Liberalization and Economic Reforms of 1991

Liberalization and Economic Reforms of 1991

1) The Genesis of Liberalization In Indian Economy

When one talks of Liberalization, multitudinous concepts come to mind. Does it mean adoption of liberal values or is it just an afterthought? Do we gain something from it? Did we gain something? All these are pertinent questions to ask. Here, we will limit the scope of our discussion to the impact of 1991 economic liberalization on Indian economy and social fabric of the country. How the zeitgeist of 1990s had changed in 25 years because of the reforms initiated by the Indian government.

In the following pages, we will shed some light on the liberalization of the economy and subsequent economic reforms. Let us try explaining the concept of liberalization for better comprehension: Freeing an economy from the direct control of the government is called Liberalization. A country can be called an
open economy if the commercial goods and services can be exchanged freely among various nations without facing any kind of hindrances or restrictions.

The ‘Invisible Hand’ ought to be truly invisible and must never treat the private businesses with a ‘stick’ approach but always handout ‘carrots’ as rewards for productive behaviour. The absence of governmental interference in the decision making ability of private businesses forms the backbone of the liberalization. It encourages the relaxation in restrictions imposed by government in social, economic and political areas by empowering the private entities to come together and participate in business activities.

The need for liberalization arose due to the dire economic conditions in the country and a negative Balance of Payment scenario. The policies like price
control, foreign exchange control, licensing system etc negatively affected the entrepreneurs and discouraged them to open new industries. The excessive governmental control ultimately led to the inefficiency, unnecessary delays, and corruption. Thus, various measures were taken by the government in order to ensure liberalization of economy, few of them are:

Abolishment of Industrial licensing and Registration: Before New Economic Policy of 1991 came into being, non-flexible licensing system along with many other restrictions was controlling the private sector. But now, except 6 industries which are cigarette, liquor, drugs, dangerous chemicals, industrial explosives and defense equipment all other industries are exempted from industrial licensing.

Freedom of Production and Expansion to Industries: New policy encourages the industries to produce and expand the way they want to. Earlier the government has imposed the restriction on production limit, where the industries were not allowed to produce more than a particular limit. This limit was set at the time, when the license was granted. But with the liberalization, the industries got free hand to produce the maximum amount of the good of their choice, based on the market demand. Government policies earlier even regulate the types of good an industry can produce.

Freedom of Importing Capital Goods: with the new reforms, the investment limit was increased of both tiny and small industries. For tiny industries the limit became 25 lakhs and for small industries it became 1 crore.

Freedom of Importing Technology: With the new reforms coming in and liberalization becoming popular, the government also allowed the import of technology. Industries which fall under high priority don’t need any permission before signing any agreement related to the high or advanced technology.

Impact of 1991 Economic Reforms on Various Sectors

Liberalization was introduced so that the policies that were restricting the free trade and business growth were abolished. Liberalization played a major role in ensuring that new industries are developed and business flourish. Trade practices which were vague and discouraging the economic growth came to an end and importing of goods and technology started resulting in concession under MRTP act, encouraging software development and information technology. Liberalization on one hand open the way of new business opportunities but somehow shift the interest of people from a conventional business to more fancy knowledge related ventures. Financial liberalization was increased and state control over trade was reduced.

1.1 Impact on Economy

Liberalization had great impact on Indian economy 1 by accelerating the India’s GDP with quadrupled growth and by surging the forex reserves from $5.8 billion to $279 billion. Not just that, the export rate of India was raised from $18 billion to $178 billion. But if we talk about our lifestyles and lives, then since 1991 we all have noticed the drastic change in it.

There was a time when Maruti 800 costing Rs 1.48 lacs defines the status of a person. Two wheelers such as Lambretta and Bajaj Chetak was the preferred choice and counted to be the best selling scooters back then. Thumbs Up and Gold Spot were the favorite drinks costing just Rs 4.50. Coming back to our present living style, we have become more advance, youngsters are loving advanced and hi-fi gadgets. Market for cola has taken a major hike from just 200 crore Rs in 1991 to 10,000 crore at present.

