Effects of Liberalization on the Indian Economy

The removal of state regulation of economic activity is accomplished through the process of liberalization. What is liberalization? How did it affect the Indian economy? What are its positive and negative impacts? Scroll down the page to know more about the effects of liberalization on the Indian economy.

Any process of a state removing limitations on some private individual activity is known as liberalization. Liberalization has taken place when formerly prohibited items are no longer prohibited or when government regulations are loosened.

It removes governmental involvement and increases the autonomy of commercial firms. It refers to a government loosening previously enacted limits on economic or social policies. Deregulation of the industrial sector, banking sector changes, tax reforms, and reforms to the foreign exchange market all contributed to India’s liberalization.

Then what is Economic liberalization? What are its objectives?

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Economic liberalization

Economic liberalization is the process of reducing or removing governmental controls over commerce and business. Those who support economic liberalism, commonly known as proponents of free markets and free trade, are typically those who advance it. Taxes, social security contributions, and unemployment compensation are frequently decreased as a result of economic liberalization.

When did economic reforms begin in India?

India began a sequence of economic reforms on July 23, 1991, in response to a fiscal and balance-of-payments (BoP) crisis. The historic reforms would fundamentally alter the character and structure of the economy in the years to come.

What were the measures taken by the Indian government to start economic reforms?

India started an economic reform initiative that included two groups of measures:

• Macroeconomic stabilization measures: All economic measures, both local and foreign, that aim to increase the economy’s overall demand are referred to as macroeconomic stabilization measures. The creation of quality and well-paying jobs must be prioritized in order to increase the purchasing power of the general public and support the increased domestic demand.
• Measures for Structural Reform: It encompasses all policy changes that the government has made to increase the overall supply of goods and services in the economy. Naturally, this involves releasing the economy’s restrictions so that it can explore its own potential for increased productivity and output.

Let us discuss what the objectives of liberalization are.

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Objectives of Liberalization

• To promote the involvement of private Indian businesses and multinational corporations.
• To enable the Indian economy’s internationalization.
• Promote foreign trade in the nation to boost exports.
• To resolve the balance of payments crisis facing India.
• To increase the private sector’s involvement in the growth of India’s economy.
• to boost foreign direct investment in the Indian industry.
• To encourage domestic enterprises to compete with one another.

Liberalization Policies

The policies of liberalization which helps in the growth of the economy are:

• Deregulation of the Industrial Sector
• Financial Sector Reforms
• Tax Reforms
• Foreign Exchange Reforms
• Trade and Investment Policy Reforms
• External Sector Reforms
• Foreign Exchange Reforms
• Foreign Trade Policy Reforms

The economic repercussions of liberalization on both the country and investors might be significant.

Economic liberalization means that a nation “opens up” to the rest of the world in terms of commerce, rules, taxes, and other areas that generally have an impact on domestic business.

It has many impacts on the Indian economy. Let us discuss them.

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Impacts of liberalization on the Indian economy

Impact on the rate of GDP growth

India’s 6.6% annual average growth rate from 1990 to 2010 is almost twice as high as it was before the country’s economic reforms.

Taking Down Obstacles to International Investment

When a country has many barriers to entry, investing in emerging market nations can occasionally seem unattainable. These obstacles can include tax policies, prohibitions on foreign investment, legal concerns, and accounting requirements, all of which make entry into the nation difficult or impossible.

These restrictions are loosened as part of the economic liberalization process, and some private sector influence over the economy’s direction is given up. Frequently, deregulation and the privatization of businesses are involved.

Rate of Industrial Growth

Due to unfettered access to Indian markets, indigenous products are no longer competitive. Of course, they had more access to technology and scale economies.

Unrestricted Capital Flow

The main objectives of economic liberalization are the effective distribution of resources and competitive advantages, as well as the free flow of capital between states. Usually, this is accomplished by lowering protectionist measures like tariffs, trade regulations, and other trade barriers.

It becomes less expensive for businesses to access capital from investors due to the increased capital flow into the nation. Higher growth rates are the result of corporations being able to invest in profitable ventures that they might not have been able to before liberalization due to a higher cost of capital.

Impact on India’s Small-Scale Sector

After independence, the government made an effort to revitalize the small-scale industry by reserving goods solely for its manufacture. The list of restricted commodities was significantly reduced as a result of liberalization, and many new industries were made accessible to large corporations.

However, there is still a small-scale sector that supports the Indian economy. It significantly impacts exports and private-sector employment. The results are conflicting, although many once small-scale industries have grown and improved. Although they only exist because of government backing, overall value addition, product innovation, and technology adoption continue to be poor.

Outcomes in Agriculture

Agriculture now only accounts for 15% of the national economy. However, the percentage of people who depend on agriculture is still about 55%. Although there has been a significant change in crop patterns, the effects of liberalization cannot be accurately quantified. We learned through the agricultural television programs that there are still a lot of pervasive government regulations and interventions, from the point of production to the point of distribution.

• The agricultural economy worldwide is severely distorted. This is mostly due to the unequal economic and political power distribution between farmers in industrialized and developing nations. Commercial, capitalist agriculture is practiced in industrialized nations and is controlled by large agribusiness conglomerates. They have easy access to WTO policies and can simply negotiate better terms for themselves at the expense of farmers in poor countries.
• On the plus side, India’s high-quality, distinctive products—like basmati rice—are virtually self-sufficient and in high demand worldwide. In general, India is better equipped to tackle the challenges of globalization in this situation. If implemented in a fair and sustainable way, it will have a significant multiplier effect on the entire economy.
• In addition to this, Farm Mechanization—the use of tractors, combines, electronic/solar pumps, etc.—is another benefit of globalization. Moving on, information technology is now being applied in agriculture to simplify farming.

