Concept of Liberalization and its Components

Concept of Liberalization and its Components

Last updated: November 19, 2019

Introduction to LPG:

  • The industrial policy was announced on 24 July 1991 by the government held by the prime minister P.V Narasimha Rao.
  • The new industrial policy(NIP) was a big departure from The erstwhile industrial policy.
  • The important objectives are:
  • The key objective of industrial policy was the rapid industrialization of the countries.
    • To maintain sustained growth in productivity and gainful employment.
    • To attend international competitiveness.
    • Therefore the basic philosophy of the new IP 1991 has been the continuity with change.
  • These changes certain broadly five areas:
    • Industrial licensing.
    • Public sector policy.
    • MRTP act of 1969.
    • Foreign investment.
    • Foreign technology agreements.
  • The new government assumed office in June 1991.
  • It made a decision to organize the sale of gold.
  • In this situation, India needed major economic overhauling.
  • liberalization refers to the relaxation of previous government restrictions usually in areas of social and economic policies.
  • Thus, when government liberalization trade it means it has removed the tariff, subsidies and other restrictions on the flow of goods and services between countries.

Introduction to Liberalisation:

  • The economic liberalization in India refers to ongoing economic reforms in India that started on 24 July 1991.
  • After independence in 1947, India adhered to socialist policies.
  • In the 1980s, prime minister Rajiv Gandhi initiated some reforms.
  • In 1991 after India faced a balance of payment crisis, it had to sale 67 tons of gold to the international monetary fund (IMF) as a part of a bailout deal and promise economic restructuring.
  • The government of P.V Narasimha Rao and his finance minister Manmohan Singh started breakthrough reforms.
  • The new neoliberal policies included opening for international trade and investment, deregulation, initiation of privatization, tax reforms, and inflation controlling measures.
  • The main objective of the government was to transform the economic system from socialism to capitalism so as to achieve hike nomic growth and industrialize the nation for the well being of the Indian citizens.
  • Today India is mainly characterized as a market economy.

Meaning:

  • The liberalization of the economy means to free it from the director of 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 the other underdeveloped countries like:
    • Korea
    • Thailand
    • Singapore
  • That had achieved rapid economic development as a result of liberalization work kept in consideration.

Characteristics of liberalization:

  • Freedom of opening/starting production units
  • Use of new machines and technology
  • No government interference in production
  • Free flow of foreign investment
  • Removal of restrictions on the movement of goods and services
  • Reduction in tax rates and lifting of unnecessary control over the Economy
  • Abolition of licensing
  • Making it easier to attract foreign capital and technology to India
  • Freedom in deciding the scale of business activities

What made India to liberalize:

  • A balance of payment crisis in 1991 which first the country to near bankruptcy.
  • The rupee devalued and economic reforms were forced upon India.
  • India Central Bank has refused new credit and foreign exchange reserves had reduced to the point that India could barely finance three weeks’ worth of imports.

          Reforms have taken during Liberalisation:

      • Abolition of industrial licensing and registration
      • Liberalizing the MRTP act
      • Freedom for expansion and production
      • Increase in the investment limit of the small industries
      • Freedom to import capital goods
      • Freedom to import technology
      • Free determination of interest rates

Impact of these reforms:

  • The average annual growth of services shifted to 28.1% from 1991 to 2001 from 6.9 % from 1981 to 1991. rate of growth that will double the average income in a decade.
  • Rapid growth in communication services, financial services, business service, and community service.
  • Export of information technology-enabled services particularly strong.

Industrial licensing:

  • Industrial licensing is governed by industries (development and regulation) act 1951.
  • It is a very easy factive tool used by the government to regulate the private sector.
  • It abolished all industrial licensing, irrespective of the level of investment, except of 18 industries related to security and strategic concern, social reasons, concerns related to safety and overriding environment issues, manufacture of products of hazardous nature and articles of elitist consumption.
  • Later, this list was trimmed, and as of now, a license is required only for six times listed in Annexure-II.
    • These are as follows:
      • Distillation and brewing of alcoholic drinks
      • Cigars and cigarettes of tobacco and manufactured tobacco substitute
      • Electronic Aerospace and defense equipment
      • Industrial explosives including detonating fuses
      • Safety fuses
      • Gun powder
      • Nitrocellulose and matches
      • Hazardous chemicals
      • Drugs and pharmaceuticals

Public Sector:

  • The statement of industrial policy 1991 reduced the list of industries reserved for the public sector to 8 from 70 and further for more area where did receive which trimmed the list of four.
  • Public sector Monopoly was limited only for 8 industries of security and strategic relevance.
  • This was also later trimmed and only railways, arms, and ammunition and allied items of:
    • Defense equipment
    • Defense aircraft, and warship
    • Atomic energy
    • Minerals specified in the schedule to the atomic energy remained
  • Presently, only 2 sectors are under the public sector monopoly: Atomic energy & Railways.