Nobody in today’s generation is aware of the name of our beloved two wheelers like Bajaj Chetak. Telephone subscribers in 1991 were 0.5 million which becomes 862 million in 2011, you can see the hike in numbers. Number of passenger cars in 1990-91 was 0.18 mn and in 2010-11 it straight away rang up to 2.9 mn. Number of passengers travelling by air in 1990-91 was 8.9 mn and in 2010-11 the number raised to 57 mn.

The living style of people changed because the salaries also increased. Earlier in 1991 the salary of cabinet secretary was 30,000 which become 90,000 in 2011. Cricketers were paid Rs 9000 per test match and 3000 per ODI match in 1991 and now we all are aware how lavishly and well paid our cricketers are, they starts getting Rs 7 lakh for a test match and Rs 4 lakh per ODI in 2011. And when we talk about the industries then the salary of the MD of TATA Group was 37.8 lakhs in 1991 which changes to 4.1 crore in 2011.

With the raise in salary the cost of accommodation and food also increased. Renting a two bhk flat in posh locality of Mumbai in 1991 costs just 40k to 50k, which drastically changes to 2 to 2.5 lakhs in 2011. Food for two in a 5 star hotel was of 600-800 Rs in 1991 and in 2011 it becomes 2200 to 3500. Having a haircut and a shave costs just Rs 32 in 1991 in Delhi’s Ambassador’s hotel whereas in 2011 the cost was Rs 500.

 

1.2 Impact on Social Fabric

 

Indian society underwent numerous changes 2 after 1991 reforms. Right to Education became the fundamental right and the education was made compulsory for all the children. It was ensured that the quality education is imparted to everybody. Entertainment in 1991 was limited to just one channel,
which gradually changes to hundreds of channel as the time passes. People started knowing about the stock markets and trades. BSE and stock brokers were one of the most liked topics for discussion.

In 1991 Indian Airlines were the preferred choice of the passengers, but with the passage of time the number of airlines grow and there was a time when owning an airline was a biggest fad. Banking was such a pain back in 1991, people have to wait in line for hours for one single money transaction. But as the years passed, more banking option came with the UTI, HDFC, ICICI and more. Liberalization accelerated the GDP per capita annually from 1¼ % to 7½ since independence.

Output in the service sectors such as insurance, communication, information technology, asset management where the regulation of government weren’t that strict, the output was awesome and it grows rapidly. Economic Liberalization abolished the License Raj and reduced the interest rates and tariffs that put the public monopolies to an end by granting approval to FDI.

All these factors together have improved the literacy rates, life expectancy, food security and other related aspects. Government stopped interfering in contentious issues such as agricultural subsidies and reforming labour law. State control over economy was reduced and India subsequently moved towards the free economy and better financial liberalization. But the fact that remains unchanged was that the people of urban area got more beneficent from these laws and reforms as compared to the ones residing in rural areas.

1.3 Impact on Demographics 3

 

NEP 1991 brings forth the major reforms in agricultural sector and tries balancing the payments position. Economic Reforms introduced various changes in financial and monetary policies, budgetary and fiscal policies and trade policies. Public sector resources were redirected through these reforms where the private sector can’t enter.

Agriculture 4 sector is the prominent part of Indian Economy and encompasses the major source of income for rural areas. Any change or alteration in agricultural sector can affect the major population and living pattern of the society. If we go with the research and studies, then the liberalization of economic have impacted rural and agricultural sectors a lot. The three of the
sectors tertiary sector, secondary sector and primary sector out of which first two sectors have seen major growth whereas the latter has lagged diversified scarcely.

Liberalization made human resources available at cheap rates in developing economies, which was facilitated further due to IT revolution. End numbers of jobs were created in developed economies hence the people from developing economies moved to developed countries, causing brain drain. But due to the LPO, KPO, BPO and software, India was able to retain the large chunk of its demographic dividend, if not done timely it would have been wasted.

