Liberalisation

Before the 1991 reforms, the Indian economy was tied down by a dense web of rules, laws and permissions that were originally meant to regulate economic activity but had, over time, become serious obstacles to growth and development. Liberalisation was the policy response to this problem. In simple terms, it means loosening or removing government controls and restrictions so that businesses, banks, traders and investors are freer to take their own decisions, and so that different sectors of the economy can be opened up to competition and market forces.

Liberalisation was not entirely new in 1991. A few limited liberalising steps had already been taken during the 1980s in areas such as industrial licensing, the export-import policy, technology upgradation, fiscal policy and foreign investment. However, the reform measures launched in and after 1991 were far more wide-ranging and systematic. They touched almost every important part of the economy at once, which is why 1991 is treated as the real turning point.

The reforms concentrated on five broad areas, each of which the chapter examines in turn:

• Deregulation of the industrial sector — abolishing most industrial licensing, opening industries earlier closed to the private sector, ending the reservation of many goods for small-scale units, and letting the market fix prices instead of the government.
• Financial sector reforms — reducing the Reserve Bank of India's role from a strict regulator to a facilitator, allowing new private and foreign banks, raising the limit on foreign investment in banks, and permitting foreign institutional investors into Indian financial markets.
• Tax reforms — lowering rates on personal income and company profits to discourage tax evasion and encourage savings, reforming indirect taxes to build a single national market (leading eventually to the Goods and Services Tax), and simplifying tax procedures.
• Foreign exchange reforms — devaluing the rupee in 1991 to overcome the balance of payments crisis and allowing the value of the rupee to be determined largely by market demand and supply rather than by government fixing. …