EFFECTS OF LIBERALISATION ON INDIAN ECONOMY

INTRODUCTION

  • There has been revolutionary change in Indian Economy since the espousal of new economic strategy in 1991. This had great impacts on all areas of life in India. When a nation becomes liberalized, the economic effects can be intense for the country and for investors. Liberalization is defined as laws or rules being liberalized, or relaxed, by a government.
  • Economic liberalization is generally described as the relaxing of government regulations in a country to allow for private sector companies to operate business transactions with fewer restrictions.
  • With reference to developing countries, this term denotes to opening of their economic borders to multinationals and foreign investment. Many economists explained that economic liberalization is “opening up” to the rest of the world with regards to trade, regulations, taxation and other areas that generally affect business in the country.
  • Investors face problems to enter in emerging market countries when there are lots of barriers. These barriers can include tax laws, foreign investment restrictions, legal issues and accounting regulations that can make it difficult or impossible to gain access to the nation.
  • The economic liberalization process begins by relaxing these obstacles and relinquishing some control over the direction of the economy to the private sector. This often involves some form of deregulation and a privatization of corporations.
  • Major goals of economic liberalization are the free flow of capital between countries and the effectual allocation of resources and competitive advantages. This is generally done by decreasing protectionist strategies such as tariffs, trade laws and other trade barriers.
  • One of the main effects of this improved flow of capital into the country is that it makes it inexpensive for companies to access capital from investors. A lower cost of capital enables companies to undertake lucrative projects that they may not have been able to with a higher cost of capital pre-liberalization, leading to higher growth rates.

FIRST REFORMS (1991–96)

A) Crisis

  • By 1991, India still had a fixed exchange rate system, 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, and by the end of 1990, the state of India was in a serious economic crisis.
  • The government was close to default, 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.
  • It had to pledge 20 tonnes of gold to Union Bank of Switzerland and 47 tonnes to Bank of England as part of a bailout deal with the International Monetary Fund (IMF). Most of the economic reforms were forced upon India as a part of the IMF bailout.

B) Liberalisation of 1991 and World Bank loan

  • In response to the above-mentioned crisis, the Finance ministry led by, the finance minister Manmohan Singh, initiated the economic liberalisation of 1991 with the support of the then Prime minister Narasimha Rao.
  • The reforms did away with the Licence Raj, reduced tariffs and interest rates and ended many public monopolies, allowing automatic approval of foreign direct investment in many sectors. Since then, the overall thrust of liberalisation has remained the same, although no government has tried to take on powerful lobbies such as trade unions and farmers, on contentious issues such as reforming labour laws and reducing agricultural subsidies.
  • By the turn of the 21st century, India had progressed towards a free-market economy, with a substantial reduction in state control of the economy and increased financial liberalisation.This has been accompanied by increases in life expectancy, literacy rates, and food security, although urban residents have benefited more than rural residents.
  • World Bank loans had been taken for agricultural projects since 1972, these continued as international seed companies were able to enter Indian markets.
  • On 12 November 1991, based on an application from the Government of India, World Bank sanctioned a structural adjustment loan / credit that consisted of two components – an IBRD loan of $250 million to be paid over 20 years, and an IDA credit of SDR 183.8 million (equivalent to $250 million) with 35 years maturity, through India’s ministry of finance, with the President of India as the borrower.
  • The loan was meant primarily to support the government’s program of stabilization and economic reform. This specified deregulation, increased foreign direct investment, liberalization of the trade regime, reforming domestic interest rates, strengthening capital markets (stock exchanges), and initiating public enterprise reform (selling off public enterprises).

