Unit III (b) Liberalisation

Liberalisation refers to a relaxation of restrictions, usually in areas of social or economic policy.

Most often, the term is used to refer to economic liberalisation, especially trade liberalisation
or capital market liberalisation; the policies often referred to as neo-liberalism. A major
revolution in the policy environment caused by the current phase of globalisation is
liberalisation of economic policy, which included the freeing up of markets and reduction in
the role of national governments in terms of ownership and control over production of goods
and services. The liberalisation revolution challenges the legitimacy of many of the activities
nation-state governments have performed in the modern (post-1914) world such as running
nationalised industries, trade exchange and price controls and monopoly over infrastructure
and public services.

Free market economic policies advocated by neo-liberals in the Western countries, put into
practice by Margaret Thatcher in Britain and Ronald Reagan in the U.S. during the 1980s, soon
became the official policy of International Financial Institutions (IFIs), which started insisting
on the deregulation of national economies and liberalisation in the trade and investment sectors
as conditions for the grant of financial assistance or loans to countries the world over. Since
the movement of economic forces in the contemporary world is beyond the control of national
governments, neo-liberals call for a fundamental restructuring of relations between the state
and civil society with the state maintaining a low profile in the area of economic activities
which should be governed by the free play of market forces. They advocated free trade, which
in modern usage means trade or commerce carried on without such restrictions as import duties,
export bounties, domestic production subsidies, trade quotas, or import licences. The basic
argument for free trade is based on the economic theory of comparative advantage that means,
each region should concentrate on what it can produce most cheaply and efficiently and should
exchange its products for those it is less able to produce economically.

In India, the pace of globalisation gathered momentum when the then central government
introduced the package of reforms at the behest of IMF and World Bank aimed at economic
liberalisation in June 1991. It was mentioned there that in India globalisation process received
an increased impetus in the early 1990s with the adoption of New Economic Policy (NEP) and
the Structural Adjustment Programme (SAP) at the behest of international financial
institutions. This increased the intensity of liberalisation and privatisation of Indian economy.

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Prior to 1991, the Indian economy had a fixed official exchange rate, and the Reserve Bank of
India (RBI) maintained the foreign currencies at stable values. The disadvantage of a fixed
official exchange rate is that it does not maintain parity in purchasing power of the currency in
the international market. If the rate of inflation in India, for example, is higher than in the USA,
this would reduce the purchasing power of the rupee vis-à-vis the dollar and therefore the
amount one should pay to buy a dollar in rupees should go up. This did not happen under a
fixed exchange rate regime.

Besides, the political uncertainty within the country was matched by turbulence in the
international arena of which two were of critical importance to the Indian economy. The first
was the break-up of the Soviet Union into its constituent nationalities and sub-nationalities.
The Soviet Union and its Eastern European neighbours had very strong trade links with India,
which were on a rupee account, i.e., trade with the former USSR was not in hard currency like
the dollar.

Our woes on the external account were further compounded when Iraq decided to attack
Kuwait in August 1990. India is largely dependent on crude oil imports from the Gulf to meet
its domestic demand for petroleum products. In the five-month period between August 1990
and January 1991, crude oil prices rose by 65% and India’s import bill on the oil account rose
by a similar degree. The impact of this on India was double because its long-term oil import
contracts with both Iraq and Kuwait became infructuous and India had to buy oil in the world
spot oil market at substantially higher prices.

The first world oil shock began soon after Yom Kippur or Arab Israel War in 1973 when the
Arab members of the Organisation of Petroleum Exporting Countries (OPEC) announced that
they would no longer ship petroleum to nations that had supported Israel that is to United States
and its allies in Western Europe. At around the same time. OPEC member states agreed to use
their leverage over the world price-setting mechanism for oil to quadruple world oil prices.
Real oil prices peaked well above $43 per barrel in1974.

New Economic Policy was a more ambitious and aimed at freeing the economy from state
intervention. The reforms introduced included short-term stabilisation measures encompassing
devaluation of the rupee, restraint on public expenditure (by reducing subsidies on fertilizer
and petroleum), a plan for the reduction of the fiscal deficit and removal of restrictions on the

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 flow of foreign capital to Indian markets. The medium and long-term Structural Adjustment
Programme (SAP) included a series of measures aimed at liberalisation of trade and
deregulation of industry, restricting the ambit of the public sector including disinvestment of
equities in profit making concerns and withdrawal of subsidies for the loss making ones,
reforms of the financial sector and the tax systems and measures to facilitate foreign capital
flows.
The main features of the liberalisation policy of Indian government have been:
• General reduction in the role of the state in economic governance
• Withdrawal by the State from some economic sectors and its replacement by the private
sector
• Decline in the government/public sectors in basic and key industries, banking, insurance and
other public sector undertakings
• Decline in the role of the State in provision of public social services like education, housing
and health
• Future development through wider participation of the private sector and hence more
dependence on the market for the exchange of goods

Conclusion
We have discussed in detail an important economic aspect of globalisation that is liberalisation
with special reference to India. Liberalisation, as we have seen, is loosening up of controls,
which the government exercises on economic forces that lead to opening up of the economy to
external flow of goods and services or the relaxation of domestic controls. And the structural
adjustment means a series of policy shifts by the national government with regard to the
economic, political and social affairs.

