The economic liberalization in India refers to ongoing reforms in
India. After Independence in 1947, India adhered to
socialist policies.In the 1980s, the Prime Minister
Rajiv Gandhi initiated some reforms. His government was blocked by politics. In 1991, after the
International Monetary Fund (IMF) had bailed out the bankrupt state, the government of
P. V. Narasimha Rao and his finance minister
Manmohan Singh started breakthrough reforms. The new policies included opening for international trade and investment,
deregulation, initiation of
privatization, tax reforms, and inflation-controlling measures. The overall direction of liberalization has since remained the same, irrespective of the ruling party, although no party has yet tried to take on powerful lobbies such as the
trade unions and farmers, or contentious issues such as reforming labor laws and reducing
agricultural subsidies.
As of 2009, about 300 million people — equivalent to the entire population of the entire United States — has
escaped extreme poverty. The fruits of liberalization reached their peak in 2007, with India recording its highest GDP growth rate of 9%. With this, India became the second fastest growing major economy in the world, next only to China.
An
Organisation for Economic Co-operation and Development (OECD) report states that the average growth rate 7.5% will double the average income in a decade, and more reforms would speed up the pace.
Indian government coalitions have been advised to continue liberalization. India grows at slower pace than
China.
states that removing main obstacles "would free India’s economy to grow as fast as China’s, at 10 percent a year".
Pre-liberalisation policies
Indian
economic policy after
independence was influenced by the colonial experience (which was seen by Indian leaders as exploitative in nature) and by those leaders' exposure to
Fabian socialism. Policy tended towards
protectionism, with a strong emphasis on
import substitution,
industrialization,
state intervention in labor and financial markets, a large public sector, business regulation, and
central planning.
resembled central planning in the
Soviet Union. Steel, mining, machine tools, water, telecommunications, insurance, and electrical plants, among other industries, were effectively nationalized in the mid-1950s.
Elaborate licences, regulations and the accompanying
red tape, commonly referred to as
Licence Raj, were required to set up business in
India between 1947 and 1990.
Impact
- Only four or five licences would be given for steel, power and communications. License owners built up huge powerful empires.
- A huge public sector emerged. State-owned enterprises made large losses.
- Infrastructure investment was poor because of the public sector monopoly.
- License Raj established the "irresponsible, self-perpetruating bureaucracy that still exists throughout much of the country"
Rajiv Gandhi government (1984-1989)
In the 80s, the government led by
Rajiv Gandhi started light reforms. The government slightly reduced
License Raj and also promoted the growth of the
telecommunications and
software industries.
The Vishwanath Pratap Singh government (1989-1990) and Chandra Shekhar government (1990-1991) did not add any significant reforms.
Narasimha Rao government (1991-1996)
Crisis
The assassination of prime minister
Indira Gandhi in 1984, and later of her son
Rajiv Gandhi in 1991, crushed international investor confidence on the economy that was eventually pushed to the brink by the early 1990s.
As of 1991, India still had a fixed exchange rate system, where the rupee was pegged to the value of a basket of currencies of major trading partners. India started having
balance of payments problems since 1985, and by the end of 1990, it was in a serious economic crisis. The government was close to default
[. Arunabha Ghosh. Global Economic Governance Programme. Retrieved on 2 March 2007.], its 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
The
Government of India headed by
Narasimha Rao decided to usher in several reforms that are collectively termed as
liberalisation in the Indian
media.
Narasimha Rao appointed
Manmohan Singh as a special economical advisor to implement liberalisation.
The reforms progressed furthest in the areas of opening up to
foreign investment, reforming
capital markets,
deregulating domestic business, and reforming the trade regime. Liberalization has done away with the
Licence Raj (investment, industrial and import licensing) and ended many public monopolies, allowing automatic approval of
foreign direct investment in many sectors.
Rao's government's goals were reducing the
fiscal deficit,
privatization of the public sector, and increasing investment in infrastructure. Trade reforms and changes in the regulation of
foreign direct investment were introduced to open India to foreign trade while stabilizing external loans. Rao's finance minister,
Manmohan Singh, an acclaimed economist, played a central role in implementing these reforms. New research suggests that the scope and pattern of these reforms in India's foreign investment and external trade sectors followed the Chinese experience with external economic reforms.
- In the industrial sector, industrial licensing was cut, leaving only 18 industries subject to licensing. Industrial regulation was rationalized.
- Abolishing in 1992 the Controller of Capital Issues which decided the prices and number of shares that firms could issue.
- Introducing the SEBI Act of 1992 and the Security Laws (Amendment) which gave SEBI the legal authority to register and regulate all security market intermediaries.
- Starting in 1994 of the National Stock Exchange as a computer-based trading system which served as an instrument to leverage reforms of India's other stock exchanges. The NSE emerged as India's largest exchange by 1996.
- Reducing tariffs from an average of 85 percent to 25 percent, and rolling back quantitative controls. (The rupee was made convertible on trade account.)
- Encouraging foreign direct investment by increasing the maximum limit on share of foreign capital in joint ventures from 40 to 51 percent with 100 percent foreign equity permitted in priority sectors.
[. Ajay Singh and Arjuna Ranawana. Asiaweek. Retrieved on 2 March 2007.]
- Streamlining procedures for FDI approvals, and in at least 35 industries, automatically approving projects within the limits for foreign participation.
- Opening up in 1992 of India's equity markets to investment by foreign institutional investors and permitting Indian firms to raise capital on international markets by issuing Global Depository Receipts (GDRs).
- Marginal tax rates were reduced.
- Privatization of large, inefficient and loss-inducing government corporations was initiated.
Other
Later reforms
- Atal Bihari Vajpayee's administration surprised many by continuing reforms, when it was at the helm of affairs of India for five years.
- The Vajpayee administration continued with privatization, reduction of taxes, a sound fiscal policy aimed at reducing deficits and debts and increased initiatives for public works.
- The UF government attempted a progressive budget that encouraged reforms, but the 1997 Asian financial crisis and political instability created economic stagnation.
- Strategies like forming Special Economic Zones - tax amenities, good communications infrastructure, low regulation — to encourage industries has paid off in many parts of the country.
Impact of reforms
The
HSBC Global Technology Center in
Pune develops software for the entire HSBC group.
The impact of these reforms may be gauged from the fact that total foreign investment (including foreign direct investment, portfolio investment, and investment raised on international capital markets) in India grew from a minuscule US $132 million in 1991-92 to $5.3 billion in 1995-96.
Cities like
Bangalore,
Hyderabad,
Pune and
Ahmedabad have risen in prominence and economic importance, became centres of rising industries and destination for foreign investment and firms.
Ongoing economic challenges
- Inadequate infrastructure, which is often government monopoly.
OECD summarized the key reforms that are needed:
Reforms at the state level
The
Economic Survey of India 2007 by
OECD concluded:
See also
