CA Foundation Business & Commercial Knowledge Study Material Chapter 4 Government Policies for Business – Meaning of Liberalization

India faced foreign exchange crises in 1990. Government of India adopted the policy of Liberalization, Privatization and Globalization (LPG) to overcome the crisis. Government controls on business and industry have since then been dismantled gradually. The process further gained momentum in 2014. Since then rules and regulations have been simplified to increase the ease of doing business. Goods and Services Tax (GST) is the latest step in this process.

Meaning of Liberalization

Liberalization of an economy means removing or relaxing Government controls and restrictions on economic activities. It is the process of liberating the economy from unnecessary controls and restrictions on trade, industry, banking system, etc. of the country. It involves abolition of those policies, rules and regulations which impede economic development.

Liberalization in India – Trends and Issues

The process of economic liberalization in India began primarily in 1991. The economic reforms are being implemented in two stages, namely (i) First Generation Reforms, and (ii) Second Generation Reforms. The main trends of liberalization in India are as follows:

1. Infrastructural Reforms:

  • Opening up of oil exploration and petroleum to foreign investment.
  • Power sector reforms.
  • Private sector participation in infrastructure development.
  • Decontrol of steel.
  • Telecom sector reforms.

2. Industrial Reforms:

  • Delicensing of industry.
  • Public sector undertakings allowed access to capital market.
  • Simplification of licensing procedures.

3. Fiscal Reforms:

  • Reduction in customs duty.
  • Five year tax holiday to enterprises in specified sectors.
  • Downsizing of some departments.
  • Reduction in personal and corporate taxes.
  • Simplified tax administration.
  • Introduction of Value Added Tax (VAT).

4. Capital and Money Market Reforms:

  • Clearing Corporation of India set up.
  • Introduction of Negotiated Dealing System.
  • Floating rate Government bonds re-introduced.
  • Trading in index options, and stock futures introduced.

5. External Sector Reforms:

  • Removal of import restrictions.
  • Liberalised Exchange Rate Management System (LERMS)
  • Liberalisation of NRI remittances.
  • Encouraging foreign tie-ups.
  • Automatic approval of foreign investment and foreign technology agreements to specified extent.

6. Banking Sector Reforms:

  • Reduction in CRR and SLR.
  • Introduction of capital adequacy norms.
  • Setting up of Debt Recovery Tribunals.
  • Issue of guidelines for entry to new private banks.
  • Setting up of IRDA.

Impact of Liberalization of Indian Economy

Liberalization has considerably expanded the scope of private sector in India. Private enterprises can now enter most of the industries. The competitive strength and industrial efficiency have improved. Business opportunities have increased and many Indian companies have established subsidiaries and joint ventures abroad. Liberalisation has also boosted foreign investment in India. Thus, liberalisation has led to radical changes in India’s business environment.


Positive Effects

  • Increase in foreign investment
  • Decline in external debt
  • Rise in foreign exchange reserves
  • Increase in tax receipts
  • Increase in production
  • Technological advancement

Negative Effects

  • Decline in small scale sector
  • Increase in unemployment
  • Decrease in GDP rate