Economic liberalisation in India

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The economic liberalization in India refers to ongoing economic reforms in India that started on 24 July 1991. After Independence in 1947, India adhered to socialist policies. In the 1980s, Prime Minister P. V. Narasimha Rao initiated some reforms. In 1991, after India faced a balance of payments crisis, it had to pledge 20 tons of gold to Union Bank of Switzerland and 47 tons to Bank of England as part of a bailout deal with the International Monetary Fund (IMF). In addition, IMF required India to undertake a series of structural economic reforms [1]. As a result of this requirement, the government of P. V. Narasimha Rao and his finance minister Manmohan Singh (the present Prime Minister of India) started breakthrough reforms, although they did not implement many of the reforms IMF wanted.[2][3] The new neoliberal policies included opening for international trade and investment, deregulation, initiation of privatization, tax reforms, and inflation-controlling measures. The overall direction of liberalisation has since remained the same, irrespective of the ruling party, although no party has yet tried to take on powerful lobbies such as the trade unions and farmers, or contentious issues such as reforming labour laws and reducing agricultural subsidies.[4] The main objective of the government was to transform the economic system from socialism to capitalism so as to achieve high economic growth and industrialize the nation for the well-being of Indian citizens.[5][6] Today India is mainly characterized as a market economy.[7] As of 2009, about 300 million peopleequivalent to the entire population of the United Stateshave escaped extreme poverty.[8]The fruits of liberalisation reached their peak in 2007, when India recorded its highest GDP growth rate of 9%.
[9]

With this, India became the second fastest growing major economy in the world, next only to China.[10] An Organisation

for Economic Co-operation and Development (OECD) report states that the average growth rate 7.5% will double the average income in a decade, and more reforms would speed up the pace.[11] Indian government coalitions have been advised to continue liberalisation. India grows at slower pace than China, which has beenliberalising its economy since 1978.[12] McKinsey states that removing main obstacles "would free Indias economy to grow as fast as Chinas, at 10 percent a year".[13] For 2010, India was ranked 124th among 179 countries in Index of Economic Freedom World Rankings, which is an improvement from the preceding year.
Contents
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1 Pre-liberalisation policies

1.1 Impact

2 Narasimha Rao government (1991 1996)

2.1 Crisis

3 Sustainability of Economic Liberalization 4 Later reforms 5 Impact of reforms 6 Ongoing economic challenges

6.1 Reforms at the state level

7 See also 8 References 9 External links

[edit]Pre-liberalisation

policies

Part of a series on the

History of Modern India

Pre-Independence British Raj (18581947) Indian independence movement (18571947) Partition of India (1947) Post-Independence Political integration of India (194749) States Reorganisation Act (1956)

Non-Aligned Movement (1956 ) Green Revolution (1970s) Indo-Pakistani War of 1971 Emergency (197577) 1990s in India Economic liberalisation in India 2000s in India See also History of India History of South Asia
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Further information: Economic history of India and Licence Raj Indian economic policy after independence was influenced by the colonial experience (which was seen by Indian leaders as exploitative in nature) and by those leaders' exposure to Fabian socialism. Policy tended towards protectionism, with a strong emphasis on import substitution, industrialization under state monitoring, state intervention at the micro level in all businesses especially in labour and financial markets, a large public sector, business regulation, andcentral planning.
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Five-Year Plans of India resembled central planning in theSoviet Union. Steel, mining, machine tools, water,

telecommunications, insurance, and electrical plants, among other industries, were effectively nationalized in the mid1950s.[15] Elaborate licences, regulations and the accompanying red tape, commonly referred to as Licence Raj, were required to set up business in Indiabetween 1947 and 1990.[16]
Before the process of reform began in 1991, the government attempted to close the Indian economy to the outside world. The Indian currency, the rupee, was inconvertible and high tariffs and import licensing prevented foreign goods reaching the market. India also operated a system of central planning for the economy, in which firms required licenses to invest and develop. The labyrinthine bureaucracy often led to absurd restrictionsup to 80 agencies had to be satisfied before a firm could be granted a licence to produce and the state would decide what was produced, how much, at what price and what sources of capital were used. The government also prevented firms from laying off workers or closing factories. The central pillar of the policy was import substitution, the belief that India needed to rely on internal markets for development, not international tradea belief generated by a mixture of socialism and the experience of colonial exploitation. Planning and the state, rather than markets, would determine how much investment was needed in which sectors.

 BBC[17]

In the 80s, the government led by P. V. Narasimha Rao started light reforms. The government slightly reduced Licence Raj and also promoted the growth of the telecommunications and software industries.[citation needed] The Vishwanath Pratap Singh (19891990) and Chandra Shekhar Singh government (19901991) did not add any significant reforms.

[edit]Impact

The low annual growth rate of the economy of India before 1980, which stagnated around 3.5% from 1950s to 1980s, while per capita income averaged 1.3%.[18] At the same time, Pakistan grew by 5%, Indonesia by 9%, Thailand by 9%, South Korea by 10% and in Taiwan by 12%.[19]

Only four or five licences would be given for steel, electrical power and communications. License owners built up huge powerful empires.[17]

A huge public sector emerged. State-owned enterprises made large losses.[17] Infrastructure investment was poor because of the public sector monopoly.[17] Licence Raj established the "irresponsible, self-perpetuating bureaucracy that still exists throughout much of the country"[20]and corruption flourished under this system.[10]

[edit]Narasimha

Rao government (19911996)

Present Prime Minister Manmohan Singhwas then Finance Minister in Cabinet of Prime Minister P V Narasimha Rao

