Economic liberalisation in India

The economic liberalisation in India refers to the ongoing economic liberalisation, initiated in 1991, of the
country’s economic policies, with the goal of making the
economy more market-oriented and expanding the role
of private and foreign investment. Specific changes include a reduction in import tariffs, deregulation of markets, reduction of taxes, and greater foreign investment.
Liberalisation has been credited by its proponents for the
high economic growth recorded by the country in the
1990s and 2000s. Its opponents have blamed it for increased poverty, inequality and economic degradation.
The overall direction of liberalisation has since remained
the same, irrespective of the ruling party, although no
party has yet solved a variety of politically difficult issues,
such as liberalising labour laws and reducing agricultural
subsidies.[1] There exists a lively debate in India as to what
made the economic reforms sustainable.[2]

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. Policy tended towards
protectionism, with a strong emphasis on import substitution, industrialisation under state monitoring, state intervention at the micro level in all businesses especially in
labour and financial markets, a large public sector, business regulation, and central planning.[8] Five-Year Plans
of India resembled central planning in the Soviet Union.
Steel, mining, machine tools, water, telecommunications,
insurance, and electrical plants, among other industries,
were effectively nationalised in the mid-1950s.[9] Elaborate licences, regulations and the accompanying red tape,
commonly referred to as Licence Raj, were required to
set up business in India between 1947 and 1990.[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.[3] The McKinsey Quarterly states that removing
main obstacles “would free India’s economy to grow as
fast as China’s, at 10% a year”.[4]

Before the process of reform began in
1991, the government attempted to close the
Indian economy to the outside world. The
Indian currency, the rupee, was inconvertible
and high tariffs and import licencing prevented
foreign goods reaching the market. India also
operated a system of central planning for the
economy, in which firms required licences to
invest and develop. 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, how much,
at what price and what sources of capital were
used. The government also prevented firms
from laying off workers or closing factories.
The central pillar of the policy was import
substitution, the belief that India needed to
rely on internal markets for development, not
international trade—a belief generated by a
mixture of socialism and the experience of
colonial exploitation. Planning and the state,
rather than markets, would determine how
much investment was needed in which sectors.
— BBC[11]

There has been significant debate, however, around liberalisation 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.[5] As India’s
gross domestic product (GDP) growth rate became lowest in 2012-13 over a decade, growing merely at 5.1%,[6]
more criticism of India’s economic reforms surfaced, as
it apparently failed to address employment growth, nutritional values in terms of food intake in calories, and
also exports growth - and thereby leading to a worsening
level of current account deficit compared to the prior to
the reform period.[7] But then in FY 2013-14 the growth
rebounded to 6.9% and then in 2014-15 it rose to 7.3%
as a result of the reforms put by the New Government
which led to the economy becoming healthy again and
the current account deficit coming in control. Growth
reached 7.5% in the Jan-Mar quarter of 2015 before
slowing to 7.0% in Apr-Jun quarter.


Pre-liberalisation policies

1.1 Pre-1991 liberalisation attempts

Further information: Economic history of India and Attempts were made to liberalise the economy in 1966
Licence Raj
and 1985. The first attempt was reversed in 1967. Thereafter, a stronger version of socialism was adopted. The

