Hello everyone, in the previous topic we had suggested you the 12 best ways to cope with Depression. Today we are going to talk about Liberalization, its types, and plans of economic liberalization.

Rules and laws which were aimed at regulating economic activities became major hindrances in growth and development. To put an end to these restrictions and open various sectors of the economy, Liberalization was introduced.

Liberalization measures were introduced in the 1980s in areas of industrial licensing, export-import policy, technology up-gradation, fiscal policy, and foreign investment and few years after i.e. 1991 received greater attention in some important areas like the industrial sector, financial sector, tax reforms, foreign exchange markets and trade, and investment sectors.

What is liberalization?

Liberalization is a general term for any process whereby a state lifts restrictions on some private individual activities. Liberalization occurs when something which used to be banned is no longer banned, or when government regulations are relaxed.

In other words, the term “liberalization” is most often used in discussing economic liberalization, which refers to the reduction of state involvement in the economy, but it can be used in other contexts as well.

Types of liberalization

The following are the types of liberalization-

Product liberalization

Product Liberalization is the removal or reduction of restrictions or barriers on the free exchange of goods between nations. It is the reason which we are able to choose from hundreds of products.

Process liberalization

Process liberalization is a process of removing controls systems in order to encourage economic development. This is the liberalization of the business process and is only partly achieved.

Capital liberalization

Capital liberalization is the process of removing restrictions from international transactions related to the movement of capital. It can involve the removal of controls on both domestic residents’ international financial transactions and on investments in the home country by foreigners. This is the liberalization of the bank processes.

Plans of Economic Liberalization

Here we are going to discuss in brief the plans of economic liberalization in some important areas-

Deregulation of Industrial Sector

In India, regulatory mechanisms were enforced in various ways-

1. Industrial licensing under which every entrepreneur had to get permission from government officials to start a firm, close a firm or decide the number of goods that could be produced in their firms.
2. The private sector was not allowed in many industries.
3. Some goods can only be produced in small-scale industries.
4. Controls on price fixation and distribution of selected industrial products.

Tax Reforms

Tax reforms are concerned with the reforms in the government’s taxation and public expenditure policies, which are collectively known as fiscal policy.

There are two types of taxes-

• Direct tax
• Indirect tax

Direct tax– Direct taxes consist of taxes on the incomes of individuals, and also on the profits of business enterprises.

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.

Indirect tax– There is a lot of effort to reform the indirect taxes, taxes levied on commodities, in order to facilitate the establishment of a common national market for goods and commodities.

In 2016, the Indian Parliament passed a law, the Goods, and Services Tax Act 2016, to simplify and introduce a unified indirect tax system in India. This law came into effect in July 2017.

This law is expected to generate additional revenue for the government, reduce tax evasion and create ‘one nation, one tax, and one market’.

Another component of reform in this area is a simplification.

 In order to encourage better compliance on the part of taxpayers, many procedures have been simplified and the rates have also been substantially lowered.

Foreign Exchange Reforms

The first important reform in the external sector was made in the foreign exchange market.

 In 1991, as 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 the government. Markets now also determine exchange rates based on the demand and supply of foreign exchange.

Trade and Investment Policy Reforms

Liberalization of trade and investment regimes were initiated to increase the international competitiveness of industrial production and also foreign investments and technology into the economy.

Their aim was also to promote the efficiency of local industries and the adoption of modern technologies In order to protect domestic industries, India was following a regime of quantitative restrictions on imports.

This was encouraged through tight control over imports and by keeping the tariffs very high. These policies reduced efficiency and competitiveness which led to slow growth of the manufacturing sector.

The trade policy reforms aimed at these points–

1. Dismantling of quantitative restrictions on imports and exports (Quantitative restrictions on imports of manufactured consumer goods and agricultural products fully removed from April 2001. Export duties had been removed to increase the competitive position of Indian goods in the international markets)
2.  It reduces tariff rates
3.  It also removes the licensing procedures for imports.

(Import licensing was abolished except in the case of hazardous and environmentally sensitive industries.)

Financial Sector Reforms

The financial sector includes financial institutions, such as commercial banks, investment banks, stock exchange operations, and foreign exchange markets.

The financial sector in India is regulated by the Reserve Bank of India (RBI).

We are aware that all banks and other financial institutions in India are regulated through various norms and regulations of the RBI.

The RBI decides the amount of money that the banks can keep with themselves, fixes interest rates, nature of lending to various sectors, etc.

One of the major aims of financial sector reforms is to reduce the role of RBI from the regulator to facilitator of the financial sector.

This means that the financial sector may be allowed to take decisions on many matters without consulting the RBI.

The reform policies led to the establishment of private sector banks, Indian as well as foreign. The foreign investment limit in banks was raised to around 74 percent. Those banks which fulfill certain conditions have been given the freedom to set up new branches without the approval of the RBI and rationalize their existing branch networks. Though banks have been given permission to generate resources from India and abroad. Certain managerial aspects have been retained with the RBI to safeguard the interests of the account-holders and the nation.

Foreign Institutional Investors (FII), such as merchant bankers, mutual funds, and pension funds, are now allowed to invest in Indian financial markets.

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