92. Liberalization in India

Prior to the reforms of 1991. India’s economic policies were dominated by  welfarism, self- reliance, socialistic ideals and others.  The State pursued the policies of import substitutions, encouragement of public or state entrepreneurship and imposed regulations and controls over private enterprises and others.  The public sector suffered from lack of autonomy in policy making. It lacked  motivation and neglected  profit making. There was neither  innovation nor  reform. This  made  the public sector sick instead of  becoming the instrument of restructuring of the economy.   Because of these environmental compulsions, restructuring was felt as the crying need and was seen as inescapable.  As a result market controlled economy was seen as a solution to address the societal inequalities.

The primary objective of liberalization is claimed to be the reorientation of economies in the direction of market principles.  All the activities and projects were weighed on the basis of its economic returns.  The emphasis was laid on removal of subsidies, price supports, user pay principle, privatization and others.  These market principles have ignored the social concerns of poor and need to compensate the interests of the market players like MNCs and TNCs.  The State was also made to bear the costs of not only transition towards market but also commit its own resources towards that.  The result is that instead of  market serving the ends of the economy, the  State and economy are in turn reoriented to serve the growth of markets.

The net results of liberalization for the economies of the third world nations have serious social implications.  Liberalization has led to the growth of elitist interests, exclusion and marginalization of poor and unsustainable patterns of development.  New investments through MNCs and TNCs which are seen as creating new jobs have also displaced traditional sectors of the economy.  Liberalization has  oriented the economy  against the poor,  both directly and indirectly.  The presumption that market would become  the corrective mechanism of the social maladies through its trickle down effect simply did not work.  Let us remember  India’s widespread poverty, high unemployment and poor record in health, nutrition and literacy and ask how far the  reform process has helped. Government has initiated many programmes and policies like  poverty alleviation programmes (PAP) and social services are expanded and broadened. It is aware  that  many areas of social concerns, growth and development could not be left entirely to market mechanism.

The  Human Development Report (1996) has rightly held , that the goal of development process should be improvement of social and material conditions and enhancement of life chances of all of society’s members and income growth is but one of the means to this end.  In the absence of determined efforts by societies and their governments, the end result may be growth that is ‘jobless, ruthless, voiceless, rootless and futureless’.  Therefore, there has been no retreat of the State rather there has been a shift from one form of State intervention to another.  The State has given up its redistributive role and entered into a new partnership with the private sector through the mixed economy structure.  This has of course narrowed the social base of the State.  There is a greater need of State intervention in social sphere but the stress seems to be on empowering people meaning making them capable of competing effectively in the market.

Witnessing the indispensable intervention of the State, consensus between State and market to achieve development through various policy measures has clearly given us an understanding that ‘markets fail, but so do governments’.  To justify the interventions, it is not enough to know that the institutions are failing; it is also necessary to come up with the alternative institutional arrangements to complement and supplement the role of market and the State in order to assist both the State and market to achieve their policy concerns of economic growth and social equity.

1. Can you explain:  restructuring was felt as the crying need and was seen as inescapable.

2.What does `the statement  market controlled economy was seen as a solution to address the societal inequalities’ mean?.

3. Explain: The net results of liberalization for the economies of the third world nations have serious social implications. `The result is that instead of  market serving the ends of the economy, the  State and economy are in turn reoriented to serve the growth of markets’..

4. How far has there been a ‘ trickle down effect?’

5. Can you discuss  some of the ‘poverty alleviation programmes’

6. What is `The  Human Development Report (1996)’

7. How far do you agree with the statements that the Reforms have led to a ‘jobless, ruthless, voiceless, rootless and futureless’ situation. `The State has given up its redistributive role and entered into a new partnership with the private sector through the mixed economy structure’.

8. How far has there been a ‘retreat of the State’?

9. In what sense have the people been empowered? Can you suggest measures for real empowerment?

10.  Explain ‘markets fail, but so do governments’.

11. Liberalization  has of course narrowed the social base of the State.

12.  What ‘alternative institutional arrangements’ will promote `concerns of economic growth and social equity’?

16 thoughts on “92. Liberalization in India

  1. Dear Students.

    Discussions on this blog will be guided by Dr. Anitha Prasanna M.A., Ph.D. I find the questions highly provocative and I am sure that you will learn a lot from her.

