Answer & Enrich Your Learning:
The economic liberalisation in India refers to the country’s economic policies, initiated in 1991 with the goal of making the economy more market- and service-oriented, and expanding the role of private and foreign investment.
- Liberalisation is referred to the rules and laws which were aimed at regulating the economic activities became major hindrances in growth and development.
- Liberalisation was introduced to put an end to restrictions and open various sectors of the economy.
- Though a few liberalisation measures were introduced in 1980s in areas of industrial licensing, export-import policy, technology upgradation, fiscal policy and foreign investment, reform policies initiated in 1991 were more comprehensive.
Deregulation of Industrial Sector:
- The reform policies introduced in and after 1991 removed many restrictions. Industrial licensing was abolished for almost all but product categories- alcohol, cigarettes, hazardous chemicals, industrial explosives, electronics, aerospace and drugs and pharmaceuticals.
- The only industries which are now reserved for the public sector are a part of defence equipment, atomic energy generation and railway transport.
- Many goods produced by small-scale industries have now been dereserved. In many industries, the market has been allowed to determine the prices.
Financial Sector Reforms:
- Financial sector includes financial institutions, such as commercial banks, investment banks, stock exchange operations and foreign exchange market.
- The RBI decides the amount of money that the banks can keep with themselves, fixes interest rates, nature of lending to various sectors, etc.
- One of the major aims of financial sector reforms is to reduce the role of RBI from regulator to facilitator of financial sector.
- The reform policies led to the establishment of private sector banks, Indian as well as foreign. Foreign investment limit in banks was raised to around 50 per cent.
- Those banks which fulfil certain conditions have been given freedom to set up new branches without the approval of the RBI and rationalise their existing branch networks.
- Foreign Institutional Investors (FII), such as merchant bankers, mutual funds and pension funds, are now allowed to invest in Indian financial markets.
- Tax reforms are concerned with the reforms in the government’s taxation and public expenditure policies, which are collectively known as its fiscal policy.
- It is now widely accepted that moderate rates of income tax encourage savings and voluntary disclosure of income. The rate of corporation tax, which was very high earlier, has been gradually reduced.
- To reform the indirect taxes, taxes levied on commodities, in order to facilitate the establishment of a common national market for goods and commodities.
- In order to encourage better compliance on the part of taxpayers many procedures have been simplified and the rates also substantially lowered.
Foreign Exchange Reforms:
- In 1991, as an immediate measure to resolve the balance of payments crisis, the rupee was devalued against foreign currencies.
- This led to an increase in the inflow of foreign exchange. Now, markets determine exchange rates based on the demand and supply of foreign exchange.
Trade and Investment Policy Reforms:
- Liberalisation of trade and investment regime was initiated to increase international competitiveness of industrial production and also foreign investments and technology into the economy. The aim was also to promote the efficiency of local industries and adoption of modern technologies.
- In order to protect domestic industries, India was following a regime of quantitative restrictions on imports. These policies reduced efficiency and competitiveness which led to slow growth of the manufacturing sector.
- The trade policy reforms aimed at:
- dismantling of quantitative restrictions on imports and exports
- reduction of tariff rates and
- removal of licensing procedures for imports.
- Import licensing was abolished except in case of hazardous and environmentally sensitive industries.
- Quantitative restrictions on imports of manufactured consumer goods and agricultural products were also fully removed from April 2001.
- Export duties have been removed to increase the competitive position of Indian goods in the international markets.