Economic liberalisation in India

The economic liberalisation in India refers to the ongoing economic liberalisation, initiated in 1991, of the
countrys economic policies, with the goal of making the
economy more market-oriented and expanding the role
of private and foreign investment. Specic changes include a reduction in import taris, deregulation of markets, reduction of taxes, and greater foreign investment.
Liberalisation has been credited by its proponents for the
high economic growth recorded by the country in the
1990s and 2000s. Its opponents have blamed it for increased poverty, inequality and economic degradation.
The overall direction of liberalisation has since remained
the same, irrespective of the ruling party, although no
party has yet solved a variety of politically dicult issues,
such as liberalising labour laws and reducing agricultural
subsidies.[1] There exists a lively debate in India as to what
made the economic reforms sustainable.[2]

Indian economic policy after independence was inuenced 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, industrialisation under state monitoring, state intervention at the micro level in all businesses especially in
labour and nancial markets, a large public sector, business regulation, and central planning.[8] Five-Year Plans
of India resembled central planning in the Soviet Union.
Steel, mining, machine tools, water, telecommunications,
insurance, and electrical plants, among other industries,
were eectively nationalised in the mid-1950s.[9] 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.[10]

Indian government coalitions have been advised to continue liberalisation. India grows at slower pace than
China, which has been liberalising its economy since
1978.[3] The McKinsey Quarterly states that removing
main obstacles would free Indias economy to grow as
fast as Chinas, at 10% a year.[4]

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 taris and import licencing prevented
foreign goods reaching the market. India also
operated a system of central planning for the
economy, in which rms required licences to
invest and develop. The labyrinthine bureaucracy often led to absurd restrictionsup to 80
agencies had to be satised before a rm 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 rms
from laying o 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[11]

There has been signicant debate, however, around liberalisation as an inclusive economic growth strategy. Since
1992, income inequality has deepened in India with consumption among the poorest staying stable while the
wealthiest generate consumption growth.[5] As Indias
gross domestic product (GDP) growth rate became lowest in 2012-13 over a decade, growing merely at 5.1%,[6]
more criticism of Indias economic reforms surfaced, as
it apparently failed to address employment growth, nutritional values in terms of food intake in calories, and
also exports growth - and thereby leading to a worsening
level of current account decit compared to the prior to
the reform period.[7] But then in FY 2013-14 the growth
rebounded to 6.9% and then in 2014-15 it rose to 7.3%
as a result of the reforms put by the New Government
which led to the economy becoming healthy again and
the current account decit coming in control. Growth
reached 7.5% in the Jan-Mar quarter of 2015 before
slowing to 7.0% in Apr-Jun quarter.

Pre-liberalisation policies

1.1 Pre-1991 liberalisation attempts

Further information: Economic history of India and Attempts were made to liberalise the economy in 1966
Licence Raj
and 1985. The rst attempt was reversed in 1967. Thereafter, a stronger version of socialism was adopted. The
1

FIRST ROUND OF REFORMS (19911996)

second major attempt was in 1985 by prime minister

Rajiv Gandhi. The process came to a halt in 1987, though
1967 style reversal did not take place.[12]
In the 80s, the government led by Rajiv Gandhi started
light reforms. The government slightly reduced Licence
Raj and also promoted the growth of the telecommunications and software industries.[13]
The Chandra Shekhar Singh government (19901991)
took several signicant steps towards the much needed
reforms and laid its foundation.[14]

1.2

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%.[15] At the same time, Pakistan grew by 5%,
Indonesia by 9%, Thailand by 9%, South Korea by
10% and Taiwan by 12%.[16]
Only four or ve licences would be given for steel,
electrical power and communications. Licence
owners built up huge powerful empires.[11]

The former prime minister P V Narasimha Rao, who spear-

A huge private sector emerged. State-owned enter- headed economic liberalisation policies in the early 1990s. Rao
was often referred to as Chanakya for his ability to steer tough
prises made large losses.[11]
economic and political legislation through the parliament at a

Income Tax Department and Customs Department time when he headed a minority government.[22][23]
became ecient in checking tax evasion.

