Economic liberalisation in India

From Wikipedia, the free encyclopedia This article needs additional citations for verification. Please help improve this article by adding reliable references. Unsourced material may be challenged and removed. (April 2011) The economic liberalisation in India refers to ongoing economic reforms in India that started in 1991. After Independence in 1947, India adhered to socialist policies. In the 1980s, Prime Minister Rajiv Gandhi initiated some reforms. In 1991, after India faced a balance of payments crisis, it had to sell 67 tons of gold to the International Monetary Fund (IMF) as part of a bailout deal, and promise economic restructuring. The government of P. V. Narasimha Rao and his finance minister Manmohan Singh (the present Prime Minister) started breakthrough reforms.[1] 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.[2] The main objective of the government was to transform the economic system from socialism to capitalism so as to achieve high economic growth and industrialize the nation for the well-being of Indian citizens.[3][4] Today India is mainly characterized as a market economy.[5] As of 2009, about 300 million people—equivalent to the entire population of the United States—have escaped extreme poverty.[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] 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.[9] Indian government coalitions have been advised to continue liberalisation. India grows at slower pace than China, which has been liberalising its economy since 1978. [10] McKinsey states that removing main obstacles "would free India’s economy to grow as fast as China’s, at 10 percent a year".[11] For 2010, India was ranked 124th among 179 countries in Index of Economic Freedom World Rankings, which is an improvement from the preceding year.

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1 Pre-liberalisation policies o 1.1 Impact 2 Narasimha Rao government (1991–1996) o 2.1 Crisis

1 Reforms at the state level 6 See also 7 References 8 External links [edit] Pre-liberalisation policies Part of a series on the History of Modern India Pre-Independence British Raj (1858–1947) Indian independence movement (1857–1947) Partition of India (1947) Post-Independence Political integration of India (1947–49) Indo-Pakistani War of 1947 States Reorganisation Act (1956) Non-Aligned Movement (1956– ) Sino-Indian War (1962) Indo-Pakistani War of 1965 Green Revolution (1970s) Indo-Pakistani War of 1971 Emergency (1975–77) Siachen conflict (1984) 1990s in India Economic liberalisation in India Kargil War (1999) 2000s in India See also History of India History of South Asia This box: view · talk · edit .• • • • • • 3 Later reforms 4 Impact of reforms 5 Ongoing economic challenges o 5.

[citation needed] The Vishwanath Pratap Singh government (1989–1990) and Chandra Shekhar Singh government (1990–1991) did not add any significant reforms.5% from 1950s to 1980s. business regulation. State-owned enterprises made large losses. 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. mining.[17] Only four or five licences would be given for steel. how much. rather than markets.[15] Licence Raj established the "irresponsible. while per capita income averaged 1. which stagnated around 3. state intervention at the micro level in all businesses especially in labour and financial markets. The Indian currency.[12] Five-Year Plans of India resembled central planning in the Soviet Union. the belief that India needed to rely on internal markets for development. telecommunications. not international trade—a belief generated by a mixture of socialism and the experience of colonial exploitation. and electrical plants. The government also prevented firms from laying off workers or closing factories.3%. power and communications. self-perpetuating bureaucracy that still exists throughout much of the country"[18] and corruption flourished under this system. License owners built up huge powerful empires. water. [edit] Impact • • • • • The low annual growth rate of the economy of India before 1980. was inconvertible and high tariffs and import licensing prevented foreign goods reaching the market. a large public sector. — BBC[15] In the 80s. were effectively nationalized in the mid-1950s.[15] A huge public sector emerged.[13] Elaborate licences. Policy tended towards protectionism. Planning and the state. The government slightly reduced Licence Raj and also promoted the growth of the telecommunications and software industries.[14] Before the process of reform began in 1991. at what price and what sources of capital were used. The central pillar of the policy was import substitution. India also operated a system of central planning for the economy. the rupee. industrialization under state monitoring. among other industries. Indonesia by 9%. the government led by Rajiv Gandhi started light reforms.[8] . and central planning. with a strong emphasis on import substitution.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. commonly referred to as Licence Raj. machine tools. South Korea by 10% and in Taiwan by 12%. regulations and the accompanying red tape. would determine how much investment was needed in which sectors. Thailand by 9%. in which firms required licenses to invest and develop. Pakistan grew by 5%.[15] Infrastructure investment was poor because of the public sector monopoly. Steel. the government attempted to close the Indian economy to the outside world. were required to set up business in India between 1947 and 1990. insurance.[16] At the same time.