    On your behalf I thank her again


  2. 1. Restructuring was felt as the crying need at the time of 1991 economic crisis as Public enterprises had become while elephant, there was rampant corruption in public schemes and bureaucracy, the industrial development was seriously lacking in quality and in quantity due to license-quota-permit raj, due to inefficient public expenditure we had been running large fiscal deficit and foreign exchange reserves were exhausted. There was no significant development in science, technology, manufacturing, entrepreneurship, innovation due to red-tapism and tight state control. The growth of the economy was meager and even after 40 years of independence we were lagging much behind in socio-economic and health parameters.

    4. “Trickle down effect” has been negligible as can be seen by increasing poverty, agrarian crisis and still more than 60% people of India are dependent on agriculture and allied sector which is only contributing 16-18% of the GDP. There is great gap between upper middle class and poor class. The social inequality has increased as can be seen by GINI index.

    5. “Swarn Jayanti Gram Rojgar Yojna”, National Rural Development Mission based on SHG model, Pradhan Mantri Rojgar Yojna, MGNREGA

    10. Market economy also fail to address wide questions of equality and social & economic justice as in USA and other western countries we can see large gap between normal people and rich people. The Wall Street occupy movement is example of the same which has given slogan of – “we are 99” i.e. 99% of the wealth is concentrated in 1% of the people in USA.

    Similarly complete state control as in socialist states like Russia has also failed as being not practical to implement such control over resources for equal distribution and even welfare state policies are also seen as time of the past.

    12. What we need is mechanism and regulatory bodies which can keep control on coercive competition, monopolistic capitalism and promote entrepreneurship – culture of “start-ups” so that there is environment of competition and level playing field. We need strong legislations so that poor, tribals and farmers are not exploited by private players colluding with administration. We need mechanisms to make sure that everyone is getting basic amenities – food, primary education, vocational training and health at affordable cost and free for socially deprived people so that everyone can get opportunity to break vicious cycle of poverty. Steps like Tribals rights on minerals and forest produce, strong regulation on control of GMO and seeds so that they benefit farmers, strict regulation on drug pricing, NRHM, MGNREGA, Food Security Bill, Promotion to MSME sector by liberal policies and regulations towards them, Reforms in public distribution system by adopting technology are right steps in that direct but a lot depends on honest and effective implementation.

    1. Dear Gaurvav,
      It is a good attempt to answer the questions. I would like to draw your attention to certain pertinent issues. Any developmental model borrowed from west will not become completely successful because it fails to understand and address the basic social issues of that country. Liberalisation model in India has failed in the areas of social concern because it has not considered the problems that crops up due to the wide variet of social fabric in India. It has no solution for the socially disadvantaged people to make them compete in the market economy. Hence, any dev elopmental model to become successful it has to be adapted to the indigeneous features of that particular country eg. Market socialism in China. One more point i would like to add for the alternative institutional mechanisms is State having successful partnership with Private sec tor that is PPP model and different types of privatisation like contract, partial contract, privatisation and so on. Therefore, the bottomline of the present argument is it is not State v ersus market but it is the synergy between State, Market and Civil Society.

  3. Ans 1. As it is being mentioned in the article after the independence and prior to 1991 Indian economy adhered to socialist policies.Efforts were made during 1966 and 1985 to liberalize the economy went in vein. During 1991 India faced a balance of payment crisis,India had to pledge enormous amount of gold to the Union bank of Switzerland and bank of England as instructed by IMF,we were merely left with any foreign exchange,the central bank had refused new credit.
    India was forced by IMF and world bank to introduce structural economic reforms,as per the need of the hour Mr. Manmohan Singh then finance minister had to introduce a wave of economic reforms in the Indian Economy. Though he had not implemented many of the reforms suggested by IMF and world bank.

    Ans 2. The statement reflects that during the economic crisis of 1991 the only possible solution to sustain was privatization which would provide social equality

