Indian Economic Liberalisation

Topics: Economics, Industry, Macroeconomics Pages: 12 (2914 words) Published: April 16, 2011
Table of Contents
Pre-Liberalisation age2
Reason for Liberalisation2
Reforms taken during Liberalisation3
Financial Sector Reforms3
Industrial Sector Reforms5
Trade Sector Reforms6
Fiscal Sector Reforms7
Challenges Ahead8
Current India14

Pre-Liberalisation age: A struggle

Indian was under social democratic policies from 1947 to 1991. The economy was characterised by extensive regulation, protectionism, public ownership, persasive corruption and slow growth. Indian economic policy after independence was influenced by colonial experinece, which was seen by Indian leaders as exploitative, and by those leaders’ exposure to democratic socialism as well as the progress achieved by the economy of the Soviet Union. Domestic ploicy tended towards protectionism, with a strong emphasis on import substitution, industrialisation, economic interventionis, a large public sector, business regulation, and central planning, while trade and foreign investment policies were relatively liberal. Steel, mining, machine tools, water, telecommunications, insurance, and electrical plants, among other industries, were effectively nationalised in the mid-1950s. Economy transformaed from primarlity agriculture, forestry, fishing, and textile manufacturing in 1947 to major heavy industry, transportation, and telecommunications industry by late 1970s. In 1980s, the root cause of the crisis was the large and growing fiscal imbalance. The subsidies grew at a rate faster than government expenditures and it rose from Rs. 19.1 billion in 1980-81 to Rs. 107.2 billion in 1990-91. Before 1991, India was a closed economy.

Reason for Liberalisation

• Balance of Payment (BOP) crisis in 1991 which pushed the country to near bankruptcy.

• The Rupee devalued and economic reorms were forced upon India.

• Indian Central bank had refused new credit and foreign exchange reserves had reduced to the point tht India could barely finance three weeks’ worth of imports.

• Politicised co-operative sector.

• Bureaucratised public sector.

• No FDI & FII investments.

Liberalisation : A beginning

Liberalisation of the economy means to free it from direct or physical controls imposed by the governement.

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 privatisation, tax reforms, and inflation-controlling measures.

Reforms taken during Liberalisation

1. Financial Sector Reforms

2. Industrial Sector Reforms

3. Trade Sector Reforms

4. Fiscal Sector Reforms

1. Financial Sector Refroms :- Financial sector reforms are at the centre stage of the economic liberalization that was initiated in India in mid 1991. This is partly because the economic reform process itself took place amidst two serious crises involving the financial sector :

• The balance of payments crisis that threatened the international credibility of the country and pushed it to the brink of default.

• The grave threat of insolvency confronting the banking system which had for years concealed its problems with the help of defective accounting policies.

Key Reforms are:-

a. Reforms in Banking Sector

b. Reforms in Stock Market

c. Reforms in Insurance

a. Reforms in Banking Sector :-

(a) Measures for liberalisation, like dismantling the complex system of interest rate controls, eliminating prior approval of the Reserve Bank of India for large loans, and reducing the statutory requirements to invest in government securities.

(b) Measures designed to increase financial soundness, like introducing capital adequacy requirements and other prudential norms for banks and strengthening banking...
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