Pre & Post Liberalisation

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

Pre Liberalization Period: In the Indian context 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. After Independence, India adhered to socialist policies. The extensive regulation was sarcastically dubbed as the “License Raj”. The slow growth rate was named the “Hindu rate of growth”. The Indian currency, the rupee, was inconvertible and high tariffs and import licensing prevented foreign goods reaching the market. The central pillar of the policy was import substitution, the belief that India needed to rely on internal markets for development, not international trade.

Need for Liberalization: A Balance of Payments crisis in 1991which pushed the country to near bankruptcy was the major deciding factor, to rescue the Indian economy of that crisis, IMF bailout was secured for which gold was transferred to London as collateral. Indian 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. The International bailout package came when India promised for the much needed economic reforms.

Post Liberalization Period: The major effect of Liberalization is in the opening of the economy, making it more competitive, getting the government out of the huge morass of regulation, empowering the states to take more responsibility for economic management and thereby creating a kind of competition among the states for foreign investors. The GDP growth rate, which had collapsed to 0.8% in 1991-92 rebounded to a near normal 5.3% in 1992-93 and then accelerated to 6.2% in 1993-94. Subsequently the GDP grew at an average rate of 7.5% in the 3 years 1994-95 to 1996-97.

The policy now allows 100% foreign ownership in a large number of industries and majority ownership in all except banks, insurance, telecommunications and airlines. Procedures for obtaining permissions were greatly simplified by listing industries that are eligible for automatic approval up to specified levels of foreign equity (100%, 74% and 51%).

The simplified view can be better shown as below-