Liberalization: Meaning, Objective, Reforms, New Economic Policy 1991


Liberalization refers to the relaxation of the previous government restriction usually in the area of economic policies and business activities. Here we have shared information about Liberalization such as the Liberalization definition and its Reforms in NEP 1991.

► What is Liberalization?

Liberalization was introduced in the New Economic policy of 1991. Liberalization is a process whereby a state lists restrictions on some private individual activities are removed.

Liberalization occurs when something which used to be banned is no longer banned, or when government regulators are relaxed.

When the government of the nation liberalized the trade, it means it has removed the tariff, subsidies, and other restrictions on the flow of goods, subsidies, and other restrictions on the flow of goods & services between the countries.

Definition of Liberalization

Liberalization can be defined as the removal of unnecessary restrictions on the private sector and giving control to the private sector regarding production, expansions.

In other words, Liberalization is the process of Removal of restrictions on entry and growth in the private sector.

Meaning of Liberalization

  • Liberalization simply means a Reduction in Restrictions.
  • Before liberalization, there was a license for everything no one can do whatever they want. Liberalization removed the license Raj system.
  • All the restrictions were reduced over trade by liberalization in the New Economic Policy of 1991.

► Objectives of Liberalization

  • To raise domestic competitiveness of industrial production.
  • To raise foreign direct investment and new technology.
  • To reduce the fiscal deficit and debt burden of the country.
  • To create opportunities to export to developed countries and to import capital goods and machinery from them.
  • To integrate the Indian economy with the world economy
  • To remove License System & other weaknesses
  • To reduce the inequality of income and wealth.

► 5 Reforms In Liberalization

There are 5 Reforms In Liberalization. For boosting the economy under liberalization reforms were made are as follows;

  1. Financial Sector Reforms
  2. Foreign Exchange Reforms
  3. Industrial Sector Reforms
  4. Tax Reforms
  5. Trade And Investment Policy Reforms

◉ 1. Financial Sector Reforms

  • Change in the role of RBI
  • Origin of private banks
  • Increase in the limit of Foreign Investment
  • Ease in the expansion process

◉ 2. Foreign Exchange Reforms

  • Devaluation of Rupee
  • Market determination of exchange rate

◉ 3. Industrial Sector Reforms

  • Reduction in industrial licensing
  • Decrease in the role of the public sector
  • Dereservation of Small-Scale Industries

◉ 4. Tax Reforms

  • Reduction to taxes
  • Simplification of process

◉ 5. Trade And Investment Policy Reforms

  • The removal of quantitative restrictions
  • Removal of export duties
  • Reduction in import duties
  • Relaxation in import licensing

Must Read :What is Sustainable Development?

✔ 1. Financial Sector Reforms in Liberalization

It was all about the money and how financial freedom has been given to the economy by which business will improve more.

(a) Change in the role of RBI

Firstly the role of the RBI was to regulate all the rules and regulations that were made by the RBI and now its role is a facilitator. The RBI was told that they have to provide facilities to the bank instead of controlling them. RBI will be the supreme, approx but their role is not to regulate the banks, it helps the banks to increase in trade in their work.

(b) Origin of private banks

Now private banks were also there whether Indian banks or Foreign banks like ICICI banks. It was the biggest step after liberalization. It has changed everything beneficial for all.

(c) Increase in the limit of foreign investment

In the financial sector, the foreign investment limit was 51% and that from outside the mutual funds and all limit was 51%. Firstly, that was very low because they were promoting domestic business. In this, there were no investors, no growth so they have to increase the limit from outside.

(d) Ease in the Expansion process

If anyone wants to increase the branches of banks and if anyone wants to expand financial institutions the expansion was done easily.

✔ 2. Foreign Exchange Reforms in Liberalization

These are related to foreign exchange the money which comes from outside Import and Export.

(a) Devaluation of Rupee

Devaluation means when the country or government devalue its currency to raise the country’s export. There was a lack of foreign exchange so we have to devalue our rupee to increase our foreign exchange.

(b) Market determination of exchange rate

The exchange rate was given freedom that it can be set by market forces it will not be set by the government. In front of the rate in equilibrium will be known as the market exchange rate.

✔ 3. Industrial Sector Reforms in Liberalization

(a) Reduction In Industrial Licensing

The license which was given by the government for expansion, business setup was reduced to the very extent. It played an important role in an increasing number of industries. We can see many numbers of private industries because of this only because it was not that much tough to take a license.

(b) Decrease in the role of the public sector

The role which was played by the government was reduced. In IPR the government has secured 17 industries that will play only a government role but it was reduced to 8 from 17 and then that 8 was reduced to 3 industries. Now only 3 industries were under government and other was liberalized, other people can here come and work

And these 3 industries were:

  • Defense
  • Atomic Energy
  • Railways

(c) Dereservation Of Small-Scale Industries

The reservation for small-scale industries was also reduced and the investment limits were increased. There was freedom for Small- scale industries and everything was open.

✔ 4. Tax Reforms in Liberalization

Here we will talk about taxation policy.

(a) Reduction in taxes

In this, the tax has to be paid less because the government knows there will be more theft if the rate of tax will be high. It was done because the people will pay tax on time. The tax was not removed it was moderated that everyone will pay the tax.

(b) Simplification of Process

With the reduction of taxes simplification of the process was also done. The structure of paying tax was very complicated now it was changed simplified. Many changes were done to Import.

✔ 5. Trade and Investment Policy Reforms in Liberalization

(a) The removal of quantitative restrictions

The restriction which was on quantity for imports was removed. The restriction was removed now they can import as much as they want.

(b) Removal of export duties

For promoting export there was a need for the removal of export duties. That we can do more exports and more foreign exchange will come.

(c) Reduction in import duties

There was a reduction in import duties also because we can get a good quality of capital goods, we can import machines, can do the production. India is a labor-oriented country we have a huge amount of labor. What we will do with those labor when we don’t have the technology, resources. Due to this, the freedom was given that from outside we can export machinery.

(d) Relaxation in import licensing

The license which was required for import that process was also simplified by many things the license was removed but where ever there was licensing it was very simplified.