[18] The growth rate has slowed significantly in the the International Monetary Fund (IMF). Licence owners built up huge powerful empires. Pakistan grew by 5%.6%.[18] tral bank had refused new credit and foreign exchange The fruits of liberalisation reached their peak in 2006.5% from 1950s to 1980s. India still had a fixed exchange rate system.[11] economic and political legislation through the parliament at a • Income Tax Department and Customs Department time when he headed a minority government. duties and taxes progressively lowered.[19] With this. who spear- • A huge private sector emerged. which stagnated around 3. The government slightly reduced Licence Raj and also promoted the growth of the telecommunications and software industries. state monopolies broken.1 First Round of Reforms (1991– 1996) Crisis Main article: 1991 India economic crisis A Balance of Payments crisis in 1991 pushed the country to near bankruptcy. and by the end much of the country”[17] and corruption flourished of 1990.[24][25] its cenunder this system. while per capita income averaged 1.[11] The former prime minister P V Narasimha Rao. private sector enterprise and competition were encouraged and globalisation . the rupee devalued and economic reforms were forced upon India. Controls started to be dismantled.5% will double the average income in a decade. gold was transferred to London as collateral.3% growth in 2014-15. South Korea by 10% and Taiwan by 12%. self. That low point was the catalyst required to transform the economy through badly needed reforms to unshackle the economy. public sector monopoly.currencies of major trading partners.[12] In the 80s. next only to tonnes to Bank of England as part of a bailout deal with China. the state of India was in a serious economic crisis. The government was close to default. India started having perpetuating bureaucracy that still exists throughout balance of payments problems since 1985. Thailand by 9%. though 1967 style reversal did not take place. Most of the ecowere forced upon India as a part of the first half of 2012.[14] 1.2 2 FIRST ROUND OF REFORMS (1991–1996) second major attempt was in 1985 by prime minister Rajiv Gandhi.[11] where the rupee was pegged to the value of a basket of • Licence Raj established the “irresponsible. In return for an IMF bailout. reserves had reduced to the point that India could barely when India recorded its highest GDP growth rate of finance three weeks’ worth of imports.2 Impact • The low annual growth rate of the economy of India before 1980.[16] • Only four or five licences would be given for steel. Rao was often referred to as Chanakya for his ability to steer tough prises made large losses. the government led by Rajiv Gandhi started light reforms.[15] At the same time. Indonesia by 9%.headed economic liberalisation policies in the early 1990s.[21] The economy then rebounded to 7. electrical power and communications.3%. tariffs. and more reforms would speed up the pace. • Infrastructure investment was poor because of the By 1991. It had to pledge 9. 2 2. the economy was opened to trade and investment.[20] An Organisation for Economic Co. State-owned enter. operation and Development (OECD) report states that the average growth rate 7. The process came to a halt in 1987. India became the second fastest 20 tonnes of gold to Union Bank of Switzerland and 47 growing major economy in the world.[13] The Chandra Shekhar Singh government (1990–1991) took several significant steps towards the much needed reforms and laid its foundation.[22][23] became efficient in checking tax evasion.nomic reforms [26] IMF bailout.

with a substantial reduction in state control of the economy and increased financial liberalisation.[32] • The second BJP-led NDA Government also opened up the coal industry through the passing of the Coal Mines (Special Provisions) Bill of 2015. Coalition Government initiated the introduction of 51% Foreign Direct Investment in retail sector. since Indian arms of foreign companies are entitled to bid for coal blocks and licences. the Congress-led UPA-2 cule[35] 96. an overall fiscal policy aimed at reducing HSBC GLT. This could result in billions of dollars investments by domestic and foreign miners. The impact of these reforms may be gauged from the fact that total foreign investment (including foreign direct investment. Pune deficits and debts and increased initiatives for public works. accelerated from just 1¼ per cent in the three it was approved in December 2012. initiated the economic liberalisation of 1991. The reforms did away with the Licence Raj. and began reduction of taxes.[1] By the turn of the 21st century.[33] 5 Impact This list is incomplete. along with his finance minister Manmohan Singh.[28] This has been accompanied by increases in life expectancy. and investment raised on international capital markets) in India grew from a minusUS$132 million in 1991–92 to $5. the second BJP-led NDA Government under Narendra Modi further opened up the insurance sector by allowing up to 49% FDI. which may now get the elbow room to bring in some much needed technology and best practices.[27] Since then. VSNL.3 billion in 1995– • Towards the end of 2011. when it was at the helm of affairs of India for five years. the overall thrust of liberalisation has remained the same. However.[31] decades after Independence to 7½ per cent . on contentious issues such as reforming labour laws and reducing agricultural subsidies. The reforms process continues today and is accepted by all political parties. Prime Minister Narasimha Rao. which existed since nationalization in 1973 through socialist controls. while opening up prospects of a better future for millions of mine workers. although no government has tried to take on powerful lobbies such as trade unions and farmers. the decision was rolled back.[29] 4 Later reforms • In the early months of 2015.3 was slowly embraced. The move is also beneficial to the state-owned Coal India Limited. but the 1997 Asian financial crisis and political instability created economic stagnation. Maruti Suzuki. but the speed is often held hostage by coalition politics and vested interests. It has opened up the path for private. This came seven years after the previous government attempted and failed to push through the same reforms and 16 years after the sector was first opened to foreign investors up to 26% under the first BJP-led NDA Government under Atal Bihari Vajpayee’s administration. you can help by expanding it.[30] • The BJP-led National Democratic Alliance Coalition began privatising under-performing government owned business including hotels. literacy rates and food security. — India Report. reduced tariffs and interest rates and ended many public monopolies. Astaire Research[18] 3 Economic Liberalisation of 1991 In response. although urban residents have benefited more than rural residents. [34] • The United Front government attempted a progressive budget that encouraged reforms. foreign investments in the sector. But due to pressure from fellow coalition parties and the Annual growth in GDP per capita has opposition. allowing automatic approval of foreign direct investment in many sectors. India had progressed towards a free-market economy. • The Bharatiya Janata Party (BJP)-Atal Bihari Vajpayee administration surprised many by continuing reforms. portfolio investment. and airports. It effectively ended the Indian central government’s monopoly over the mining of coal. as well as for commercial mining of coal.

