You are on page 1of 9

1/ 6/ 13

Econom i l er al at i n i I ndi - Wi i edi , t he f r ee encycl pedi c i b i o n s a kp a o a

Economic liberalisation in India
From Wikipedia, the free encyclopedia

The economic liberalisation in India refers to ongoing economic reforms in India that started on 24 July 1991. After Independence in 1947, India adhered to socialist policies. Attempts were made to liberalize economy in 1966 and 1985. The first attempt was reversed in 1967. Thereafter, a stronger version of socialism was adopted. Second major attempt was in 1985 by Prime Minister Rajiv Gandhi. The process came to a halt in 1987, though 1966 style reversal did not take place.[1] In 1991, after India faced a balance of payments crisis, it had to pledge 20 tons of gold to Union Bank of Switzerland and 47 tons to Bank of England as part of a bailout deal with the International Monetary Fund (IMF). In addition, the IMF required India to undertake a series of structural economic reforms.[2] As a result of this requirement, the government of P. V. Narasimha Rao and his finance minister Manmohan Singh (currently the Prime Minister of India) started breakthrough reforms, although they did not implement many of the reforms the IMF wanted.[3][4] The new neo-liberal policies included opening for international trade and investment, deregulation, initiation of privatization, tax reforms, and inflation-controlling measures. The overall direction of liberalisation 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 labour laws and reducing agricultural subsidies.[5] Thus, unlike the reforms of 1966 and 1985 that were carried out by the majority Congress governments, the reforms of 1991 carried out by a minority government proved sustainable. There exists a lively debate in India as to what made the economic reforms sustainable? [6] The fruits of liberalisation reached their peak in 2007, when India recorded its highest GDP growth rate of 9%.[7] With this, India became the second fastest growing major economy in the world, next only to China.[8] The growth rate has slowed significantly in the first half of 2012.[9] 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.[10] Indian government coalitions have been advised to continue liberalisation. India grows at slower pace than China, which has been liberalising its economy since 1978.[11] The McKinsey Quarterly states that removing main obstacles "would free India’s economy to grow as fast as China’s, at 10 percent a year".[12] There has been significant debate, however, around liberalization as an inclusive economic growth strategy. Since 1992, income inequality has deepened in India with consumption among the poorest staying stable while the wealthiest generate consumption growth.[13] For 2010, India was ranked 124th among 179 countries in Index of Economic Freedom World Rankings, which is an improvement from the preceding year.

Contents
1 Pre-liberalisation policies 1.1 Impact 2 Narasimha Rao government (1991–1996) 2.1 Crisis 3 Sustainability of Economic Liberalization
en. w i edi . or g/ w i Econom i _l er al at i n_i _I ndi k ip a k i/ c i b i o n s a 1/ 9

The government also prevented firms from laying off workers or closing factories. water. with a strong emphasis on import substitution. telecommunications. Planning and the state. would determine how much investment was needed in which sectors. w i edi . rather than markets. mining. machine tools.1/ 6/ 13 Econom i l er al at i n i I ndi . were effectively nationalized in the mid-1950s. India also operated a system of central planning for the economy.1 Reforms at the state level 7 See also 8 References 9 External links Pre-liberalisation policies Further information: Economic history of India and Licence Raj 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. The government slightly reduced Licence Raj and also promoted the growth of the telecommunications and software industries. was inconvertible and high tariffs and import licensing prevented foreign goods reaching the market. and central planning. how much. the rupee.[16] Before the process of reform began in 1991. not international trade—a belief generated by a mixture of socialism and the experience of colonial exploitation. the government led by Rajiv Gandhi started light reforms.[15] Elaborate licences. among other industries. commonly referred to as Licence Raj. t he f r ee encycl pedi c i b i o n s a kp a o a 4 Later reforms 5 Impact of reforms 6 Ongoing economic challenges 6. Policy tended towards protectionism. — BBC[17] In the 80s. regulations and the accompanying red tape. The labyrinthine bureaucracy often led to absurd restrictions—up to 80 agencies had to be satisfied before a firm could be granted a licence to produce and the state would decide what was produced. en.Wi i edi . or g/ w i Econom i _l er al at i n_i _I ndi k ip a k i/ c i b i o n s a 2/ 9 .[14] Five-Year Plans of India resembled central planning in the Soviet Union. industrialization under state monitoring. were required to set up business in India between 1947 and 1990. The central pillar of the policy was import substitution. state intervention at the micro level in all businesses especially in labour and financial markets. the belief that India needed to rely on internal markets for development. the government attempted to close the Indian economy to the outside world. in which firms required licenses to invest and develop. The Indian currency. a large public sector. business regulation. and electrical plants. insurance. at what price and what sources of capital were used.[citation needed] The Vishwanath Pratap Singh (1989–1990) and Chandra Shekhar Singh government (1990–1991) did not add any significant reforms. Steel.

