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Effects of Liberalization
on the Indian Economy

The removal of state regulation of economic activity

is accomplished through the process of
liberalization. What is liberalization? How did it
affect the Indian economy? What are its positive and
negative impacts? Scroll down the page to know
more about the effects of liberalization on the
Indian economy.

Any process of a state removing limitations on some

AimisIAS,
private individual activity knownIPS, or IFS?
as liberalization.
Liberalization has taken place when formerly
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prohibited items are no longer
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government regulations are loosened.

It removes governmental involvement and increases

It removes governmental involvement and increases
the autonomy of commercial firms. It refers to a
government loosening previously enacted limits on
economic or social policies. Deregulation of the
industrial sector, banking sector changes, tax reforms,
and reforms to the foreign exchange market all
contributed to India’s liberalization.

Then what is Economic liberalization? What are its

objectives?

Also read: Dollarization of Economy

(https://www.clearias.com/dollarization-of-economy/)

Table of Contents
1. Economic liberalization
1.1. When did economic reforms begin in India?
1.2. Objectives of Liberalization
1.3. Liberalization Policies
2. Impacts of liberalization on the Indian economy
2.1. Impact on the rate of GDP growth
2.2. Taking Down Obstacles to International
Investment
2.3. Rate of Industrial Growth
2.4. Unrestricted Capital Flow
2.5. Impact on India’s Small-Scale Sector
2.6. Outcomes in Agriculture
2.7. Result for the Services Sector
2.8. Banking
2.9. Stock exchanges
2.10. Telecom SectorAim IAS, IPS, or IFS?
2.11. Sectors of Education and Health
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3. Advantages of liberalization
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4. Negative impacts of liberalization
5. Conclusion
Economic liberalization
Economic liberalization is the process of reducing or
removing governmental controls over commerce and
business. Those who support economic liberalism,
commonly known as proponents of free markets and
free trade, are typically those who advance it. Taxes,
social security contributions, and unemployment
compensation are frequently decreased as a result of
economic liberalization.

When did economic reforms begin in India?

India began a sequence of economic reforms on July 23,
1991, in response to a fiscal and balance-of-payments
(BoP) (https://www.clearias.com/balance-of-payments/)
crisis. The historic reforms would fundamentally alter
the character and structure of the economy in the years
to come.

What were the measures taken by the Indian

government to start economic reforms?

India started an economic reform initiative that

included two groups of measures:

Macroeconomic stabilization measures: All

economic measures, both local and foreign, that
aim to increase the economy’s overall demand are
referred to as macroeconomic stabilization
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measures. The creation of quality and well-paying
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jobs must be prioritized in order
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any important the
purchasing power of the general public and
support the increased domestic demand.
Measures for Structural Reform: It encompasses
 Measures for Structural Reform: It encompasses
all policy changes that the government has made to
increase the overall supply of goods and services in
the economy. Naturally, this involves releasing the
economy’s restrictions so that it can explore its own
potential for increased productivity and output.

Let us discuss what the objectives of liberalization are.

Also read: History of Banking in India

(https://www.clearias.com/history-of-banking-in-india/)

Objectives of Liberalization
To promote the involvement of private Indian
businesses and multinational corporations.
To enable the Indian economy’s
internationalization.
Promote foreign trade in the nation to boost
exports.
To resolve the balance of payments crisis facing
India.
To increase the private sector’s involvement in the
growth of India’s economy.
to boost foreign direct investment in the Indian
industry.
To encourage domestic enterprises to compete with
one another.

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Liberalization Policies
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The policies of liberalization which
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any in the growth
important information!
of the economy are:

Deregulation of the Industrial Sector

 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

The economic repercussions of liberalization on both

the country and investors might be significant.

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Economic liberalization means
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miss anya important
nation “opens up”
information!
to the rest of the world in terms of commerce, rules,
taxes, and other areas that generally have an impact on
domestic business.
do est c bus ess.

It has many impacts on the Indian economy. Let us

discuss them.

Also read: Unified Payment Interface (UPI): Made

Simple (https://www.clearias.com/unified-payment-
interface-upi/)

Impacts of liberalization on the

Indian economy

Impact on the rate of GDP growth

India’s 6.6% annual average growth rate from 1990 to
2010 is almost twice as high as it was before the
country’s economic reforms.

Taking Down Obstacles to International

Investment
When a country has many barriers to entry, investing in
emerging market nations can occasionally seem
unattainable. These obstacles can include tax policies,
prohibitions on foreign investment, legal concerns, and
accounting requirements, all of which make entry into
the nation difficult or impossible.

