Liberalisation Introduction, Process, Positive and Negative Impacts

The stock market has improved hugely after liberalization which means that both domestic and foreign investment has improved many times due to liberalization. One of the most notable advantages of Liberalisation is that it allowed free movement of capital, allowing companies to access big funds easily from investors. In features of liberalisation the pre-liberalization period, undertaking costly projects was not possible for firms due to the dearth of capital. This was rectified in 1991, initiating higher growth rates for private firms and therefore the economy. Globalization means to encourage foreign private participation in India’s industrial development.

• By the end of the twentieth century trade in the European region was dominated by the regulatory framework of the European Single Market and the European Economic Area.
• In the cases of mergers with larger firms, employees of the smaller firms need to go through rigorous re-skilling which leads to productivity stagnation.
• As the financial strength of these firms is very strong, small businesses cannot compete with the MNCs even if they wish to do so.
• What privatisation did not automatically achieve was market opening and greater competition, it simply transferred state assets to the private sector (Mota 1998).
• It was during 1991 financial crisis that urged the need of  Economic reforms in India.

The economic liberalization in India impacted the economy in many ways. It was, however, a good step because it brought India to the forefront of the competition among world economies. (ii) There has been liberalisation of the regulations with respect to listing of companies on the stock exchanges. Trade liberalization can pose a threat to developing nations or economies because they are forced to compete in the same market as stronger economies or nations. This challenge can stifle established local industries or result in the failure of newly developed industries there. Trade liberalization is the removal or reduction of restrictions or barriers on the free exchange of goods between nations.

Economic Reforms in Context of Liberalisation

A new round of negotiations concentrating on agriculture, GATS, TRIPS and TRIMS was initiated through the Doha agreement in 2001. By the end of the twentieth century trade in the European region was dominated by the regulatory framework of the European Single Market and the European Economic Area. In Spain trade liberalisation transformed the economy from autarchy in the late 1950s to an open economy, integrated closely into Europe (Salmon 1995a). Liberalisation was initiated in 1959 with the ‘Stabilisation Plan’ agreed with the World Bank and the Organisation for European Economic Cooperation (later renamed the Organisation for Economic Cooperation and Development, OECD). By the mid-1990s Spanish trade policy was fully integrated into the Common Trade Policy of the EU, with free trade between Member States and external trade governed by the Common External Tariff and the various agreements made between the EU and third parties. If services were added, the proportion rose to over sixty per cent (Salmon 2001c and Sanz Serrano 2002).

Critics of trade liberalization claim that the policy can cost jobs because cheaper goods will flood the nation’s domestic market. Critics also suggest that the goods can be of inferior quality and less safe than competing domestic products that may have undergone more rigorous safety and quality checks. Earlier maximum limit of foreign equity participation was 40% for industrial units open to foreign investment.

What Is Trade Liberalization?

However, by Autumn 2002 the government was giving ground on the reforms, suggesting either that liberalisation in this market was testing its limits for the moment. Liberalisation is a general term referring to making laws, opinions or institutions less rigid. Usually, it means eliminating or easing certain government restrictions or regulations.

• The IMF had asked India to adopt the policy of LPG – Liberalisation, Globalisation, and Privatisation.
• The government has removed the industrial licensing requirement from all industries except for a short list of 18 industries; which number has been now reduced to only six industries.
• However, liberalisation comes with both its advantages and disadvantages.
• The term came from the word ‘laissez-faire’ which means – ‘free to do’.

Strict government laws also lead to more corruption and unnecessary delays and inefficiencies, due to which economic growth started to fall sharply. The Indian economy’s global transformation began with the 1991 economic reforms, which were triggered by the balance of payment crisis. In 1991, the country suffered a major balance of payment crisis and requested help from global financial institutions like the International Monetary Fund. However, the IMF put several conditions before providing India with financial assistance.

Moreover, as public sectors need to compete with private sectors, it creates a transparent atmosphere for all sectors participating in the economy. Public sector has shown a very low rate of return on capital invested. Most of public sector enterprises have become a burden rather than being an asset to the nation.

Economic Destabilization

Countries with advanced education systems tend to adapt rapidly to a free-trade economy because they have a labor market that can adjust to changing demands and production facilities that can shift their focus to more in-demand goods. Countries with lower educational standards may struggle to adapt to a changing economic environment. Liberalisation is the process or means of eliminating absolute government control over economic activity. It was during 1991 financial crisis that urged the need of  Economic reforms in India. Relaxation of economic laws means there will be a rise in the stock market and stock value. (iii) Those which are chronically sick and incur heavy losses must be closed down or their ownership passed on to the private sector.