[2] Present Prime Minister Manmohan Singh was then Finance Minister in Cabinet of Prime Minister P V Narasimha Rao A Balance of Payments crisis in 1991 pushed the country to near bankruptcy.5% from 1950s to 1980s. License owners built up huge powerful empires. which stagnated around 3.3%. or g/ w i Econom i _l er al at i n_i _I ndi k ip a k i/ c i b i o n s a enterprise and competition were encouraged and 3/ 9 . India still had a fixed exchange rate system. Most of the economic reforms were forced upon India as a part of the IMF bailout. electrical power and communications. Infrastructure investment was poor because of the public sector monopoly. the economy was opened to trade and investment.[17] A huge public sector emerged.[8] Narasimha Rao government (1991–1996) Crisis Main article: 1991 India economic crisis The assassination of prime minister Indira Gandhi in 1984.[19] Only four or five licences would be given for steel.1/ 6/ 13 Econom i l er al at i n i I ndi . Controls started to be dismantled. and by the end of 1990. Thailand by 9%. and later of her son Rajiv Gandhi in 1991. duties and taxes progressively lowered. t he f r ee encycl pedi c i b i o n s a kp a o a Impact The low annual growth rate of the economy of India before 1980. self-perpetuating bureaucracy that still exists throughout much of the country"[20] and corruption flourished under this system. In return for an IMF bailout. where the rupee was pegged to the value of a basket of currencies of major trading partners.[17] Licence Raj established the "irresponsible.Wi i edi . w i edi . Indonesia by 9%. tariffs. The government was close to default. South Korea by 10% and in Taiwan by 12%. while per capita income averaged 1. the rupee devalued and economic reforms were forced upon India. Pakistan grew by 5%. crushed international investor confidence on the economy that was eventually pushed to the brink by the early 1990s. As of 1991.[18] At the same time. gold was transferred to London as collateral. State-owned enterprises made large losses. private sector en.[21][22] 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. That low point was the catalyst required to transform the economy through badly needed reforms to unshackle the economy.[17] Income Tax Department and Customs Department manned by IAS officers became efficient in checking tax evasion. it was in a serious economic crisis. India started having balance of payments problems since 1985. state monopolies broken.

