LIBERALIZATION

CONTENTS
 INTRODUCTION

 COMPONENTS OF LIBERALIZATION
 Industrial Sector Reforms
 Trade Sector Reforms
 Financial Sector Reforms
 Fiscal Sector Reforms

 IMPACT OF LIBERALIZATION
 INTRODUCTION

Liberalization of the economy means to free it from

direct or physical controls imposed by the
government.

Economic reforms were based on the assumption

that market forces could guide the economy in a
more effective manner than government control.
Examples of one of other undeveloped countries like
Korea, Thailand, Singapore, etc. that had achieved
rapid economic development as a result of
liberalization were kept in consideration.
Brief History
After Independence, India adhered
to socialist policies. The extensive
regulation was sarcastically dubbed
as the "License Raj"
The slow growth rate was named
the "Hindu rate of growth".
The Indian currency, the rupee,
was inconvertible and high tariffs
and import licensing prevented
foreign goods reaching the market
The central pillar of the policy was
import substitution, the belief that
India needed to rely on internal
markets for development, not
international trade
What made India to be liberalize
A Balance of Payments crisis in 1991which
pushed the country to near bankruptcy.
IMF bailout, gold was transferred to London
as collateral.
the Rupee devalued and economic reforms
were forced upon India.
India central bank had refused new credit and
foreign exchange reserves had reduced to the
point that India could barely finance three
weeks’ worth of imports
Key players in the battle
field of economy reforms
Dr. Man Mohan Singh, a professional economist and an
economic administrator, was appointed Finance Minister.
Man Mohan Singh is undoubtedly the architect of the most
far reaching reforms in India since independence in 1947.

Government economists such as Dr. Arvind Virmani took

upon themselves the task of clarifying the goals, objectives
and methods of the reform package along with:-
C. Rangarajan,
Montek Singh Ahluwalia,
Shankar Acharya and
Y. Venugopal Reddy.
Reforms taken during
liberalization

Abolition of industrial licensing and

registration
Liberalizing the MRTP act
Freedom for expansion and production
Increase in the investment limit of the small
industries
Freedom to import capital goods
Freedom to import technology
Free determination of interest rates
Impact of these reforms
Annual growth in GDP per capita has
accelerated from just 1¼ per cent in
the three decades after
Independence to 7½ per cent
currently.
A rate of growth that will double
average income in a decade
Rapid Growth in all sectors like…
communications, insurance, asset
management and information
technology.
Exports of information technology
enabled services particularly strong.

The private sector has proven to be

extremely effective and growth has
been phenomenal
 COMPONENTS
OF
LIBERALIZATION

Fiscal Sector
Trade Reforms
Liberalization
Industrial Financial
Liberalization Liberalization
 1. Industrial Liberalization

Industrial Sector was among the first sectors to be

liberalized in India in a series of measures. Industrial
licensing has been abolished except in a small number of
sectors where it has been retained on strategic
considerations.

The industrial policy reforms have substantially reduced

the industrial licensing requirements
removed restrictions on expansion
facilitated easy access to foreign technology and,
foreign direct investment.
Foreign Direct Investment in India

Foreign investment is more than 24% in the

equity capital of units manufacturing items
reserved for the small scale industries.
Foreign collaborator has a previous
venture/tie-up in India.
Acquisition of shares in an existing Indian
company in favor of a Foreign
Foreign Investment Promotion Board
(FIPB) is a competent body to consider and
recommend foreign direct investment (FDI
 2. Trade Liberalization

Trade policy allowing domestic providers (of goods and/or

services) to compete more freely in world markets and
foreign providers to compete more freely in domestic
markets.

Trade liberalization promotes growth. As the first generation

of trade reforms, consisting mainly of easing of border
restrictions to merchandize trade and liberalization of foreign
exchange markets, have been or are being implemented by
the majority of developing countries

The provision of greater access to markets, for both goods

and service providers plays an equally major role in
stimulating the access to foreign markets
 3. Financial Liberalization
Financial liberalization (FL) refers to the deregulation of domestic
financial markets and the liberalization of the capital account.

In one view, it strengthens financial development and contributes to

higher long-run growth. In another view, it induces excessive risk-
taking, increases macroeconomic volatility and leads to more
frequent crises.
FL leads to more rapid economic growth in middle-income
countries (MIC), but does not have the same effect in low-
income countries (LIC)

In LIC liberalization does not lead to higher growth because

their financial systems are not sufficiently developed so as to
permit significant increases in leverage and financial flows
Financial Liberalization and Common
Currency Area (CCA)

Facilitate migration of capital in the

long-run
Greater access to international
financial markets for financing of
balance of payments imbalances in
the short run
Risk sharing through international
portfolio diversification
Financial Market Integration in
East Asia
Causes of Foreign Dominance

Financial Globalization
Underdevelopment of Capital Markets
Lack of Harmonization of legal,
regulatory, and tax systems.
Saving-Investment Profiles
Intermediation through International
financial market.
 4. Fiscal Sector Reforms

India's fiscal sector reforms help to raise the rate of savings

and investment in India. This further helps to enhance the
productivity of public expenditures

India has established itself as one of the fastest growing

economies in the world. India is also advancing towards the
economical growth and improvement in literacy.

