Structural Changes in the Indian Economy After Liberalisation
1. Need for Economic Reforms
Weakness of the pre-1991 policies- The pre-1991 policies resulted in low rate of economic growth, rising
unemployment, stagnation in the rate of domestic savings, poor performance of public sector industries, inadequate
infrastructural facilities, slow industrial development and growth of monopolies, etc.
Major Foreign Exchange Crisis- First, the immediate cause for the foreign exchange crisis was the war between the
two Gulf Countries, Iraq and Kuwait in 1990-91. Secondly, India’s external debt had increased over time. The burden
of interest and repayment of old debts was very large. Third, the foreign exchange in the form of NRI deposits was
being withdrawn very rapidly because of the political instability and uncertainty at home. Fourth, the growth of
imports had always been far more than the growth of exports.
Conditionalities imposed by IMF and World Bank- India reached out to the IMF and World Bank to tide over the
crisis. As part of these conditions, India was required to cut down fiscal deficit and growth of money supple. Under the
pressure of the IMF and World Bank, the Indian policy-makers were almost pressurised to make several changes in the
economic policy before the country could obtain fresh credit from the IMF and World Bank to tide over the crisis.
Fall of USSR (Union of Soviet Socialist Republics)- At the end of 1990, the political system of these countries
collapsed. Most of these countries became market-oriented economies. India had to open up trade with these and
other countries on the basis of its ability to compete. India had to reorganise its own policies to preserve its share in
the world trade.
Liberalisation:
Economic liberalisation is the policy of deregulation of different segments of the economy. It is the policy of doing away or
reducing the government controls over industry, investment, imports, foreign exchange and other activities which exited
before 1991.
2. Features of Liberalisation
Delicensing- The industrial licensing policy led to unnecessary government interference, delays in investment
decisions and bureaucratic red-tapism, etc. Therefore, there was a need to review these measures. The thrust of the
policy of liberalisation was on abolishing the requirement of licensing of industries. The licensing requirement was
abolished for most of the industries except five (alcohol, cigarettes, hazardous chemicals, defence equipments and
industrial explosives) for environmental, social, strategic, and security reasons. Entrepreneurs are now free to enter
any business, industry or trade. The industrial policy of 1991 made the licensing policy very liberal.
Foreign Trade Reforms- Tariff restrictions have been considerably relaxed. Import controls have been abolished
thereby moving to market-based method of allocating imports. The policy of liberalisation has led to freedom to
import capital goods and technology.
Foreign Exchange Market Reforms- Flexible exchange rate has been introduced under which exchange rate is
determined by market forces. The RBI only ensures that there are no extreme fluctuations in the exchange rate.
Removal of Restrictions on mergers- Restrictions on mergers, takeovers, separation of industrial units, etc. have all
been removed.
Relaxation in Controlling Monopolies- Under the Monopolies and Restrictive Trade Practice Act, 1969, all the firms
with assets above a certain amount (100 crore since 1985) were permitted to enter selected industries only and they
were required to take approval of the government for any investment proposals. This Act has been abolished as part
of liberalisation policy. Monopoly houses are no longer required to seek government approval for expansion and
establishment of new industries.
Industrial Location Policy Liberalised- Industries are allowed to start up their operation at all locations other than the
cities with more than one million population.
Development of Infrastructure- Private sector has been allowed to enter and develop the infrastructure such as
power, roadways, banking, civil aviation, communications, etc.
Ease of Doing Business- As part of this policy, the existing rules regarding various licenses and permissions needed for
doing business in the country have been simplified.
3. Significance of Liberalisation Policy
It liberalised trade and industrial policies and freed up capital market and the financial sector.
Liberalisation policy has provided freedom to entrepreneurs. The business entry is now liberalised.
Liberalisation policy has injected a spirit of competition in the economic system and has encouraged the entrepreneurs to
undertake investment. This has increased efficiency in the economy.
1. Need for Economic Reforms
Weakness of the pre-1991 policies- The pre-1991 policies resulted in low rate of economic growth, rising
unemployment, stagnation in the rate of domestic savings, poor performance of public sector industries, inadequate
infrastructural facilities, slow industrial development and growth of monopolies, etc.
Major Foreign Exchange Crisis- First, the immediate cause for the foreign exchange crisis was the war between the
two Gulf Countries, Iraq and Kuwait in 1990-91. Secondly, India’s external debt had increased over time. The burden
of interest and repayment of old debts was very large. Third, the foreign exchange in the form of NRI deposits was
being withdrawn very rapidly because of the political instability and uncertainty at home. Fourth, the growth of
imports had always been far more than the growth of exports.
Conditionalities imposed by IMF and World Bank- India reached out to the IMF and World Bank to tide over the
crisis. As part of these conditions, India was required to cut down fiscal deficit and growth of money supple. Under the
pressure of the IMF and World Bank, the Indian policy-makers were almost pressurised to make several changes in the
economic policy before the country could obtain fresh credit from the IMF and World Bank to tide over the crisis.
Fall of USSR (Union of Soviet Socialist Republics)- At the end of 1990, the political system of these countries
collapsed. Most of these countries became market-oriented economies. India had to open up trade with these and
other countries on the basis of its ability to compete. India had to reorganise its own policies to preserve its share in
the world trade.
Liberalisation:
Economic liberalisation is the policy of deregulation of different segments of the economy. It is the policy of doing away or
reducing the government controls over industry, investment, imports, foreign exchange and other activities which exited
before 1991.
2. Features of Liberalisation
Delicensing- The industrial licensing policy led to unnecessary government interference, delays in investment
decisions and bureaucratic red-tapism, etc. Therefore, there was a need to review these measures. The thrust of the
policy of liberalisation was on abolishing the requirement of licensing of industries. The licensing requirement was
abolished for most of the industries except five (alcohol, cigarettes, hazardous chemicals, defence equipments and
industrial explosives) for environmental, social, strategic, and security reasons. Entrepreneurs are now free to enter
any business, industry or trade. The industrial policy of 1991 made the licensing policy very liberal.
Foreign Trade Reforms- Tariff restrictions have been considerably relaxed. Import controls have been abolished
thereby moving to market-based method of allocating imports. The policy of liberalisation has led to freedom to
import capital goods and technology.
Foreign Exchange Market Reforms- Flexible exchange rate has been introduced under which exchange rate is
determined by market forces. The RBI only ensures that there are no extreme fluctuations in the exchange rate.
Removal of Restrictions on mergers- Restrictions on mergers, takeovers, separation of industrial units, etc. have all
been removed.
Relaxation in Controlling Monopolies- Under the Monopolies and Restrictive Trade Practice Act, 1969, all the firms
with assets above a certain amount (100 crore since 1985) were permitted to enter selected industries only and they
were required to take approval of the government for any investment proposals. This Act has been abolished as part
of liberalisation policy. Monopoly houses are no longer required to seek government approval for expansion and
establishment of new industries.
Industrial Location Policy Liberalised- Industries are allowed to start up their operation at all locations other than the
cities with more than one million population.
Development of Infrastructure- Private sector has been allowed to enter and develop the infrastructure such as
power, roadways, banking, civil aviation, communications, etc.
Ease of Doing Business- As part of this policy, the existing rules regarding various licenses and permissions needed for
doing business in the country have been simplified.
3. Significance of Liberalisation Policy
It liberalised trade and industrial policies and freed up capital market and the financial sector.
Liberalisation policy has provided freedom to entrepreneurs. The business entry is now liberalised.
Liberalisation policy has injected a spirit of competition in the economic system and has encouraged the entrepreneurs to
undertake investment. This has increased efficiency in the economy.
