History of Liberalization
The time when the world economy started growing, trade among various nations became strong, this increased the wealth as well as talent potentiality among the citizens. In this scenario, sitting back for the Indians would be absurd thus, we too started to implement liberalization in our economy.
Although after failed attempts in 1966 and 1980, finally in 1991 the liberalization process bloomed in India. Liberalization is one of the important facets for the development of a country. This must be implemented by every nation’s government at any cost. So, what is liberalization? More importantly, does this liberalization literally have any impact on our Indian economy? In this context, we are going to understand the same.
The Term Liberalization – Introduction and Explanation
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The term liberalisation denotes removing restrictions from certain private individual activity, typically pertaining to the economic system. Commonly, liberalisation is used in the context of a government relaxing its previously imposed restrictions on economic or social policies.
An Introduction to the Concept of Economic Liberalisation
Economic liberalisation refers to a situation where inessential restrictions and controls are removed from a country’s economy to ensure that businesses and enterprises can maximise their contribution. It is, however, important to note that liberalisation does not mean an uncontrolled economy.
Economic Liberalisation in India
The Indian economy was liberalized in the year 1991. In India, the concept of economic liberalization was introduced to attain several objectives – industrialization, expansion in the role of private and foreign investment, and introducing a free market system. Restrictions were relaxed for private companies to enter several core industries, which were previously reserved for the public sector.
Why was Liberalisation initiated in India?
Economic liberalization in India was bolstered by its balance of payments crisis in 1985. This crisis rendered the country incapable of paying for its essential imports and servicing its debt payments. India was pushed to the brink of bankruptcy therein.
As a response to it, the then finance minister of India, Dr. Manmohan Singh, introduced economic liberalization in India.
Features of Liberalization in India
Following are some of the features of liberalization that was initiated as a part of economic reforms of 1991 –
Abolition of the previously existing License Raj in the country. License or Permit Raj is a complicated system of regulations, licenses, and restrictions that were imposed to run and set up businesses between 1947 and 1990.
Reduction of interest rates and tariffs.
Curbing monopoly of the public sector from various areas of our economy.
Approval of foreign direct investment in various sectors.
Economic liberalization in India integrated the above features and in general waived off several restrictions to become more private sector-friendly.
What were the Objectives of Liberalisation in India?
The primary objectives of initiating liberalization in India can be summed up as follows –
To solve India’s impending balance of payment crisis.
To boost the private sector’s participation in the development of India’s economy.
To increase the volume of foreign direct investment in India’s businesses.
To introduce competition between India’s domestic businesses.
To maximize India’s economic potential by encouraging multinational and private companies to expand.
To usher in globalization for the Indian economy.
To regulate export and import and promote foreign trade.
Impact of Liberalisation on Indian Economy
Liberalization in India – Is it Double-Edged?
Advantages and Disadvantages
When it comes to discussing the impacts of liberalization, it is crucial to look at both the positive and negative ramifications on our country’s economy.
Advantages:
Free Capital Flow in The Economy - Liberalisation has enabled free movement of capital in our country, allowing companies to access the same easily from investors. In the pre-liberalization period, undertaking lucrative projects was taboo due to the dearth of capital, which was rectified in 1991, initiating higher growth rates.
Diversification of Investor Portfolio - post-liberalization, investors have the liberty to invest a percentage of their portfolio into a diversified asset class, thus generating more profit.
Improvement of Stock Market Performance - Relaxation of economic laws also leads to a rise in the stock market’s value, thus encouraging more trading among investors.
Impact on The Agricultural Sector - Even though the impact of liberalization on the agricultural sector cannot be measured accurately, in the period post-1991, there was a significant modification in cropping patterns throughout the country.
Disadvantages:
Economic Destabilization - Such a severe economic reform led to the redistribution of political and economic power that destabilized the Indian economy to quite an extent.
Increased Competition from MNCs - In the period of pre-liberalization, multinational companies had no role to play in the Indian economy. However, soon after, Indian companies faced increased competition from MNCs, which threatened the existence of several smaller firms.
FDI impact on The Banking Sector - Lifting restrictions from foreign direct investment in the banking and insurance sectors led to a downfall in the government’s stakes in both these sectors.
Increase of Acquisitions and Mergers - The increased scope of mergers and acquisitions in the post-liberalization period has posed a threat to the employees of smaller firms. In the event of a merger with bigger companies, employees of the smaller firms had to undergo rigorous re-skilling that led to a stagnation of productivity.
Did You know?
Ministers like – Atal Bihari Vajpayee, Manmohan Singh, P.V. Narasimha Rao initiated liberalization in India.
In India, after the implementation of liberalization following improvements were noticed:
All restrictive barriers to International Investing were removed. This permitted the Indian companies to bank huge funds from foreign investors.
There was an unrestricted flow of capital in India and among other big nations. This allowed the country inefficient allocation of resources and also to gain a competitive advantage.
The Indian stock market has appreciated ever since liberalization.
Political risks got reduced.
The investors diversified.
Liberalization encompasses an extensive part of India’s economic history. You can learn more about this topic by referring to the notes and solutions available on Vedantu’s website.
FAQs on Liberalisation
1. What is Liberalisation in lucid language?
Liberalization refers to the relaxation of restrictions imposed by a government on its existing social and economic policies.
2. What are the Effects of Liberalisation on the Indian Economy?
There were several effects of liberalization on the Indian economy. Some of them are as follows –
It has opened up the Indian economy to foreign investors.
India’s private sector can engage in core industries, which were previously limited to the public sector.
Export and import have become simpler through reforms in foreign direct investment.
Increased employment opportunities.
3. What is Liberalisation, Privatisation and Globalisation?
Liberation – This refers to the de-licensing and deregulation of the economic activities of a country by relaxing previously imposed restrictions.
Privatization – Privatisation refers to the transfer of ownership, control, and management of public sector enterprises to the private sector.
Globalization – Globalisation is a process driven by international trade which leads to interaction between companies, people, and the governments of different nations.
4. What is the difference between Liberalisation and Privatisation?
Liberalization means the elimination of a state’s control over economic policies while privatization refers to the transfer of ownership from the public sector to the private sector. Privatization, in a sense, is a step towards the liberalization of an economy.
