Liberalisation means freeing Indian economy from excessive government controls, licensing system, restrictions and red tapism to promote ease of doing business. It is the first pillar of LPG reforms under New Industrial Policy, 1991. Its main aim is to encourage private sector, competition, efficiency and entrepreneurship by removing barriers.
Under it, industrial licensing was abolished except for few hazardous sectors, MRTP Act, 1969 restrictions removed and import procedures simplified. It allows market forces to decide production. Regulated by amendment in Industries (Development and Regulation) Act, 1951 – Sec 11, Companies Act, 2013, Competition Act, 2002 and replacement of FERA, 1973 with liberal FEMA, 1999 – Sec 3 for economic growth and global integration.
Characteristics of Liberalisation:
1. Removal of Industrial Licensing System
Main characteristic is abolition of industrial licensing and registration system except for few hazardous and strategic industries. Earlier, licence was needed under Industries (Development and Regulation) Act, 1951 – Sec 11 for starting business. Under New Industrial Policy, 1991, this control was removed to promote ease of doing business, entrepreneurship and competition. It reduced red tapism and government interference and encouraged private sector growth, efficiency and expansion of industries as per market needs.
2. Freedom to Private Sector and Privatization
Liberalisation gave more freedom and scope to private sector by reducing role of public sector. Many industries reserved for public sector were opened for private participation. It promoted disinvestment and privatization of PSUs for better productivity and profit motive. Supported by Companies Act, 2013 – Sec 2(45) [Government Company], Sec 2(68) [Private Company] and Competition Act, 2002 – Sec 3 & 4 to prevent monopoly and ensure fair competition and capital formation.
3. Liberal Foreign Investment and Technology Policy
It allows free flow of FDI, foreign technology, MNCs and collaborations. Earlier FERA, 1973 had strict controls, now replaced by liberal FEMA, 1999 – Sec 6. Foreign equity up to 51% to 100% allowed in many sectors through automatic route. It encourages technology transfer, modernization and global competitiveness. Regulated by RBI Act, 1934, FDI Policy and Foreign Trade Policy for economic integration and self-reliance with quality.
4. Reduction in Trade and Import Restrictions
Liberalisation removed quantitative restrictions on imports and reduced custom duties and tariffs to promote free trade. It made import of capital goods and raw material easier and cheaper. Export promotion was encouraged. This increased competition and improved quality and reduced cost for consumers. Governed by Customs Act, 1962 – Sec 12, Foreign Trade (Development & Regulation) Act, 1992 – Sec 5, SEZ Act, 2005 – Sec 3 and FEMA, 1999 – Sec 7 for globalization.
5. Market Oriented Economy and Competition
Under liberalisation, economic decisions like what to produce, how to produce and price determination are left to market forces of demand and supply instead of government controls. It promotes competition, efficiency and consumer welfare. Monopoly of public sector reduced and competitive market created. Regulated by Competition Act, 2002 – Sec 18 [Duties of Commission], Consumer Protection Act, 2019 – Sec 2(9) and Constitution – Art 19(1)(g) [Freedom of trade] for sustainable growth.
Socio-economic Implications of Liberalisation:
1. Increase in Economic Growth and Efficiency
Liberalisation promoted competition, productivity and efficiency by removing licensing system under Industries (Development and Regulation) Act, 1951 – Sec 11. Market forces of demand and supply led to better utilization of resources, capital formation and higher GDP growth. Private sector expanded, entrepreneurship increased and industries became globally competitive. Regulated by Competition Act, 2002 – Sec 18, Companies Act, 2013 and FEMA, 1999 – Sec 6. It ensured technological upgradation and quality improvement for sustainable development.
2. Growth of Foreign Investment and MNCs
Liberalisation attracted huge FDI, foreign technology and MNCs after replacement of FERA, 1973 with liberal FEMA, 1999. Foreign equity up to 100% allowed through automatic route under FDI Policy and RBI Act, 1934. It brought modern technology, employment and export promotion. However, dominance of MNCs increased, affecting Swadeshi industries. Governed by FEMA, 1999 – Sec 6, SEZ Act, 2005 – Sec 3 and Foreign Trade Policy for global integration.
3. Adverse Effect on Small Scale Industries
Liberalisation created unequal competition for Small Scale Industries [SSI] due to entry of large industries and cheap imported goods. Many MSME units closed, leading to unemployment and regional imbalance. SSI could not compete in capital and technology. Though protected under MSME Act, 2006 – Sec 7, Industrial Disputes Act, 1947 – Sec 25N and Constitution – Art 39(b), the policy of free trade under Customs Act, 1962 – Sec 12 harmed self-reliance and balanced growth.
4. Increase in Unemployment and Income Inequality
Due to capital intensive technology, automation and disinvestment of public sector, demand for labour reduced and retrenchment increased. It created job insecurity, labour unrest and widened gap between rich and poor. Economic inequality and concentration of wealth increased. Protected under Constitution – Art 41 [Right to work], Art 38 & 39(c), Minimum Wages Act, 1948 – Sec 3 and Social Security Code, 2020 – Sec 2(78), but inclusive growth was affected.
5. Impact on Consumer Welfare and Quality
Liberalisation benefited consumers through improved quality, variety of goods, lower prices and consumer choice due to competition among domestic and foreign companies. Monopoly of public sector ended. Consumer rights are protected under Consumer Protection Act, 2019 – Sec 2(9), Competition Act, 2002 – Sec 3 & 4 [Prevents unfair practices], Essential Commodities Act, 1955 – Sec 3 and Bureau of Indian Standards Act, 2016, ensuring consumer welfare and fair trade.
6. Change in Social Structure and Culture
Liberalisation brought western culture, change in lifestyle, consumption pattern and increase in materialism. Traditional values, joint family system and Swadeshi concept were affected. Growth of urbanization, migration and consumerism created social disparity. Though Constitution – Art 19(1)(g) gives freedom of trade, excessive globalization under Foreign Trade (Development & Regulation) Act, 1992 – Sec 5 and FEMA, 1999 led to cultural erosion and influence of MNCs on social norms.
7. Threat to Economic Sovereignty and Balanced Development
Excessive dependence on FDI, foreign technology and MNCs created threat to economic sovereignty and self-reliance. Profits repatriated by foreign companies affected Balance of Payments. Balanced regional development suffered as investment concentrated in developed areas. Regulated by RBI Act, 1934, FEMA, 1999 – Sec 7, Industries Act, 1951 and Constitution – Art 39(b), but policy made economy vulnerable to global fluctuations and reduced State control, against objective of Industrial Policy Resolution, 1956.
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