Meaning of liberalization
Liberalization of the economy means freedom of the producing unit from direct or physical control imposed by the government.
It denotes removing restrictions from 13 private individual activity typically pertaining to the economic system commonly liberalization is used in the context of a government relaxing its previously in post restriction on economic or social policies.
Following are some notable observations in this regard
- Prior to 1991, the government had imposed several types of control on private enterprises in the domestic economy. These included industrial licensing systems, price control, import license, foreign exchange control, etc.
- It was experienced by the government that several shortcomings had emerged in the economy on account of these controls.
- The growth rate of GDP had fallen sharply and a high-cost economic system came into being.
- These controls had given rise to corruption and inefficiency.
Features of Liberalization
- Reduction in extra burden on the government.
- Use of new machines and Technology.
- It leads to stress on freedom of business and industry from unnecessary control and restriction of the government.
- Approval of foreign direct investment in various sectors.
- Evolution of the previously existing license Raj in the country.
- It helps in removing inefficiency from industrial units.
- It results in the integration of world economies that help in raising world production.
- It encourages Global competition which reduces costs and improves quality.
Objectives of Liberalization
- To regulate export and import and promote foreign trade.
- To increase the volume of foreign direct investment in Indian businesses.
- To decrease the debt burden of the country.
- To improve financial discipline and facilitate modernization.
- To develop the production capacity.
- To improve the process of domestic production.
- To improve the quality of good services.
- To increase the employment opportunities.
Advantages of Liberalization
- Increase in employment.
- Delicensing of industries.
- Increase in foreign investment.
- Increase in efficiency of domestic firms.
- Rise in the rate of economic growth.
- Control of price.
Disadvantages of Liberalization
- Increase in unemployment.
- Loss to the domestic unit.
- Unbalanced development of sectors.
- Increase dependence.
- Economic inequality.
- Skipping the development in the manufacturing sector which has potential for employment generation.
Economic Reforms under Liberalization
Liberalisation included the following reforms:
- Industrial sector reforms
- Financial sector reforms
- Fiscal reforms
- External reforms
1. Industrial sector Reforms
Liberalization Virtually implied regulation of the industrial sector of the economy. Following observations highlight how it happened:
- Abolition of Industrial licensing
- Contraction of public sector
- De- reservation of Production Areas
- Expansion of Production capacity
- Freedom to import Capital goods.
Abolition of Industrial licensing
In July 1991, a new industrial policy was announced. It abolished the requirement of licensing except for the following five industries:
- Defense equipment
- Industrial explosives
- Dangerous chemicals.
Contraction of the Public sector
Under the new industrial policy, the number of industries reserved for the public sector was reduced from 17 to 8. In 2010- 11, the number of these Industries was reduced merely to two: atomic energy and Railways.
De-reservation of Production Areas
Many production areas which earlier were reserved for small-scale industries were deserved. Forces of the market were allowed to determine the allocation of resources.
Expansion of Production Capacity
Earlier production capacity was linked with licensing. Now, freedom from licensing implied freedom from capacity constraints.
Freedom to Import capital goods
Liberalization also implied freedom from the industrialists to import capital goods with a view to upgrading their Technology.
2. Financial sector Reforms
The financial sector includes:(a) banking and non-banking financial institutions, (b) foreign exchange market, © stock exchange market.
In India, the financial sector is regulated and controlled by the Reserve Bank of India. liberalization implied a substantial shift in the role of the RBI from ‘a regulator’ to ‘a facilitator’ of the financial sector.
Free play of the market forces has led to the emergence of private bankers- both domestic as well as International in the Indian banking industry.
Liberalization has allowed FII(Foreign institutional investors) to invest in Indian financial markets (example of mutual fund and pension funds.)
The financial sector in India has shown multi-dimensional growth and is playing a significant role in the growth and development of the economy.
3. Fiscal Reforms
Fiscal reforms relate to the revenue and expenditure of the government. Tax reforms are the principal component of fiscal reforms. Broadly, taxes are classified as direct taxes and indirect taxes.
Direct taxes: Direct taxes are those taxes, the burden of which cannot be shifted onto others. One who pays a tax himself bears the burden of it. example income tax, wealth tax. etc
Indirect taxes: Indirect taxes are those taxes, the burden of which can be shifted onto others. One who pays such a tax can shift the burden of this tax on to the final buyers of the goods by adding The tax amount to the basic price of the goods sold.
Now tax structure has been simplified and moderated. This has raised the tax compliance and therefore tax revenue of the government.
4. External Sector Reforms
External sector Reform includes:
- Foreign exchange reforms
- Foreign trade policy reforms.
Foreign exchange reforms were initiated in 1991 with the devaluation of the Indian rupee against foreign currencies.
Devaluation implies a fall in the value of the rupee vis-a-vis the US dollar or British pound. Implying that a US dollar or British pound can be exchanged for more rupees than before. This increased the supply of foreign currency into the Indian economy by way of higher export of domestic goods and services.
Followed by devaluation in 1991, the exchange value of the Indian rupee in the international money market was left to the free play of the market forces. Presently, the exchange rate is determined by the forces of supply and demand in the international exchange market.
Foreign trade policy underwent a substantial change in the wake of liberalization. Tariff restrictions have been considerably moderated, rather withdrawn from many items of export and import. Instead of policy of protection to the domestic industry, now there is the policy of ‘survival of the fittest’.
Salient features of Trade Policy after Liberalization
- Import quotas have been abolished.
- Import licensing has been abolished.
- Export duty has been withdrawn to enhance the competitiveness of Indian goods in the international market.
- There is a reduction of import duty to enhance competitiveness in the domestic market.
- Trade policy after liberalization is to facilitate the integration of the Indian market with the Global market with a view to achieving growth through competition rather than protection.