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Economic liberalisation in India

The economic liberalisation in India refers to the ongoing economic liberalization, initiated in 1991, of the country's economic policies, with the goal of making the economy more market-oriented and expanding the role of private and foreign investment. Specific changes include a reduction in import tariffs, deregulation of markets, reduction of taxes, and greater foreign investment. Liberalization has been credited by its proponents for the high economic growth recorded by the country in the 1990s and 2000s. Its opponents have blamed it for increased poverty, inequality and economic degradation. The overall direction of liberalisation has since remained the same, irrespective of the ruling party, although no party has yet solved a variety of politically difficult issues, such as liberalizing labour laws and reducing agricultural subsidies.[1] There exists a lively debate in India as to what made the economic reforms sustainable.[2]

Indian government coalitions have been advised to continue liberalisation. India grows at slower pace than China, which has been liberalising its economy since 1978.[3] The McKinsey Quarterly states that removing main obstacles "would free India's economy to grow as fast as China's, at 10% a year".[4]

There has been significant debate, however, around liberalisation as an inclusive economic growth strategy. Since 1992, income inequality has deepened in India with consumption among the poorest staying stable while the wealthiest generate consumption growth.[5] As India's gross domestic product (GDP) growth rate became lowest in 2012-13 over a decade, growing merely at 5%,[6] more criticism of India's economic reforms surfaced, as it apparently failed to address employment growth, nutritional values in terms of food intake in calories, and also exports growth - and thereby leading to a worsening level of current account deficit compared to the prior to the reform period.[7]


  • Pre-liberalisation policies 1
    • Pre-1991 liberalization attempts 1.1
    • Impact 1.2
  • First Round of Reforms (1991–1996) 2
    • Crisis 2.1
  • Later reforms 3
  • Impact of reforms 4
  • Challenges to further reforms 5
    • Reforms at the state level 5.1
  • See also 6
  • References 7
  • External links 8

Pre-liberalisation policies

Indian economic policy after independence was influenced by the colonial experience (which was seen by Indian leaders as exploitative in nature) and by those leaders' exposure to Fabian socialism. Policy tended towards protectionism, with a strong emphasis on import substitution, industrialisation under state monitoring, state intervention at the micro level in all businesses especially in labour and financial markets, a large public sector, business regulation, and central planning.[8] Five-Year Plans of India resembled central planning in the Soviet Union. Steel, mining, machine tools, water, telecommunications, insurance, and electrical plants, among other industries, were effectively nationalised in the mid-1950s.[9] Elaborate licences, regulations and the accompanying red tape, commonly referred to as Licence Raj, were required to set up business in India between 1947 and 1990.[10]

Pre-1991 liberalization attempts

Attempts were made to liberalise the economy in 1966 and 1985. The first attempt was reversed in 1967. Thereafter, a stronger version of socialism was adopted. The second major attempt was in 1985 by prime minister Rajiv Gandhi. The process came to a halt in 1987, though 1967 style reversal did not take place.[12]

In the 80s, the government led by Rajiv Gandhi started light reforms. The government slightly reduced Licence Raj and also promoted the growth of the telecommunications and software industries.

The Vishwanath Pratap Singh (1989–1990) and Chandra Shekhar Singh government (1990–1991) did not add any significant reforms.


  • The low annual growth rate of the economy of India before 1980, which stagnated around 3.5% from 1950s to 1980s, while per capita income averaged 1.3%.[13] At the same time, Pakistan grew by 5%, Indonesia by 9%, Thailand by 9%, South Korea by 10% and Taiwan by 12%.[14]
  • Only four or five licences would be given for steel, electrical power and communications. Licence owners built up huge powerful empires.[11]
  • A huge private sector emerged. State-owned enterprises made large losses.[11]
  • Income Tax Department and Customs Department became efficient in checking tax evasion.
  • Infrastructure investment was poor because of the public sector monopoly.[11]
  • Licence Raj established the "irresponsible, self-perpetuating bureaucracy that still exists throughout much of the country"[15] and corruption flourished under this system.[16]

