Liberalisation was one of the reforms of New Economic Policy of 1991. It was introduced to put an end to the restrictions and open up various sectors of the economy. The following are the important areas of liberalization:
1. Deregulation of industrial sector: The liberalization policy removed many restrictions enforced on industrial sector. Industrial licensing was abolished for almost all but product categories like alcohol, cigarettes, hazardous chemicals, industrial explosives, electronics, aerospace and drugs and pharmaceuticals.
The only industries which are not reserved for the public sector are defence equipments, atomic energy generation and railway transport. Many goods produced by the small scale industries have now been dereserved.
2. Financial sector reforms: The financial sector consists of financial institutions like commercial banks, investment banks, stock exchange operations and foreign exchange market.
The financial sector in India is regulated by the Reserve Bank of India. The RBI decides the amount of money that the banks can keep with themselves, fixes interest rates, nature of lending to various sectors, etc.
The major objective of financial sector reforms is to reduce the role of RBI from regulator to facilitator of financial sector. That means, the financial sector may be allowed to take decisions on many matters independent of RBI.
The financial sector reform policies led to the establishment of private sector banks both Indian and foreign. Foreign investment limit in banks was raised to around 50%. The banks which fulfill certain conditions have been given freedom to set up new branches without the approval of the RBI. Foreign institutional investors (FIT) like merchant bankers, mutual funds and pension funds are now allowed to invest in Indian financial markets.
3. Tax reforms: These are the reforms which are concerned with government’s taxation and public expenditure policies which are collectively known as its fiscal policy. There are two types of taxes, direct and indirect.
Since 1991, there has been a continuous reduction in the taxes on individual incomes as it was felt that high rates of income tax were an important reason for tax evasion. It is now widely accepted that moderate rates of income tax encourage savings and voluntary disclosure of income.
The rate of corporation tax (tax on income of companies) which was very high earlier has been gradually reduced. A new tax called Goods and Services Tax (GST) has been introduced from 1.7.2017 to bring uniformity in indirect taxes. In order to encourage better compliance on the part of tax payers, many procedures have been simplified and the rates also substantially lowered.
4. Foreign exchange reforms: During 1991, the Government took an immediate measure to resolve the balance of payments crisis, the rupee was devalued against foreign currencies. This led to an increase in the inflow of foreign exchange. It also set the tone to free the determination of rupee value in the foreign exchange market from government control. At present, the market forces i.e., demand and supply, determine the exchange rates.
5. Trade and investment policy reforms: A new trade and investment policy under liberalization strategy was made to increase international competitiveness of industrial production and a foreign investments and technology into the economy. The aim was also to promote the efficiency of the local industries and the adoption of modem technologies.
To protect Indian industries, the government was following quantitative restrictions on imports which encouraged tight control over imports. At the same time, tariffs were very high. These policies reduced efficiency and competitiveness which led to a slower growth of manufacturing sector.
The main objectives of Trade and Investment Policy were:
- To remove quantitative restrictions on imports.
- To reduce quantitative restrictions in exports.
- Reducing tariff rates.
- Removal of licensing system.
Import licensing was abolished except in case of hazardous and environmentally sensitive industries. Quantitative restrictions on imports of manufactured consumer goods and agricultural products were also fully removed. Export duties have been removed to increase the competitive position of Indian goods in the international markets. A process of disinvestment was also initiated by selling of part of equity shares of public sector enterprises to the public.