wikipedia. t he f r ee encycl pedi c i b i o n s a kp a o a enterprise and competition were encouraged and globalisation was slowly embraced. you can help by expanding it (//en. according to the latest world development indicators. the decision was rolled back. and sanctions that were more comprehensive were imposed following Pokhran-II. There were dire predictions of the collapse of the economy. double-digit inflation etc. it translates into $2.3 billion in 1995–96. it was approved in December 2012. VSNL. when it was at the helm of affairs of India for five years. Maruti Suzuki. India faced severe sanctions after Pokhran-I (five nuclear tests on 11 and 13 May 1998 at the Pokhran range in Rajasthan Desert). w i edi . most of the sanctions have been lifted and the Indian economy is continuing to grow at an acceptably satisfactory rate.[24] Impact of reforms The impact of these reforms may be gauged from the fact that total foreign investment (including foreign direct investment. But due to pressure from fellow coalition parties and the opposition.[23] The BJP-led National Democratic Alliance Coalition began privatizing under-performing government owned business including hotels. The reforms process continues today and is accepted by all political parties. After five years.1/ 6/ 13 Econom i l er al at i n i I ndi . However. behind only the US. but the speed is often held hostage by coalition politics and vested interests. portfolio investment. Airports and began reduction of taxes.0%.php? title=Economic_liberalisation_in_India&action=edit) . but the 1997 Asian financial crisis and political instability created economic stagnation.913 billion purchasing power parity (PPP). and investment raised on international capital markets) in India grew from a minuscule US$132 million in 1991–92 to $5.[26] en. The Bharatiya Janata Party (BJP)-Atal Bihari Vajpayee administration surprised many by continuing reforms.4 billion by conventional calculations. Astaire Research[8] Sustainability of Economic Liberalization Go to : Economic liberalization Later reforms This list is incomplete. the Government initiated the introduction of 51% Foreign Direct Investment in retail sector. Towards the end of 2011. or g/ w i Econom i _l er al at i n_i _I ndi k ip a k i/ c i b i o n s a 4/ 9 . a sound fiscal policy aimed at reducing deficits and debts and increased initiatives for public works. — India Report.org/w/index. Economic and technology-related sanctions have repeatedly not proved to be very effective in compelling nations to change their sovereign decisions made in enlightened self-interest. it is the world's fourth largest economy. In PPP terms. Though India’s Gross National Income is only $477. The United Front government attempted a progressive budget that encouraged reforms.Wi i edi . China and Japan. The growth rate for 2003–04 was 6.

a framework for the foreign investment had been established. powered by IT and BPO. or g/ w i Econom i _l er al at i n_i _I ndi k ip a k i/ c i b i o n s a 5/ 9 . the West would consider investment in India. fascination with India is translating into active consideration of India as a destination for FDI. only a few years back. The new incoming government of Dr. should the conditions permit. — OECD[10] The HSBC Global Technology Center in Pune develops software for the entire HSBC group. In those infrastructure sectors which have been opened to competition. and knowledge management activities”. Jaipur. asset management and information technology—output has grown rapidly.. Highly restrictive and complex labour laws. The A T Kearney study is putting India second most likely destination for FDI in 2005 behind China. By the end of Vajpayee’s term as Prime Minister. [25] Election of AB Vajpayee as Prime Minister of India in 1998 and his agenda was a welcome change. t he f r ee encycl pedi c i b i o n s a kp a o a Cities like Chennai. Today. Increasing Gap Between the Lower and Upper Classes. research and development. By 2004. Manmohan Singh in 2004 is further strengthening the required infrastructure to welcome the FDI. Inefficient public sector. Ongoing economic challenges Main article: Economy of India Problems in the agricultural sector. Gurgaon. Corruption en. Indore and Ahmedabad have risen in prominence and economic importance.. NOIDA. such as telecoms and civil aviation. To quote the A T Kearney Study “India's strong performance among manufacturing and telecom & utility firms was driven largely by their desire to make productivity-enhancing investments in IT. Gaziabad.1/ 6/ 13 Econom i l er al at i n i I ndi .] In service sectors where government regulation has been eased significantly or is less burdensome —such as communications.Wi i edi . business process outsourcing. the West was developing a bit of a fascination to India’s brainpower. Pune. w i edi . Inflation in basic consumable goods. insurance. with exports of information technology enabled services particularly strong. [. the private sector has proven to be extremely effective and growth has been phenomenal. which is often government monopoly. a rate of growth that will double average income in a decade. This is a great leap forward. His prescription to speed up economic progress included solution of all outstanding problems with the West (Cold War related) and then opening gates for FDI investment. It has displaced US to the third position. India was at the 15th position. become centres of rising industries and destination for foreign investment and firms.[4][10][27][28][29][30][31][32][33] Inadequate infrastructure. In three years. Annual growth in GDP per capita has accelerated from just 1¼ per cent in the three decades after Independence to 7½ per cent currently. Hyderabad. Bangalore.