These restrictions are loosened as part of the economic

liberalization process, and some private sector
influence over the economy’s direction is given up.
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Frequently, deregulation and
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businesses are involved.

Rate of Industrial Growth

Rate of Industrial Growth
Due to unfettered access to Indian markets, indigenous
products are no longer competitive. Of course, they had
more access to technology and scale economies.

Unrestricted Capital Flow

The main objectives of economic liberalization are the
effective distribution of resources and competitive
advantages, as well as the free flow of capital between
states. Usually, this is accomplished by lowering
protectionist measures like tariffs, trade regulations,
and other trade barriers.

It becomes less expensive for businesses to access

capital from investors due to the increased capital flow
into the nation. Higher growth rates are the result of
corporations being able to invest in profitable ventures
that they might not have been able to before
liberalization due to a higher cost of capital.

Impact on India’s Small-Scale Sector

After independence, the government made an effort to
revitalize the small-scale industry by reserving goods
solely for its manufacture. The list of restricted
commodities was significantly reduced as a result of
liberalization, and many new industries were made
accessible to large corporations.

However, there is still a small-scale sector that supports

the Indian economy. ItAim IAS, IPS,
significantly or IFS?
impacts exports and
private-sector employment. The results are conflicting,
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although many once small-scale
Don't missindustries have information!
any important grown
and improved. Although they only exist because of
government backing, overall value addition, product
innovation, and technology adoption continue to be
 o at o , a d tec o ogy adopt o co t ue to be
poor.

Outcomes in Agriculture
Agriculture now only accounts for 15% of the national
economy. However, the percentage of people who
depend on agriculture
(https://www.clearias.com/agricultural-marketing-
reforms-apmc-act-nam/) is still about 55%. Although
there has been a significant change in crop patterns, the
effects of liberalization cannot be accurately quantified.
We learned through the agricultural television
programs that there are still a lot of pervasive
government regulations and interventions, from the
point of production to the point of distribution.

The agricultural economy worldwide is severely

distorted. This is mostly due to the unequal
economic and political power distribution between
farmers in industrialized and developing nations.
Commercial, capitalist agriculture is practiced in
industrialized nations and is controlled by large
agribusiness conglomerates. They have easy access
to WTO policies and can simply negotiate better
terms for themselves at the expense of farmers in
poor countries.
On the plus side, India’s high-quality, distinctive
products—like basmati rice—are virtually self-
sufficient and in high demand worldwide. In
Aim equipped
general, India is better IAS, IPS,toor IFS?
tackle the
challenges of globalization
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this situation.
email If
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implemented in aDon't
fair and sustainable
miss way, it
any important will
information!
have a significant multiplier effect on the entire
economy.
In addition to this Farm Mechanization the use of
 In addition to this, Farm Mechanization—the use of
tractors, combines, electronic/solar pumps, etc.—is
another benefit of globalization. Moving on,
information technology is now being applied in
agriculture to simplify farming.

Result for the Services Sector

In this instance, globalization has benefited poor
nations while harming industrialized ones. Human
resources have historically been substantially more
affordable in developing economies because of
historical economic inequality between the two
groups.
The IT revolution
(https://www.clearias.com/software-sector/) helped
to expedite this even more, and as a result, many
jobs left developed countries and moved to poor
nations.
The growth of the information technology,
software, BPO, KPO, and LPO industries in India
has prevented a large portion of the country’s
demographic dividend from being wasted. The best
thing is that exporting services results in high-
value exports.
The only product that gets exported is professional
labour, which doesn’t diminish with time but
actually increases. India is now better positioned to
develop into a true knowledge economy.
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The majority of India’s
Don't foreign exchange
miss any gains
important information!
come from the export of these services. In actuality,
only during the three years 2000–2002 did India
have a current account surplus
 have a current account surplus.

Banking
Additionally, India has benefited in the banking sector.
There have been three rounds of licence grants for
private banks since the reforms. Private banks like
ICICI, HDFC, and Yes Bank
(https://www.clearias.com/yes-bank-crisis-
reconstruction/), as well as foreign institutions,
increased the bar for the Indian banking sector. The
banking sector is now more competitive, and public
sector banks are more customer-focused. Similarly, the
insurance sector currently provides a wide range of
products, including Unit Linked Insurance Plans and
Travel Insurance.