During 1999-2000, India's domestic savings and investment

was estimated to grow by 23% and Indian economy was
expected to grow by 6.4% although the average growth rate
declined to 6.0% in comparison to earlier year.
In the first five year plan (1951-1979), India had
attained an average annual growth rate by 3.5%.

Indian economy showed an average growth rate of

6.4%, which was 5.9% in the 80's. At the end of the
8th Five Year Plan, the annual growth rate of India
reached 6.9 percent.

During the period from 1991-92 the Indian economy

passed through a tough time. The overall economic
growth in this period declined to 1.1% and the total
fiscal deficit became 8% of the GDP.
Wide Ranging Reform Measures

Complexity and inter-linkages

Administrative structure
Rigidities of expenditure pattern
Democratic limitations
Political uncertainties
Late start of State level reforms
 Emerging Issues
Increasing cost of oil
Skills shortages
Environmental matters
New technology
security issues
Pandemic influenza
Infrastructure congestion
capacity building
These issues must be taken into account when
developing approaches
 Challenges Ahead

1. Governance
 Need for elimination of large number of Rules &
Regulations in the books
 Sharply reducing the number of implementing agencies
 Moving towards single window clearance

1. Infrastructure: A Challenge and an opportunity

Investments required upto 2012 – US$ 334 billion
 Power Generation - US$ 143 billion
 Power Transmission & Distribution – US$ 116 billion
 Roads – US$ 40 billion
 Ports – US$ 20 billion
 Railways – US$ 15 billion
Indian Foreign Exchange Reserves: a steady rise
after liberalization
F o r e ig n e x c h a n g e r e s e r v e s ( U S $ b illio n )

150
1 1 8 .3
100 7 5 .4
5 4 .1
50
1 7 .0
2 .2
0
1 9 9 0 - 9 11 9 9 5 - 9 6 2 0 0 1 - 0 22 0 0 2 - 0 32 0 0 3 - 0 4
 Foreign Investments after liberalization
T o ta l F o r e ig n In v e s tm e n t (U S $ m illio n )
U S $ m il li o n
18000 1 5 ,8 7 2
16000
14000
12000
10000 8 ,1 5 2
8000 6 ,7 8 9
5 ,1 3 8 5 ,3 8 5 5 ,6 3 9
6000
4000
2000 103
0
1 9 9 0 - 9 11 9 9 4 - 9 51 9 9 7 - 9 82 0 0 0 - 0 12 0 0 1 - 0 22 0 0 2 - 0 32 0 0 3 - 0 4
 Import duty Reductions after liberalization

R e d u c tio n in P e a k C u s to m s D u tie s o n M a n u fa c tu r e d ite m s

160
140
150
120
100
110
in per cent

80
60
40
50 42
20 3 8 .5 3 0 25 20
0
1991 M a r -9 2 M a r -9 5 M a r -9 7 M a r -0 0 M a r -0 2 M a r -0 3 w . e . f M a r c h
2004
 Rising share of India’s external trade after
liberalization
Total Exports in 2003-04 - US$ 61.8 Bn; Imports – US$
75.2 Bn.
 Assume target for exports for 2009 - US$150 Bn
S h a r e o f e x te r n a l tr a d e in GD P

3 0 .3 3 1 .6 32
35
2 6 .9 2 8 .9
30 2 3 .1 2 5 .5
25 1 8 .1
in per cent

20
15
10
5
0
19 9 1- 9 219 9 4 - 9 519 9 7 - 9 8 19 9 9 - 2 0 0 0 - 0 12 0 0 1- 0 22 0 0 2 - 0 32 0 0 3 - 0 4
2000
PHARMACEUTICALS INDUSTRY
AFTER LIBERALISATION

 India is world's 4th largest pharmaceuticals

producer with 8% share of global production.

 3 New Molecules discovered by Indian

companies - 12 more in the final stages.

 Over 100 Indian formulations have received

United States FDA approval
 BIOTECH AFTER LIBERALISATION

 More than 900 companies involved in

traditional biotech products
 Biopharma products – 35 new MNC
companies set up in past 5 years.
 R&D and commercialization of products on
agricultural biotechnology is the latest trend.
 Opportunities for fresh investment in Indian
biotech sector in next 5-7 years - US$ 1.5 – 2
billion
 AGRI & FOOD PROCESSING
AFTER LIBERALISATION

India is looking for investment in infrastructure,

packaging and marketing.

 India - One of the largest food producers of the

world

 The Indian scientific and research talent had

boomed up after liberalization because of various
MNC are investing big money in R&D.
 AUTO & AUTO COMPONENTS
AFTER LIBERALISATION

 2nd largest small car market in the world.