Various Sectors

Industry and Services:

  • Industry accounts for 28% of the GDP and employs 14% of the total workforce.
  • The Indian industrial sector underwent significant changes as a result of the economic reforms of 1991 which removed import restrictions, brought in foreign competition, led to the privatization of certain public sector industries.
  • India is 13th in services output.
  • The services sector provides employment to 23% of the workforce and its growing quickly, whether the growth rate of 7.5 % in 1991-2000, up from 4.5% in 1951-80.
  • Even sectors like insurance which were earlier reserved for the public sector but not only open for the private sector, when foreign investment was allowed up to 26%.
  • Under 1997, WTO financial servicer’s agreement, India is committed to permitting 12 foreign bank branches annually.
  • 100% foreign investment is permitted in an information technology unit setup exclusively for exports.
  • 100% of FDI is allowed in E-commerce automatic approval is allowed for foreign equity in software and almost all areas of electronics.

Agriculture:

  • India ranks second worldwide in farm output.
  • Agriculture and allied sectors like forestry, logging and finishing accounted for 15.7% of the GDP in 2009-10, employed 50 2.1% of the total workforce.
  • Yields per unit area of all crops have grown since 1950 e due to the special emphasizes list on agriculture in the five-year plans and steady improvements in irrigation, technology, application of modern agricultural practices and provision of agricultural credit and subsidies since the green revolution in India.
  • India is the largest producer in the world of milk, jute, and pulses, and also has the world’s second-largest cattle population with 175 million animals and 2008.
  • It is the second-largest producer of rice, wheat, sugar cane, cotton and groundnuts and as well as the second-largest fruit and vegetable producer, accounting for 10.9% and 8.6% of the world fruit and vegetable production respectively.

Banking and finance:

  • Prime minister Indira Gandhi nationalized 14 banks in 1969, followed by six other in 1980, and made it mandatory for a bank to provide 40% of their net credit to priority sectors like agriculture, small scale industry, retail trade, small businesses, etc.
  • To ensure that the bank fulfills their social and development goals.
  • Since then the number of bank branches has increased from 8,260 in 1969 to 72,170 in 2007 and the population covered by a branch decreased from 63,800 to 15,000 during the same period.
  • India’s gross domestic saving in 2006-07 as a percentage of GDP stood at a high 32.7%.
  • More than half of personal savings are invested in physical assets such as land, houses, cattle, and gold.
  • The public sector bank holds over 75% of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively.
  • Since liberalization, the government has approved significant banking reforms.

 The MRTP Act, 1969:

  • MRTP act 1969, The New Industrial Policy, 1991 proposes to amend suitably the monopolies and Restrictive Trade Practices Act 1969.
  • It can be divided into four-part:
    • Monopolistic practices
    • Restrictive Trade Practices
    • Unfair tread practices
    • Controlling the concentration of economic power
  • The principal objective of the MRTP Act as under:
    • The prevention of concentration of economic power and control of monopolies
    • Prohibition of monopolistic
    • Restrictive and unfair trade practices
  • This restricted the growth of the Indian industry and units like TISCO, TELCO, HINDALCO, and Ranbaxy, which have the capacity to become global players, remained confined to India, producing substandard goods.
  • In 1991, the MRTP Act was restricted and free Android restriction removed with respect to new undertakings, expansion, amalgamation, merger, takeover, registration, etc.

Foreign investment:

  • The 1956 industrial policy accepted the role of foreign equity, since independence we have always looked at foreign equity as some sort of economic slavery.
  • But in the last 50 years, the enormous underutilization of resources, unemployment, poor infrastructure, and pervasive poverty compelled the government to open the door for foreign equity.
  • Today, India welcomes foreign equity in almost every sector.
  • In 1991, it allowed:
    • automatic approval for foreign equity participation up to 51% granted two high priority industries listed every in Annexure IV.
    • Foreign trading companies are allowed to invest up to 51% in Indian trading houses engaged in export activity.
    • In the hotel and tourism-related industry up to 51%, foreign equity is allowed.
    • Even in the mining sector foreign investment up to 50% was allowed.

