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The economic liberalization in India refers to ongoing economic reforms in India that started on 24 July 1991. After Independence in 1947, India adhered to socialist policies. In the 1980s, Prime Minister P. V. Narasimha Rao initiated some reforms. 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, IMF required India to undertake a series of structural economic reforms . As a result of this requirement, the government of P. V. Narasimha Rao and his finance minister Manmohan Singh (the present Prime Minister of India) started breakthrough reforms, although they did not implement many of the reforms IMF wanted. The new neoliberal 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. 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. Today India is mainly characterized as a market economy. As of 2009, about 300 million people—equivalent to the entire population of the United States—have escaped extreme poverty.The fruits of liberalisation reached their peak in 2007, when India recorded its highest GDP growth rate of 9%.
With this, India became the second fastest growing major economy in the world, next only to China. 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. Indian government coalitions have been advised to continue liberalisation. India grows at slower pace than China, which has beenliberalising its economy since 1978. McKinsey states that removing main obstacles "would free India’s economy to grow as fast as China’s, at 10 percent a year". For 2010, India was ranked 124th among 179 countries in Index of Economic Freedom World Rankings, which is an improvement from the preceding year.
1 Pre-liberalisation policies
2 Narasimha Rao government (1991– 1996)
1 Crisis 3 Sustainability of Economic Liberalization 4 Later reforms 5 Impact of reforms 6 Ongoing economic challenges ○ • • • 6.1 Reforms at the state level 7 See also 8 References 9 External links 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) States Reorganisation Act (1956) .○ • • • • 2.
business regulation. commonly referred to as Licence Raj. in which firms required licenses to invest and develop.Non-Aligned Movement (1956– ) Green Revolution (1970s) Indo-Pakistani War of 1971 Emergency (1975–77) 1990s in India Economic liberalisation in India 2000s in India See also History of India History of South Asia This box: view talk edit 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. regulations and the accompanying red tape. machine tools. state intervention at the micro level in all businesses especially in labour and financial markets. were required to set up business in Indiabetween 1947 and 1990. 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. India also operated a system of central planning for the economy. and electrical plants. Elaborate licences. Before the process of reform began in 1991. Policy tended towards protectionism. water. not international trade—a belief generated by a mixture of socialism and the experience of colonial exploitation. mining. at what price and what sources of capital were used. The government also prevented firms from laying off workers or closing factories. were effectively nationalized in the mid1950s. rather than markets. among other industries. a large public sector. how much. would determine how much investment was needed in which sectors. andcentral planning. the government attempted to close the Indian economy to the outside world. the belief that India needed to rely on internal markets for development. was inconvertible and high tariffs and import licensing prevented foreign goods reaching the market. telecommunications. insurance. with a strong emphasis on import substitution. . The central pillar of the policy was import substitution. industrialization under state monitoring. Steel. The Indian currency. Planning and the state. the rupee.  Five-Year Plans of India resembled central planning in theSoviet Union.
electrical power and communications. the government led by P. Pakistan grew by 5%. A huge public sector emerged. self-perpetuating bureaucracy that still exists throughout much of the country"and corruption flourished under this system. State-owned enterprises made large losses. License owners built up huge powerful empires. Licence Raj established the "irresponsible. The Vishwanath Pratap Singh (1989–1990) and Chandra Shekhar Singh government (1990–1991) did not add any significant reforms.5% from 1950s to 1980s. Narasimha Rao started light reforms. The government slightly reduced Licence Raj and also promoted the growth of the telecommunications and software industries. At the same time. Narasimha Rao government (1991–1996) Present Prime Minister Manmohan Singhwas then Finance Minister in Cabinet of Prime Minister P V Narasimha Rao .— BBC In the 80s. Only four or five licences would be given for steel. Infrastructure investment was poor because of the public sector monopoly.3%. South Korea by 10% and in Taiwan by 12%. while per capita income averaged 1. which stagnated around 3. Indonesia by 9%. Impact The low annual growth rate of the economy of India before 1980. Thailand by 9%. V.
