• The rules and regulation which were once aimed at regulating economic activities in the country became primary hindrances in growth and development of the economy. Liberalisation was introduced to put an end to these restrictions and open up various sectors of the economy.
  • Liberalisation literally means the process of easing up of rules and regulation pertaining to a particular practice or activity.
  • Liberalisation is one of the major highlight of The New Economic Policy of 1991. Even though some liberalisation measures were undertaken in 1980s in areas of industrial licensing, export-import policy, technology upgradation, fiscal policy and foreign investment but the reform policies initiated in 1991 were significantly more comprehensive.

Deregulation of Industrial Sector: In the time pre-1991 era, regulatory mechanisms were enforced in various ways which were as follows:

  1. Industrial licensing under which every entrepreneur had to get permission from government officials to start a firm, close a firm or to decide the amount of goods that could be produced
  2. Private sector was not allowed in many industries
  3. Some goods could be produced only in small-scale industries
  4. Controls on price fixation and distribution of selected industrial products.
  • Post 1991 reforms in Economic Policies the industrial licensing was abolished for almost all the product categories except— alcohol, cigarettes, hazardous chemicals, industrial explosives, electronics, aerospace and drugs and pharmaceuticals. The only industries which are now reserved for the public sector are defence equipment, atomic energy generation and railway transport. Many goods produced by small-scale industries have also been de-reserved. In many industries, the market has been allowed to determine the prices as well.

Financial Sector Reforms: One of the major aims of financial sector reforms was to reduce the role of RBI from regulator to facilitator of financial sector. This means that the financial sector was 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. Foreign investment limit in banks was raised to around 50 per cent. Those banks which fulfil certain conditions have been given freedom to set up new branches without the approval of the RBI and rationalise their existing branch networks.
  • Foreign Institutional Investors (FII) such as merchant bankers, mutual funds and pension funds are now allowed to invest in Indian financial markets.

Tax Reforms: Tax reforms are concerned with the reforms in government’s taxation and public expenditure policies, collectively known as the fiscal policy. The rate of corporation tax has been gradually reduced. Efforts have also been made to reform the indirect taxes and the taxes levied on commodities, in order to facilitate the establishment of a common national market for goods and commodities. Another major aspect of these reforms is simplification. In order to encourage better compliance from taxpayers many procedures have been simplified and the rates also substantially lowered.

Foreign Exchange Reforms: In 1991, in order to resolve the crisis of BOPs, the rupee was devalued against foreign currencies. This led to an increase in the inflow of foreign exchange. This resulted in markets determining exchange rates based on the demand and supply of foreign exchange.

Trade and Investment Policy Reforms: Trade and investments were liberalised to increase international competitiveness of industrial production and that of foreign investments and technology into the economy. It also aimed at promoting the efficiency of the local industries and the adoption of modern technologies.

The trade policy reforms aimed at:

  1. Dismantling of quantitative restrictions on imports and exports.
  2. Reduction of tariff rates.
  3. Removal of licensing procedures for imports. Import licensing was abolished except in case of hazardous and environmentally sensitive industries.






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