India was ranked 124th among 179 countries states that had more liberal regulatory regimes had better in Index of Economic Freedom World Rankings. Public expenditure should be re-oriented towards infrastructure investment by reducing subsidies. and knowledge management activities”. a framework for the foreign investment had been established. fascination with India is translating into active consideration of India as a destination for FDI. • Slow growth of the agricultural sector. business process outsourcing. employment growth has been concentrated in firms that operate in sectors not covered by India’s highly restrictive labour laws.. In product markets.1 6 Challenges to further reforms In labour markets. In those infrastructure sectors which have been opened to competition. 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. 6. Today. India was at the 15th position.. The A T Kearney study put India second most likely destination for FDI in 2005 behind China. such as telecoms and civil aviation. were complementary measures for better delivery of infrastructure. which economic performance. Manmohan Singh in 2004 further strengthened the required infrastructure to welcome the FDI. only a few years back. In service sectors where government regulation has been eased significantly or is less burdensome—such as communications. This is a great leap forward. the West was developing a bit of a fascination to India’s brainpower. In the formal sector. should the conditions permit. where half of they would boost employment creation and poverty reduction. the taxable base should be broadened and rates lowered. asset management and information technology—output has grown rapidly. employment has been falling and firms are becoming more capital intensive despite abundant low-cost labour. education and basic services implemented. particularly in some of the states. the private sector has proven to be extremely effective and growth has been phenomenal. “India’s strong performance among manufacturing and telecom & utility firms was driven largely by their desire to make productivity-enhancing investments in IT. while for direct taxes. — OECD[21] Reforms at the state level See also: Economic disparities in India According to an OECD survey of the Indian economy [21] For 2010. A number of barriers to competition in financial markets and some of the infrastructure sectors. Furthermore. — OECD[21] • Lack of political consensus and will[36][45] OECD summarised the key reforms that are needed: Election of AB Vajpayee as Prime Minister of India in 1998 and his agenda was a welcome change. acts as a barrier to entrepreneurship and need to be improved. also need to be addressed. a rate of growth that will double average income in a decade. Labour market reform is essential to achieve a broader-based development and provide sufficient and higher productivity jobs for the growing labour force. inefficient government procedures. Public companies are generally less productive than private firms and the privatisation programme should be revitalised. In three years. By 2004. To quote the A T Kearney Study. It has displaced US to the third position. with exports of information technology enabled services particularly strong.[21][37][38][39][40][41][42][43][44] • High inflation[36] labour 7 See also • High poverty[36] • Economy of India • Corruption and graft[36] • Globalisation in India . research and development. The indirect tax system needs to be simplified to create a true national market. 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. powered by IT and BPO. the West would consider investment in India. Indians earn most of their income[36] • Highly restrictive and complex laws. which are other constraints on growth.4 7 SEE ALSO currently. By the end of Vajpayee’s term as prime minister.. insurance. where these labour laws apply. The survey also concluded that is an improvement from the preceding year. The new incoming government of Dr.