Result for the Services Sector

• In this instance, globalization has benefited poor nations while harming industrialized ones. Human resources have historically been substantially more affordable in developing economies because of historical economic inequality between the two groups.
• The IT revolution helped to expedite this even more, and as a result, many jobs left developed countries and moved to poor nations.
• The growth of the information technology, software, BPO, KPO, and LPO industries in India has prevented a large portion of the country’s demographic dividend from being wasted. The best thing is that exporting services results in high-value exports.
• The only product that gets exported is professional labour, which doesn’t diminish with time but actually increases. India is now better positioned to develop into a true knowledge economy.
• The majority of India’s foreign exchange gains come from the export of these services. In actuality, only during the three years 2000–2002 did India have a current account surplus.

Banking

Additionally, India has benefited in the banking sector. There have been three rounds of licence grants for private banks since the reforms. Private banks like ICICI, HDFC, and Yes Bank, as well as foreign institutions, increased the bar for the Indian banking sector. The banking sector is now more competitive, and public sector banks are more customer-focused. Similarly, the insurance sector currently provides a wide range of products, including Unit Linked Insurance Plans and Travel Insurance.

Stock exchanges

• Stock markets are a key development as well. Corporate Securities can be traded in real-time on stock exchanges.
• It offers methods for ongoing price discovery as well as flexible exit and entry points for investors. These are the foundation of free markets today, and there is active trading taking place on stock exchanges around the globe. Their significance can be gauged by the fact that stock market performance is the best predictor of an economy’s current state and future potential.
• A comprehensive range of related services, including Investment Banking, Asset Management, Underwriting Services, Hedging Advice, etc., have been made available by these markets. In total, these support lakhs of jobs across India.
• Similar to stock markets, commodities markets offer opportunities for buying and selling a variety of permissible commodities.

Telecom Sector

• Traditionally, the telecom industry was a monopoly owned by the government, which led to very poor service. Private telecom industry success peaked after reforms. Indian telecom firms also expanded internationally. However, this sector’s growth and outlook were harmed by corruption and rent-seeking.
• Modern Direct to Home services led to increases in television service quality on the one hand and the demise of many local cable companies on the other.

Sectors of Education and Health

• India has had access to top-notch education, and deregulation has led to the mushrooming of private engineering and medical colleges. In actuality, though, society as a whole was devastated.
• Only a very small percentage of applicants are accommodated by these new universities, and they are exceedingly expensive.
• Transparency International, an independent group, recently published a report alleging that India’s healthcare system is the most corrupt in the entire world.
• Many students must borrow money from banks to pay for their education due to the high cost of tuition. The majority of them are unable to find employment after qualifying. Practice ends up being the last recourse. Now, a person gets seduced by corruption in order to maintain a respectable standard of living and repay loans. As a result, when numerous instances of the same type are combined, a corrupt system, economy, and society result.
• The truth is that after deregulation and liberalization, the government withdrew its support from social sectors along with other sectors. There are now affordable solutions in the private sector that range in quality from mediocre to excellent. Less than Mediocre to Mediocre alternatives are accessible in the public sector. This still remains a sizable population of future students and patients.

Advantages of liberalization in India

• Freely flowing Capital: Liberalization has boosted the flow of funding by making it more inexpensive for all types of businesses to access capital from investors and to have a successful project.
• Investor diversity: As a result of liberalization, investors are now able to place a significant amount of their capital in a variety of assets.
• Impact on agriculture: Liberalization had a favorable effect on agriculture. The cropping patterns and designs have undergone significant alteration. Before the agricultural sector was liberalized, the government imposed limitations on everything from the beginning of crop production to its distribution.
• Economic laws that are relaxed result in a rise in the value of the stock market, which improves investor trading.

Negative impacts of liberalization

• Economic instability: Due to the drastic changes that were made in the political and economic spheres, there was economic instability. Indian liberalization’s unfavorable effects include the decline of the economy. The massive return of political-economic power will undermine India’s whole economy.
• Impact of technology: Due to rapid development and innovation in technology, many small- and medium-sized enterprises (SMEs) and other firms in emerging nations are able to adapt to the changes or even close their doors.
• Acquisitions and mergers: A lot of tiny firms have amalgamated with big businesses. Numerous smaller businesses faced increased competition from powerful global corporations.  Because of this, workers in small industries might need to develop their abilities and adopt new technologies. Employee inefficiency and a strain on the company’s resources may result from time.

Conclusion

Economic liberalization started in 1991 in India by reviving economic policies, with the goal of creating an economy more market-oriented and increasing the role of private and foreign investment.

Self-reliance and a lack of R&D spending served as roadblocks to technological advancement, which resulted in the manufacture of items of lower quality. In Indian society, there is still a strong assumption that imported items are preferable to domestic ones. It is widely accepted that, before assessing the success of the ongoing industrial policy, consideration must be given to the state of the country following two centuries of exploitation and a horrific separation.

Many factors like lack of tactical skills, low literacy levels, unskilled labor, and absence of technology were significant aspects of the Indian economy before independence. It is stated that industrial strategies, policies, and their restoration are essential for a nation’s economy to thrive.

Article Written By: Atheena Fathima Riyas