#6: Economic Liberalisation in India
This article seeks to explore one of the largest economic reforms that took place in India which has dramatically determined the course of Indian history today — Liberalisation.
What was the status pre-liberalisation?
Before any form of reformation, the government sought to close the economy to the outside world. The rupee was not convertible and there were drastically high import tariffs and policies that prevented the introduction of foreign goods into the market. Central planning was at the centre of the economy which restricted growth in many areas. The government decided what would be produced, at how much it would be sold, how many resources it could use and how much quantity could be produced. Firms were unable to fire workers and close factories. The largest pillar to this was import substitution which was grounded in the importance of the development of the domestic economy as opposed to furthering international trade statuses.
However, it became evident that the Indian economy was drastically lagging behind other East and Southeast Asian nations, and something had to be done. Hence, the governments of both Indira and Rajiv Gandhi subsequently began implementing the first traces of Liberalisation policies. Under this policy, the government began to loosen policies and restrictions on the creation of businesses and their internal affairs and decrease tariffs and other import controls to boost international trade. This resulted in an increase in the average GDP growth rate from 2.9% in the 1970s to 5.6%. However, there were still many issues, as the Bofors scandal (a major weapons contract, political scandal) tarnished Gandhi reputation and halted liberalisation efforts.
During the 1990s, India still had a fixed rate of exchange system and hence the balance of payments problems started to arise — thus causing the 1991 Indian economic crisis. By the 1990s, India was close to bankruptcy and the central bank refused any new lines of credit. With the assassination of Rajiv Gandhi and the fall of the Chandra Shekhar government, a new government was elected. This included the selection of Amar Nath Verma as the Principal Secretary and Manmohan Singh as the new finance minister. They set out a five-point plan to promote Liberalisation and revive the economy.
- It abolished the License Raj by removing any and all licensing restrictions for industries (except for a few industries due to social, environmental and security reasons).
- To incentivise foreign investment, it approved all investment up to 51% of equity participation by foreign firms which incentivised the international trade of modern technology and industrial development.
- In order to increase technological advancements, old policies that caused difficulties in approving foreign technologies was scrapped.
- Public and natural monopolies were effectively taken down by distributing shares of public sector companies and reducing the number of industries that could be publicly owned.
- MRTP companies (companies where the government-controlled certain asserts) were scrapped as a whole.
Other actions were taken such as the Eopchal Budget to get the fiscal deficit under control and subsidise companies and firms that would help boost the economy. However, all of them sought to stabilise the economy, reregulate, increase foreign direct investment, strengthen capital markets and reform public enterprises. As a result, India has continued to grow as one of the fastest-growing economies in the world.