(b) Privatisation
Along with the liberalisation of the economy in the 1980s the neo-liberals of the U.K. and the
U.S also advocated the privatisation of industries and services to make enterprises more
competitive and efficient so as to meet the challenges of the global economy. The U.K.
privatised 80% of its public sector by the 1980s (Mandel 1993). Privatisation largely means
selling of public owned assets to private ownership by stages.

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Neo liberalism is a political and economic ideology based on specific principles. It is a market
driven approach to economic and social policy based on neo classical theories of economics. It
makes an advocacy for maximising the role of private business sector in determining the
political and economic priorities of the state. The term “neo liberalism” became an ideological
paradigm that fixed priorities on markets, productivity, efficiency, consumer choice,
transactional behaviour. According to the Collins dictionary, neo liberalism is a modern
politico-economic theory favouring free trade, privatization, and minimal government
intervention in business, reduced public expenditure on social services, etc. Neo liberalism is
the dominant and pervasive economic policy agenda of the present world. It is a powerful and
expansive political agenda of class domination and exploitation. Perry Anderson describes it
as ‘the most successful ideology in world history.’ Thus, neo liberalism as an approach to
economic and social studies refers to the process in which control of economic factors is shifted
from the public sector to the private sector.

As the very name “Neo liberalism” indicates, it is a revival of “liberalism”. In other words, this
is the ideology of liberalism reincarnated. To be more specific, liberalism has undergone a
process of initial growth, intermediary decline, and finally a recent rejuvenation. Neo liberalism
is a collection of economic policies support by an ideological commitment. It argues for the
reduction of state-intervention in the economy and a promotion of laissez-faire capitalism in
order to promote human well being, economic efficiency and personal freedom.

Under this ideology, the rich grow richer and the poor grow poorer. Around the world, neo-
liberalism has been imposed by powerful financial institutions like the International Monetary
Fund (IMF), the World Bank and the Inter- American Development Bank. The capitalist crisis
over the last 25 years, with its shrinking profit rates, inspired the corporate elite to revive
economic liberalism.

Liberalism in economics had its roots in the writings of a Scottish economist, Adam Smith.
Smith published a book in 1776 called The Wealth of Nations. In this book, Smith advocated
the abolition of government intervention in economic matters. To him here should be no
restrictions on manufacturing, no barriers to commerce, and no tariffs imposed by the
government. On the other hand, he argued free trade was the best way for a nation's economy
to develop. Such ideas were liberal in the sense of no controls. This encouraged the capitalists

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 to make huge profits as they wished. Liberalism reflects itself in political, economic, or even
religious ideas.

To accomplish this, neoliberalism requires the removal of various controls deemed as barriers
to free trade, such as:
• Tariffs
• Regulations
• Certain standards, laws, legislation and regulatory measures
• Restrictions on capital flows and investment

(b) Privatisation
The liberal ideology believes that state is the best which governs the least. They are against the
notion of public sector and government control and government management. They propose to
transfer state-owned enterprises, goods and services to the hands of private investors. This
includes banks, major industries, railroads, toll highways, electricity, educational institutions,
hospitals and even fresh water. To them it will bring efficiency, increase productivity and bring
better economic prosperity and development to nations. Privatization means the selling off of
public assets to run for profit. It can be done using any or all of the following techniques;
• Public offering of shares = all or part of the shares of public limited company are offered for
sale to the public
• Private sale of shares = all or part of the state-owned enterprise is sold to private individual or
a group of purchasers
• New private investment in a state-owned enterprise = private share issues are subsidised by the
private sector or the public
• Entry of the private sector into public sector – private groups allowed to get into areas reserved
for the public sector, such as the power and telecommunications sectors in India
• Contracting out the services and utilities to private operators or contractors for operation and
maintenance, while retaining ownership with the government. Like water supply, sewage
treatment, etc.
• Sale of government or state enterprises’ assets as private sale instead of shares
• Reorganisation or fragmentation of subsidiary units of a company
• Management/employee buy-out are in which the management or the employees acquire the
controlling interest in which shares are purchased on credit extended by the government

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With the aim of privatising the economy, the Indian government adopted various measures in
the 1990s. Initiatives such as abolition of licence raj for deregulation of the industries,
scrapping of legislations such as MRTP and FERA, approval for 100% equity for NRIs,
streamlining of approval committees, disinvestment in Public Sector Undertakings (PSUs), and
reference of sick industrial units to Board of Industrial and Financial Reconstruction for
rationalisation were meant for more and more privatisation of the Indian economy.

*Refer to class discussion