LATER REFORMS

  • The Bharatiya Janata Party(BJP)–Atal Bihari Vajpayee administration surprised many by continuing reforms, when it was at the helm of affairs of India for six years, from 1998–99 and from 1999–2004
  • The BJP-led National Democratic AllianceCoalition began privatising under-performing government-owned business including hotels, VSNL, Maruti Suzuki, and airports, and began reduction of taxes, an overall fiscal policy aimed at reducing deficits and debts and increased initiatives for public works.
  • The United Frontgovernment attempted a progressive budget that encouraged reforms, but the 1997 Asian financial crisis and political instability created economic stagnation.
  • Towards the end of 2011, the Congress-led UPA-2 Coalition Government initiated the introduction of 51% Foreign Direct Investmentin retail sector. But due to pressure from fellow coalition parties and the opposition, the decision was rolled back. However, it was approved in December 2012.
  • In the early months of 2015, the second BJP-led NDA Government under Narendra Modifurther opened up the insurance sector by allowing up to 49% FDI. This came seven years after the previous government attempted and failed to push through the same reforms and 16 years after the sector was first opened to foreign investors up to 26% under the first BJP-led NDA Government under Atal Bihari Vajpayee’s administration.
  • The second BJP-led NDA Government also opened up the coal industry through the passing of the Coal Mines (Special Provisions) Bill of 2015. It effectively ended the Indian central government’s monopoly over the mining of coal, which existed since nationalization in 1973 through socialist controls.
  • It has opened up the path for private, foreign investments in the sector, since Indian arms of foreign companies are entitled to bid for coal blocks and licences, as well as for commercial mining of coal. This could result in billions of dollars investments by domestic and foreign miners. The move is also beneficial to the state-owned Coal India Limited, which may now get the elbow room to bring in some much needed technology and best practices, while opening up prospects of a better future for millions of mine workers.
  • In the 2016 budget session of Parliament, the Narendra Modi led BJP Government pushed through the Insolvency and Bankruptcy Code. The Code creates time-bound processes for insolvency resolution of companies and individuals. These processes will be completed within 180 days. If insolvency cannot be resolved, the assets of the borrowers may be sold to repay creditors. This law drastically eases the process of doing business, according to experts and is considered by many to be the second most important reform in India since 1991 next to the proposed GST.
  • On July 1, 2017, the BJP-led NDA Government under Narendra Modi approved the Act to Uniform Goods and Services Tax (India). It was approved 17 years after the legislation was first proposed under the earlier BJP-led NDA Government under Atal Bihari Vajpayee’s administration in 2000. Touted to be India’s biggest tax reform in 70 years of independence and the most important overall reform in terms of ease of doing business since 1991. GST replaced a slew of indirect taxes with a unified tax structure and was therefore showcased as dramatically reshaping the country’s 2.5 trillion dollar economy.
  • In the NDA-2 government, Finance Minister Nirmala Sitharaman had on September 20, 2019 announced lowering of the base corporate taxrate to 22 per cent from 30 per cent for companies that do not seek exemptions, and reduced the rate for new manufacturing companies to 15 per cent from 25 per cent. It is believed that this would be very beneficial in attracting investment by MNCs in the Indian economy and thus usher in its growth.

 

IMPACT ON SMALL SCALE IN INDIA

  • This impact shall be studied right from the beginning of colonization in 18th Colonization can be considered as 1stwave of globalization. In pre colonization era, India’s textiles and handicraft was renowned worldwide and was backbone of Indian economy. With coming of industrial revolution along with foreign rule in India, Indian economy suffered a major setback and much of its indigenous small scale cottage Industry was destroyed.
  • After independence, government attempted to revive small scale sector by reserving items exclusively for it to manufacture. With liberalization list of reserved items was substantially curtailed and many new sectors were thrown open to big players.
  • Small scale industry however exists and still remains backbone of Indian Economy. It contributes to major portion of exports and private sector employment. Results are mixed, many erstwhile Small scale industries got bigger and better. But overall value addition, product innovation and technology adoption remains dismal and they exist only on back of government support. Their products are contested by cheaper imports from China.

IMPACT ON AGRICULTURE

  • Share of agriculture in domestic economy has declined to about 15%. However, people dependent upon agriculture are still around 55%. Cropping patterns has undergone a huge change, but impact of liberalization can’t be properly assessed. We saw under series relating to agriculture that there are still all pervasive government controls and interventions starting from production to distribution
  • Global agricultural economy is highly distorted. This is mainly because imbalance in economic and political power in hands of farmers of developed and developing countries. In developed countries, commercial and capitalistic agriculture is in place which is owned by influential Agri corporations. They easily influence policies of WTO and extract a better deal for themselves at cost of farmers of developing world.
  • Farming in developing world is subsistence and supports large number of poor people. With globalization there has been high fluctuation in commodity prices which put them in massive risk. This is particularly true for cash crops like Cotton and Sugarcane. Recent crises in both crops indicate towards this conclusively.
  • Also there is global Food vs. Fuel confusion going on. Sugar and corn are used to manufacture ethanol which is used as fuel. In USA Corn is produced mainly for this purpose, as sugar cane is in Brazil. Now there are apprehensions that what if converting food into fuel is more remunerative for producers? More than 1 billion people still live in hunger, much more are just hand to mouth. It is futile to expect that free market will take care of these people, who don’t have any purchasing power. Clearly, Agriculture is biggest market failure, but is rarely discussed for being so in WTO.
  • Another global debate born out of globalization is one of GM crops. Here too powerful MNCs like Monsanto hold the key. USA allows unhindered use of GM crops, but EU bans it. In India field trails are going on.
  • On the positive note, India’s largely self-sufficient and high value distinguished products like Basmati Rice are in high demand all over. Generally speaking, India is better placed to take up challenge of globalization in this case. If done in sustainable and inclusive manner, it will have a huge multiplier impact on whole economy. Worldwide implicit compulsion to develop Food processing Industry is another landmark effect of globalization.
  • Apart from these, Farm Mechanization i.e. use of electronic/solar pumps, Tractors, combines etc. all are fruits of globalization. Now moving a step further, Information technology is being incorporated into agriculture to facilitate farming.