[10] The analysis of this report suggests that the differences in economic performance across states are associated with the extent to which states have introduced market-oriented reforms. which is a key to sharing the fruits of growth and lowering poverty. economic performance is much better in states with a relatively liberal regulatory environment than in the relatively more restrictive states". social policies should be improved to better reach the poor and—given the importance of human capital—the education system also needs to be made more efficient. t he f r ee encycl pedi c i b i o n s a kp a o a High fiscal deficit This list is incomplete. Public expenditure should be re-oriented towards infrastructure investment by reducing subsidies. employment growth has been concentrated in firms that operate in sectors not covered by India’s highly restrictive labour laws. also need to be addressed.wikipedia. w i edi . acts as a barrier to entrepreneurship and need to be improved.Wi i edi . where these labour laws apply. you can help by expanding it (//en. Thus.php? title=Economic_liberalisation_in_India&action=edit) .org/w/index.1/ 6/ 13 Econom i l er al at i n i I ndi . would increase the potential for growth outside of agriculture and thus boost better-paid employment. education and basic services. particularly in some of the states. while for direct taxes. In the formal sector. further reforms on these lines. which are other constraints on growth. employment has been falling and firms are becoming more capital intensive despite abundant low-cost labour. A number of barriers to competition in financial markets and some of the infrastructure sectors. the taxable base should be broadened and rates lowered. complemented with measures to improve infrastructure. In product markets. — OECD[10] Reforms at the state level See also: Economic disparities in India The Economic Survey of India 2007 by OECD concluded: At the state level. OECD summarized the key reforms that are needed: In labour markets. or g/ w i Econom i _l er al at i n_i _I ndi k ip a k i/ c i b i o n s a 6/ 9 . The indirect tax system needs to be simplified to create a true national market. Public companies are generally less productive than private firms and the privatisation programme should be revitalised.[10] en. inefficient government procedures. Furthermore. Labour market reform is essential to achieve a broader-based development and provide sufficient and higher productivity jobs for the growing labour force.

ukibc.com/news/redefining-the-hindu-rate-ofen.swaminomics. Kirit (2000). http://www.ukibc.indiainfo.html) .bbc.cfm? story_id=S%26%29H%2C%2BPQ%27%25%0A) .com/doi/abs/10.co.com/ukindia2/files/India60. ^ "That old Gandhi magic" (http://economist.reason.eldis. http://news.cfm? story_id=10808493. New York Times.htm. 12. ^ a b c d "India: the economy" (http://news.2011.html) .economist. 5.stm) . 15. ^ https://www. ^ Street Hawking Promise Jobs in Future (http://www. June 29.indiatimes.reason. 16. The Financial Express. http://www.cms 14.htm) . http://www. ^ "India's economy: What's holding India back?" (http://www.uk/2/hi/south_asia/55427.co. w i edi .nytimes.indian-network. Saman and Parikh.com/india/Indias-income-inequality-has-doubled-in-20years/articleshow/11012855.de/artikel/The%20McKinsey%20Quarterly-%20India-From%20emerging%20to%20surging. UK)126-84 7.com/ukindia2/files/India60.bbc. 12 February 1998. ^ For a critique of the existing explanations and a comprehensive alternative explanation see: Sharma.org/static/DOC12473.org/dataoecd/17/52/39452196. ^ http://www.pdf) .org/dataoecd/17/52/39452196.cfm?story_id=S%26%29H%2C%2BPQ%27%25%0A. ^ a b Economic Crisis Forcing Once Self-Reliant India to Seek Aid (http://www.de/artikel/The%20McKinsey%20Quarterly-%20IndiaFrom%20emerging%20to%20surging.html) . Chanchal Kumar (2011) "A Discursive Dominance Theory of Economic Reforms Sustainability (http://www. The Times of India.html.oecd.org/static/DOC12473. The Economist.pdf) .Wi i edi . http://www.pdf.com/news/redefining-the-hindu-rate-ofgrowth/104268/) ." India Review (Routledge. t he f r ee encycl pedi c i b i o n s a kp a o a See also Economy of India Globalisation in India License Raj Hindu rate of growth References 1.cia. 1991 3. ^ Sam Staley (2006).financialexpress.pdf. http://economist. 13. ^ a b c d e f "Economic survey of India 2007: Policy Brief" (http://www.com/opinion/displaystory. Astaire Research. ^ Kelegama.economist.1/ 6/ 13 Econom i l er al at i n i I ndi . 2001. "The Rise and Fall of Indian Socialism: Why India embraced economic reform" (http://www.pdf.1080/14736489.uk/2/hi/south_asia/55427.com/2006/04/20/2004imf-labour-laws. 6 March 2008.com/doi/abs/10. Political Economy of Growth and Reforms in South Asia (http://www.htm) . Second Draft. or g/ w i Econom i _l er al at i n_i _I ndi k ip a k i/ c i b i o n s a growth/104268/. 7/ 9 .com/displaystory.org/articles/20011125_streethawking.tandfonline.oecd.stm. 6.stm) 1991 4. 9.com/displaystory. ^ "Redefining The Hindu Rate Of Growth" (http://www.bbc.bbc. 18.indiannetwork.gov/library/publications/the-world-factbook/geos/in. UK)126-84 2. ^ a b c "The India Report" (http://www.pdf) . ^ "The McKinsey Quarterly: India—From emerging to surging" (http://business.tandfonline.com/news/show/36682. ^ a b "IMF calls for urgent reform in Indian labour laws" (http://news.co.com/1991/06/29/world/economic-crisis-forcing-once-self-reliant-india-to-seek-aid.574550) . 27 November 1997. Chanchal Kumar (2011) "A Discursive Dominance Theory of Economic Reforms Sustainability (http://www.eldis.co. ^ http://timesofindia.com/opinion/displaystory.indiainfo.cfm? story_id=10808493) ." India Review (Routledge. 11.html#Econ 8.com/2006/04/20/2004imf-labourlaws.com/news/show/36682. see: Sharma.1080/14736489. ^ For a complete history & analysis of liberalization episodes in India.financialexpress. http://news. 25 November 2001 17. ^ Timeline:India -BBC (http://news. http://www. http://www. http://business.574550) . OECD. BBC. The McKinsey Quarterly.uk/2/hi/south_asia/1155813. The Economist.html.2011.uk/news/business-18275858 10.