Before 1991, technology agreements by an Indian company with foreign parties for import of technology required advance clearance from the government. However, the Government realized that in the fast changing world of technology, the relationship between suppliers and users of technology must be a continuous one. (iii) 100% foreign equity is permitted in cases of mining; projects for electricity generation, transmission and distribution; ports; harbours; oil refining; all manufacturing activities in SEZs (Special Economic Zones) and some activities in telecom sector. There has been an increased number of mergers and acquisitions in the post-liberalization period. In the cases of mergers with larger firms, employees of the smaller firms need to go through rigorous re-skilling which leads to productivity stagnation. The allowance of Multinational Companies (MNCs) to operate in India threatened the existence of several smaller firms.

What is Liberalization?

PrivatisationPrivatisation was the principle process whereby the state withdrew from direct participation in the economy. For governments seeking a more market-centred ethos in society it brought the political benefit of giving more people a direct financial stake in the economy. In Europe, privatisation as a deliberate economic policy began in Britain in the early 1980s (Wright 1994; Parker 1998). By the early 1980s the sector had swollen to its largest historical size. In 1986 there were 180 companies in which the state had a direct majority holding plus hundreds of subsidiary companies and minority holdings (Fernández Rodríguez 1989).

However, liberalisation comes with both its advantages and disadvantages. Liberalization in India has a more positive impact than a detrimental one. The reputed Indian businesses have flourished in the post-liberalization period indicating that liberalization has impacted the Indian businesses positively. Liberalization helped many Indian companies that were previously resource-deprived gain momentum with the aid of foreign investments. So, in general, liberalization has impacted India more positively.

It stresses the induction of private ownership, management and control in the public sector. There was a significant reduction in the role of public sector enterprises for economic growth. BIFR (Board on Industrial and Financial Reconstruction) was established for revival of loss making and sick enterprises.

Disinvestment of the public sector took place at a significant rate. Disinvestment means the process of sale of public sector enterprises to the private sector. Liberalization means to liberate industry from the shackles of the licensing system.

It is sum total of transactions of capital account and current account. The term came from the word ‘laissez-faire’ which means – ‘free to do’. The founder of Economy Adam Smith in his excerpts coined the concept of market based / capitalist economy. To understand the concept, two economies – America and China can be quoted. USA being on South pole and China on North Pole, any movement from North to South is called liberalization. Exactly opposite to it, moving from South to North is called illiberalization.

Although liberalization and agricultural outputs cannot be linked directly, there has been notable growth in both patterns and production in the agricultural sector post-liberalization in India. Liberalization has the potential to improve economies when it is appropriately applied to the economy. In the case of India, the effects of liberalization are yet to be seen completely as the process is still in progress.

All the modern  economies of the world would be moving from north to south towards the process of Liberalization. Liberalization has not been that sweet for government and small businesses. Public sectors and small businesses have seen a downfall due to the entry of powerful MNCs into the Indian market. As the financial strength of these firms is very strong, small businesses cannot compete with the MNCs even if they wish to do so.

Economic relations were everywhere governed by social connections and obscure agreements rather than by contract and transparency. Liberalisation, which had been making inroads into this environment since the 1960s, mainly in terms of international trade, quickened during the 1980s and stepped up a gear in the 1990s. But with the election to office of the People’s Party (Partido Popular, PP), Spain emerged as an advocate of liberalisation, demonstrating its credentials through a series of policy initiatives (Ariño Ortiz 2000). In the first six months of 2002, as holder of the Presidency of the European Council, it was given a platform on which to display its leadership in this area. The following discussion looks at the process of liberalisation, the particular character, tensions and contradictions of liberalisation within Spain and the contribution of the Spanish Presidency.

These MNCs were very strong in terms of funds which could not be matched by the smaller firms in India. Therefore, the smaller businesses had to succumb due to the power of capital of MNCs. A sudden economic reform led to the redistribution of political and economic power. This created an imbalance in socio-political factors that destabilized the Indian economy to quite a large extent.

These barriers include tariffs, such as duties and surcharges, and nontariff barriers, such as licensing rules and quotas. Economists often view the easing or eradication of these restrictions as steps to promote free trade. India’s liberalization policies were enacted in response to the balance of payment situation of the country that took the country on the verge of bankruptcy in 1985. To get rid of economic malfunctions and insufficiency of funds to meet the requirements, economic liberalization policies were announced in 1991. The Government will provide automatic approval for technology agreements related to high priority industries within specified parameters. Indian companies will be free to negotiate the terms of technology transfer with their foreign counterparts, according to their own commercial judgement.