What is Liberalisation? Meaning, Objectives, Advantages & More

Liberalisation involves the removal of state control over economic activities, allowing for greater freedom and flexibility within the market. This process grants businesses increased autonomy in their decision-making processes and minimises government intervention. By reducing regulatory barriers, liberalisation enables enterprises to operate more independently, developing a more dynamic and competitive economic environment. Read this article to understand about liberalisation easily.

History of Liberalisation

At the time when the world economy started growing, trade among various nations became strong, and this increased the wealth as well as talent potentiality among the citizens. In this scenario, sitting back for the Indians would be absurd thus, we too started to implement liberalisation in our economy. 

However after failed attempts in 1966 and 1980, finally in 1991, the liberalisation process bloomed in India. Liberalisation is one of the important facets of the development of a country. This must be implemented by every nation’s government at any cost. So, what is liberalisation? More importantly, does this liberalisation have any impact on our Indian economy? In this context, we are going to understand the same.

The Term Liberalisation – Introduction and Explanation

Liberalisation means lifting restrictions on certain private activities, usually related to the economic system. It often refers to a government easing previously imposed restrictions on economic or social policies.

An Introduction to the Concept of Economic Liberalisation

Economic liberalisation involves removing unnecessary restrictions and controls from a country’s economy to allow businesses and enterprises to contribute more effectively. However, it is important to understand that liberalisation does not imply a completely uncontrolled economy.

Economic Liberalisation in India

The Indian economy was liberalised in the year 1991. In India, the concept of economic liberalisation was introduced to attain several objectives – industrialisation, expansion in the role of private and foreign investment, and introducing a free market system. Restrictions were relaxed for private companies to enter several core industries, which were previously reserved for the public sector.

Why was Liberalisation initiated in India?

India's economic liberalisation was triggered by a balance of payments crisis in 1985. This crisis left the country unable to pay for essential imports or meet its debt obligations, pushing it to the verge of bankruptcy.

To address this situation, Dr. Manmohan Singh, who was the finance minister at the time, introduced economic liberalisation measures.

Key Features of Liberalisation in India

Here are some of the main features of the liberalisation reforms introduced in 1991:

• Abolition of License Raj: The License or Permit Raj was a complex system of regulations, licenses, and restrictions imposed on businesses between 1947 and 1990. It was eliminated to simplify the process of starting and running businesses.

• Reduction of Interest Rates and Tariffs: Interest rates and tariffs were reduced to encourage economic growth and trade.

• Limiting Public Sector Monopoly: The monopoly of the public sector in various areas of the economy was curtailed.

• Approval of Foreign Direct Investment (FDI): Foreign direct investment was allowed in multiple sectors to encourage international participation in the economy.

Economic liberalisation incorporated these features and, overall, reduced several restrictions to make the economy more favorable for the private sector.

What were the Objectives of Liberalisation in India?

The primary objectives of initiating liberalisation in India can be summed up as follows – 

1. To solve India’s impending balance of payment crisis.

2. To boost the private sector’s participation in the development of India’s economy.

3. To increase the volume of foreign direct investment in India’s businesses.

4. To introduce competition between India’s domestic businesses.

5. To maximise India’s economic potential by encouraging multinational and private companies to expand.

6. To usher in globalisation for the Indian economy.

7. To regulate exports and imports and promote foreign trade.

8. Impact of Liberalisation on Indian Economy

Liberalisation in India – Is it Double-Edged? 

When it comes to discussing the impacts of liberalisation, it is crucial to look at both the positive and negative ramifications on our country’s economy.

Advantages:

1. Free Capital Flow in The Economy - Liberalisation has enabled free movement of capital in our country, allowing companies to access the same easily from investors. In the pre-liberalisation period, undertaking lucrative projects was taboo due to the dearth of capital, which was rectified in 1991, initiating higher growth rates.

2. Diversification of Investor Portfolio - post-liberalisation, investors have the liberty to invest a percentage of their portfolio into a diversified asset class, thus generating more profit.

3. Improvement of Stock Market Performance - Relaxation of economic laws also leads to a rise in the stock market’s value, thus encouraging more trading among investors.

4. Impact on The Agricultural Sector - Even though the impact of liberalisation on the agricultural sector cannot be measured accurately, in the period post-1991, there was a significant modification in cropping patterns throughout the country.

Disadvantages:

1. Economic Destabilisation - Such a severe economic reform led to the redistribution of political and economic power that destabilised the Indian economy to quite an extent.

2. Increased Competition from MNCs - In the period of pre-liberalisation, multinational companies had no role to play in the Indian economy. However, soon after, Indian companies faced increased competition from MNCs, which threatened the existence of several smaller firms.

3. FDI impact on The Banking Sector - Lifting restrictions from foreign direct investment in the banking and insurance sectors led to a downfall in the government’s stakes in both these sectors.

4. Increase of Acquisitions and Mergers - The increased scope of mergers and acquisitions in the post-liberalisation period has posed a threat to the employees of smaller firms. In the event of a merger with bigger companies, employees of the smaller firms had to undergo rigorous re-skilling that led to a stagnation of productivity.

Did You know?

• Ministers like – Atal Bihari Vajpayee, Manmohan Singh, P.V. Narasimha Rao initiated liberalisation in India. 

• In India, after the implementation of liberalisation following improvements were noticed:

1. All restrictive barriers to International Investing were removed. This permitted the Indian companies to bank huge funds from foreign investors. 

2. There was an unrestricted flow of capital in India and among other big nations. This allowed the country inefficient allocation of resources and also to gain a competitive advantage.

3. The Indian stock market has appreciated ever since liberalisation.

4. Political risks got reduced.

5. The investors diversified. 

Liberalisation encompasses an extensive part of India’s economic history. You can learn more about this topic by referring to the notes and solutions available on Vedantu’s website.