    ans 3. 1991 reforms introduction goal was to liberalize the economy, One of the solution was FDI (foreign direct investment). It was to provide long term sustainability to the Indian economy.No doubt the FDI has conceived ample amount of Jobs, opportunities and made India’s economy as the worlds second largest growing economy after China. Our then and current finance minister Manmohan Singh follows the ideology of economist ‘Keynes’s ‘ according to whom ‘it is the rich society who deserve the cake but they take only a piece of it and they have all right to do that’. The Ideology behind the liberalization seems to serve only the elite society only. It is the economy(cake) which depends on the capitalist not the capitalist depends on economy.
    If we take the current scenario, as per the world bank around 37% of the indian population is below poverty line according the GHI 2011 report places india among the three countries out of 81 developing countries whoes poverty index has increased from 1996 to 2011.
    The big states which consist of Karnataka,Andra pradesh, Maharashtra, Madhya pradesh and Uttar pradesh constitutes more then half of the farmer suicide in the our all country as per a recent ‘The Hindu’ report.
    If take the case of literacy though our government has introduced sarwa siksha abhiyan but the number drop outs increasing day by day where are the reforms to keep a check on them.
    On the other hand Reliance group amassing enormous amount of wealth,Hero honda(now hero) group has become the prestigious automobile company within 10 years the share price has shoot up from rs190 to rs 2200,KFC and Mcdonald can be seen at every nook and the corner ,Brand has become a status now(Nike,Reebok,Adidas etc).
    The structural reforms has created a hiatus between the two face of an Indian coin(rich and poor).

  4. It is a very good attempt to answer the first three questions from economic perspective. I would suggest that reasons given from sociological perspective will give holistic angle to the answers. India has not been successful in addressing the poverty related issues, literacy, unemployment, education and so on. Therefore, arguments from socio-economic point of view will give more weightage to the answers. ( Reference of Indian journal of public administration 1999 , special issue on Liberalisation will help a lot ).

  5. 1. A> Welfare activities mainly includes subsidies.
    B> Salaries of public sector employees was raising, but most of the public sectors making no profit.
    C> The cost of education and health was raising as population the grow.

    These expenditures have reached the peak point where in government cannot bear this loss any more. Government at that movement could not escape but to look out for alternative income source through any means which has come as Liberalization.

    2. Hoping to boost economy with more private and foreign players in the market with the assumption that this economic growth will have trickle down effect on society.

    3. As markets grown the rich became richer leading to huge economic imbalance in the society. Huge competition made some to survive in the field while leaving behind many in loss.

    4. I don’t see MNCs built dams, electricity generation centres, educational institutions, agricultural research institutes and health research centres. There by poverty, low yield farming, illiteracy and poor health remains permanent.
    Regarding jobs in IT industry, automobile, telecom sector and few other sectors helped the society to trickle down economic condition. Again these jobs mainly concentrated in urban areas and for well qualified professionals.

  6. 1. Prior to 1990, the global economy was driven by two powerful blocs of left and free market economy. With the downfall of Soviet, the economic power rested with the group who preferred free market.
    The economy of our country was depended on imports, especially of Petroleum which had to be paid in dollars. The foreign reserves left were enough for two weeks only. Moreover India had to pay interest for the loans it owed to foreign institutions.
    Under such circumstances, India had to pledge for more loans. IMF and world bank in return wanted economy to be reformed to model they appreciated. Since power was with the free market, India also had to join the wagon.
    Restructuring was indeed crying need and inescapable as to sustain and develop in the new economic world order we had to align ourselves with those who had more power.

  7. 2. India had adopted a socialistic economic model. The responsiblity of production primarily rested with the government and private sector was discouraged by a number of strict norms to play active role in economy.
    It was noticed that the growth in technology and revenue was almost nill to adopt to the newer needs. The growing population, lack of ownership feeling among the state industries, the changing face of economy in the world led to the pose questions on our economic model.
    The new theory advocated that it should be left to market to determine the how economy should function. As Father of modern economics said if people pursue there own interest, overall economic good can be achieved. The liberalization was to give every individual the opportunity to pursue its own economic interest.

    The intent was to make people part of the development and keep them alien to the economy policies.

  8. 3. The characters of third world countries have developed under extraordinary conditions. These countries have been colonies of Western countries who have exploited them for centuries. These countries have high population growth rate and rampant poverty. The poor living conditions, lack of growth of technology, lack of capital and overdependce on working class have made government’s role important.
    Most of economic activities were carried out by government. It had paid salaries, subsidies, aided agricultural developments, build infrastructure. People didn’t not have much capital and hence less control on economy. The market was planned and regulated by government since it had to take care of people.
    When liberalization took place, it wanted market to reorient itself towards a equilibrium determined by market only. But in third world countries the economy was strangled by so many rules and regulations that it hardly had any capacity to reorient itself.
    The trigger had to set up by government. The government had to bring a wave of fiscal, economic and tarrif reforms to set the market free and make the inflow of funds easy.
    Before market could reorient themselves the government and economy had to transfer power to the market.