Foreign technology agreements:

  • The new industrial policy purposes to give automatic permission for foreign technology agreements unidentified high priority industries.
  • Further, it also proposes to allow other industries to import foreign technology subject to the fulfillment of certain conditions.
    • The RBI grants automatic approval by the means of the regional offices to Indian industries for foreign technology collaboration. T
    • The royalty period should not exceed 7 years from the date of starting of the business for 10 years from the date mentioned in the agreement.

Balance of payment:

  • Since independence, India’s balance of payment on its current account has been negative.
  • Since economic liberalization in 1990 precipitated by a balance of payment crisis.
  • India’s export rose consistently covering 8.3 % of its imports in 2002-2003, up from 66.2% in 1990-91.
  • However, the global economic slump followed by a general declaration in world trade shows the export as a percentage of import drop to 61.4% in 2008-09.
  • Between January and October 2010, India imported $82.1 billion worth of crude oil. India’s reliance on external assistance and concessional debt health creed since the liberalization of the economy and the debt service ratio decreased from 35.3% 1990-91 to 4.4% in 2008-09.
  • India’s foreign exchange reserve have steadily risen from $5.8 billion in March 1991 to $283.5 billion in December 2009.

Challenges ahead

  • Governance:

    • Need for the elimination of a large number of rules and regulations in the books.
    • Sharply reducing the number of implementing agencies.
    • Moving towards single-window clearance.
  • Infrastructure: A challenge and an opportunity

    •  Investment required up to 2012-US $334 billion
    • Power generation- US $143 billion
    • Power transmission and distribution- US $116 billion
    • Roads- US $40 billion
    • Ports- US $20 billion
    • Railways- the US $15 billion

Arguments in the favor of liberalization:

  • Increase in the rate of economic growth
  • Increase in the competitiveness of the industrial sector
  • Reduction in poverty and inequality
  • Fall in fiscal deficit
  • Control on prices
  • A decline in the deficit of BOP
  • Increase inefficiency

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
  • The problem of unemployment

Components of Liberalization

    • Industrial liberalization
    • Trade liberalization
    • Financial liberalization
    • Fiscal sector reforms

Industrial liberalization:

  • The industrial sector was among the first sector 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 consideration.
    • Abolition of industrial licensing
    • Reduction in the reservation of the public sector
    • Facilitated easy access to foreign technology
    • The restriction was removed on expansion
    • Opening the economy to FDI

 The Trade liberalization:

  • It allowing domestic providers to compete more freely in the world market and foreign providers to compete more freely in domestic market.
  • Trade sector reforms:-
    • Elimination of import licensing
    • Rationalization of tariff structure
    • Adoption of the flexible exchange rate

Financial liberalization:

  • It refers to the deregulation of the domestic financial market and the liberalization of the capital account.
  • In one view, it strengthens financial development and contributes to higher long-run growth.
  • Another view, it induces excessive risk-taking, increases microeconomic volatility and leads to more frequent crises.
  • Financial liberalization reforms:-
    • Reforms the banking sector
    • In the capital market
    • Reforms in insurance

Fiscal Sector Reforms:

  • It helps 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 economic growth and improvement in literacy.
  • In the five year plan, India had attended an average annual growth rate of 3.5%. Indian economy showed an average growth rate of 6.4 % which was 5.9% in the 1980s.
  • At the end of the 8th five-year plan,, the annual growth of India reached 6.9%. 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.

Concept of Liberalization and its Components


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Concept of Liberalization and its Components Introduction to LPG Introduction to liberalization  Concept of Liberalization and its ComponentsMeaning of liberalization Concept of liberalization Concept of Liberalization and its Components Characteristics of liberalization What made India to liberalize Reforms taken during the liberalization Impact of the reforms Concept of Liberalization and its ComponentsIndustrial licensing Public sector Various sectors Industry and services Agriculture Banking and finance MRTP Act, 1969 Foreign investment Concept of Liberalization and its Components Foreign technology agreements Balance of payments Challenges ahead Conclusion Concept of Liberalization and its Components