Essay on Policy of Economic Liberalization in India. To discuss economic liberalization in our country, we must understand what affects our economy at the most and why was liberalization necessary at all.
The main factor today, which has always been our concern as a developing country is our foreign exchange reserves. This depends on the balance of payments position. Reserve Bank of India clarifies the exact meaning, “Balance of Payments of a country is a systematic record of all economic transactions between the ‘residents’ of a country and the rest of the world. It presents a classified record of all receipts on account of goods exported, services rendered and capital received by ‘residents’ and payments made by them on account of goods imported and services rendered by and from the capital transferred to ‘non-residents’ or ‘foreigners’.”
The explanation although confusing simply means, in ‘layman’ terms, the account of transactions received in foreign exchange as export earnings and that of transactions paid for in foreign exchange as import payment. This has mostly been a factor of our export earnings being lower than import payments.
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A study of the situation during the post-independence period can give us the true picture. This is reflected in balances during each five year plan.
The first Five Year plan saw an adverse balance of Rs. 42 crores which was quite satisfactory. However the Second Plan saw this spiraling to Rs. 2330 crores with aid and donation reduced by Rs. 614 crores. This was mostly due to compulsory imports for heavy industries, failure to boost exports and failure of the agricultural sector to meet the food requirement. The Third Plan saw an equally negative situation and factors remained the same. It was partially made up with loans and aids from World Bank, IMF and USA Plans PL 480 and 665.the Fourth Five Year Plan saw the drive for self reliance and the period 1969 to 1974 saw the restrictions of imports which were substituted by indigenous accommodation and export promotion to match imports. The agricultural side was also given a boost and managed to achieve self-sufficiency. Further, the receipt of about Rs. 1700 crores from the PL 480 and other rupees funds made it possible to have a surplus in balance of payments, although a token one, of about Rs. 100 crores.
The Fifth Plan was a golden period regarding balance of payment position. The period 1975 to 1979 saw the value of exports improving under the impact of promotional measures. Although it was negated to some extent by the mounting prices of oil imports. However, stringent measures to stop smuggling and illegal payment transactions, relative stability in the external value of rupee, earning from tourists and technical consultancy and increased remittances from Indians living abroad saw considerable increase in invisible receipt. Thus India was able to achieve a huge surplus of about Rs. 3000 crores in balance of payments. This was the only period when we saw a positive trend in this sector.
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The Sixth and Seventh Plans period which stood for 1980 to 1990 saw all the positive factors wiped out due to a tremendous growth in rate of imports. This was to the tune of Rs. 50000 crores and was mostly met by borrowings from the International Monetary fund under the extended facility arrangements. This highly adverse balance of payments position was the cause for serious concern.
The situation has been constantly deteriorating since then, trade deficits have been mounting alarmingly and even invisibles have turned negative. The trade deficit of Rs. 17000 crores approximately of 1990-91 had shot up to Rs. 53000 crores by 1996-97 which is more than three times or 300% increase.
It is obvious from these details that except for two exceptional years when there was a trade surplus, our economy has always seen trade deficits. The Fourth five Year plan has been the only period where some serious and successful efforts had been made to balance import with exports. Since then the situation has constantly worsened.
The announcement of the export-import policy on 12th April 1985 has seen the emergence of liberalization and several items were permitted to be imported without license. Computer systems and peripherals valued below Rs. 16 lakhs automatically qualified for imports by all persons. Import of 53 items was decanalized and 67 items were transferred from OGL (Open General License) to Automatic Permissible List.
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A new scheme, the export-import passbook was introduced allowing dutyfree access to exporters for imported inputs necessary for production and more than 200 items were placed on Open General License. These have all been planned to ensure efficient, smooth and quality production without delay or hindrance. This was necessary for boosting exports and making competitive bids. Another factor was the need for technological up-gradation. These policies were helpful only to a certain extent negated by indiscriminate liberalization of exports.
Trading houses have unscrupulously taken advantage of this liberalization and spent precious foreign exchange on needless items like video cassettes; color TVs, polystyrene films even billiard balls and tables. These were not important items and mostly for elitist consumption. Electronic items available, in surplus, indigenously from units like BHEL and resources from MHTC were also imported. Powerful multi-national lobbies exerted pressure and their style of persuasion to permit imports overriding objections from the department of electronics and national entrepreneurs.
The yawning trade deficit as a result of such indiscriminate imports made the government sit up and take notice. The flow was accepted of opening the import window rather too wide and the policy of MODVAT introduced to restrict unnecessary imports based on frivolous grounds. But pilferation continued in the name of technical up-gradation, secondhand and obsolete machinery as well as technology outdated in developed countries were forced on us. This technological dumping by foreign groups in collusion with big Indian business houses have led to the growth of foreign dominance in the economy. This has served as a dampner to indigenous production and instead of importing what is available in abundance; qualitatively restrictions should have been set. One of the main sources of pressurization for indiscriminate liberalization was the World Bank and International Monetary Fund.
The main idea behind liberalization of imports for the electronic sector and automotive industry was by concessional import licensing and custom duties, to enable the sector to upgrade, modernize and reduce costing. This benefit was to be passed on to the consumer overall, the benefit of export increase was offset by the percentage increase in import. The trade deficit has continued to grow because of the depreciating value of the rupee. The value stood at around Rs. 13 per dollar around 1987 going up steadily to Rs. 18 in 1989, Rs. 32 in 1993 and now in 2003 at Rs. 52 per dollar. This shows a depreciation of nearly 400 percent in 15 years. Naturally our imports have become more expansive and the payments in foreign exchange for exports have not been able to offset the payment of imports.
A developing economy like ours has been armtwisted by World Bank and IMF into signing the WTO Pact. The restrictions placed earlier to save our industry have been lifted. India is going to become the dumping ground by developed countries. Quantam restrictions have been lifted due to WTO pressures and we are headed for situation faced by African, Latin American and East Asian countries. The slogan has been changed from ‘Be Indian, Buy Indian’ to ‘Be Indian, Buy Foreign.’