Stock exchanges
Stock markets are a key development as well.
Corporate Securities can be traded in real-time on
stock exchanges.
It offers methods for ongoing price discovery as
well as flexible exit and entry points for investors.
These are the foundation of free markets today, and
there is active trading taking place on stock
exchanges around the globe. Their significance can
be gauged by the fact that stock market
performance is the best predictor of an economy’s
current state and future potential.
A comprehensiveAim
rangeIAS, IPS, services,
of related or IFS?
including Investment Banking, Asset Management
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(https://www.clearias.com/insolvency-and-
Don't miss any important information!
bankruptcy-code/), Underwriting Services, Hedging
Advice,
(https://en wikipedia org/wiki/Hedge (finance)) etc
 (https://en.wikipedia.org/wiki/Hedge_(finance)) etc.,
have been made available by these markets. In
total, these support lakhs of jobs across India.
Similar to stock markets, commodities markets
offer opportunities for buying and selling a variety
of permissible commodities.

Telecom Sector
Traditionally, the telecom industry was a monopoly
owned by the government, which led to very poor
service. Private telecom industry success peaked
after reforms. Indian telecom firms also expanded
internationally. However, this sector’s growth and
outlook were harmed by corruption and rent-
seeking.
Modern Direct to Home services led to increases in
television service quality on the one hand and the
demise of many local cable companies on the other.

Sectors of Education and Health

India has had access to top-notch education, and
deregulation has led to the mushrooming of private
engineering and medical colleges. In actuality,
though, society as a whole was devastated.
Only a very small percentage of applicants are
accommodated by these new universities, and they
are exceedingly expensive.
Aim IAS, an
Transparency International, IPS, or IFS? group,
independent
recently published a report alleging that India’s
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healthcare systemDon't
is themiss
mostany
corrupt in theinformation!
important entire
world.
Many students must borrow money from banks to
pay for their education due to the high cost of
 pay for their education due to the high cost of
tuition. The majority of them are unable to find
employment after qualifying. Practice ends up
being the last recourse. Now, a person gets seduced
by corruption in order to maintain a respectable
standard of living and repay loans. As a result,
when numerous instances of the same type are
combined, a corrupt system, economy, and society
result.
The truth is that after deregulation and
liberalization, the government withdrew its
support from social sectors along with other
sectors. There are now affordable solutions in the
private sector that range in quality from mediocre
to excellent. Less than Mediocre to Mediocre
alternatives are accessible in the public sector. This
still remains a sizable population of future students
and patients.

Advantages of liberalization in
India
Freely flowing Capital: Liberalization has boosted
the flow of funding by making it more inexpensive
for all types of businesses to access capital from
investors and to have a successful project.
Investor diversity: As a result of liberalization,
investors are now able to place a significant
Aim IAS,
amount of their capital IPS, or
in a variety of IFS?
assets.

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Impact on agriculture: Liberalization
Don't miss had ainformation!
any important
favorable effect on agriculture. The cropping
patterns and designs have undergone significant
alteration Before the agricultural sector was
 alteration. Before the agricultural sector was
liberalized, the government imposed limitations on
everything from the beginning of crop production
to its distribution.
Economic laws that are relaxed result in a rise in
the value of the stock market, which improves
investor trading.

Negative impacts of liberalization

Economic instability: Due to the drastic changes
that were made in the political and economic
spheres, there was economic instability. Indian
liberalization’s unfavorable effects include the
decline of the economy. The massive return of
political-economic power will undermine India’s
whole economy.
Impact of technology: Due to rapid development
and innovation in technology, many small- and
medium-sized enterprises
(https://www.clearias.com/micro-small-and-
medium-enterprises-msme/) (SMEs) and other
firms in emerging nations are able to adapt to the
changes or even close their doors.
Acquisitions and mergers: A lot of tiny firms have
amalgamated with big businesses. Numerous
smaller businesses faced increased competition
from powerful global corporations. Because of this,
workers in small industries
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IPS, need to develop
or IFS?
their abilities and adopt new technologies.
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Employee inefficiency
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any important
company’s resources may result from time.

Concl sion
Conclusion
Economic liberalization started in 1991 in India by
reviving economic policies, with the goal of creating an
economy more market-oriented and increasing the role
of private and foreign investment.

Self-reliance and a lack of R&D spending served as

roadblocks to technological advancement, which
resulted in the manufacture of items of lower quality. In
Indian society, there is still a strong assumption that
imported items are preferable to domestic ones. It is
widely accepted that, before assessing the success of the
ongoing industrial policy, consideration must be given
to the state of the country following two centuries of
exploitation and a horrific separation.

Many factors like lack of tactical skills, low literacy

levels, unskilled labor, and absence of technology were
significant aspects of the Indian economy before
independence. It is stated that industrial strategies,
policies, and their restoration are essential for a nation’s
economy to thrive.

Article Written By: Atheena Fathima Riyas

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