LIBERALISATION POLICY

VIVEKANANDA INSTITUTE OF PROFESSIONAL STUDIES

VSLLS

Ms. Chanchal Sharma

By- Hardik Sharma

10317703819

III-B
 ACKNOWLEDGEMENT

I am highly indebted to Ms. Chanchal Sharma for her guidance and constant supervision.
She provided me the necessary information regarding the project and also supported me
in completing the project. I also would like to show my gratitude to my friends and
family who gave me very good input during the course of this project.
 REFERENCES

Other Authorities

Ministry of Commerce & Industry, Directorate general of foreign trade, chapter-A.1 FTP
(2015-20)........................................................................................................................ 9
Rakesh Mohan, “Financial Sector Reforms in India: Policies and Performance Analysis”,
(2004) RBI bulletin........................................................................................................7

Journals

M. Govinda Rao, “Tax Reform in India: Achievements and Challenges”, (2000) 7 APDJ
9..................................................................................................................................... 8
Staffan Jacabsson and Gayur Alam, “Liberalisation and Industralisation in the Third
world: A Comparison of Indian and South Korean Engineering Industries”, (1994)
Chamlers University of Technology, Sweden................................................................5
T.N. Srinivasan, “Indian Economic reforms: A Stocktaking” (2003) 190 SCGD 12.........8
Utam Kumar, “Trade policy of India since 1991-a critical evaluation and comparative
study between pre & post reform periods”, (2008) 4 IRAJ 99.......................................9

Articles

A Jayagovind, 'The Concept of Liberalisation: Some Reflections' (1995) 7 Student Advoc

1..................................................................................................................................... 5
V Umakanth, 'The New Economic Policy and Concentration of Economic Power' (1993)
5 Student Advoc 1..........................................................................................................6
 TABLE OF CONTENTS

Contents
ACKNOWLEDGEMENT...............................................................................................2

REFERENCES.................................................................................................................3

TABLE OF CONTENTS.................................................................................................4

INTRODUCTION............................................................................................................5

BACKGROUND...........................................................................................................5

LIBERALISATION POLICY.........................................................................................7

Deregulation of Industries—..........................................................................................7

Financial sector reform—...............................................................................................7

Tax reform—.................................................................................................................. 7

Foreign exchange regulation—......................................................................................8

Trade and Investment policy reform—..........................................................................8

Post reform policy—......................................................................................................9

 INTRODUCTION

Liberalisation refers to the process of freeing economic activities from the stranglehold of
political and bureaucratic controls. The underlying assumption is that socialism and its
concomitant process of planning have suppressed entrepreneurship and shackled the
economy.1 Although, liberalisation is the need of the hour for developing countries, the
concept, taken to its extreme conclusion, would lead to the total withdrawal of state from
economic functions. Leaving it in the hands of the market forces. Pure liberalisation of
the market is folly. It is best to take the concept with a grain of salt.

Take, for example, a country like India, where only a small percentage of the market
actually possesses some economic power. Complete dependence upon the market forces
would only add to the income disparity. State regulation is needed to ensure all-round
development.

Inward looking, protectionist policies have been quite favorable for nations like South
Korea, that not only earmarked economic sectors to be developed, but also companies to
receive favorable treatment by the state.2 Liberalisation came only after an extensive
period of government succor.

BACKGROUND
In 1980, the government expenditure was far greater that its revenue. The
government spending was so great that it became impossible to mitigate
through borrowings. Prices began to skyrocket and the expenditure on imports
became more than the receipts on export. No country would be willing to lend
to India in such dire straits.

In 1991, India met with an economic crisis relating to its external debt. The
government was unable to pay off the debts it had taken in the International

1
A Jayagovind, 'The Concept of Liberalisation: Some Reflections' (1995) 7 Student Advoc 1
2
Staffan Jacabsson and Gayur Alam, “Liberalisation and Industralisation in the Third world: A Comparison of
Indian and South Korean Engineering Industries”, (1994) Chamlers University of Technology, Sweden.
 market. Foreign exchange reserves dropped at an unprecedented rate. These
problems were further aggravated by the rising prices of essential commodities.
The Public Sector Undertakings were highly inefficient owing to mismanagement
and expansion beyond the core sectors.

This would lead to the government introducing certain policies which would affect
our nation’s development for years to come. India approached the International
Bank for Reconstruction and Development (IBRD), popularly known as World
Bank and the International Monetary Fund (IMF), and received $7 billion as loan
to manage the crisis. For availing the loan, these international agencies expected
India to liberalise and open up the economy by removing restrictions on the
private sector, reduce the role of the government in many areas and remove trade
restrictions between India and other countries.3 India agreed to the conditions of
World Bank and IMF and announced the New Economic Policy (NEP).

3
V Umakanth, 'The New Economic Policy and Concentration of Economic Power' (1993) 5 Student Advoc 1
 LIBERALISATION POLICY

The main aim of the Liberalisation policy was to open up most of the sectors that were
cluttered up with bureaucratic red tape. The policies were initiated from 1991 to bring
about reform in the Industrial sector, foreign exchange market, trade and investment
sector, and the taxation policy.

Deregulation of Industries—Industrial licensing was abolished all but the most

deserving industries, such as alcohol and cigarette production, hazardous chemicals
manufacture, Industrial explosives, electronics, aerospace engineering, drugs and
pharmaceutical production, were still regulated. As of the day of writing this paper only
public defence, atomic energy and transportation are licensed sectors.