html.org/interns2006/How%20Wrong%20is%20left%20about%20ecoonimic%20reforms%20in%2 0India%20-%20Aditya.ccsindia. Valerie Cerra and Sweta Chaman Saxena. The World Bank. http://www. and Shub Debgupta. Reason. 26.html) .stm) labour law reform".PDF.html.co. ^ J.worldbank. Labor Laws and Government Policy: An Analysis with Special Reference to India" (http://www. growth/104268/.worldbank. 21. t he f r ee encycl pedi c i b i o n s a kp a o a 19.org/20060701faessay85401-p0/gurcharan-das/the-india-model. 30.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0. "Contemporary Issues on (http://atlmri.googlepages.htm) . ^ Aditya Gupta (2006).com/. 27. 2008.googlepages.html. http://www. Kaushik (27 June 2005).net/Econ_Articles/India/India_Rodrik_DeLong.bbc.html. http://www. en. The Foreign Affairs.com/50yrs/kapur. "How wrong has the Indian Left been about economic reforms?" (http://www.com/blog/show/131810. "Retrenchment. http://www.com/asiaweek/96/0412/nat1. http://www.pdf) . ^ "Industry passing through phase of transition" (http://www. 23.revver.economist.bbc. w i edi . "What Slumdog Millionaire can teach Americans about economic stimulus" (http://www.globaleconomicgovernance.tribuneindia.asiaweek. 32. Makar (2007). 28.economist. http://news.htm. Ajay Singh and Arjuna Ranawana.PDF) . Bradford DeLong (2001).com/RCD_MILI.html) . C. Global Economic Governance Programme.reason.org/interns2006/How%20Wrong%20is%20left%20about%20ecoonimic%20reforms%20in% 20India%20-%20Aditya. ^ "India Country Overview 2008" (http://www. Retrieved 22 August 2008.ccsindia. 24.uk/2/hi/south_asia/4103554. 25.reason.00. The Economist.com/watch/339183/flv/affiliate/94378) .pdf. http://www.foreignaffairs.contentMD K:20195738~menuPK:295591~pagePK:141137~piPK:141127~theSitePK:295584.contentMD K:20195738~menuPK:295591~pagePK:141137~piPK:141127~theSitePK:295584. Nick Gillespie (2009).hsbcglt. ^ What Caused the 1991 Currency Crisis in India? (http://www.com/specialreports/displayStory.net/Econ_Articles/India/India_Rodrik_DeLong. Gary S.1/ 6/ 13 Econom i l er al at i n i I ndi . 31.hsbcglt.uk/2/hi/south_asia/4103554. http://www.pdf) . An American's Guide to Doing Business in India.org/20060701faessay85401-p0/gurcharan-das/the-india-model. http://www. ^ Basu.com/) .pdf) .org.Wi i edi . "Why India needs (http://news..worldbank. ^ Kaushik Basu. Asiaweek.html ^ "HSBC GLT frontpage" (http://www.com/50yrs/kapur.org. External links For a short educational video of the "economic history of India" (http://one. The World Bank. http://www.uoit.cfm?story_id=12749735.foreignaffairs.foreignaffairs. 33.html) . BBC. ^ Local industrialists against multinationals (http://www.com/business/news/economy/govt-approves-51-fdi-in-multi-brand-retail_60309.pdf. not a tiger" (http://www.org/20060701faessay85401p0/gurcharan-das/the-india-model. ^ Eugene M. 29. The Foreign Affairs. 8/ 9 . Gurcharan Das (2006). "The India Model" (http://www. Fields. Retrieved on 2 March 2007.worldbank. "The India Model" (http://www..org/20060701faessay85401p0/gurcharan-das/the-india-model.org/wpcontent/uploads/Ghosh%20-%20India.html) .pdf) . The Tribune India. IMF Staff Papers. 22. 11 December 2008. ^ "A special report on India: An elephant. Datta/Milly Sil (2007). ^ http://zeenews.cfm?story_id=12749735) . Retrieved on 2 March 2007.com/specialreports/displayStory.foreignaffairs. 20.india.com/blog/show/131810. "India Since Independence: An Analytic Growth Narrative" (http://www.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN/0.j-bradforddelong.stm.org/html/prdph/downsize/docs/india.html) .pdf.j-bradforddelong.co. ^ India's Pathway through Financial Crisis (http://www.com/RCD_MILI.00.org/html/prdph/downsize/docs/india. or g/ w i Econom i _l er al at i n_i _I ndi k ip a k i/ c i b i o n s a http://www.pdf) Labour Law Reform in India". http://atlmri.ca/sas/Macroeconomic%20Issues/What1991CrisisIndia. ^ R. ^ Gurcharan Das (July/August 2006). Arunabha Ghosh.tribuneindia.

