Liberalization of the Indian Economy, Positive and Negative Impacts of Liberalisation on Indian Economy, Economic Effects Of Country Liberalization

Liberalization in India: We have seen a landmark shift in the Indian Economy since the adoption of a new economic policy in 1991. This had far-reaching impacts on all spheres of life in India. This had great impacts on all the areas of life in India. When a nation becomes liberalized, the economic effects can be intense for the country and as well as for the investors. 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. 

   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 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 privatization of corporations. 

Liberalization of countries in emerging markets provides new opportunities for investors to increase their diversification(विविधता) and profit. Economic liberalization refers to a country "opening up" to the rest of the world with regards to trade, regulations, taxation, and other areas that generally affect business in the country. The liberalization process has impacted the conditions of Indian labor in the organized and unorganized sectors, both big and small, with regard to factors such as wages, labor welfare, trade unionism, social security, employability, labor utilization, job security, labor flexibility, employment growth, and industrial disputes.

Effects of Liberalization on Indian Economy and Society:

=> GDP growth rate 

Liberalization is compulsory for the growth of the Indian economy. India’s annual average growth rate from 1990 – 2010 has been 6.6 % which is

almost double than of the pre reforms era. GDP growth rate surpassed the 5% mark in the early 1980s. This made the impact of the 1990’s reforms on growth unclear. Some believe that the 1980’s reforms were a precursor to LPG reforms.

=> Industrial Growth Rate 

Barring a few years, the industrial growth rate has not been much impressive. The share of Industry still remains stagnantly low at 25%. Worst is that India has transitioned to be a service-led economy, directly from an agrarian one. One expiation(परिशुद्धि) of this is the end of the policy of import substitution which derived industrial growth up to 1990. Foreign companies got free access to Indian markets and made domestic products uncompetitive. They obviously had better access to technology and larger economies of scale.

=> 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 the IT revolution and this all culminated in the exodus of numerous jobs from developed countries to developing countries. Here the US has to jealously guard its jobs as we guard our agriculture.

=> IT industry

Software, BPO, KPO, LPO industry boom in India has helped India to absorb a big chunk of demographic dividend, which otherwise would have wasted. The best part is that the export of services results in the export of high value. There is almost no material exported which consumes some natural resources. Only thing exported is a labor of Professionals, which doesn’t deplete(व्यय करना), instead grows with time. Now India is better placed to become a truly Knowledge Economy.

=> 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 the 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 the path of bringing banking revolution. New government schemes like Pradhan Mantri Jan Dhan Yojana aims to achieve their targets by using Aadhaar Card. Having said this, Public Sector Banks still remain a major lender in the country.

=> Stock Markets

Another major development is one of Stock Markets. Stock Markets are platforms on which Corporate Securities can be traded in real-time. It provides mechanisms for constant price discovery, options for investors to exit from, or enter into an investment at any time. These are the backbone 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 the behavior of the stock markets of a country is the strongest indicator of the health and future prospects of an economy.

=> Telecom Sector

Conventionally, the Telecom sector was a government-owned monopoly, and consequently, service was quite substandard. After reforms, the private telecom sector reached a peak of success. And Indian telecom companies went global. However, corruption and rent-seeking marred growth and outlook of this sector.

The entry of modern Direct to Home services saw improvements in the quality of Television services on one hand and loss of livelihood for numerous local cable operators.

=> Education and Health Sector

It should be noted that food (Agriculture), Health and education are among the 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 the majority of people can’t afford beyond a certain limit (or can’t afford at all). The concept of free markets, globalization, liberalization, etc. fails here miserably. Free markets provide goods and services to people who can afford to pay for them, not to those who deserve and need these.

Now if we consider these sectors from the angle of our inclination towards free markets, certainly there has been a 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 a far-reaching devastating effect on society.     

Recently, an Independent organization ‘Transparency International’ came out with a report claiming that India’s medical system is the most corrupt in the world. This was no surprise, we all know from where it starts. High fees of education force many aspirants to take educational loans from banks. After qualifying, the job market is unable to absorb the majority of them.

Positive impacts of liberalization in India:

=> Free flow of capital: 

Major goals of economic liberalization are the free flow of capital between countries and the effective allocation of resources and competitive advantages. This is generally done by decreasing protectionist strategies such as tariffs, trade laws, and other trade barriers. Liberalization has improved the flow of capital into the country which makes it inexpensive for the companies to access capital from investors. Lower cost of capital enables them to undertake lucrative(आकर्षक) projects which may not have been possible with a higher cost of capital pre-liberalization, leading to higher growth rates. 

