Liberalisation : History and Achievements

Factors that led to liberalisation:

  • Balance of payments situation became almost unmanageable.
  • Fiscal deficits rose sharply from 4.1 per cent of GDP in 1974–75 to 10.4 per cent in 1991.
  • Domestic debt rose from 31.8 per cent of GDP in 1974– 75 to 54.6 per cent in 1989–90.
  • The foreign debt rose from $23.5 billion in 1980–81 to $83.8 billion 1990–91.
  • Excessive dependence on foreign debt rather than foreign equity capital, and inadequate returns on the borrowings led to an unsustainable debt service burden.
  • India’s foreign exchange reserves fell from $5.85 billion in 1980–81 to $4.1 billion in 1989–90, and in the next year (1990– 91) they fell drastically by nearly half to $2.24 billion enough only for one month’s import cover.
  • The Iraqi invasion of Kuwait in August 1990, led to an increase in oil prices and a fall in Indian exports to the Middle East.
  • Foreign lending had virtually dried up, the government was forced to sell 20 tonnes of gold to the Union Bank of Switzerland in March 1991.
What reforms were involved in the liberalization?
  • Making the exchange rate more realistically linked to the market (the rupee underwent about 20 per cent devaluation at the very outset).
  • Liberalization of trade and industrial controls.
  • Considerable dismantling of the industrial licensing system and the abolition of the MRTP Act.
  • Reform of the public sector including gradual privatization;
  • Reform of the capital markets and the financial sector;
  • Removing a large number of the restrictions on Multinational corporations and foreign investments
What are the achievements since liberalization?
  • Decadal growth rates of India Years Growth Rate 1950-51 to 1964-65     4.8 percent 1964-65 to 1974-75     3.4 per cent 1974-75 to 1984-85    4.2 per cent 1984-85 to 1994-95    5.9 per cent 1994-95 to 2004-05   7.1 per cent 2004-05 to 2013-14   8.3 per cent
  • Our GDP is seven times larger (calculated at current prices).
  • Foreign investment inflows that averaged $8-15 billion before 2004-05 rose to more than $70 billion in 2014-15.
  • We have achieved universal primary education with a 100% primary enrolment ratio.
What were the expectations by Liberalization?
  • One of the motives was unleashing the competition to make domestic industries competitive to foreign industries.
  • These domestic technologically upgraded industries were expected to stimulate exports and earn foreign exchange to pay for imports.
  • It was expected to result in a restructuring of domestic industry, which would be forced by the cutting edge of competition to establish internationally competitive capacities.
  • Liberalisation was also expected to attract foreign direct investors who, whether in collaboration with domestic partners or through investment in subsidiaries.
  • Industry will be the leading sector in the growth process. Liberalization would help fulfil the promise India showed as a potential industrial power.
  • GDP based claims of growth ignores welfare.
  • Appallingly poor state of physical and social infrastructure in the country could not be improved yet.
  • In the 25 years since 1991, India has recorded a current account deficit on its balance of payments in all but three years.
  • CAD implies that India has accumulated large currency reserves due to pumping of investments by foreign investors and lenders but trade. Hence these flows are inflows are liabilities and have associated with them payment commitments in future.
  • Manufacturing has not been the driver of growth in the country. In 2010, industry’s contribution to GDP stood at 47 per cent in China, 47 per cent in Indonesia, 39 per cent in South Korea, 44 per cent in Malaysia, and 45 per cent in Thailand. In India that contribution was only 27 per cent.
  • India has also failed to raise its market share even in the case of traditional exports.
  • 100% primary enrolment ratio has come with a very high drop-out rate of 20%.
  • Only 6% of Indians above 15 years of age achieve higher education (as per Euro monitor data), while China is at nearly 12% for the same age group.
  • 44% of people still defecate in the open.
  • 10 of the top 20 most polluted cities in the world are in India
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