Liberalisation in India: Background and Necessity

Liberalisation: Background and Necessity

• India's economic performance in the global market was poor despite vast resources.
• In 1992, India's contribution to world trade was only 0.53%, less than Thailand.
• Despite planned economic growth, India remained underdeveloped with issues like low NNP, chronic unemployment, low per capita income, poverty, and low capital formation.
• Increasing imports led to a trade deficit, foreign debt, low technological base, and a poor external image.
• The government identified liberalisation as a crucial step to address these challenges.

Factors Supporting Liberalisation

• Global Change:

  • The global economy was experiencing rapid change, requiring nations to adapt.
  • The European Economic Community (EEC) became the largest single market, showcasing global integration.
  • The Gulf War facilitated increased cooperation and integration between the EEC and America.
  • The US and Canada formed an integrated trade zone.
  • Japan, despite its large trade surplus, remained a strong trading partner for America.
  • The US granted "Most Favoured Nation" status to China, signifying a global business philosophy.
  • The Asian-Pacific block was emerging, with a common market philosophy gaining ground.
  • The success of China's liberalised economy in less than a decade served as an eye-opener.

• Position of Indian Economy:

  • India faced a severe economic crisis and external pressure for foreign exchange.
  • The country was on the brink of defaulting in the international arena in 1991.
  • This triggered panic among Non-Resident Indians (NRIs), leading to the withdrawal of deposits.
  • The country was trapped by internal and external debt.
  • The foreign exchange crisis was fuelled by long-term and short-term foreign debts.
  • The government needed to attract foreign exchange, increase exports, and reduce imports.
  • The country urgently required a modern technology base, greater innovation, capital formation, more employment opportunities, latest technical know-how, and inflow of foreign capital.
  • Liberalisation was crucial to attract foreign investors.

• Trade Deficit:

  • India's trade deficit had been a persistent issue since independence.
  • India failed to achieve economic independence despite political independence.
  • India's share in the world market remained negligible while the import bill increased.
  • The trade balance was negative in 1990-91 and became increasingly worse in subsequent years.
  • The trade deficit in 1995-96 stood at -3.2% of GDP.
  • The trade deficit in 1999-2000 stood at -0.4% of GDP.
  • The trade balance was -2.1% and -2.5% in 2002-03 and 2003-04, respectively.

Liberalisation: The Path Forward

• The government needed to release the economy from restricting rules and regulations.
• India needed to establish a new image: a market-oriented economy, private sector-friendly, and a more confident image.
• The government aimed to control both unemployment and inflation.
• Globalisation necessitates liberalisation.
• The LPG (Liberalisation, Privatisation, Globalisation) model of development introduced in 1991 aimed to implement a new strategy with an emphasis on these three pillars.
• Areas previously reserved for the public sector were opened to the private sector.
• The government aimed to transfer loss-making public sector units to the private sector.