Initially the telecom sector was owned by government and the services were not up-to- the-mark.Reforms improved the telecom sectors and it touched the zenith of success.Banking sector is another sector that liberalization had great impact on. Private and public sectors came face to face but public banks still remain the ones answering the customers in better way and also remain the prominent
lender. IT brings in revolution here as well, and the government introduced new schemes such as Pradhan Mantri Jan dhan Yojana that aims at achieving the target by the use of Aadhar card.

Since 1991 major changes have been observed in growth pattern of urban India. Cities got restructured, laws of buying a home and land too changed. India is looking for the options to ensure and outline the growth in such a way that sustainable development is ensured.

1.4 Impact on Culture

In order to counter the economic crisis the concept of liberalization was introduced by government of India. Government plans to limit its role and giving more power to the market demands and needs. IMF inspired programs related with macro-economic stabilization programs and World Bank inspired structural adjustment programs related with the foreign investment, industry, trade, financial and public sector. Structure of institutions and incentives were changed giving an upper hand to private initiative as compared with the state government. This economic philosophy was more focused towards market forces and emphasized on growth of private sector.

Casteism once had a great impact Indian culture, which is more or less is a fading concept now. Concentrated majorly in rural areas, it is still reflected in voting patterns and social inequalities. There is a debate going on to introduce the reservation in corporate and private sector based on caste system, but nothing has been done yet as it has faced fierce retaliation. Liberalization has set a pursuit of economic reforms that has turned the country into consumer society.

Urban Indian life has changed a lot where the new customer spirit is discovered that is focusing upon information technology. Liberalization and globalization has opened the better opportunities for the people with premium knowledge, great entrepreneurial skills and excellent educational background, the people who can live with the theory of ‘the survival of the fittest’. But the ones with less education and of labor class didn’t get much benefit in this highly competitive environment.

These economic reforms affected the traditional jobs very badly like rag-picking, it happens because the waste paper gets imported from the developed nations. Other traditional jobs such as silk-spinning, hawkers and vendors etc also suffered the major blow. Silk spinning was taken over by the yarn and thread manufactured in China and super markets and foreign direct investment kills the business of hawkers. This ultimately amplified the wealth inequality and uneven distribution of wealth. These reforms can prove beneficial if the equal opportunities are created for people belonging to urban as well as rural area and ensuring that they have equal opportunities of growth.

Effects of Liberalization on India

Liberalization had mixed impact on Indian Economy; let’s go through the positive and negative effects one by one:

Positive Impact:

● Acquisition, merging and restructuring wasn’t a problem anymore
● Cost consciousness and quality of the workers increased
● Little or no pressure and hostility was exhibited by the workers and trade unions
● Productivity, technical growth, R&D and quality constantly start moving upward
● Brand building was encouraged and companies starts carving their own way to get recognized in highly competitive market
● Production moves to capital intensive methods from labor intensive methods
● Industries starts catering the global markets

Negative Impact:

● Growth of reserved small scale industries slowed down when compared with the unreserved industries
● Disinvestment and privatization are the crucial factors, which are taken out in completely unplanned manner. It demands more transparency and rationality
● Infrastructure is the major factor that determines the growth of the country and when it comes to our infrastructure then the areas like roads, ports, power and telecommunication are still inadequate and underdeveloped. There is a pressing need to increase the growth rate in this arena
● Fiscal deficits in India are quite high and there is an urgent need to minimize them, which could be done through the improved taxation, re-prioritization of schemes and plans and by reducing subsidies.

References:

1) Article Title: How the Indian economy changed in 1991-2011 (Published in the Economic Times- Sep. 15, 2011)

2) Report Title: Impacts of Liberalization on Social Fabric (Published on Social Watch- Jan. 13. 2010)

3. Research Paper Title: An Analysis of Urban Growth Trends in the Post-Economic Reforms Period in India (Published in the International Journal of Sustainable Built Environment- June,
2012)

4) Article Title: Impact of economic reforms on Indian agricultural sector: Application of geomatics technology to reduce marginalisation and vulnerability of small farmers in India ( Published on Geospatialworld.net- Sep. 1, 2009.)

5) Paper Title: Globalisation and social transformation in India: Theorising the transition (Published in Academic Journals- March 16, 2011)