the economy was opened to trade and investment. it was in a serious economic crisis. duties and taxes progressively lowered. As of 1991. . crushed international investor confidence on the economy that was eventually pushed to the brink by the early 1990s. gold was transferred to London as collateral. Controls started to be dismantled. The government was close to default. A Balance of Payments crisis in 1991 pushed the country to near bankruptcy. but the speed is often held hostage by coalition politics and vested interests. where the rupee was pegged to the value of a basket of currencies of major trading partners. India started having balance of payments problems since 1985. state monopolies broken. India still had a fixed exchange rate system. The reforms process continues today and is accepted by all political parties. tariffs. In return for an IMF bailout. and by the end of 1990. private sector enterprise and competition were encouraged and globalisation was slowly embraced.[19] 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. and later of her son Rajiv Gandhi in 1991. the Rupee devalued and economic reforms were forced upon India.[edit] Narasimha Rao government (1991–1996) Present Prime Minister Manmohan Singh was then Finance Minister in Cabinet of Prime Minister P V Narasimha Rao [edit] Crisis Main article: 1991 India economic crisis The assassination of prime minister Indira Gandhi in 1984. That low point was the catalyst required to transform the economy through badly needed reforms to unshackle the economy.

The United Front government attempted a progressive budget that encouraged reforms. double-digit inflation etc. most of the sanctions have been lifted and the Indian economy is continuing to grow at an acceptably satisfactory rate. but the 1997 Asian financial crisis and political instability created economic stagnation. according to the latest world development indicators. 1998 at the Pokhran range in Rajasthan Desert). This list is incomplete. when it was at the helm of affairs of India for five years. it is the world's fourth largest economy. and investment raised on international capital markets) in India grew from a minuscule US$132 million in 1991–92 to $5. In PPP terms. reduction of taxes. a sound fiscal policy aimed at reducing deficits and debts and increased initiatives for public works. [edit] Impact of reforms The HSBC Global Technology Center in Pune develops software for the entire HSBC group.— India Report.0%. it translates into $2. Though India’s Gross National Income is only $477.[22] .913 billion purchasing power parity (PPP). portfolio investment.4 billion by conventional calculations. you can help by expanding it. India faced severe sanctions after Pokhran-I (five nuclear tests on May 11 and 13. 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. The anticipated growth rate for 2003-04 is 6. After five years. China and Japan. and sanctions that were more comprehensive were imposed following Pokhran-II. behind only the US.[21] The impact of these reforms may be gauged from the fact that total foreign investment (including foreign direct investment. Astaire Research[8] [edit] Later reforms • • • • • Atal Bihari Vajpayee's administration surprised many by continuing reforms. There were dire predictions of the collapse of the economy.3 billion in 1995–96.[20] The Vajpayee administration continued with privatization.

— OECD[9] Election of AB Vajpayee as Prime Minister of India in 1998 and his agenda was a welcome change. should the conditions permit. Still. the West was developing a bit of a fascination to India’s brainpower. But. Annual growth in GDP per capita has accelerated from just 1¼ per cent in the three decades after Independence to 7½ per cent currently. Thanks to the hard work of the politicians in control in Delhi for the last five years.Gurgaon. By 2004. India was at the 15th position. 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 productivityenhancing investments in IT. and knowledge management activities”. It has displaced US to the third position. A few of the remaining antiquated labor laws in India need to be repealed and neglected infrastructure are upgraded to put an investor at ease. [.Gaziabad. Only recently a proposal to use a part of India’s huge foreign reserves to rebuild infrastructure was shot down by these politicians. the West would consider investment in India. India has not made into the grade where manufacturing investment will be targeted to it. The new incoming government of Professor Manmohan Singh in 2004 is further strengthening the required infrastructure to welcome the FDI. a framework for the foreign investment had been established. In those infrastructure sectors which have been opened to competition. with exports of information technology enabled services particularly strong. This is a great leap forward.. business process outsourcing.Cities like NOIDA. such as telecoms and civil aviation. the private sector has proven to be extremely effective and growth has been phenomenal. research and development. The A T Kearney study is putting India second most likely destination for FDI in 2005 behind China. Hyderabad. Today. asset management and information technology—output has grown rapidly. That status belongs to China.Bangalore. Chennai and Ahmedabad have risen in prominence and economic importance. By the end of Vajpayee’s term as Prime Minister. insurance. 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. progressively positive noises are being heard in the world financial circles to consider India at par with China. To the contrary. only a few years back. In three years. they have nothing-worthwhile alternative to offer..] In service sectors where government regulation has been eased significantly or is less burdensome—such as communications. fascination with India is translating into active consideration of India as a destination for FDI. [edit] Ongoing economic challenges Main article: Economy of India . Pune. become centres of rising industries and destination for foreign investment and firms. The irony is that all plans to redress the labor laws or upgrading of the infrastructure are shot down by left leaning politicians at the federal level. a rate of growth that will double average income in a decade. powered by IT and BPO.