Infrastructure investment was poor because of the By 1991, India still had a xed exchange rate system,
public sector monopoly.[11]
where the rupee was pegged to the value of a basket of
Licence Raj established the irresponsible, self- currencies of major trading partners. India started having
perpetuating bureaucracy that still exists throughout balance of payments problems since 1985, and by the end
much of the country[17] and corruption ourished of 1990, the state of India was in a serious economic crisis. The government was close to default,[24][25] its cenunder this system.[18]
tral bank had refused new credit and foreign exchange
The fruits of liberalisation reached their peak in 2006, reserves had reduced to the point that India could barely
when India recorded its highest GDP growth rate of nance three weeks worth of imports. It had to pledge
9.6%.[19] With this, India became the second fastest 20 tonnes of gold to Union Bank of Switzerland and 47
growing major economy in the world, next only to tonnes to Bank of England as part of a bailout deal with
China.[18] The growth rate has slowed signicantly in the the International Monetary Fund (IMF). Most of the ecowere forced upon India as a part of the
rst half of 2012.[20] An Organisation for Economic Co- nomic reforms
[26]
IMF
bailout.
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.[21] The economy then rebounded to 7.3% growth in
2014-15.

2
2.1

First Round of Reforms (1991

1996)
Crisis

Main article: 1991 India economic crisis

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, taris, 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

3
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[18]

Economic Liberalisation of 1991

In response, Prime Minister Narasimha Rao, along with

his nance minister Manmohan Singh, initiated the
economic liberalisation of 1991. The reforms did away
with the Licence Raj, reduced taris and interest rates
and ended many public monopolies, allowing automatic
approval of foreign direct investment in many sectors.[27]
Since then, the overall thrust of liberalisation has remained the same, although no government has tried to
take on powerful lobbies such as trade unions and farmers, on contentious issues such as reforming labour laws
and reducing agricultural subsidies.[1] By the turn of the
21st century, India had progressed towards a free-market
economy, with a substantial reduction in state control
of the economy and increased nancial liberalisation.[28]
This has been accompanied by increases in life expectancy, literacy rates and food security, although urban
residents have beneted more than rural residents.[29]

Later reforms

In the early months of 2015, the second BJP-led

NDA Government under Narendra Modi further
opened up the insurance sector by allowing up to
49% FDI. This came seven years after the previous
government attempted and failed to push through
the same reforms and 16 years after the sector was
rst opened to foreign investors up to 26% under the
rst BJP-led NDA Government under Atal Bihari
Vajpayees administration.[32]
The second BJP-led NDA Government also opened
up the coal industry through the passing of the
Coal Mines (Special Provisions) Bill of 2015. It
eectively ended the Indian central governments
monopoly over the mining of coal, which existed
since nationalization in 1973 through socialist controls. It has opened up the path for private, foreign
investments in the sector, since Indian arms of foreign companies are entitled to bid for coal blocks
and licences, as well as for commercial mining of
coal. This could result in billions of dollars investments by domestic and foreign miners. The move is
also benecial to the state-owned Coal India Limited, which may now get the elbow room to bring in
some much needed technology and best practices,
while opening up prospects of a better future for millions of mine workers.[33]

5 Impact

This list is incomplete; you can help by

expanding it.
The Bharatiya Janata Party (BJP)-Atal Bihari Vajpayee administration surprised many by continuing
reforms, when it was at the helm of aairs of India
for ve years.[30]
The BJP-led National Democratic Alliance Coalition began privatising under-performing government owned business including hotels, VSNL,
Maruti Suzuki, and airports, and began reduction
of taxes, an overall scal policy aimed at reducing
HSBC GLT, Pune
decits and debts and increased initiatives for public works.
[34]
The United Front government attempted a progressive budget that encouraged reforms, but the 1997
Asian nancial crisis and political instability created
economic stagnation.

