LIBERALIZATIONLIBERALIZATION

INTRODUCTION

Liberalization of the economy means to free it from direct or physical controls imposed by the government.

Economic reforms were based on the assumption that market forces could guide the economy in a more effective manner than government control. Examples of one of other undeveloped countries like Korea, Thailand, Singapore, etc. that had achieved rapid economic development as a result of liberalization were kept in consideration.

What made India to liberalize

A Balance of Payments crisis in 1991 which pushed the country to near bankruptcy.

the Rupee devalued and economic reforms were forced upon India.

India central bank had refused new credit and foreign exchange reserves had reduced to the point that India could barely finance three weeks’ worth of imports

Reforms taken during liberalization

Abolition of industrial licensing and registrationLiberalizing the MRTP actFreedom for expansion and productionIncrease in the investment limit of the small industriesFreedom to import capital goodsFreedom to import technologyFree determination of interest rates

Impact of these reforms

Annual growth in GDP

A rate of growth that will double average income in a decade

Rapid Growth in all sectors.

Exports of information technology enabled services particularly strong.

COMPONENTSOF

LIBERALIZATION

Industrial Liberalization

Trade Liberalization

Financial Liberalization

Fiscal Sector Reforms

1. Industrial Liberalization

Industrial Sector was among the first sectors to be liberalized in India in a series of measures. Industrial licensing has been abolished except in a small number of sectors where it has been retained on strategic considerations.

Abolition of industrial licensing

Reduction in d reservation of public sector

Facilitated easy access to foreign technology

Restriction were removed on expansion and,

Opening the economy to FDI.

Foreign Direct Investment in India

Foreign investment is more than 24% in the equity capital of units manufacturing items reserved for the small scale industries.

Foreign Investment Promotion Board (FIPB) is a competent body to consider and recommend foreign direct investment.

Trade policy allowing domestic providers (of goods and/or services) to compete more freely in world markets and foreign providers to compete more freely in domestic markets.

2. Trade Liberalization

TRADE SECTOR REFORMS

ELIMINATION OF IMPORTLICENSING RATIONALISATION

OF TARIFF STRUCTURE

ADOPTIONOF FLEXIBLEEXCHANGE

RATE

Financial liberalization (FL) refers to the deregulation of domestic financial markets and the liberalization of the capital account.

In one view, it strengthens financial development and contributes to higher long-run growth. In another view, it induces excessive risk-taking, increases macroeconomic volatility and leads to more frequent crises.

3. Financial Liberalization

Financial Liberalization reforms

REFORMS IN BANKING SECTOR

REFORMS IN CAPITAL MARKET

REFORMS IN INSURANCE

4. Fiscal Sector Reforms

India's fiscal sector reforms help to raise the rate of savings and investment in India. This further helps to enhance the productivity of public expenditures

India has established itself as one of the fastest growing economies in the world. India is also advancing towards the economical growth and improvement in literacy.

During 1999-2000, India's domestic savings and investment was estimated to grow by 23% and Indian economy was expected to grow by 6.4% although the average growth rate declined to 6.0% in comparison to earlier year.

In the first five year plan, India had attained an average annual growth rate by 3.5%.

Indian economy showed an average growth rate of 6.4%, which was 5.9% in the 80's. At the end of the 8th Five Year Plan, the annual growth rate of India reached 6.9 percent. 

During the period from 1991-92 the Indian economy passed through a tough time. The overall economic growth in this period declined to 1.1% and the total fiscal deficit became 8% of the GDP. 

Indian Foreign Exchange Reserves: a steady rise after liberalization

Foreign exchange reserves (US$ billion)

2.217.0

54.175.4

118.3

0

50

100

150

1990-91 1995-96 2001-02 2002-03 2003-04

Foreign Investments after liberalization

103

5,138 5,3856,789

8,1525,639

15,872

02000400060008000

1000012000140001600018000

1990-91 1994-95 1997-98 2000-01 2001-02 2002-03 2003-04

Total Foreign Investment (US$ million)

US$ million

Import duty Reductions after liberalization

Reduction in Peak Customs Duties on Manufactured items

150

110

5038.5 30 25 2042

0

20

40

60

80

100

120

140

160

1991 Mar-92 Mar-95 Mar-97 Mar-00 Mar-02 Mar-03 w.e.f March2004

in p

er ce

nt

Challenges Ahead

1. Governance Need for elimination of large number of Rules &

Regulations in the books Sharply reducing the number of implementing agencies Moving towards single window clearance

2. Infrastructure: A Challenge and an opportunity

Investments required upto 2012 – US$ 334 billion Power Generation - US$ 143 billion Power Transmission & Distribution – US$ 116 billion Roads – US$ 40 billion Ports – US$ 20 billion Railways – US$ 15 billion

CONCLUSION

Arguments in the favour of Liberalization

Increase in rate of economic growthIncrease in competitiveness of industrial sectorReduction in poverty and inequalityFall in fiscal deficitControl on pricesDecline in deficit of BOPIncrease in Efficiency

Arguments in the Against of Liberalization

Less importance to agriculture.

Pressure by IMF and World Bank.

More depending on Foreign Debt.

Dependence on Foreign technology.

Undue importance to Privatization.

Problem of Unemployment.

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