“The Rise and Fall of Indian Socialism: Why India embraced economic reform”.The Times of India”. An American’s Guide to Doing Business in India. [33] “Parliament boost to Modi’s plans: Coal. [4] “The McKinsey Quarterly: India—From emerging to surging” (PDF).com/ c/8158805. Venkatesan (1–14 January 2005). Chanchal Kumar (2011) "A Discursive Dominance Theory of Economic Reforms Sustainability.intotoday. indiatoday. [22] V. “Challenges ahead for India reforms”. • Economic miracle 8 References [1] “That old Gandhi magic”. [16] “Industry passing through phase of transition”.3% in first quarter”. C. The Times of India. Timesofindia. [17] Eugene M. The McKinsey Quarterly. [6] GDP growth slumps to 5%. Retrieved 30 March 2010. “Obituary: A scholar and a politician”. East Asia Forum 4 June 2013 [8] Kelegama. Global Economic Governance Programme.indiatimes. and Shub Debgupta. Cia. pp. [36] Biswas. Retrieved 22 August 2008. . [35] Local industrialists against multinationals. [18] “The India Report” (PDF). [21] “Economic survey of India 2007: Policy Brief” (PDF). [39] R. Saman and Parikh. BBC News (BBC). 12 February 1998. [28] Kumar p. [37] “IMF calls for urgent reform in Indian labour laws”. Kirit (2000). Bradford DeLong (2001). 1037 [30] J. The Economist. Rajaraman. Retrieved 18 January 2016. [26] Economic Crisis Forcing Once Self-Reliant India to Seek Aid. 2001. The Economist. “Political Economy of Growth and Reforms in South Asia”. livemint. [25] What Caused the 1991 Currency Crisis in India?. Retrieved 2015-03-29. Ajay Singh and Arjuna Ranawana. 25 November 2001 [11] “India: the economy”. 27 November 1997. Retrieved 201503-13. • Hindu rate of growth [20] “BBC News .uk. The World Bank. [27] Task Force Report 2006. Second Draft.india. Retrieved 201307-10. BBC. Valerie Cerra and Sweta Chaman Saxena. Fields. mining bills passed by Rajya Sabha”. “How wrong has the Indian Left been about economic reforms?" (PDF). [14] New Indian Express http://epaper. [40] Aditya Gupta (2006). “Contemporary Issues on Labour Law Reform in India” (PDF). pp. Retrieved 2013-12-23. Archived from the original on 2011-09-08. New York Times. The Financial Express. IMF Staff Papers.newindianexpress. Retrieved 2013-07-10. [38] Kaushik Basu. 7–8. Archived from the original on 2010-01-30. UK)126-84 [13] History of Computing in India: 1955-2010. [31] “End of policy paralysis: Govt approves 51% FDI in multi-brand retail”. The Tribune India. [2] For a critique of the existing explanations and a comprehensive alternative explanation see: Sharma. 6 March 2008. OECD. Archived 1 November 2007 at the Wayback Machine [24] India’s Pathway through Financial Crisis. Frontline 22 (1). “India Since Independence: An Analytic Growth Narrative” (PDF). [7] India’s Ponzi-styled economic reforms run out of steam. Chanchal Kumar (2011) "A Discursive Dominance Theory of Economic Reforms Sustainability.” India Review (Routledge. V. UK)126-84 [3] “India’s economy: What’s holding India back?".com.India growth rate slows to 5. Retrieved 2013-07-10. Retrieved 2013-07-10. see: Sharma. Makar (2007). a decade’s low. Gary S. Missing or empty |title= (help) [15] “Redefining The Hindu Rate of Growth”. [34] “HSBC GLT frontpage”. Arunabha Ghosh. Hindu Business Line 31 May 2013 [29] Task Force Report 2006. Retrieved on 2 March 2007. Bbc. [9] Sam Staley (2006). “Retrenchment.5 • Licence Raj [19] “The World Factbook”. [32] “Parliament passes insurance bill in a major boost to Modi’s reforms agenda”. Astaire Research. Retrieved 7 October 2007. Retrieved on 2 March 2007. Datta/Milly Sil (2007). Labor Laws and Government Policy: An Analysis with Special Reference to India” (PDF).” India Review ( Soutik (2011-07-27). [23] PV Narasimha Rao Passes Away. Zeenews. [12] For a complete history & analysis of liberalisation episodes in [10] Street Hawking Promise Jobs in Future. 29 June 1991 [5] “India’s income inequality has doubled in 20 years . 17–20. 2012-05-31.

[44] Gurcharan Das (July–August 2006). Television and New Media. The Foreign Affairs. Economic and Political Weekly. The Economist. “Good Times. [45] Schuman. Centre for Civil Society. • Ravinder Kaur (2012). “India Inc. Astaire Research <<doesn't work>>. Kaushik (27 June 2005). “The India Model”. • Aditya Gupta (2006). “How wrong has the Indian Left been about economic reforms?" (PDF). The World Bank. BBC. Retrieved 2013-12-23. 9 External links • For a short educational video of the “economic history of India”. “The India Model”. Time (Time).6 9 [41] Basu. not a tiger”. • Nick Gillespie (2009). “India vs China: Which Has a Bigger Reform Challenge?". Reason. • “The India Report” (PDF). Michael (2012-11-05). • Ravinder Kaur (2015). Archived from the original on 2013-03-09. [43] “India Country Overview 2008”. 2008. [42] “A special report on India: An elephant. “Why India needs labour law reform”. Brought to you by Brand Modi”. 11 December 2008. “What Slumdog Millionaire can teach Americans about economic stimulus”. 2007. • Gurcharan Das (2006). The Foreign Affairs. EXTERNAL LINKS . and its Moral Discontent”.

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