  9. 4.Although every one who wanted and had access to the benefits of the new economic policy gladly accepted that, there has been widespread debate about its performance and effects it had had on the overall socio-economic conditions.
    It is necessary to understand what the new economic policies intended to do. The primary reason of the economic change was the necessity to align with global economy. Hence to expect groundbreaking change in sectors not associated with the global economy is unfair.

    In global economy there had been considerable development in services sector. India has become the hub of service industry. The sectors of society which could take part in the this industry have seen considerable improvements. The free market encouraged people to work hard and reap the benefits. People who could have access to education or vocational training were better of as the value of labour increased in services and production sectors. India had achieved unprecedented growth rates. And overall lifestyle in urban areas had indeed improved.
    Poverty in Indian was predominant in rural areas. The new economic policy had little to do with any economic activities of rural India. Moreover, earlier the government who had facilitated the development in rural sectors through subsidies and other welfare programs was rendered with limited economic powers. The ‘inefficient’ system which could not cater to handle changing economic scenario was left with responsibility of channelising the fruits of development.
    Taking all such circumstances into account, the growing middle class is only trickle down effect this change have had.

  10. 6. The unprecedented economic growth in some nations and growing poverty and misery prompted UNDP to poses questions on sustainable human development. The 1996 report starts with the line’ human development in the end, economic growth is the mean’.
    The report argued that unregulated economic growth can be ruthless, jobless, voiceless and future less. That quality of growth was as important as the quantity.
    The report wanted a forceful marriage of economic growth and human development. It identified employment as critical for translating benefits of economic growth into the lives of people. It wanted good governance to pay attention to structure and quality of growth so that it would contribute to human development, poverty alleviation and sustainable development.
    HDR 1996 had made it clear that economic development is not sustainable without human development.

  11. 7. The observations of HDR 1996 should be seen as warning bells. Almost two decades later,now that new economic world order is in its full prime the observations are real.
    The capitalism or what is referred as free market has allowed unprecedented growth. Access to this growth model had few entry point restricted by some stringent prerequisites.
    One needed to have skill or capital to get inside the system. Capital was always a problem. What masses used to reap benefits was skill. The skill is highly valued and is compensated adequately. Another factor involved was technology. The labor required was specialized and less.
    A majority of world population was depended on traditional methods of production. A villager did not have access to cable television but he had enough to fill his stomach. His needs were limited. In traditional societies money did not have much role to play as they were mostly self sufficient.
    With free market economy, this setup had to break. This policy wanted the global market to be one.
    Government allowed this since it had failed to provide an alternative. Since the unskilled majority did not have any stake, they were never heard or involved. The minority which had access to capital and knowledge grabbed it with both hands and self interest was priotized.
    So along with private sector and government, it was the growing urban middle class to blinded themselves to growing miseries of the poor.

  12. 8. The new economic policy introduced by the government had made provision for withdrawal of involvement of government in many sectors of economy. These reforms were intended to encourage private and foreign players to actively participate in our Economy.
    Deregulation of industry by ending the license era, allowing the companies to decide how much and what to produce in almost all sectors apart from defense, atomic power and railways was one from of retreat from production activities.
    The fiscal reforms allowed similar foreign and private investment with cap in banks. The older banks did not anymore require permission from RBI to expand and implement reforms. The currency was devalued and market was allowed to decide its value.
    Import and export duties were relaxed to allow global economic growth to sip into our system. Government also reduced taxes it collected from the people.
    To sum up, government stopped to play a major role in daily economic activities.

  13. 8.
    8. With Liberalization and introduction of NEP, people were free to carry whatever economic activity they wished. Availability of the capital was made easy. Fiscal reforms and tax reforms made encouraged liquidity in market which was critical for enjoying the economic freedom.
    Allowing private and international players in banking sector and freeing the nationalized bank from the clutches of the RBI made availing loans easy. Introduction of foreign technology and license free era helped private players to grow and develop. Relaxation of import export policies made international market available to people.
    Overall people were allowed to have more money and larger market so that they could develop as they wished.

    If we study the ‘urban’ living standards, definitely there has been ground break changes. The economic empowerment of the liberalization has been used by those who could avail to education.
    There has been huge rise in employment opportunity, but unskilled laborers which is a major chunk of our labor force have been left out.
    Another important segment is that rural India has been forgotten in this growth rate. The people who still depend on traditional economics activities have been ignored and in fact, in some cases have been dis-powered.

    With liberalization, government had decided to change how the Economy of our country function. The real empowerment would have happened when if not all, a majority of people would have imparted knowledge to adapt and ride on this change.

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