The impact of these reforms may be gauged from the fact

that total foreign investment (including foreign direct investment, portfolio investment, and investment raised on
international capital markets) in India grew from a minusUS$132 million in 199192 to $5.3 billion in 1995
Towards the end of 2011, the Congress-led UPA-2 cule[35]
96.
Coalition Government initiated the introduction of
51% Foreign Direct Investment in retail sector. But
due to pressure from fellow coalition parties and the
Annual growth in GDP per capita has
opposition, the decision was rolled back. However,
accelerated from just 1 per cent in the three
it was approved in December 2012.[31]
decades after Independence to 7 per cent

7 SEE ALSO
currently, a rate of growth that will double average income in a decade.... In service sectors
where government regulation has been eased
signicantly 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 eective and
growth has been phenomenal.
OECD[21]

Lack of political consensus and will[36][45]

OECD summarised the key reforms that are needed:

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 further strengthened 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 put 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, Indias strong performance among manufacturing and telecom & utility rms was driven largely
by their desire to make productivity-enhancing investments in IT, business process outsourcing, research and
development, and knowledge management activities.
6.1

Challenges to further reforms

In labour markets, employment growth

has been concentrated in rms 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 rms are becoming more
capital intensive despite abundant low-cost
labour. Labour market reform is essential
to achieve a broader-based development and
provide sucient and higher productivity
jobs for the growing labour force. In product
markets, inecient 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 rms and the
privatisation programme should be revitalised.
A number of barriers to competition in nancial markets and some of the infrastructure
sectors, which are other constraints on growth,
also need to be addressed. The indirect tax
system needs to be simplied 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 andgiven the importance of human
capitalthe education system also needs to be
made more ecient.
OECD[21]

Reforms at the state level

See also: Economic disparities in India

According to an OECD survey of the Indian economy [21]

For 2010, India was ranked 124th among 179 countries states that had more liberal regulatory regimes had better
in Index of Economic Freedom World Rankings, which economic performance. The survey also concluded that
is an improvement from the preceding year.
were complementary measures for better delivery of infrastructure, education and basic services implemented,
Slow growth of the agricultural sector, where half of they would boost employment creation and poverty reduction.
Indians earn most of their income[36]
Highly
restrictive
and
complex
laws.[21][37][38][39][40][41][42][43][44]
High ination[36]

labour

7 See also

High poverty[36]

Economy of India

Corruption and graft[36]

Globalisation in India

5
Licence Raj

[19] The World Factbook. Cia.gov. Retrieved 2013-07-10.

Hindu rate of growth

[20] BBC News - India growth rate slows to 5.3% in rst quarter. Bbc.co.uk. 2012-05-31. Retrieved 2013-07-10.

Economic miracle

References

[1] That old Gandhi magic. The Economist. 27 November

1997.
[2] For a critique of the existing explanations and a comprehensive alternative explanation see: Sharma, Chanchal
Kumar (2011) "A Discursive Dominance Theory of Economic Reforms Sustainability. India Review (Routledge,
UK)126-84
[3] Indias economy: Whats holding India back?". The
Economist. 6 March 2008.
[4] The McKinsey Quarterly: IndiaFrom emerging to
surging (PDF). The McKinsey Quarterly. 2001.

[21] Economic survey of India 2007: Policy Brief (PDF).

OECD.
[22] V. Venkatesan (114 January 2005). Obituary: A
scholar and a politician. Frontline 22 (1). Archived from
the original on 2010-01-30. Retrieved 30 March 2010.
[23] PV Narasimha Rao Passes Away. Retrieved 7 October
2007. Archived 1 November 2007 at the Wayback Machine
[24] Indias Pathway through Financial Crisis. Arunabha
Ghosh. Global Economic Governance Programme. Retrieved on 2 March 2007.
[25] What Caused the 1991 Currency Crisis in India?, IMF
Sta Papers, Valerie Cerra and Sweta Chaman Saxena.
[26] Economic Crisis Forcing Once Self-Reliant India to Seek
Aid, New York Times, 29 June 1991

[5] Indias income inequality has doubled in 20 years - The

Times of India. Timesondia.indiatimes.com. Retrieved
2013-07-10.

[27] Task Force Report 2006, pp. 78.

