III ECONOMIC REFORMS SINCE | Class 11 Economics Notes

3.3 LIBERALISATION

Liberalisation refers to the removal or relaxation of government restrictions and regulations in the economy to encourage private sector participation and competition. Prior to 1991, India had a highly regulated industrial sector with licensing requirements for starting or closing firms, restrictions on production quantities, and limits on private sector participation in many industries. Price controls and reservation of certain goods for small-scale industries further constrained growth. The 1991 reforms abolished industrial licensing for most industries except a few sensitive sectors such as alcohol, cigarettes, hazardous chemicals, electronics, aerospace, and pharmaceuticals. The public sector was restricted only to atomic energy and some core railway activities. Many goods previously reserved for small-scale industries were deregulated, allowing larger firms to produce them. Price controls were largely removed, letting market forces determine prices. Financial sector reforms aimed to transform the Reserve Bank of India (RBI) from a controller to a facilitator by reducing its direct control over banks. Private and foreign banks were allowed entry, foreign investment limits in banks were raised to 74%, and banks were given freedom to open branches and raise resources with certain safeguards. Foreign Institutional Investors (FIIs) were permitted to invest in Indian financial markets. Tax reforms reduced direct taxes on individuals and corporations to encourage compliance and savings, and simplified indirect taxes. The introduction of the Goods and Services Tax (GST) in 2016 unified indirect taxes to create a common national market. Foreign exchange reforms included devaluation of the rupee to boost exports and allowing market forces to determine exchange rates. Trade and investment reforms dismantled quantitative restrictions, reduced tariffs, and removed import licensing except for sensitive items, promoting international competitiveness and efficiency.

📊 Diagram: No specific diagrams in this section.

🧪 Activity: Activities include visiting a bank to observe its functions, finding examples of banks and financial institutions, and researching foreign exchange reserves and currency exchange rates.

🔗 Connection: Leads to 'Privatisation' section which discusses the reduction of government ownership in public sector enterprises.