IMPACT ON SERVICES SECTOR

  • In this case globalization has been boon for developing countries and bane for developed ones. Due to historic economic disparity between two groups, human resources have been much cheaper in developing economies. This was further facilitated by IT revolution and this all culminated in exodus of numerous jobs from developed countries to developing countries. Here US have to jealously guard its jobs as we guard our agriculture.

A) IT industry

  • Software, BPO, KPO, LPO industry boom in India has helped India to absorb a big chunk of demographic dividend, which otherwise could have wasted. Best part is that export of services result in export of high value. There is almost no material exported which consume some natural resource. Only thing exported is labor of Professionals, which doesn’t deplete, instead grows with time. Now India is better placed to become a truly Knowledge Economy.
  • Exports of these services constitute big part of India’s foreign Exchange earnings. In fact, the only three years India had Current Account surplus, I.e. 2000-2002, was on back of this export only

B) Banking

  • Further, in banking too India has been a gainer. Since reforms, there have been three rounds of License Grants for private banks. Private Banks such as ICICI, HDFC, Yes Bank and also foreign banks, raised standards of Indian Banking Industry. Now there is cut through competition in the banking industry, and public sector banks are more responsive to customers.
  • Here too IT is on path of bringing banking revolution. New government schemes like Pradhan Mantri Jan dhan Yojana aims to achieve their targets by using Adhaar Card. Having said this, Public Sector Banks still remain major lender in the country.
  • Similarly Insurance Industry now offers variety of products such as Unit Linked Insurance plans, Travel Insurance etc. But, in India life Insurance business is still decisively in hands of Life Insurance Corporation of India.

C) Stock Markets

  • Another major development is one of Stock Markets. Stock Markets are platforms on which Corporate Securities can be traded real time. It provides mechanisms for constant price discovery, options for investors to exit from or enter into investment any time.
  • These are back bone of free markets these days and there is robust trade going all over the world on stock exchanges. Their Importance can be estimated from the fact that, behavior of stock markets of a country is strongest indicator of health and future prospects of an economy.
  • These markets has thrown open wide array of associated services such as Investment Banking, Asset Management, Underwriting services, Hedging advice etc. These collectively employ lakhs of people all over India.
  • Similarly there are commodities market which provides avenues for investment and sale of various eligible commodities.

D) Telecom Sector

  • Conventionally, Telecom sector was a government owned monopoly and consequently service was quite substandard. After reforms, private telecom sector reached pinnacle of success. And Indian telecom companies went global. However, corruption and rent seeking marred growth and outlook of this sector.
  • Entry of modern Direct to Homeservices saw improvements in quality of Television services on one hand and loss of livelihood for numerous local cable operators.

E) Education and Health Sector

  • It should be noted that food (Agriculture), Health and education (and to lesser extent banking) are among basic necessities, which every human being deserves and can’t do without. Unfortunately, in developing countries there is market failure in all these sectors and majority of people can’t afford beyond a certain limit (or can’t afford at all).
  • Concept of free markets, globalization, liberalization etc. fails here miserably. Free markets provide goods and services to people who can afford paying for them, not to those who deserve and need these.
  • Now if we consider these sectors from angle of our inclination towards free markets, certainly there has been lot of progress. There has been world class education available in India and Deregulation has resulted in Mushrooming of private engineering and Medical Colleges. But in reality, this had far reaching devastating effect on society.
  • These new colleges accommodate only a miniscule proportion of aspirants at very high costs. Recently, an Independent organization ‘Transparency International’ came out with report claiming that India’s medical system is most corrupt in the world. This was no surprise, we all know from where it starts.
  • High fees of education forces many aspirants to take educational loans from banks. After qualifying job market is unable to absorb majority of them. Practice turns out to be option of last resort.
  • Now to make a decent living and to pay back the loans person is lured by corruption. Consequently, when many similar cases are put together, we get a corrupt system, economy and society.
  • Reality is that after deregulation and liberalization, government along with other sectors, pulled its hand from social sectors too. Now there is Mediocre to high quality options are available in private sector which can be availed as per one’s budget. In public Sector Less than Mediocre to Mediocre options are available. This leaves huge proportion of aspiring students and expecting patients.
  • On Social front India’s performance is deplored all over the world and it is probably behind all important developing economies. This lacuna has been recognized and government has taken the charge. In case of education almost universal enrollments has been achieved upto primary level and now impetus should be on improving quality, so that student of public schools comes at par with atleast average private ones.
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