Liberalisation and Globalisation

In order to overcome the foreign exchange crisis and speed up economic development, the Government of India announced a new industrial policy in July 1991. The Industrial Policy, of 1991 seeks to liberate the industry from the shackles of licensing, encourage foreign private participation in industrial development, and drastically reduce the role of the public sector.

The main objectives of the Industrial Policy 1991 are as follows:

• To liberalize the industry from licensing and other controls.
• To increase the competitiveness of industries.
• To ensure the running of public sector enterprises on business lines so as to reduce their losses.
• To ensure rapid industrial development in a competitive environment.
• To ensure support to the small sector.
• To provide greater incentives for the industrialization of backward areas.

Thus, the new industrial policy aims at encouraging private enterprise and initiative. Economic Liberalisation, privatization of public enterprises, and Globalisation are the salient features of this policy.

India’s Experience with Liberalisation (

Liberalisation and Globalisation)

The major Policy changes introduced under Liberalisation can be summed up as follows:

1. Deregulation of Industries: The new economic policy has abolished industrial licensing for all industries except six strategic industries. All other industries are now permitted to establish new units and expand without acquiring any license. They are free to decide the scale and level of production. The Indian economy has become free from the shackles of the license permit quota Raj.
2. Dereservation of Industries: The number of industries reserved for the public sector has been reduced from 18 to 4. The private sector is allowed to start and operate units in all areas except areas of strategic importance. These are defense production, atomic energy, railway transport, and minerals used in automatic energy. Under the liberalized economic environment, the public sector is expected to become competitive and growth-oriented.

India’s Experience With Globalisation (

Liberalisation and Globalisation)

Industrial Policy 1991 aims to globalize the Indian economy through reforms in foreign trade policy, such as the abolition of import licensing, convertibility of the rupee, market determination of foreign exchange rates, etc. These policy reforms are explained below:

1. Imports Liberalisation: Quantitative restrictions such as import licenses and quotas have been phased out. Under the new foreign trade policy most imports have been put under Open General License (OGL) list, wherein automatic permission is granted to import goods. Now import license is necessary for very few items. Qualitative restrictions on a large number of export items have been removed. Several items of import have been decimalized.
2. Rationalization of Traffic Structure: The structure and patterns of custom duties levied on the import of different commodities (known as tariff structure) had become very complex over the years. Since 1991 the peak tariff has been reduced substantially the tariff structure has been rationalized. These reforms in trade policy seek to make Indian goods competitive in the world market. Cheaper import of raw materials will help to reduce the cost of production and improve quality. Low-cost and high-quality products will enable Indian exporters to compete with foreign goods and thereby increase the country’s export.
3. Reforms in Foreign Exchange Management: Before 1991, the Government of India exercised strict control over foreign exchange. Under the Foreign Exchange Regulation Act (FERA) all Indian exporters had to surrender their foreign exchange earnings to the Reserve Bank of India. They were given in return an Indian rupee at a fixed exchange rate. In 1999 the Government abolished FERA and enacted Foreign Exchange Management Act (FEMA) to promote foreign trade. Under the new exchange management system, the value of the rupee is determined by market forces of demand and supply. Exporters are free to sell their foreign currency in the open market and the importers can freely buy it from the open market. Thus, the Indian rupee has been made freely convertible so as to boost the country’s exports.
4. Reforms in Foreign Direct Investment (FDI): Now 100% foreign equity is allowed in many industries. In other cases, the upper limit for foreign investment has been raised from 40% to 74%. Automatic permission is given to foreign technology agreements in High priority industries. Imports of capital goods also get automatic approval in case the foreign exchange required for such import is received through foreign equity.
5. Capital Market Reforms: The major reforms in the capital market are as follows:

• The Capital Issues (Control Act,1947) has been repealed. Indian companies faced bureaucratic delays in the issue of securities due to this Act.
• The listing of companies on stock exchanges has been liberalized.
• (iii) The role of Foreign Institutional Investors (FIIs) on Indian stock exchanges has increased tremendously due to the Liberalisation of foreign portfolio inflows.
• Private mutual funds (both Indian and Foreign) have been permitted to Operate thereby ending the monopoly of UTI.
• The Securities Exchange Board of India (SEBI) has become the regulator of capital markets.
• Guidelines have been issued for the floating of Euro issues by Indian companies. Several Indian companies have raised capital in foreign markets by issuing Global Depositary Receipts (GDRs) and American Depositary Receipts (ADRs). Their securities have been listed on foreign stock exchanges.