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What is Liberalisation ? - Objectives, Impacts, Background

Liberalisation

Table of Contents :

  • Meaning of Liberalisation.
  • Implication of Liberalisation.
  • Objectives of Liberalisation.
  • Impacts / Effects of Liberalisation on Industry.
  • Background of Liberalisation.

What do you mean by Liberalisation ? 

Introduction :


Many countries in the recent past 1991 onwards have signed GATT agreement, and made possible free movement of goods and services all over the worid. Many countries (including India) have principally agreed for the 'free entry' of foreign goods and foreign companies in local market. India, as one of the members of GATT in recent years is required to adopt the policy of 'liberalisation' and remove all the barriers restrictions on import export trade activities. The adoption of the policy of liberalisation has made some effects on business and industrial enterprises.

Meaning of Liberalisation :

Liberalisation means giving more freedom to the industry. It is a process of removing the supply constraints, delicensing, fiscal incentives, etc. in respect of industry. It aims at improving technology and efficiency, competitiveness of domestic industry over a wide range and building the base for greater self-reliance.


Implications of Liberalisation :


The policy of liberalisation encompasses the following :
  • To lift all qualitative and quantitative controls imposed on the foreign trade.
  • To promote free movement of goods and services all over the world.
  • To allow free entry of foreign goods, services, capital and companies in local markets.
  • To provide opportunities for specialists, IT intellectuals in the world trade.


Objectives of Liberalisation :


  • To boost competition between domestic businesses.
  • To reduce the debt burden of a country.
  • To unlock the economic potential of the country by encouraging the private sector and multinational corporations to invest and expand.
  • To encourage the private sector to take an active part in the development process.
  • To introduce more competition into the economy with the aim of increasing efficiency.


Effects of Liberalisation on Industry :


These effects can be classified as "favourable" and "unfavourable", "positive and negative" effects.

a) Favourable / Positive Effects :


1) Better Availability of Spares and Raw Materials :
Liberalisation of trade has made possible availability of spare parts, machinery, raw materials, finished goods, through imports from abroad necessary for industrial units and consumers.

2) Competition from Foreign Companies :
Local industrial units and business units are required to face the competition from foreign companies. As a result, they are required to improve qualitative and quantitative performance. In order to get scope in foreign markets, the Indian industries are required to produce superior quality products and regularise their supply. The keen competition in world market has made essential to control costs and improve the quality at one and the same time.
 
3) Opportunity for Additional Investment of Funds :
Local entrepreneurs get the opportunity for additional investment of funds, and there by implement the plans of rationalisation, mechanisation and modernisation of units. They can import new machinery and equipments from abroad, and manufacture superior quality products. Liberalisation indirectly contributes in making healthy growth of business units. The entry of foreign companies in the field of banking and insurance companies has made it essential to improve 'service sector'.

4) Additions to the Capital Market in India :
Influx of foreign capital, NRI deposits has resulted in improving capital market conditions in India to some extent. Availability of funds from abroad (foreign investment) is also the sign of confidence in Indian entrepreneurs.

5) Higher Opportunities for Indian Experts :
As a result of liberalisation, Indian experts, technologists are getting wide opportunities to prove their merits in the field of software technology, information technology.

b) Unfavourable / Negative Effects :


1) Reduction in Employment :
As a result of liberalisation, industrial and business sector have 'received a set back'. There are complaints on large scale that Indian economy is required to pass through "recession phase" of trade cycle. Many large scale, medium size industries, business units are compelled to 'pull down the shutters' and further it has resulted in large-scale retrenchment of employees. In many companies, there is serious consideration of "Voluntary retirement schemes".


2) Lesser Saving and Investment :
Liberalisation and globalisation have created problems on two major fronts "Capital Formation" and "Generation of new employment opportunities". People in India, in recent years are experiencing' slack market conditions. The demand for goods and services is uncertain. The ratio of unemployed population to total population is higher. Retrenchment of employees in years has aggravated the problem of income generation and further made 'savings and investment' difficult.

3) Creation of New Challenges Before Economy :
To sum up, the measures of liberalisation and globalisation have changed the scene all over the world. Comparatively, this policy has proved more advantageous for the economically advanced countries, as they possess more abilities for exports. On the other hand countries in Africa and Asian subcontinents are less beneficiaries. It is because of weaknesses in their economies. Their export potentiality is minimum. On the other hand, it is difficult for them to face the competition with MNC's in local markets. So globalisation and liberalisation has posed new challenges before them.

Background of Liberalisation :


Economic liberalisation implies "economic freedom or freedom for economic decisions". In simple words, economic liberalisation means minimum of controls on consumption, production and use of factors of production. India has accepted liberalisation, privatisation and globalisation and are the major thrust areas of its New Economic Policy. Liberalisation is the beginning of this revolution. The background of liberalisation can be explained with the following points :

1) Indian Economic Policy After Independence :
Indian economic policy after independence was influenced by the colonial experience. Policy tended towards protectionism, with a strong emphasis on import substitution, industrialisation, state intervention in labour and financial markets, a large public sector, business regulation and central planning. Elaborate licences, regulations and the accompanying red tape, commonly referred to as Licence Raj, were required to set up business in India between 1947 and 1990.

2) Liberalisation During 1975-80 :
In this period, 21 industries were delicensed and were allowed expansion beyond licensed capacity. Further, Sondhi Committee and Alexander Committee recommendations were accepted and industries were allowed to import capital goods.

3) Liberalisation During 1980-85 :
In this phase liberalisation policy was adopted to improve competitive spirit, efficiency and productivity. The major steps taken were as under :
  • Regulation of excess capacity.
  • MRTP-industries were allowed to start industries in backward areas
  • Liberal foreign trade policy was adopted.
  • Foreign collaborations were permitted.
  • Foreign trade sector was also liberalised.

4) Liberalisation During 1985-91 :
In this period, major steps of liberalisation were taken. For instance, diversification and expansion was liberally permitted. Around 23 industries were delicensed. MRTP limit was raised to Rs. 100 crore.

5) Liberalisation Since 1991 :
The year 1991 is said to be the real beginning of economic liberalisation. Because since then major steps were taken to liberalise the Indian economy. 

These measures can be listed as under :

a) New Industrial Policy :
In order to solve the economic crisis, Government decided to take bold decisions. Particularly, the industrial sector was liberalised. Foreign participation in industries was permitted. Except 14 products, all other industries were delicensed. MRTP Act was abolished.

b) New Trade Policy :
Export-Import Policy was liberalised. Gold import was freed. Import duties were reduced slowly. NRI deposits were attracted. Exports were encouraged.

c) Exchange Policy :
FERA Act was amended and replaced by FEMA. Accordingly, foreign exchange rate was made more market oriented. Control and regulation of exchange rate was removed.

d) Union Budget 1991-92 :
Union budget of 1991-92 is said to be more liberal. Controls and restrictions on economic activities were removed. In this budget, the decision to open up the infrastructure sector to foreign investors was taken. They were allowed to invest in rail, road and power projects. SEBI a separate body was created to protect the interests of small investors. Income tax laws were amended to attract NRI deposits. The tax structure was made more rational, 85 per cent of the recommendations of Chelliah Committee were accepted by the Government.
Further, privatisation of public sector industries was initiated. It means the disinvestment programme was prepared so as to gradually transfer the State owned enterprises to the private sector. In short, since 1991, the Government of India has started liberalising the economy and improve efficiency and productivity in all the sectors of the economy.

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