banks are free to introduce new branches after fulfilling certain conditions without the permission of RBI.

3. Tax Reforms

Tax reforms refer to the improvements in government public expenditure and tax policies, which are also known as fiscal policies. There are two types of taxes:

  • Direct Tax is the tax imposed on an individual’s income as well as profits earned by business enterprises. For example, Income tax and Corporate tax.
  • Indirect Tax is generally imposed on goods & services. It is the type of tax that affects the income & property of individuals by their consumption expenditure. For example,  Goods and Service tax (GST).

Some important tax reforms made are:

i) Rationalising Direct Taxes

Since 1991, there was a continuous drop in the income of individuals and high tax rates were the main reasons behind the tax evasion. Now, it is generally accepted that moderate tax rates promote savings and voluntary disclosure of income.

ii) Indirect Tax Reforms

Significant reforms have been made in indirect taxes to assist the foundation of the common national market for goods & commodities.

iii) Process Simplification

In order to promote better obedience on the taxpayer’s part, many procedures have been simplified. The GST Act was passed on 29th march 2017 and came into effect on 1st July 2017 to simplify and introduce a unified tax system in India. 

4. Foreign Exchange Reforms

The major reforms made in the foreign exchange market are:

i) Devaluation of Rupee

Devaluation of the rupee refers to the planned reduction in the value of the domestic currency in comparison to any foreign currency by the government of a country. To overcome the BOP(Balance of Payment) crisis in 1991, the rupee was deliberately devalued against the foreign currency to increase the inflow of foreign exchange.

ii) Market Determination of Exchange Rate

The government does not decide the value of the rupee. It is free from the control of the government because of which market forces, like demand & supply, determine the exchange value of the rupee against foreign currency.

5. Trade and Investment Policy Reforms

Before 1991, there were a lot of restrictions on imports to safeguard domestic industries. However, these restrictions result in a lack of competitiveness and reduced efficiency, which led to the slow growth of domestic industries. So, the trade and investment policy reforms were initiated to:

  • Encourage foreign investments & technology into the economy.
  • Increase international competitiveness in the industrial sector.
  • Increase the efficiency of the domestic industries.

Major reforms in trade and investment policy are:

i) Removal of Quantitative Restrictions on Imports & Exports

Under liberalisation, quantitative restrictions on imports & exports were highly reduced. For example, quantitative restrictions on the import of consumer and agricultural goods were fully eliminated from April 2001.

ii) Removing Export Duties

The government removes the export duties on goods and services to raise the competitive position of Indian products in the international market.

iii) Reducing Import Duties

The government reduces the import duties of the goods and services to increase the competitiveness in the domestic industries as it makes them able to import raw materials at better prices.

iv) Relaxing Import Licensing System

The import licensing system was evaded, except for the hazardous and environmentally sensitive industries. This enables domestic industries to import raw materials at lower prices, which increases their efficiency and makes them more competitive.

Objectives of Liberalisation

The objectives of Liberalisation are as follows:

1. To develop a global market of a nation.

2. To promote foreign trade and control the imports & exports of the country.

3. To reduce the debt burden of the nation.

4. To encourage competition between domestic businesses.

5. To gain an economic advantage for the country by encouraging the private sector and multinational corporations to invest and expand.

6. To improve technology and foreign capital.

7. To limit the role of the public sector in future industrial development.

8. To motivate the private sector to participate actively in the development process.



Last Updated : 06 Apr, 2023
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