[edit]Crisis
Main article: 1991 India economic crisis The assassination of prime minister Indira Gandhi in 1984, and later of her son Rajiv Gandhi in 1991, crushed international investor confidence on the economy that was eventually pushed to the brink by the early 1990s. As of 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 havingbalance of payments problems since 1985, and by the end of 1990, it was in a seriouseconomic crisis. The government was close to default,[21] [22] 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. Most of the economic reforms were forced upon India as a part of the IMF bailout. [1]
A Balance of Payments crisis in 1991 pushed the country to near bankruptcy. In return for an IMF bailout, gold was transferred to London as collateral, the rupee devalued and economic reforms were forced upon India. That low point was the catalyst required to transform the economy through badly needed reforms to unshackle the economy. Controls started to be dismantled, tariffs, duties and taxes progressively lowered, state monopolies broken, the economy was opened to trade and investment, private sector enterprise and competition were encouraged and globalisation was slowly embraced. The reforms process continues today and is accepted by all political parties, but the speed is often held hostage by coalition politics and vested interests. India Report, Astaire Research[10]

[edit]Sustainability

of Economic Liberalization

Go to : Economic_liberalization

[edit]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 five years.[23]

The BJP-led National Democratic Alliance Coalition began privatizing under-performing government owned business including hotels, VSNL, Maruti Suzuki, Airports and began reduction of taxes, a sound fiscal policy aimed at reducing deficits and debts and increased initiatives for public works.

The United Front government attempted a progressive budget that encouraged reforms, but the 1997 Asian financial crisis andpolitical instability created economic stagnation.

Economic and technology-related sanctions have repeatedly not proved to be very effective in compelling nations to change their sovereign decisions made in enlightened self-interest. India faced severe sanctions after Pokhran-I (five nuclear tests on 11 and 13 May 1998 at the Pokhran range in Rajasthan Desert), and sanctions that were more comprehensive were imposed following Pokhran-II. There were dire predictions of the collapse of the economy, double-digit inflation etc.

After five years, most of the sanctions have been lifted and the Indian economy is continuing to grow at an acceptably satisfactory rate. The growth rate for 200304 was 6.0%. Though Indias Gross National Income is only $477.4 billion by conventional calculations, it translates into $2,913 billion purchasing power parity (PPP), according to the latest world development indicators. In PPP terms, it is the world's fourth largest economy, behind only the US, China and Japan. This list is incomplete; you can help by expanding it.

[edit]Impact

of reforms

The HSBC Global Technology Center inPune develops software for the entire HSBC group.[24]

The impact of these reforms may be gauged from the fact that total foreign investment(including foreign direct investment, portfolio investment, and investment raised oninternational capital markets) in India grew from a minuscule US$132 million in 199192 to $5.3 billion in 199596.[25] Cities like NOIDA, Gurgaon, Gaziabad, Bangalore, Hyderabad, Pune, Chennai, Jaipur,Indore and Ahmedabad have risen in prominence and economic importance, become centres of rising industries and destination for foreign investment and firms.
Annual growth in GDP per capita has accelerated from just 1 per cent in the three decades after Independence to 7 per cent currently, a rate of growth that will double average income in a decade. [...] In service sectors where government regulation has been eased significantly or is less burdensomesuch as communications, insurance, asset management and information technologyoutput has grown rapidly, with exports of information technology enabled services particularly strong. In those infrastructure sectors which have been opened to competition, such as telecoms and civil aviation, the private sector has proven to be extremely effective and growth has been phenomenal. OECD[11]

Election of AB Vajpayee as Prime Minister of India in 1998 and his agenda was a welcome change. His prescription to speed up economic progress included solution of all outstanding problems with the West (Cold War related) and then opening gates for FDI investment. In three years, the West was developing a bit of a fascination to Indias

brainpower, powered by IT and BPO. By 2004, the West would consider investment in India, should the conditions permit. By the end of Vajpayees term as Prime Minister, a framework for the foreign investment had been established. The new incoming government of Dr. Manmohan Singh in 2004 is further strengthening the required infrastructure to welcome the FDI. Today, fascination with India is translating into active consideration of India as a destination for FDI. The A T Kearney study is putting India second most likely destination for FDI in 2005 behind China. It has displaced US to the third position. This is a great leap forward. India was at the 15th position, only a few years back. To quote the A T Kearney Study India's strong performance among manufacturing and telecom & utility firms was driven largely by their desire to make productivity-enhancing investments in IT, business process outsourcing, research and development, and knowledge management activities.

[edit]Ongoing

economic challenges

Main article: Economy of India

Problems in the agricultural sector. Highly restrictive and complex labour laws.[11][3][26][27][28][29][30][31][32] Inadequate infrastructure, which is often government monopoly. Failing education. Inefficient public sector. Inflation in basic consumable goods. Corruption High fiscal deficit This list is incomplete; you can help by expanding it. OECD summarized the key reforms that are needed:
In labour markets, employment growth has been concentrated in firms that operate in sectors not covered by Indias highly restrictive labour laws. In the formal sector, where these labour laws apply, employment has been falling and firms are becoming more capital intensive despite abundant low-cost labour. Labour market reform is essential to achieve a broader-based development and provide sufficient and higher productivity jobs for the growing labour force. In product markets, inefficient government procedures, particularly in some of the states, acts as a barrier to entrepreneurship and need to be improved. Public companies are generally less productive than private firms and the privatisation programme should be revitalised. A number of barriers to competition in financial markets and some of the infrastructure sectors, which are other

constraints on growth, also need to be addressed. The indirect taxsystem needs to be simplified to create a true national market, while for direct taxes, the taxable base should be broadened and rates lowered. Public expenditure should be re-oriented towards infrastructure investment by reducing subsidies. Furthermore, social policies should be improved to better reach the poor and given the importance of human capitalthe education system also needs to be made more efficient.