(Sample Material) IAS Mains GS Online Coaching : Paper 3 - "Effect of Liberalization on The Economy"

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Subject: General Studies (Paper 3 - Technology, Economic Development, Bio diversity, Environment, Security and Disaster Management)

Topic: Effect of Liberalization on The Economy




India was faced with a severe balance of payment crisis in June 1991. Basically, in 1990 and 1991, there were several inter-connected events which were growing unfavorable for the Indian economy.

(i) Due to the Gulf War (1990-91), the higher oil prices were fastly depleting India’s foreign reserves.
(ii) Sharp decline in the private remittances from the overseas Indian workers in the wake of the Gulf War, specially from the Gulf region,
(iii) Inflation peaking at nearly 17 per cent.-
(iv) The gross fiscal deficit of the central government reaching 8.4 per cent of the GDP.
(v) By the month of June 1991, India’s foreign exchange had declined to just two weeks of import coverage.

India’s near miss with a serious balance of payments crisis was the proximate cause that started India’s market liberal isation measures in 1991 followed by a gradualist approach". As the reforms were induced by the crisis of the BoP, the initial phase focused on macroeconomic stabilization while the reforms of industrial policy, trade and exchange rate policies, foreign investment policy, financial and tax reforms as well as public sector reforms did also follow soon. The financial support India received from the IMF to fight out the BoP crisis of 1990-91 were having a tag of conditions to be fulfilled by India. These IMF conditionalities required the Indi an economy to go fo r a structural re-adjustment. As the nature and scope of economy were molded by the various industrial policies India did follow till date, any desired change in the economic structure had to be induced with the help of another industrial policy. The new industrial policy, announced by the Government on July 23, 1991 had initiated a bigger process of economic reforms in the country, seriously motivated towards the structural readjustment naturally obliged to ‘fulfill ’ IMF conditionalities'. The major highlights of the policy are as follows:


The industries which were reserved for the Central government by the IPR, 1956 were cut down to only eight. In coming years many other industries were also opened for private sector investment. At present there are only three industries which are fully or partially reserved for the central government:

(i) Nuclear energy (at present the central government is seriously considering the proposal of allowing the private sector to enter into the management of the nuclear power plants in the country.).
(ii) Nuclear research and related activities i.e. mining, use, management, fuel fabrication, export-import, waste management, etc. of radioactive minerals (none of the nuclear powers in the world have allowed the entry to private sector in these activities, thus no such attempts look logical in India, too).
(iii) Railways (many of the functions related to die railways have been allowed private entry, but still the private sector cannot enter the sector as a full-fledged railway service provider).


The number of industries put under the compulsory provision of licensing (belonging to schedules B and C as per the IPR, 1956) were cut down to only 18. Reforms regarding die area were further followed and presently there are only six industries which carry the burden of compulsory licensing:

(i) Aero -space and defense related electronics
(ii) Gun powder, industrial explosives and detonating fuse
(iii) Dangerous chemicals
(iv) Tobacco, cigarette and related products
(v) Alcoholic drinks
(vi) Drugs and Pharmaceuticals.


The MRTP limit was Rs. 100 crore so that the mergers, acquisitions and takeovers of the industries could become possible. In 2002, a Competition Act was passed which has replaced the MRTP Act. In place of the MRTP Commission, the Competition Commission has started functioning (though there are still some hitches regarding the compositional form of the latter and its real functions and jurisdictions).

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