[6] GDP growth slumps to 5%, a decades low, Hindu Business Line 31 May 2013

[29] Task Force Report 2006, pp. 1720.

[7] Indias Ponzi-styled economic reforms run out of steam,

East Asia Forum 4 June 2013
[8] Kelegama, Saman and Parikh, Kirit (2000). Political
Economy of Growth and Reforms in South Asia. Second Draft.
[9] Sam Staley (2006). The Rise and Fall of Indian Socialism: Why India embraced economic reform.
[10] Street Hawking Promise Jobs in Future, The Times of India, 25 November 2001
[11] India: the economy. BBC. 12 February 1998.
[12] For a complete history & analysis of liberalisation
episodes in India, see: Sharma, Chanchal Kumar (2011)
"A Discursive Dominance Theory of Economic Reforms
Sustainability. India Review (Routledge, UK)126-84
[13] History of Computing in India: 1955-2010, Rajaraman,
V.
[14] New Indian Express http://epaper.newindianexpress.com/
c/8158805. Retrieved 18 January 2016. Missing or
empty |title= (help)
[15] Redening The Hindu Rate of Growth. The Financial
Express.
[16] Industry passing through phase of transition. The Tribune India.
[17] Eugene M. Makar (2007). An Americans Guide to Doing
Business in India.
[18] The India Report (PDF). Astaire Research.

[28] Kumar 2005, p. 1037

[30] J. Bradford DeLong (2001). India Since Independence:

An Analytic Growth Narrative (PDF).
[31] End of policy paralysis: Govt approves 51% FDI in
multi-brand retail. Zeenews.india.com. Retrieved 201307-10.
[32] Parliament passes insurance bill in a major boost to
Modis reforms agenda. livemint.com. Retrieved 201503-13.
[33] Parliament boost to Modis plans: Coal, mining bills
passed by Rajya Sabha. indiatoday.intotoday.in. Retrieved 2015-03-29.
[34] HSBC GLT frontpage. Retrieved 22 August 2008.
[35] Local industrialists against multinationals. Ajay Singh
and Arjuna Ranawana. Asiaweek. Retrieved on 2 March
2007.
[36] Biswas, Soutik (2011-07-27). Challenges ahead for India
reforms. BBC News (BBC). Archived from the original
on 2011-09-08. Retrieved 2013-12-23.
[37] IMF calls for urgent reform in Indian labour laws.
[38] Kaushik Basu, Gary S. Fields, and Shub Debgupta.
Retrenchment, Labor Laws and Government Policy: An
Analysis with Special Reference to India (PDF). The
World Bank.
[39] R. C. Datta/Milly Sil (2007). Contemporary Issues on
Labour Law Reform in India (PDF).
[40] Aditya Gupta (2006). How wrong has the Indian Left
been about economic reforms?" (PDF).

[41] Basu, Kaushik (27 June 2005). Why India needs labour
law reform. BBC.
[42] A special report on India: An elephant, not a tiger. The
Economist. 11 December 2008.
[43] India Country Overview 2008. The World Bank. 2008.
[44] Gurcharan Das (JulyAugust 2006). The India Model.
The Foreign Aairs.
[45] Schuman, Michael (2012-11-05). India vs China:
Which Has a Bigger Reform Challenge?". Time (Time).
Archived from the original on 2013-03-09. Retrieved
2013-12-23.

External links
For a short educational video of the economic history of India.
Nick Gillespie (2009). What Slumdog Millionaire can teach Americans about economic stimulus.
Reason.
Gurcharan Das (2006). The India Model. The
Foreign Aairs.
Ravinder Kaur (2015). Good Times, Brought to
you by Brand Modi. Television and New Media.
Ravinder Kaur (2012). India Inc. and its Moral
Discontent. Economic and Political Weekly.
Aditya Gupta (2006). How wrong has the Indian
Left been about economic reforms?" (PDF). Centre
for Civil Society.
The India Report (PDF). Astaire Research
<<doesn't work>>. 2007.

EXTERNAL LINKS

10
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Text and image sources, contributors, and licenses

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