Liberalization: Meaning, Impact, Objectives, Reforms

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Meaning of Liberalisation

Liberalisation is the process or means of the elimination of control of the state over
economic activities. It provides a greater autonomy to the business enterprises in decision-
making and eliminates government interference.

Table of content:

1. Liberalisation in India

2. Objectives

3. Reforms under Liberalisation

4. Impact of Liberalisation

5. MCQs

6. FAQs

Liberalisation was begun to put an end to these limitations, and open multiple areas of the
economy. Though some liberalisation proposals were prefaced in the 1980s in areas of
export-import policy, technology up-gradation, fiscal policy, and foreign investment,
industrial licensing, and economic reform policies launched in 1991 were more general.
There are a few significant areas, namely, the financial sector, industrial sector, foreign
exchange markets, tax reforms, and investment and trade sectors that gained recognition in
and after 1991.

Liberalisation in India

Since the adoption of the New Economic Strategy in 1991, there has been a drastic change in
the Indian economy. With the arrival of liberalisation, the government has regulated the
private sector organisations to conduct business transactions with fewer restrictions.

For the developing countries, liberalisation has opened economic borders to foreign
companies and investments. Earlier, the investors had to encounter difficulties to enter
countries with many barriers.
These barriers included tax laws, foreign investment restrictions, accounting regulations, and
legal issues. Economic liberalisation reduced all these obstacles and waived a few
restrictions over the control of the economy to the private sector.

Objectives

 To boost competition between domestic businesses

 To promote foreign trade and regulate imports and exports

 To improve the technology and foreign capital

 To develop a global market of a country

 To reduce the debt burden of a country

 To unlock the economic potential of the country by encouraging the private sector
and multinational corporations to invest and expand

 To encourage the private sector to take an active part in the development process

 To reduce the role of the public sector in future industrial development

 To introduce more competition into the economy with the aim of increasing
efficiency

Reforms under Liberalisation

 Deregulation of the Industrial Sector

 Financial Sector Reforms

 Tax Reforms

 Foreign Exchange Reforms

 Trade and Investment Policy Reforms

 Foreign Exchange Reforms

 Foreign Trade Policy Reforms

Impact of Liberalisation

Positive Impact of Liberalisation in India

Free flow of capital: Liberalisation has enhanced the flow of capital by making it affordable
for the businesses to reach the capital from investors and take a profitable project.

Diversity for investors: The investors will be benefitted by investing a portion of their
business into a diversifying asset class.

Impact on agriculture: In this area, the cropping designs have experienced a huge change,
but the impact of liberalisation cannot be accurately measured. Government’s restrictions
and interventions can be seen from the production to the distribution of the crops.

Negative Impact of Liberalisation in India

The weakening of the economy: An enormous restoration of the political power and
economic power will lead to weakening the entire Indian economy.

Technological impact: Fast development in technology allows many small scale industries
and other businesses in India to either adjust to changes or shut their businesses.

Mergers and acquisitions: Here, the small businesses merge with the big companies.
Therefore, the employees of the small companies may need to enhance their skills and
become technologically advanced.[1] This enhancing of skills and the time it might take, may
lead to non-productivity and can be a burden to the company’s capital.

Economic Reforms during Liberalisation

Several sectors were affected by the impact of Liberalisation. A few economic reforms were:

 Financial Sector Reforms

 Tax Reforms / Fiscal Reforms

 Foreign Exchange Reforms / External Sector Reforms

 Industrial Sector Reforms

MCQs

Q.1 ___________ means removing all unnecessary controls and restrictions like permits, licenses,
quotas etc. imposed by the government.
 a. Liberalisation

b. Privatisation

c. Globalisation

d. None of the above

Q.2- Which of the following reforms are included under liberalisation taken by the government?

a. Industrial Sector Reforms

b. Financial Sector Reforms

c. Tax Reforms

d. All of the above

Q.3- ______________ introduced more competition into the economy with aim of increasing
efficiency.

a. Liberalisation

b. Privatisation

c. Globalisation

d. None of the above

Answer Key

1-a, 2-d, 3-a

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Frequently Asked Questions on Liberalisation

Q1

What is the meaning of Liberalisation in Economics?

Q2

Name one example of Liberalisation.

One example of Liberalisation is the European Union liberalising electricity and gas.

Q3

What is one role of Liberalisation?

The one important role of liberalisation is to ease the government controls to encourage
economic development.

Q4

What are the pros of Liberalisation?

The following are the pros of Liberalisation:

1. Removing the tariff barriers and, therefore, reducing the products or services prices
for the consumers.

2. Trade liberalisation will increase the competition from abroad.

3. Encourage incoming investment.

Q5

What are the 2 main objectives of Liberalisation?

The following are the two main objectives of Liberalisation:

1. To boost international foreign investment, industrial production, and technology

2. To increase the position of Indian goods in the international markets.