Economic Reforms
The year 1991, is an important year in the economic history
of India. As soon as the new government resumed office on June 21,
1991, it adopted a number of stabilization measures to restore internal and
external confidence in India’s economy. Today, we will talk about the
economic reforms in India.
In 1991, the government made some radical changes in its policies regarding
foreign investment, trade, exchange rate, industries, banking, and fiscal
affairs, etc. It also announced several new policies under the name – New
Economic Reforms of India, which gave a new direction and dimension to the
Indian economy.
Nature
of Economic Reforms in India
The nature of the new economic
reforms in India are as follows:
Liberalization
The fundamental feature of the new
economic reforms in India was that it offered freedom to the entrepreneurs to
establish any trade or industry or business venture.
Economic liberalization means freedom to make economic decisions.
In other words, the producers,
owners or consumers of the factors of production are free to take their
decisions in order to promote their interests. The Government of India
announced the liberalization policy in
the:
·
Industrial sector
·
Foreign trade
·
Exchange rate
·
Banking and financial
sector
·
The fiscal sector, etc.
Further, the government also freed
the capital markets
and opened them to private enterprises. Also, it permitted foreign equity
participation of up to 51 percent or more.
Additionally, the government
de-licensed the industrial sector and abolished the Monopolies and
Restrictive Trade Practices (MRTP) Act.
Further, the government also
allowed foreign investments to enter the infrastructure sector. Finally, the
policy amended the Foreign Exchange Regulation Act (FERA) and enacted
the Foreign Exchange Management Act
(FEMA).
Extension of Privatization
Another important feature of the
new economic reforms in India was the extension of privatization in the
country. In simple words, privatization is a process which helps to reduce the
role of the State or the public sector in the economic activity of a country.
The primary objective of
privatization is improving the overall performance of the public sector
undertakings. This is especially beneficial to the taxpayers as it reduces the
financial burden on them.
As a part of privatization, the
government gave 11 industries to the private sector. These were out of the 17
industries reserved for the public sector. Further, the government offered
better opportunities for investment to the foreign private investors and
extended the scope of privatization.
Globalization of the Economy
The new economic reforms in India
made our country’s economy outwardly oriented. Globalization is basically a
process of increasing the economic integration and growing economic
interdependence between different countries in the world economy.
The processes of economic
liberalization and privatization of the public sector enterprises eventually
led to the globalization of the Indian economy. Globalization is the flow of
capital, commodities, technology, and labor across national boundaries. As a
result of globalization, both domestic and world markets started
governing the economic activities in India.
What are the
three main aspects of the nature of economic reforms in India?
The three main
aspects of the economic reforms in India are:
·
Liberalization – where the government changed several
economic policies to create an environment of freedom for economic
decision-making.
·
Privatization – the government had reserved 17
industries for the public sector. It gave 11 out of these to the private
sector.
·
Globalization – Both
liberalization and privatization of the public sector enterprises led to the
globalization of the Indian economy.
Meaning of Liberalisation
Liberalisation (or liberalization)
is any method of how a state raises limitations on some private individual
ventures. Liberalisation befalls when something which was forbidden is no
longer forbidden or when government laws are loosened.
Liberalization refers
to laws or rules being liberalized, or relaxed, by a government.
... While liberal is used to refer to more than just politics, liberalization is
used only when speaking of economic or social policies or other government
regulations.
Liberalisation in India
Since the adoption of the New
economic strategy in 1991, there has been a drastic change in the Indian
economy. With the arrival of liberalisation, the government has regulated the
private sector organisations to conduct business transactions with fewer
restrictions.
For developing countries,
liberalisation has opened economic borders to foreign companies and
investments. Earlier, Investors has to encounter difficulties to enter
countries with many barriers.
These
barriers included tax laws, foreign investment restrictions, accounting
regulations, and legal issues. The economic liberalisation reduced all
these obstacles and waived few restrictions over the control of the economy to
the private sector.
Objectives
·
To boost competition between domestic
businesses
·
To promote foreign trade and regulate imports
and exports
·
Improvement of technology and foreign capital
·
To develop a global market of a country
·
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 reduce the role of the public sector in
future industrial development.
·
To introduce more competition into the
economy with the aim of increasing efficiency.
Reforms under Liberalisation
·
Deregulation of the Industrial Sector
·
Financial Sector Reforms
·
Tax Reforms
·
Foreign Exchange Reforms
·
Trade and Investment Policy Reforms
·
External Sector Reforms
·
Foreign Exchange Reforms
·
Foreign Trade Policy Reforms
Impact of Liberalisation
Positive
Impact of Liberalisation in India
1. Free flow of capital: Liberalisation has enhanced the
flow of capital by making it affordable for businesses to reach the capital
from investors and take a profitable project.
2. Diversity for Investors: The Investors will be benefitted by
investing a portion of their business into a diversifying asset class.
3. Impact on Agriculture: In this area, the cropping
designs have experienced a huge change, but the impact of liberalisation cannot
be accurately measured. Government restrictions and interventions can be seen
from production to distribution of the crop.
Negative Impact of Liberalisation in India
1. The weakening of the economy: Enormous restoration of
political power and economic power will lead to weakening the entire Indian
economy.
2.Technological Impact: Fast development in technology allows many small
scale industries and other businesses in India to either adjust to changes or
shut their businesses.
3. Mergers and Acquisitions: Here small businesses are
merging with big companies, therefore, the small companies employees may need
to enhance their skilled and technologically advanced. This enhancing of
skill and the time it might take may lead to non-productivity and can be a
burden to the company’s capital.
Economic
Reforms during Liberalisation
Several sectors were affected by the outburst of the
impact of Liberalization. Few economic reforms were:
·
Financial Sector Reforms
·
Tax Reforms / Fiscal Reforms
·
Foreign Exchange Reforms / External Sector
Reforms
·
Industrial Sector Reforms
Liberalisation
vs Privatisation vs Globalisation
Liberalisation
Liberalisation refers to the slackening of government regulations. The economic
liberalisation in India denotes the continuing financial reforms which began
since July 24, 1991.
Privatisation
Privatisation refers to the participation of private entities in businesses and
services and transfer of ownership from the public sector (or government) to
the private sector as well.
It means a transfer of ownership, management, and control of
public sector enterprises to the private sector.
Globalisation
Globalisation stands
for the consolidation of the various economies of the world.
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