=> Stock Market Performance: 

Generally, when a country relaxes its laws, taxes, the stock market values also rise. Stock Markets are platforms on which Corporate Securities can be traded in real-time. It offers mechanisms for continuous price discovery, choices for investors to exit from, or enter into an investment at any time. These are strong bases of free markets these days and there is vigorous(जोरदार) trade going all over the world on stock exchanges.

=> Political Risks Reduced: 

Liberalization policies in the country lessen political risks to investors. The government can attract more foreign investment through the liberalization of economic policies. These are the areas that support and foster a readiness to do business in the country such as a strong legal foundation to settle disputes, fair and enforceable contract laws, property laws. All these modifications can reduce the political risks for depositors.

=> Diversification for Investors:

In a liberalized economy, Investors get benefits by being able to invest a portion of their portfolio into a diversifying asset class.

=> Impact on Agriculture: 

In the area of agriculture, cropping patterns have undergone a huge modification, but the impact of liberalization cannot be properly measured. It is observed that there are still all-pervasive government controls and interventions starting from production to distribution for the produce.

Negative impacts of liberalization in India:

=> Destabilization of the economy:

Tremendous redistribution of economic power and political power leads to Destabilizing effects on the entire Indian economy.

=> Impact of FDI in Banking sector:

The foreign direct investment allowed in the banking and insurance sectors resulted in a decline of the government’s stake in banks and insurance firms. 

=> Threat from Multinationals: 

Prior to 1991 MNC’s did not play many roles in the Indian economy. In the pre-reform period, there was the domination of public enterprises in the economy. On account of liberalization, competition has increased for the Indian firms. Multinationals are quite big and operate in several countries which have turned out a threat to local Indian Firms.

=> Technological Impact: 

Rapid increase in technology forces many enterprises and small scale industries in India to either adapt to changes or close their businesses.

=> Mergers and Acquisitions: 

Acquisitions and mergers are increasing day-by-day. In cases where small companies are being merged by big companies, the employees of the small companies may require exhaustive re-skilling. Re-skilling duration will lead to non-productivity and would cast a burden on the capital of the company.

Changes in Industrial Policies and their effect on Industrial Growth:

Industrial policy is described as a statement that explains the role of government in industrial development. The place of the public and private sectors in the industrialization of the country. The relative role of large and small industries. The role of foreign capital etc. The industrial policy formally designates the spheres of activity of the public and the private sectors. It lays down rules and procedures that would govern the growth and pattern of industrial activity.

The major objectives of industrial policy are as under:

=> Rapid Industrial Development: 

The objective of the industrial policy of the Government of India is to augment industrial development. It seeks to create a positive investment climate for the private sector as well as mobilize resources for investment in the public sector. In its way, the government seeks to promote rapid industrial development in the country.

=> Balanced industrial Structure:

The industrial policy is intended to correct the predominant lopsided industrial structure. The industrial policy had to be framed in such a manner that these imbalances in the industrial structure are corrected. Thus by laying emphasis on heavy industries and development of the capital goods sector, the industrial policy seeks to bring a balance in industrial structure.

=> Prevention of Concentration of Economic Power:

The industrial policy offers a framework of rules, regulations, and reservation of spheres of activity for the public and the private sectors. This is aimed at reducing the monopolistic tendencies and preventing the concentration of economic power in the hands of a few big industrial houses.

=> Balanced Regional Growth:

Industrial policy has an objective to check regional imbalances in industrial development. It is well recognized that some regions in the country are industrially quite advanced such as Maharashtra and Gujarat while others are industrially backward, like Bihar, Orissa. It is the duty of industrial policy to work out programs and policies which lead to industrial development or industrial growth.

To summarize, economic liberalization started in 1991 in India of reviving economic policies, with the goal of creating the economy more market-oriented and increasing the role of private and foreign investment. Regarding industrial policies, it is apparent from the development of industrial policy that the governmental role in development has been widespread. The economic reforms were mainly towards liberalizing the Indian business industry from all unnecessary controls and restrictions by the Government. Liberalization of the Indian industry has taken place with respect to abolishing license requirements in most of the industries across the country. Removal of restrictions on the movement of goods and services across the country, freedom in fixing the prices of goods and services, reduction in tax rates, simplification of procedures for imports and exports and easier paths to attract foreign capital and technology in India. It is said that Industrial plans and policies and their revival has a vital role in the economic growth of any country.