Small scale production was de-reserved and price regulation policy was abolished for
many industries. Business concerns would be free to determine the price of their
products, government would only act as a regulator of market practices.

Financial sector reform—The role of RBI was changed from regulator to facilitator of
the financial sector. Banks could operate with greater autonomy. Foreign investment
ceiling was raised to 74%. Banks could open up new branches if they met certain
requirements without needing to refer to RBI. Although banks could generate funds from
domestic as well as international sources, RBI could still act in the interest of the account
holders.4

Institutions like mutual funds, investment bankers and pension funds could now invest in
the Indian market.

Tax reform—Tax Reform Committee suggested an overall reduction in taxation on

individual incomes. The aim being to reduce instances of tax evasion. The tax rates were
drastically reduced to 10, 20 and 30 percent. At the same time, the exemption limit was
raised in stages to Rs 50,000. Combined with the standard deduction, a salaried taxpayer up
4
Rakesh Mohan, “Financial Sector Reforms in India: Policies and Performance Analysis”, (2004) RBI bulletin.
to an income of Rs 75,000 need not pay any tax. In addition, saving incentives were given by
exempting investment in small savings and provident funds up to a specified limit. 5

Corporate tax rates were reduced substantially for both domestic and foreign companies, 35
and 48% respectively.6 Indirect taxes were adjusted in order to facilitate the national market
for goods and commodities. Selective taxation was imposed in the service industries like
telephones, stock brokerage, mechanized slaughter houses, underwriters, private
investigators, real estate agencies, chartered accountants, etc.

Foreign exchange regulation—The rupee was devalued in order to facilitate foreign

exchange inflows. Automatic approval of up to 51% of equity in high priority industries
and trading companies engaged in exporting was allowed; 100% equity was allowed in
export-oriented units subject to some conditions; and NRIs and overseas corporate bodies
(OCBs) were allowed to invest up to 100% equity in high priority industries. 7 The foreign
exchange market deepened with the opening up of the economy. Despite periods of
volatility, subsequent exchange regulation measures have managed to handle the volatile
foreign market.

Trade and Investment policy reform—

Prior to 1991, India was known for one of the most restrictive and protectionist policies
in the word. After the economic crisis, significant measures were taken to overhaul the
trade policy. The trade regime was liberalised to foster a spirit of competitiveness and to
attract foreign investment, technological development.

The pre-reform policy was characterized by its severe import restrictions and import
substitution. Imported goods were categorized into non permissible, limited permissible,
automatic permissible and open general license goods. Varying degrees of certification
and licenses were required for the import goods in accordance with the category to which
they belonged. These quantitative restrictions were selective in the sense that the ceiling

5
M. Govinda Rao, “Tax Reform in India: Achievements and Challenges”, (2000) 7 APDJ 67.
6
Ibid, p. 68.
7
T.N. Srinivasan, “Indian Economic reforms: A Stocktaking” (2003) 190 SCGD 12.
limit on the import of goods were different, depending upon the perceived importance in
the development strategy.

Import substitution implies substitution of foreign imports with domestic goods, in order
to limit foreign exchange to important goods only. Additionally, import substitution was
intended to promote self-reliance among the citizens of India. These policies, along with
high tariffs and a pessimistic approach to exports reduced the efficiency of the
manufacturing sector.

Post reform policy—

India joined the WTO in 1995 as a founding member. It was required to remove
all quantitative restrictions and reduce import tariffs in order to open up its market
to the world at large. By 2000, 8161 tariff lines were removed 8. India has managed
to keep its commitment to the World Trade Organisation. Quantitative restrictions
have been withdrawn and the market has become freer.

The rupee was made fully convertible in 1994, allowing the Indian economy to
check itself against its foreign counterparts. Free trade and warehousing zones
were set up by the Ministry of Commerce and Industry, to create related
infrastructure to facilitate the import and export of good and services with
freedom to carry out trade and transaction in free currency.” 9 The tariff structure
was rationalized and transactional costs were reduced, special economic zones
were set up to overcome inefficiency arising out of multiple control points,
underdeveloped infrastructure and an absence of foreign investment

However, the FTP choses to focus on foreign trade and investment, as a

consequence the domestic market has been left behind. Unrestricted imports and
foreign competition threaten the development of domestic businesses. An

8
Uttam Kumar, “Trade policy of India since 1991-a critical evaluation and comparative study between pre & post
reform periods”, (2008) 4 IRAJ 99.

9
Ministry of Commerce & Industry, Directorate general of foreign trade, chapter-A.1 FTP (2015-20).
argument can be made that the current trade policy has led to an overdependence
on foreign economies. For sustained growth development of domestic technology
is as important as assimilating foreign technology.

Government regulation is required to ensure that the natural resources are not
exploited. Consumers must be protected against hazardous goods that may enter
via imports. Exploitative trade practices must be curtailed by state interference.
State must ensure that its pursuit of development does not further expand the class
divide. Both the rich and the poor are entitled to the benefits of growth. It is up to
the government to provide for equality in production of low-profit consumer
goods and high yield capital goods. Price margins must be put down to protect to
disenfranchised. Free reign liberalisation would not allow any of these measures.
A balance must be struck between the welfare state and free market.
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