Liberalisation

Liberalisation

The structural reforms in India have started in 1980’s, but it has got logically consistent shape only since 1991. The structural reform measures undertaken in association with the liberalisation process spanned a number of areas including industrial policy, financial sector regulation, exchange and trade regime, foreign investment policy, tax policy, etc. The package of structural reforms in India consists of three elements viz (a) deregulation and liberalisation of all markets, (b) increasing competitiveness in all spheres of economic activity, (c) living within the means or a strong budget constraints on all economic agents. Measures undertaken under structural reforms in India include decontrol and deregulation of industry and service sector, divestment of public sector undertakings, opening the economy for foreign investment and steps to integrate the economy into the world system.
Indian industry is unshackled from the clutches of regulation and control under structural reforms. Industrial licensing was virtually abolished except for a selected list of hazardous and environmentally sensitive industries. Separate permission needed under the MRTP houses for investment and expansion was abolished. Private sector is allowed to enter new areas previously reserved for the public sector. The most important features of the industrial reforms have been to ease the entry of foreign direct investment in several sectors of the economy. Access to foreign technology was made relatively freer. Private initiative was encouraged in the development of infrastructure such as power, roadways, telecommunications, insurance, shipping and ports and airports and civil aviation. Automatic approval of foreign investment of up to 51% of equity was allowed and foreign technology agreements permitted for 35 priority industries – including engineering, chemicals, food processing and tourism. Foreign investment was also liberalised in other sectors such as export houses, trading houses, hospitals, sick industries, hotels and other tourism related industries. The measures undertaken under liberalisation policies reflected a decisive break from the past.
The structural reforms led the economic growth to rise to over 7.3% in 1995-96, but fallen to 5.9% in 1999-2000. The investment-GDP ratio has grown during 1994-97. Inflation rate has fallen from 12% in 1990-91 to 2.9% in 1999-2000. The industrial production has risen from 9% in 1990-91 to 12.8% in 1995-96 and fallen subsequently, but recovered to some extent in 1999-2000.
The financial sector reforms are an essential adjunct to economic growth. The financial sector reforms refer to a general improvement in the functioning and efficiency of the financial system as a whole and the removal of impediments to its long-term development. By 1991, the country had erected an unprofitable, inefficient and financially unsound banking sector. The operational efficiency of banking system had been unsatisfactory in terms of low profitability, growing incidence of non-performing assets and relatively low capital base. In order to increase the efficiency and quality of service of the nationalised banks, the Narasimham Committee (1991) recommended that the banking industry should be made more competitive on entry and expansion of private banks and foreign banks.
The Narasimham Committee made separate recommendations for the reforms of (a) the banking sector, (b) the public sector financial institutions and (c) the money and capital markets.
The capital market has undergone rapid change with the introduction of reforms in the capital market. In the primary market the number of issues has gone up from 512 amounting Rs. 58 billion in 1991-92 to 1132 amounting to Rs. 1427 billion in 1996-97. In the secondary market too there is renewed optimism developed.
The tax structure was virtually transformed during the liberalisation period. Though a regime of excise tax rebate for raw materials against excises on final products, termed the Modified Valued Added Tax (MODVAT) by the authorities was began in a small scale (for a few commodities) in 1986, the process was speeded up in the 1990’s, reducing cascading significantly (Agrawal, 1995). The number and levels of excise rates were both reduced. Income tax rates were sequentially reduced through 1990’s. In 1997, the maximum marginal rate of the personal income tax was reduced to 30% and that of corporate income tax to 40%. The wealth tax on all productive assets was abolished.
The reform took the form of reduction in average tax rates across the board even while the revenue base remained narrow. As a result there was a decline in the tax revenue to GDP ratio from about 11% in 1990-91 to 10% in 1995-96, hovering around that range since then. The fall in tax revenue was due to custom and excise duties.