Liberalisation

Liberalisation Meaning

The Indian economy was liberalised within the year 1991. Economic reforms were passed to achieve a number of goals, including modernisation, growth of the role of personal and capital inflows, and the establishment of a free-market economy.  Let us discuss liberalisation in detail.

What is Liberalisation?

Liberalisation, simply put, refers to the relief of state restrictions within the areas of social, political, and economic policies. Liberalization in economic policy focuses on the reduction of government laws and restrictions in place to encourage greater participation by private entities.

Liberalisation in India

India’s economic reforms were aided by a balance of payments problem in 1985. This crisis caused the government unable to pay for basic imports and service its debt obligations. Consequently, India drove to the verge of bankruptcy. As a response thereto, the then minister of finance of India, Dr Manmohan Singh, introduced economic liberalisation in India.

Features of Liberalisation

The following are some of the characteristics of liberalisation that began as part of the 1991 economic reforms:

• The country’s previously existing License Raj is annulled.
• Interest rates and tariffs were lowered.
• Stripping away the public sector’s existing monopoly from various segments of the economy
• Foreign investment in different industries was sanctioned.

Advantages of Liberalisation

• Economic liberalisation has enabled free capital flow in our country, allowing companies to easily access capital from investors. Due to a lack of capital during the pre-liberalisation period, taking on lucrative projects was frowned upon, but this was changed in 1991, resulting in higher growth rates.
• Following the liberalisation of the financial system, investors now have the option of investing a portion of their portfolio in a diverse asset class, thus generating more revenue.
• A relief in economic laws leads to an increase in the value of the stock market, inviting more trading between investors.
• Although the effect of liberalisation on the agricultural sector cannot be directly measured, there was a substantial increase in the period following 1991.

Disadvantages of Liberalisation

• Such a significant economic overhaul resulted in a redistribution of economic and political power, which rattled the Indian economy to a large extent.
• Prior to liberalisation, global corporations played no role in the Indian economy. However, Indian firms soon faced increased competition from MNCs, endangering the existence of many small enterprises.
• The emergence of mergers and acquisitions in the post-liberalisation period posed a threat to employees of small companies. Employees of smaller firms had to undergo rigorous re-skilling in the event of a merger with larger corporations, resulting in stagnant productivity.

Objectives

1. To address India’s looming balance-of-payments crisis.
2. To increase the private sector’s engagement in India’s economic development.
3. Increasing the flow of foreign direct investment in Indian businesses.
4. To promote competition among domestic businesses in India.
5. Maximizing India’s economic opportunities by empowering multinational and private entities.
6. To lead the way for the Indian economy into globalisation.
7. To control and encourage foreign trade by governing exports and imports.

Reforms under Liberalisation

• Industrial Sector Deregulation
• Finance Industry
• Taxation
• International Finance
• Trade and Investment Policy
• External Sector
• Forex
• Foreign Trade Policy

Impact of Liberalisation

Positive Impacts:

• Capital liberalisation has increased the flow of capital by making it cheaper for businesses to access capital from investors and embark on profitable projects.
• Investors will benefit from diversification if they invest a portion of their business in a diversifying asset class.

Negative Impacts:

• A massive reconstruction of political and economic power will result in the destabilisation of the entire Indian economy.
• Rapid technological advancement allows many small-scale industries and other enterprises in India to either adapt to changes or close their doors.
• Small businesses merge with large corporations. As a result, employees of small businesses may need to improve their skills and become more technologically advanced. Skill enhancement and the time it may take may result in non-productivity and be a drain on the company’s capital.

FAQs on Liberalisation

1) Define Liberalisation?

Liberalisation is the loosening of a government’s constraints on its current economic and social policies.

2) What’s the difference between privatisation and liberalisation?

Privatisation refers to the transfer of ownership from the public to the private sector, whereas liberalisation refers to the removal of a state’s influence over economic policies. In some ways, privatisation is a step toward economic liberalisation.

3) What were the two primary goals of liberalisation in India?

The two main goals of liberalisation in India were:

• To increase foreign direct investment, industrial production, and technological competitiveness on a global scale.
• Strengthen India’s standing in foreign markets.