In product markets. which is a key to sharing the fruits of growth and lowering poverty. Corruption High fiscal deficit This list is incomplete. where these labour laws apply. In the formal sector. the taxable base should be broadened and rates lowered. complemented with measures to improve infrastructure. Inflation in basic consumable goods. 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. employment has been falling and firms are becoming more capital intensive despite abundant low-cost labour. Thus. particularly in some of the states. which is often government monopoly. Failing education. would increase the potential for growth outside of agriculture and thus boost better-paid employment. further reforms on these lines.[9] The analysis of this report suggests that the differences in economic performance across states are associated with the extent to which states have introduced marketoriented reforms. Public companies are generally less productive than private firms and the privatisation programme should be revitalised. while for direct taxes. you can help by expanding it. inefficient government procedures. OECD summarized the key reforms that are needed: In labour markets. which are other constraints on growth. education and basic services. A number of barriers to competition in financial markets and some of the infrastructure sectors.• • • • • • • • Problems in the agricultural sector. Furthermore. acts as a barrier to entrepreneurship and need to be improved. Labour market reform is essential to achieve a broader-based development and provide sufficient and higher productivity jobs for the growing labour force. Highly restrictive and complex labour laws.[9][23][24][25][26][27][28][29][30] Inadequate infrastructure. also need to be addressed. 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. — OECD[9] [edit] Reforms at the state level See also: Economic disparities in India The Economic Survey of India 2007 by OECD concluded: At the state level.[9] . Inefficient public sector. economic performance is much better in states with a relatively liberal regulatory environment than in the relatively more restrictive states".

^ Timeline:India -BBC 1991 2. 30 September 2010. 19. ^ a b c d "India: the economy". ^ J.html#Econ 8. and Shub Debgupta. The Times of India. "What Slumdog Millionaire can teach Americans about economic stimulus". ^ "Redefining The Hindu Rate Of Growth". The Economist. ^ Street Hawking Promise Jobs in Future. ^ "India's great journey to market economy". 11. 18. ^ "India's surprising economic miracle". "Retrenchment. ^ "IMF calls for urgent reform in Indian labour laws". ^ "Industry passing through phase of transition". 14. Retrieved 2008-08-22. 5. 6 March 2008.[dead link] 3. BBC. Retrieved Sep 30th 2010. 20. 10. ^ Eugene M. 21. ^ a b c d e f "Economic survey of India 2007: Policy Brief". Anjan. 6. 4. The World Bank. The Economist. Saman and Parikh. The McKinsey Quarterly. Arunabha Ghosh. 200111-25 15. The Economist.[edit] See also • • • • Economy of India Globalisation in India License Raj Hindu rate of growth [edit] References 1. "The Rise and Fall of Indian Socialism: Why India embraced economic reform". Retrieved on 2 March 2007. 22. Retrieved 2010-03-29. ISBN 9780415934855. 9. ^ "India's economy: What's holding India back?". ^ Sam Staley (2006). Retrieved on 2 March 2007. Ajay Singh and Arjuna Ranawana.com. 13. 7. Transition from socialism to capitalism in india. Makar (2007). ^ https://www. 12 February 1998. Fields. ^ a b c "The India Report". Political Economy of Growth and Reforms in South Asia. "India Since Independence: An Analytic Growth Narrative". Cullenberg. Second Draft. Stephen (2003). Bradford DeLong (2001). ^ Local industrialists against multinationals.gov/library/publications/the-worldfactbook/geos/in. ^ "HSBC GLT frontpage". 12. ^ Chakrabarti. Asiaweek. Gary S. ^ Kelegama. 16. Reason. The Financial Express. . ^ Nick Gillespie (2008). 17. Labor Laws and Government Policy: An Analysis with Special Reference to India". OECD. ^ India's Pathway through Financial Crisis. An American's Guide to Doing Business in India. Rediff. 27 November 1997. Astaire Research. Global Economic Governance Programme. 24. The Tribune India. ^ Kaushik Basu. ^ "The McKinsey Quarterly: India—From emerging to surging".cia. Kirit (2000). 23. ^ "That old Gandhi magic".

[edit] External links . "Why India needs labour law reform". ^ R. The World Bank. 28. "The India Model". Datta / Milly Sil (2007). ^ Gurcharan Das (July/August 2006). ^ Aditya Gupta (2006). ^ "India Country Overview 2008".25. 26. 29. C. BBC. "Contemporary Issues on Labour Law Reform in India". ^ Basu. 2008. 30. ^ "A special report on India: An elephant. 27. 11 December 2008. not a tiger". The Foreign Affairs. Kaushik (27 June 2005). "How wrong has the Indian Left been about economic reforms?". The Economist.