The fruits of liberalisation reached their peak in 2007, when India recorded its highest GDP growth rate of 9%.[17] With this, India became the second fastest growing major economy in the world, next only to China.[16] The growth rate has slowed significantly in the first half of 2012.[18] An

  • For a short educational video of the "economic history of India".
  • Nick Gillespie (2009). "What Slumdog Millionaire can teach Americans about economic stimulus". Reason. 
  • Gurcharan Das (2006). "The India Model". The Foreign Affairs. 
  • Aditya Gupta (2006). "How wrong has the Indian Left been about economic reforms?". Centre for Civil Society. 
  • "The India Report". Astaire Research <>. 2007. 

External links

  1. ^ "That old Gandhi magic". The Economist. 27 November 1997. 
  2. ^ For a critique of the existing explanations and a comprehensive alternative explanation see: Sharma, Chanchal Kumar (2011) "A Discursive Dominance Theory of Economic Reforms Sustainability." India Review (Routledge, UK)126-84
  3. ^ "India's economy: What's holding India back?". The Economist. 6 March 2008. 
  4. ^ "The McKinsey Quarterly: India—From emerging to surging". The McKinsey Quarterly. 2001. 
  5. ^ "India's income inequality has doubled in 20 years - The Times of India". Retrieved 2013-07-10. 
  6. ^ GDP growth slumps to 5%, a decade’s low, Hindu Business Line 31st May 2013
  7. ^ India’s Ponzi-styled economic reforms run out of steam, East Asia Forum 4th June, 2013
  8. ^ Kelegama, Saman and Parikh, Kirit (2000). "Political Economy of Growth and Reforms in South Asia". Second Draft. 
  9. ^ Sam Staley (2006). "The Rise and Fall of Indian Socialism: Why India embraced economic reform". 
  10. ^ Street Hawking Promise Jobs in Future, The Times of India, 25 November 2001
  11. ^ a b c d "India: the economy". BBC. 12 February 1998. 
  12. ^ For a complete history & analysis of liberalisation episodes in India, see: Sharma, Chanchal Kumar (2011) "A Discursive Dominance Theory of Economic Reforms Sustainability." India Review (Routledge, UK)126-84
  13. ^ "Redefining The Hindu Rate of Growth". The Financial Express. 
  14. ^ "Industry passing through phase of transition". The Tribune India. 
  15. ^ Eugene M. Makar (2007). An American's Guide to Doing Business in India. 
  16. ^ a b c "The India Report". Astaire Research. 
  17. ^ "The World Factbook". Retrieved 2013-07-10. 
  18. ^ "BBC News - India growth rate slows to 5.3% in first quarter". 2012-05-31. Retrieved 2013-07-10. 
  19. ^ a b c d e "Economic survey of India 2007: Policy Brief". OECD. 
  20. ^ V. Venkatesan (1–14 January 2005). "Obituary: A scholar and a politician". Frontline 22 (1). Archived from the original on 2010-01-30. Retrieved 30 March 2010. 
  21. ^ PV Narasimha Rao Passes Away. Retrieved 7 October 2007.
  22. ^ India's Pathway through Financial Crisis. Arunabha Ghosh. Global Economic Governance Programme. Retrieved on 2 March 2007.
  23. ^ What Caused the 1991 Currency Crisis in India?, IMF Staff Papers, Valerie Cerra and Sweta Chaman Saxena.
  24. ^ Economic Crisis Forcing Once Self-Reliant India to Seek Aid, New York Times, 29 June 1991
  25. ^ J. Bradford DeLong (2001). "India Since Independence: An Analytic Growth Narrative". 
  26. ^ "End of policy paralysis: Govt approves 51% FDI in multi-brand retail". Retrieved 2013-07-10. 
  27. ^ "HSBC GLT frontpage". Retrieved 22 August 2008. 
  28. ^ Local industrialists against multinationals. Ajay Singh and Arjuna Ranawana. Asiaweek. Retrieved on 2 March 2007.
  29. ^ a b c d e Biswas, Soutik (2011-07-27). "Challenges ahead for India reforms". BBC News (BBC). Archived from the original on 2011-09-08. Retrieved 2013-12-23. 
  30. ^ "IMF calls for urgent reform in Indian labour laws". 
  31. ^  
  32. ^  
  33. ^  
  34. ^ Basu, Kaushik (27 June 2005). "Why India needs labour law reform". BBC. 
  35. ^ "A special report on India: An elephant, not a tiger". The Economist. 11 December 2008. 
  36. ^ "India Country Overview 2008". The World Bank. 2008. 
  37. ^ Gurcharan Das (July–August 2006). "The India Model". The Foreign Affairs. 
  38. ^ Schuman, Michael (2012-11-05). "India vs China: Which Has a Bigger Reform Challenge?". Time (Time). Archived from the original on 2013-03-09. Retrieved 2013-12-23. 


