BMP-MBA 504

Session 3

Liberalization
Session Speaker
Jayashree K

Asst. Professor
M.S Ramaiah School of Advanced Studies - Bangalore

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LIBERALIZATION

INTRODUCTION

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Liberalization of the economy means to free it from

direct or physical controls imposed by the
government.
Economic reforms were based on the assumption
that market forces could guide the economy in a
more effective manner than government control.
Examples of one of other undeveloped countries like
Korea, Thailand, Singapore, etc. that had achieved
rapid economic development as a result of
liberalization were kept in consideration.

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What made India to liberalize

A Balance of Payments crisis in 1991 which

pushed the country to near bankruptcy.
the Rupee devalued and economic reforms were
forced upon India.
India 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
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Reforms taken during

liberalization

Abolition of industrial licensing and registration

Liberalizing the MRTP act
Freedom for expansion and production
Increase in the investment limit of the small
industries
Freedom to import capital goods
Freedom to import technology
Free determination of interest rates
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Impact of these reforms

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Annual growth in GDP

A rate of growth that will double average
income in a decade
Rapid Growth in all sectors.
Exports of information technology
enabled services particularly strong.

COMPONENTS
OF
LIBERALIZATION

Trade
Liberalization
Industrial
Liberalization

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Fiscal Sector
Reforms
Financial
Liberalization

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1. Industrial Liberalization
Industrial Sector was among the first sectors to be
liberalized in India in a series of measures. Industrial
licensing has been abolished except in a small number of
sectors where it has been retained on strategic
considerations.
Abolition of industrial licensing
Reduction in d reservation of public sector
Facilitated easy access to foreign technology
Restriction were removed on expansion and,
Opening the economy to FDI.

Foreign Direct Investment in India

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Foreign investment is more than 24% in the

equity capital of units manufacturing items
reserved for the small scale industries.
Foreign Investment Promotion Board (FIPB) is a
competent body to consider and recommend
foreign direct investment.

2. Trade Liberalization

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Trade policy allowing domestic providers (of goods and/or

services) to compete more freely in world markets and
foreign providers to compete more freely in domestic
markets.
TRADE SECTOR
REFORMS

ADOPTION
LIMINATION
OF FLEXIBLE
OF IMPORT RATIONALISATION
EXCHANGE
OF TARIFF
LICENSING
RATE
STRUCTURE

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3. Financial Liberalization
Financial liberalization (FL) refers to the deregulation of
domestic financial markets and the liberalization of the
capital account.
In one view, it strengthens financial development and
contributes to higher long-run growth. In another view, it
induces excessive risk-taking, increases macroeconomic
volatility and leads to more frequent crises.

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Financial Liberalization reforms

REFORMS IN
REFORMS IN
ANKING SECTOR
INSURANCE
REFORMS IN
CAPITAL MARKET
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4. Fiscal Sector Reforms

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India's fiscal sector reforms help to raise the rate of savings

and investment in India. This further helps to enhance the
productivity of public expenditures
India has established itself as one of the fastest growing
economies in the world. India is also advancing towards the
economical growth and improvement in literacy.
During 1999-2000, India's domestic savings and investment
was estimated to grow by 23% and Indian economy was
expected to grow by 6.4% although the average growth rate
declined to 6.0% in comparison to earlier year.
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In the first five year plan, India had attained an

average annual growth rate by 3.5%.
Indian economy showed an average growth rate
of 6.4%, which was 5.9% in the 80's. At the end
of the 8th Five Year Plan, the annual growth rate
of India reached 6.9 percent.
During the period from 1991-92 the Indian
economy passed through a tough time. The
overall economic growth in this period declined
to 1.1% and the total fiscal deficit became 8% of
the GDP.

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504
Indian Foreign Exchange Reserves: a steadyBMP-MBA
rise
after liberalization

Foreign exchange reserves (US$ billion)

150

118.3

100

54.1
50

2.2

75.4

17.0

0
1990-91

1995-96

2001-02

2002-03

2003-04
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Foreign Investments after liberalization

18000
16000
14000
12000
10000
8000
6000
4000
2000
0

Total Foreign Investment (US$ million)

US$ million

5,138

5,385

1994-95

1997-98

6,789

15,872

8,152
5,639

103
1990-91

2000-01

2001-02

2002-03

2003-04
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Import duty Reductions after liberalization

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Challenges Ahead

2.

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1.
Governance
Need for elimination of large number of Rules & Regulations in
the books
Sharply reducing the number of implementing agencies
Moving towards single window clearance

Infrastructure: A Challenge and an opportunity

Investments required upto 2012 US$ 334 billion

Power Generation - US$ 143 billion

Power Transmission & Distribution US$ 116 billion

Roads US$ 40 billion

Ports US$ 20 billion

Railways US$ 15 billion

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CONCLUSION

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Arguments in the favour of Liberalization

Increase in rate of economic growth
Increase in competitiveness of industrial
sector
Reduction in poverty and inequality
Fall in fiscal deficit
Control on prices
Decline in deficit of BOP
Increase in Efficiency
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Arguments in the Against of

Liberalization

Less importance to agriculture.

Pressure by IMF and World Bank.
More depending on Foreign Debt.
Dependence on Foreign technology.
Undue importance to Privatization.
Problem of Unemployment.

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