Liberalization – Need and Measures for Liberalization


Liberalization, need for liberalization, measures taken for libralization,

Liberalization of the economy means to free it from direct or physical controls imposed by the government. It refers to the removal or reduction of restrictions or barriers on the free exchange of goods between nations. It is the relaxation of existing or previous Government restrictions usually in areas of social, political or economic policy which results in greater participation of private entities.

Need for Liberalization

Prior to 1991, Government had imposed various controls on Indian economy e.g. Industrial licensing system, price control, import license, foreign exchange control etc. This dampened the enthusiasm of the entrepreneurs to establish new industries and let to rise in corruption, undue delay and inefficiency.  Rate of economic growth fell sharply.

Economic reforms therefore made a bid to reduce restrictions imposed on the economy.  Economic reforms were based on the assumptions that market forces could guide the economy in a more effective manner than government control.

Measure taken for Liberalization in India→

◊ Abolition of industrial listening and registration – Policy of liberalization is adopted over controlled economy. Until the New Economic Policy of 1991, private sector was functioning under rigid licensing system and other restrictions but now with the exception of 6, industrial licensing has been abolished for all other industries, the 6 being –

  1. Liquor

  2. Cigarette

  3. Defence equipment

  4. Drugs

  5. Industrial explosives

  6. Dangerous chemicals

◊ Concession from Monopolies Act – Earlier according to MRTP Act all companies having assets worth more than 100 crore were declared MRTP firms and restrictions were put. Now, the capital investment limit fixed earlier has been removed. Companies falling under MRTP Act are given concessions.  They no longer require prior government approval and are free to expand themselves.

◊ Freedom for expansion and production to industries – Under the new policy industries are free to expand and produce.Earlier a maximum limit of production capacity was set at the time of granting license and no industry could produce beyond this limit. Now this limit has been removed enabling the industries to enjoy large scale production.Producers are now free to produce anything on the basis of demand in the market. Earlier they could produce only goods mentioned in the license.

◊ Increase in the investment limit of the small industries – Investment limit of small industries have been raised to 1 crore and for tiny industries to 25 lakhs.

◊ Freedom to import capital goods – Industries are free to buy machines and raw materials from abroad in order to expand or modernize.

◊ Freedom to import technology – Government has allowed agreements to import high technology. Provision has been made that thigh priority industries need not seek permission to enter into agreements relating to high technology.

◊ Free determination of interest rates – Banks all over the country are now free to determine the rate of interest as they like which was earlier determined by the Reserve Bank of India.

◊ Action Plan for Information Technology and Software Development – A national task force on IT and SD submitted 108 point action plan in July 1988. The recommendations were accepted and directions for implementations were given.

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