See also

According to an OECD survey of the Indian economy [19] states that had more liberal regulatory regimes had better economic performance. The survey also concluded that were complementary measures for better delivery of infrastructure, education and basic services implemented, they would boost employment creation and poverty reduction.

Reforms at the state level

OECD summarised the key reforms that are needed:

For 2010, India was ranked 124th among 179 countries in Index of Economic Freedom World Rankings, which is an improvement from the preceding year.

Challenges to further reforms

Today, fascination with India is translating into active consideration of India as a destination for FDI. The A T Kearney study is putting India second most likely destination for FDI in 2005 behind China. It has displaced US to the third position. This is a great leap forward. India was at the 15th position, only a few years back. To quote the A T Kearney Study “India's strong performance among manufacturing and telecom & utility firms was driven largely by their desire to make productivity-enhancing investments in IT, business process outsourcing, research and development, and knowledge management activities”.

Election of AB Vajpayee as Prime Minister of India in 1998 and his agenda was a welcome change. His prescription to speed up economic progress included solution of all outstanding problems with the West (Cold War related) and then opening gates for FDI investment. In three years, the West was developing a bit of a fascination to India's brainpower, powered by IT and BPO. By 2004, the West would consider investment in India, should the conditions permit. By the end of Vajpayee's term as prime minister, a framework for the foreign investment had been established. The new incoming government of Dr. Manmohan Singh in 2004 is further strengthening the required infrastructure to welcome the FDI.

Cities like Chennai, Bangalore, Hyderabad, NOIDA, Gurgaon, Ghaziabad, Pune, Jaipur, Indore and Ahmedabad have risen in prominence and economic importance, become centres of rising industries and destination for foreign investment and firms.

The impact of these reforms may be gauged from the fact that total foreign investment (including foreign direct investment, portfolio investment, and investment raised on international capital markets) in India grew from a minuscule US$132 million in 1991–92 to $5.3 billion in 1995–96.[28]

The HSBC Global Technology Centre in Pune develops software for the entire HSBC group.[27]

Impact of reforms

Later reforms

By 1991, India still had a fixed exchange rate system, where the rupee was pegged to the value of a basket of currencies of major trading partners. India started having balance of payments problems since 1985, and by the end of 1990, it was in a serious economic crisis. The government was close to default,[22][23] its central bank had refused new credit and foreign exchange reserves had reduced to the point that India could barely finance three weeks’ worth of imports. It had to pledge 20 tonnes of gold to Union Bank of Switzerland and 47 tonnes to Bank of England as part of a bailout deal with the International Monetary Fund (IMF). Most of the economic reforms were forced upon India as a part of the IMF bailout.[24]


The former prime minister P V Narasimha Rao, who spearheaded economic liberalisation policies in the early 1990s. Rao was often referred to as Chanakya for his ability to steer tough economic and political legislation through the parliament at a time when he headed a minority government.[20][21]

First Round of Reforms (1991–1996)


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