Posted by Anjali Kaur on Jun 11, 2020

What is Liberalization?

Well, when we learned about New Economic Policy we also discussed in brief its elements and why reforms were introduced in India. In today’s post, we will be discussing the ‘Liberalization element of New Economic Policy’. Let’s start.

Meaning of Liberalization

Liberalization was introduced to put an end to various restrictions on the import and export of goods and opening up various sectors of the economy. Important areas that are covered under liberalization:

  • Industrial Sector
    • Before the New Economic Policy, Industrial licensing policy was followed under which every entrepreneur had to get permission from the government official to start, to close, or to diversify the firm.
    • Many industries were banned from the private sector.
    • Goods were reserved for small scale industries.
    • After the introduction of the New Economic Policy, many of these restrictions were removed; Industrial licensing was abolished for almost all products except on alcohol, cigarettes, etc.
    • Some industries are still reserved with the public sector because of its sensitivity like; defense equipment, atomic energy generation, and railways transport.
    • Many goods produced by Small Scale Industries were dereserved.
  • Financial Sector
    • The financial sector includes financial institutions such as commercial banks, investment banks, stock exchange, and foreign exchange markets.
    • The financial sector in India is controlled by the Reserve Bank of India.
    • Before reforms, the Reserve Bank of India had full control over the banks.
    • After reforms, the role of Reserve Bank of India was reduced from ‘regulator’ to ‘facilitator’ of the financial sector, which means the financial sector was allowed to make many decisions without consulting the R.B.I.
    • The reform policies led to the establishment of private sector banks; Indian as well as foreign.
    • The foreign investment limit in banks was raised to around 50%.
    • Those banks which fulfill certain conditions have been given the freedom to set up new branches without the approval of the R.B.I.
  • Tax Reforms
    • Tax reforms are related to the fiscal policy of the government; the government revenue and expenditure policy.
    • Before reforms, tax rates were very high and there used to be a lot of tax evasion. Even the process of paying the tax was complicated and involved hurdles like long-distance, fixed period, etc.
    • After reforms, there has been a continuous reduction in taxes on individual incomes and on corporates due to tax evasion.
    • Efforts have been made to reform the indirect taxes; taxes which are levied on commodities, to establish a common national market for goods and services.
    • Now, the tax-paying procedures have been simplified.
    • Recently, the Goods and Services Tax Act 2016 was passed to simplified and a unified indirect tax system was introduced in India.
  • Foreign Exchange Reforms
    • This was the important reform introduced in the external sector to bring reforms in the foreign exchange market.
    • In 1991, India was suffering from the Balance of Payment crises. For this, the devaluation of Indian currency was done. Devaluation refers to the reduction in the value of the domestic currency to foreign currency by the government, which encourages exports and discourages imports. It led to an increase in the inflow of foreign exchange.
    • Before reforms, foreign exchange was controlled by the government. But after reforms, the government allowed market forces to determine the foreign exchange rate.
  • Trade and Investment Policy Reforms
    • Liberalization of trade and investment policy was started to increase the international competitiveness of industrial production and also foreign investment and technology into the economy. The aim was to promote the efficiency of the local industries and the adoption of modern technologies.
    • Before reforms, to protect the domestic industries, India was following a system of quantitative restrictions on imports. This was encouraged through tight control over imports and by keeping the tariff very high.
    • After reforms, quantitative restrictions were removed on the imports and exports.
    • Tariff on imports was reduced to encourage domestic trade.
    • Import licensing was abolished except in the case of hazardous and environmentally sensitive industries.
    • Export duties have been removed to increase the competitive position of Indian goods in the international market.

Check out the below slideshow for more details:

Image by John Hain from Pixabay

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