HPAS/Allied Mains 2022 Answer Writing Challenge Day 201: Model Answer

Question: What is Liberalisation and what are its effects on Indian economy? (8 marks/ 120 words)

Answer:

Liberalisation is the process or means of removing the state’s control over economic activities. It gives business enterprises more autonomy in decision-making and eliminates government interference. In India, liberalization was done through deregulating the industrial sector, financial sector reforms, tax reforms and foreign exchange reforms.

Advantages:

Free Capital Flow in The Economy – Liberalisation has enabled free movement of capital in our country, allowing companies to access the same easily from investors. In the pre-liberalization period, undertaking lucrative projects was taboo due to the dearth of capital, which was rectified in 1991, initiating higher growth rates.

Diversification of Investor Portfolio – post-liberalization, investors have the liberty to invest a percentage of their portfolio into a diversified asset class, thus generating more profit.

Improvement of Stock Market Performance – Relaxation of economic laws also leads to a rise in the stock market’s value, thus encouraging more trading among investors.

Impact on The Agricultural Sector – Even though the impact of liberalization on the agricultural sector cannot be measured accurately, in the period post-1991, there was a significant modification in cropping patterns throughout the country.

Disadvantages:

Economic Destabilization – Such a severe economic reform led to the redistribution of political and economic power that destabilized the Indian economy to quite an extent.

Increased Competition from MNCs – In the period of pre-liberalization, multinational companies had no role to play in the Indian economy. However, soon after, Indian companies faced increased competition from MNCs, which threatened the existence of several smaller firms.

FDI impact on The Banking Sector – Lifting restrictions from foreign direct investment in the banking and insurance sectors led to a downfall in the government’s stakes in both these sectors.

Increase of Acquisitions and Mergers – The increased scope of mergers and acquisitions in the post-liberalization period has posed a threat to the employees of smaller firms. In the event of a merger with bigger companies, employees of the smaller firms had to undergo rigorous re-skilling that led to a stagnation of productivity.