What is Liberalisation?

The term liberalisation denotes removing restrictions from certain private individual activity, typically pertaining to economic system. Commonly, liberalisation is used in the context of a government relaxing its previously imposed restrictions on economic or social policies. 


An Introduction to the Concept of Economic Liberalisation

Economic liberalisation refers to a situation where inessential restrictions and controls are removed from a country’s economy to ensure that businesses and enterprises can maximise their contribution. It is, however, important to note that liberalisation does not mean an uncontrolled economy.


Economic Liberalisation in India

The Indian economy was liberalised in the year 1991. In India, the concept of economic liberalisation was introduced to attain several objectives – industrialisation, expansion in the role of private and foreign investment, and introducing a free market system. Restrictions were relaxed for private companies to enter several core industries, which were previously reserved for public sector.


Why was liberalisation initiated in India? 

Economic liberalisation in India was bolstered by its balance of payments crisis in 1985. This crisis rendered the country incapable of paying for its essential imports and servicing its debt payments. India was pushed to the brink of bankruptcy therein.   

As a response to it, the then finance minister of India, Dr. Manmohan Singh, introduced economic liberalisation in India. 


Features of liberalisation in India

Following are some of the features of liberalisation that was initiated as a part of economic reforms of 1991 – 

  • Abolition of the previously existing License Raj in the country. License or Permit Raj is a complicated system of regulations, licenses and restrictions that were imposed to run and set up businesses between 1947 and 1990.

  • Reduction of interest rates and tariffs.

  • Curbing monopoly of the public sector from various areas of our economy.

  • Approval of foreign direct investment in various sectors. 

Economic liberalisation in India integrated the above features and in general waived off several restrictions to become more private sector-friendly.


What were the Objectives of Liberalisation in India?

The primary objectives of initiating liberalisation in India can be summed up as follows – 

  1. To solve India’s impending balance of payment crisis.

  2. To boost the private sector’s participation in the development of India’s economy.

  3. To increase the volume of foreign direct investment in India’s businesses.

  4. To introduce competition between India’s domestic businesses.

  5. To maximise India’s economic potential by encouraging multinational and private companies to expand.

  6. To usher in globalisation for the Indian economy.

  7. To regulate export and import and promote foreign trade.

Impact of Liberalisation on Indian Economy

When it comes to discussing impacts of liberalisation, it is crucial to look at both the positive and negative ramifications on our country’s economy.


Advantages of liberalisation

  1. Free capital flow in the economy - Liberalisation has enabled free movement of capital in our country, allowing companies to access the same easily from investors. In the pre-liberalisation period, undertaking lucrative projects was a taboo due to the dearth of capital, which was rectified in 1991, initiating higher growth rates.

  2. Diversification of investor portfolio - Post-liberalisation, investors have the liberty to invest a percentage of their portfolio into a diversified asset class, thus generating more profit.

  3. Improvement of stock market performance - Relaxation of economic laws also leads to a rise in the stock market’s value, thus encouraging more trading among investors.

  4. Impact on the agricultural sector - Even though the impact of liberalisation on the agricultural sector cannot be measured accurately, in the period post-1991, there was a significant modification in cropping patterns throughout the country.


Disadvantages of liberalisation

  1. Economic destabilisation - Such a severe economic reform led to the redistribution of political and economic power that destabilised the Indian economy to quite an extent.

  2. Increased competition from MNCs -  In the period pre-liberalisation, multinational companies had no role to play in the Indian economy. However, soon after, Indian companies faced increased competition from MNCs, which threatened the existence of several smaller firms.

  3. FDI impact on banking sector -  Lifting restrictions from foreign direct investment in the banking and insurance sectors led to a downfall in the government’s stakes in both these sectors.

  4. Increase of acquisitions and merger - The increased scope of mergers and acquisitions in the post-liberalisation period has posed a threat to the employees of smaller firms. On the event of a merger with bigger companies, employees of the smaller firms had to undergo rigorous re-skilling that led to a stagnation of productivity.

Liberalisation encompasses an extensive part of India’s economic history. You can learn more about this topic by referring to the notes and solutions available in Vedantu’s website.

FAQ (Frequently Asked Questions)

1. What is Liberalisation?

Liberalisation refers to the relaxation of restrictions imposed by a government on its existing social and economic policies.

2. What are the Effects of Liberalisation on the Indian Economy?

There were several effects of liberalisation on the Indian economy. Some of them are as follows – 

  • It has opened up the Indian economy to foreign investors.

  • India’s private sector can engage in core industries, which were previously limited to the public sector.

  • Export and import have become simpler through reforms in foreign direct investment.

  • Increased employment opportunities.

3. What is Liberalisation, Privatisation and Globalisation?

Liberation – This refers to the de-licensing and deregulation of the economic activities of a country by relaxing previously imposed restrictions.

Privatisation – Privatisation refers to the transfer of ownership, control and management of public sector enterprises to the private sector.

Globalisation – Globalisation is a process driven by international trade which leads to interaction between companies, people and the governments of different nations.

4. What is the difference between Liberalisation and Privatisation?

Liberalisation means elimination of a state’s control over economic policies while privatisation refers to the transfer of ownership from the public sector to the private sector. Privatisation, in a sense, is a step towards the liberalisation of an economy.