Liberalization – Meaning, Components, Reforms, Pros and Cons

Liberalization is necessary for economic development and growth. We will understand the concept of liberalization from the Indian point of view. In 1991, the Indian economy was facing a financial crisis. The main reason for this crisis was the Gulf War. India imported a large amount of petrol from these Gulf countries. Because of this war, the price of crude oil increased, which led to a deficit in the balance of payments. In order to take loans from the International Monetary Fund, India was forced to adopt the New Economic Policy of LPG, which stands for: 

● Liberalization 

● Privatization 

● Globalization 

What is liberalization? 

In liberalization, control and restrictions are reduced on the industries. The rules and regulations are simplified for industries and enterprises. In other words, we can say that in liberalization, the economy is opened to foreign and private players with fewer restrictions in terms of tariffs, taxes, and trade regulations. 

Economic Reforms Under Liberalization: 

1. Delicensing:

India abolished licensing for all the industries except five, which are 

● cigarettes or tobacco 

● defense equipment 

● industrial explosives 

● dangerous chemicals 

● Alcohol 

2. Introduction of the Competition Act:

The Corporate Affairs Department of India established Monopolies and Restrictive Trade Practices (MRTP) in 1969 to restrict the formation of monopolies by controlling the price and production of goods. But in 2002, India abolished the MRTP Act, and in

place of this, the Liberal Competition Act was introduced. This new act gives more autonomy to industries and prohibits the dominance of a few firms in the market and anti-competitive agreements. 

3. Increase the investment limit:

After liberalization, the investment limit in small-scale industries increased to 1 crore. 

4. Introduction of FEMA:

The Indian Parliament formed the Foreign Exchange Regulation Act (FERA) in 1973, which imposed various restrictions on the exchange of foreign transactions. This act was very narrow in nature. So in 1999, the Indian Parliament passed a new act, which is the Foreign Exchange Management Act (FEMA). It promotes the payment of foreign exchange and international trade. 

5. Change in taxation policy:

Before liberalization, the tax rates were very high in India, which in turn demotivated the new industries to set up their plants. But after adopting the liberalization policy, 

● income tax rates were decreased to 30% 

● customs duty was reduced from 250% to 10%. Customs duty is a form of tax that is imposed on the import and export of goods and services 

● Excise duty was also reduced. An excise duty is a form of tax that is imposed on the production of goods and services produced within the borders of a country. 

6. Changes in the banking sector:

India took the following steps in the banking sector: 

● Bank rate:

It was fixed at 8.2%. The bank rate is the rate at which the Central Bank of India (Reserve Bank of India) gives loans to commercial banks without providing any security. ● Cash Reserve Ratio (CRR): It was reduced to 4%. CRR is the percentage of the total deposits of the commercial banks that are to be kept with the RBI. When this ratio is decreased, it means the banks can give more loans to customers, which is important for the growth of the country. 

● Statutory liquidity ratio (SLR):

It was also reduced from 38.5% to 23%. SLR is the percentage of total deposits of the commercial banks that are to be kept within the commercial bank as reserves. The lower the SLR, the higher the number of loans that can be given to consumers, which is again important for the development of the country.

Components of Liberalization: 

● Foreign direct investment 

● Delicensing 

● Unrestricted trade 

● Imported technology 

● Autonomy in decision-making 

● Removal of the quota system 

● Reduction in tax rates

Advantages/Pros of Liberalization:

1. Increase in competition:

The competition increases between the industries due to the liberalization. It can be explained with an example. In India, in the telecom industry, various companies entered to provide services, like Jio, Airtel Bharati, Vodafone, and BSNL. As a result of this competition, better quality is provided to consumers at the best price. They have been given the freedom to fix the prices of goods and services. 

2. Increase in Foreign Investment:

Liberalization leads to an increase in the inflow of foreign direct investment as big multinational companies set up their industries in the country that adopts liberalization. India is the best example of it. After liberalization, the FDI limit was extended to 51% in private-actor banks in India in 2002. 

3. Increase in Production:

The license process for setting up industries is made easy under liberalization. So a large number of industries were set up, which in turn increased industrial production. 

4. Economic development of the country:

Another important advantage of liberalization is the economic growth and development of the country. It simplifies exports, imports, and exports. There is no need for the government to take foreign loans to solve the problem of the balance of payments deficit. 

5. Check on corruption:

Because of liberalization, there is no need for the businessman to give money to the administrative authorities to acquire the license and quota quickly. So liberalization keeps checking on corruption.

 

Disadvantages/Cons of Liberalization:

1. Loss to Small-Scale Industries:

In a liberalized economy, goods and services are imported from foreign markets. The small and medium-scale industries of India cannot compete with these big foreign multinational companies in terms of price and quality. As a result, these industries shut down after some time.

2. Loss of jobs:

Liberalization also increased the unemployment rate in India. The main reason for this is the import of capital-intensive techniques from foreign countries, which leads to less demand for labor. 

3. Regional Imbalance:

The private sector sets up its companies and industries in areas where there are facilities for transportation, electricity, water, etc. As a result, the backward areas become more backward. 

4. Dependence on foreign investment:

The major disadvantage of liberalization is the dependence on foreign companies for investment, which threatens the sovereignty of the country. 

In short, we can say that the liberalization policy is important for the development of the country. It is up to the country to balance the restrictions and autonomy in the business.