 Largest motorcycle manufacturer in the world.
 2nd largest scooter and tractor manufacturer in the
world.
 Many international auto majors are manufacturing
in India – Daimler Chrysler, General Motors, Toyota,
Ford, Honda, Hyundai, Volkswagen, Suzuki etc
 Most of them are also outsourcing their
components from India as a hub.
 Production of Automobiles (4
Wheelers)
after Liberalization

4 W h e e le rs (in N o s )
1400000 1 ,2 6 3
1200000
1000000
8 0 0 0 60 07 1 ,9 2 8
600000
400000
200000
 Vehicle Exports
after Liberalization

Vehicle Exports

4 Wheelers (in Nos) 2 and 3 Wheelers (in Nos

600000
332087
500000
400000
In Nos.

300000
121140
200000
146543
100000
0 38230
 STEEL Industry after Liberalization

P r o d u c t io n a n d E x p o r t o f F in is h e d S t e e l

P r o d u c t io n ( in m illioEnx tpoonr nt se s( in) ' 0 0 0 t o n n e s )

3 3 . 6 7 3 6 . 1 96 0 0 0
40
2 9 .7 5 2 05 00 0 0
30 2 3 .8 2 4 5 0 6
1 4 .3 3 1 7 .8 2
4000
20 3000
2000
10
1000
0 368 0
1 9 9 1 -9 2 1 9 9 4 -9 5 1 9 9 8 -9 9 2 0 0 0 -0 1 2 0 0 2 -0 3 2 0 0 3 -0 4
( P r o v i s io n a l)
RESEARCH & DEVELOPMENT
facilities after liberalization
More than 100 global companies outsource R&D facilities from India
 GE John F Welch Technology Centre – Company’s largest research
outfit outside the US
 GE Medical Systems – India as sole sourcing base for its portable
ultrasound scanner
 Monsanto – First non-US research facility
 Eli Lilly – largest research facility in Asia and 3rd largest in the world
 Texas Instruments – Digital Signal Processor developed in India –
controls 50% of the world market
 AVL, Austria – India as base to do R&D for the company.
IT & IT ENABLED SERVICES after
Liberalization
 Compounded annual growth rate (CAGR) exceeding 50 %
over the last five years

 IT enabled services key driver of growth. Engine for

outsourcing

 This segment poised to grow very rapidly, world-wide -

India has potential to tap 38 % of the world market.

 Revenues from ITeS (remote services) showed an annual

growth rate of 68.2 %.
 ENTERTAINMENT industry
after Liberalization

 Industry growing at 15% - Total industry valued at US$ 4.267

billion in 2003

 Expected to reach US$ 9.4 billion by 2008

 Largest producer of films and enterntainment content in the

world - More than 1000 films produced in 2003-04

 Co-production treaties being signed with UK, Canada, China

and Italy,USA (Time Warner,Universal,Goldmyn Mayor).

 Animation and gaming – one of the fastest growing sectors

 Animation and special effects for SPIDERMAN and
GLADIATOR done in India
 HEALTHCARE industry after Liberalization

 Size of the Healthcare industry - over US$22 billion

 Sector employs over 60 lakh people

 One of the fastest growing sectors in India - expected to

grow at 12-13% per annum.

 Over 80% of healthcare spending is captured by private

sector & MNC.

 Investment Potential : 750,000 extra beds over the next 10

years at a cost of approximately US$30 billion.
 OIL & GAS after liberalization
 World’s 6th largest consumer of Energy
World’s 8th largest consumer of Oil
 Demand for Petroleum Products expected to be 179 MT by 2006-
07.
 Investments of US$ 150 Billion required to meet ongoing
demand. More than US$ 6 Billion already committed for
exploration and development work over next few years
 Liberalized Govt policies on exploration, production, refining,
distribution, marketing and pipelines for private sector
participation.
 POWER after Liberalization
 By 2012
• Peak Demand (Expected) – 1,57,000 MW
• Proposed Capacity Addition – 1,00,000 MW
 Estimated Investment for National Grid
Development – US$ 20 Billion
 Up-to 100% FDI allowed in projects relating to
electricity generation, transmission and distribution
(other than atomic reactor power plants).
 AIRPORTS after liberalization

 Projection 2010: International Passenger Traffic – 26 Million;

Domestic Passenger Traffic – 40 Million; Cargo Movement – 1.8
Million tones.

 FDI up-to 74% (up-to 100% with Special Permission) allowed in

ventures for airports.

 FDI up-to 49% and NRI Investment up-to 100% permitted in

Domestic Airport Services.
Arguments in the favour of
Liberalization
Increase in rate of economic growth
Increase in competitiveness of
industrial sector
Reduction in poverty and inequality
Fall in fiscal deficit
Control on prices
Decline in deficit of BOP
Increase in Efficiency
Arguments in the Against of
Liberalization
Less importance to agriculture.
Pressure by IMF and World Bank.
More depending on Foreign Debt.
Dependence on Foreign technology.
Promotion of Consumerism.
Undue importance to Privatization.
Problem of Unemployment.
 CONCLUSION

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THANK YOU
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