 A Balance of Payments crisis in 1991 pushed the country to near bankruptcy. The United Front government attempted a progressive budget that encouraged reforms. Most of the economic reforms were forced upon India as a part of the IMF bailout. . it was in a seriouseconomic crisis. state monopolies broken. private sector enterprise and competition were encouraged and globalisation was slowly embraced. when it was at the helm of affairs of India for five years. where the rupee was pegged to the value of a basket of currencies of major trading partners. The government was close to default. 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. gold was transferred to London as collateral. Airports and began reduction of taxes. Astaire Research Sustainability of Economic Liberalization Go to : Economic_liberalization Later reforms The Bharatiya Janata Party (BJP)-Atal Bihari Vajpayee administration surprised many by continuing reforms. but the 1997 Asian financial crisis andpolitical instability created economic stagnation. India still had a fixed exchange rate system. the rupee devalued and economic reforms were forced upon India. crushed international investor confidence on the economy that was eventually pushed to the brink by the early 1990s. and sanctions that were more comprehensive were imposed following Pokhran-II. The reforms process continues today and is accepted by all political parties. tariffs. a sound fiscal policy aimed at reducing deficits and debts and increased initiatives for public works. India started havingbalance of payments problems since 1985. That low point was the catalyst required to transform the economy through badly needed reforms to unshackle the economy. duties and taxes progressively lowered. Maruti Suzuki.  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. but the speed is often held hostage by coalition politics and vested interests. — India Report. and later of her son Rajiv Gandhi in 1991. VSNL. and by the end of 1990. There were dire predictions of the collapse of the economy. As of 1991. The BJP-led National Democratic Alliance Coalition began privatizing under-performing government owned business including hotels. the economy was opened to trade and investment. In return for an IMF bailout.Crisis Main article: 1991 India economic crisis The assassination of prime minister Indira Gandhi in 1984. Controls started to be dismantled. double-digit inflation etc. India faced severe sanctions after Pokhran-I (five nuclear tests on 11 and 13 May 1998 at the Pokhran range in Rajasthan Desert).
4 billion by conventional calculations. and investment raised oninternational capital markets) in India grew from a minuscule US$132 million in 1991–92 to $5. it is the world's fourth largest economy.3 billion in 1995–96. Cities like NOIDA. [.. The growth rate for 2003–04 was 6.Indore and Ahmedabad have risen in prominence and economic importance. Impact of reforms The HSBC Global Technology Center inPune develops software for the entire HSBC group. behind only the US. In three years. according to the latest world development indicators. Gaziabad.. a rate of growth that will double average income in a decade. 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. you can help by expanding it.913 billion purchasing power parity (PPP). it translates into $2. China and Japan. insurance. with exports of information technology enabled services particularly strong. Hyderabad. Pune. — OECD Election of AB Vajpayee as Prime Minister of India in 1998 and his agenda was a welcome change. Chennai. Though India’s Gross National Income is only $477. portfolio investment. This list is incomplete.] In service sectors where government regulation has been eased significantly or is less burdensome—such as communications. In PPP terms. Jaipur. the West was developing a bit of a fascination to India’s . most of the sanctions have been lifted and the Indian economy is continuing to grow at an acceptably satisfactory rate. In those infrastructure sectors which have been opened to competition. Gurgaon. The impact of these reforms may be gauged from the fact that total foreign investment(including foreign direct investment. Annual growth in GDP per capita has accelerated from just 1¼ per cent in the three decades after Independence to 7½ per cent currently. After five years. asset management and information technology—output has grown rapidly. such as telecoms and civil aviation.0%. the private sector has proven to be extremely effective and growth has been phenomenal. Bangalore. become centres of rising industries and destination for foreign investment and firms.
The A T Kearney study is putting India second most likely destination for FDI in 2005 behind China. Labour market reform is essential to achieve a broader-based development and provide sufficient and higher productivity jobs for the growing labour force. acts as a barrier to entrepreneurship and need to be improved. Manmohan Singh in 2004 is further strengthening the required infrastructure to welcome the FDI. which is often government monopoly. should the conditions permit. powered by IT and BPO. This is a great leap forward. fascination with India is translating into active consideration of India as a destination for FDI. Failing education. Corruption High fiscal deficit This list is incomplete. you can help by expanding it. and knowledge management activities”. The new incoming government of Dr. research and development. business process outsourcing.brainpower. In the formal sector. Today. a framework for the foreign investment had been established. Inflation in basic consumable goods. By 2004. employment growth has been concentrated in firms that operate in sectors not covered by India’s highly restrictive labour laws. OECD summarized the key reforms that are needed: In labour markets. where these labour laws apply. Public companies are generally less productive than private firms and the privatisation programme should be revitalised. inefficient government procedures. It has displaced US to the third position. In product markets. Inefficient public sector. A number of barriers to competition in financial markets and some of the infrastructure sectors. 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. By the end of Vajpayee’s term as Prime Minister. India was at the 15th position. particularly in some of the states. which are other . only a few years back. Inadequate infrastructure. Highly restrictive and complex labour laws. Ongoing economic challenges Main article: Economy of India Problems in the agricultural sector. the West would consider investment in India. employment has been falling and firms are becoming more capital intensive despite abundant low-cost labour.
the taxable base should be broadened and rates lowered. 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. . while for direct taxes. Public expenditure should be re-oriented towards infrastructure investment by reducing subsidies.constraints on growth. The indirect taxsystem needs to be simplified to create a true national market. also need to be addressed. Furthermore.
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