com/ukindia2/files/India60.1/ 6/ 13 Econom i l er al at i n i I ndi .pdf. http://www.wikipedia.ukibc. "How wrong has the Indian Left been about economic reforms?" (http://www. Astaire Research <<doesn't work>>.com/ukindia2/files/India60.pdf) . additional terms may apply.Wi i edi .org/20060701faessay85401-p0/gurcharan-das/the-india-model.pdf) . http://www. a non-profit organization. w i edi . en.ccsindia.foreignaffairs.. Aditya Gupta (2006). Retrieved from "http://en. Text is available under the Creative Commons Attribution-ShareAlike License.ccsindia.pdf. t he f r ee encycl pedi c i b i o n s a kp a o a http://www.org/interns2006/How%20Wrong%20is%20left%20about%20ecoonimic%20reforms %20in%20India%20-%20Aditya.php?title=Economic_liberalisation_in_India&oldid=530040384" Categories: Economic history of India Economy of India Economic liberalization Independent India Rao administration Navigation menu This page was last modified on 27 December 2012 at 21:39. Inc. Wikipedia® is a registered trademark of the Wikimedia Foundation. Centre for Civil Society. or g/ w i Econom i _l er al at i n_i _I ndi k ip a k i/ c i b i o n s a 9/ 9 .org/w/index.ukibc.org/interns2006/How%20Wrong%20is%20left%20about%20ecoonimic%20reforms% 20in%20India%20-%20Aditya. See Terms of Use for details. 2007.html. "The India Report" (http://www.