Meaning of Liberalisation

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Liberalization is an economic concept that mainly refers to reforms to remove certain limiting policies enacted by the government. Liberalization is aimed at growing the economy through increased participation of private players. Usually, liberalization is initiated by the government to lift restrictions put on trade and businesses to create a transparent and active free-market economy.

What is Liberalization?

Liberalization mainly refers to the upliftment of certain economic policies to bolster economic growth in a country. While initiating liberalization, the government ensures increased participation of private industries and individuals in the economy, thereby strengthening the economy in the long run.

Liberalization refers to industrialization, expansion in the role of private and foreign investment, and the introduction of a free market system. Restrictions on the entry of private companies in core industries, which were previously reserved for the public sector are removed in the process of liberalization.

Liberalization in India

India’s liberalization policies were enacted in response to the balance of payment situation of the country that took the country on the verge of bankruptcy in 1985. To get rid of economic malfunctions and insufficiency of funds to meet the requirements, economic liberalization policies were announced in 1991.

Liberalization has the potential to improve economies when it is appropriately applied to the economy. In the case of India, the effects of liberalization are yet to be seen completely as the process is still in progress. However, as much as the conditions are considered, it may be stated that liberalization has worked well in uplifting the Indian economy.

Features of Liberalization in India

The following are characteristics of India’s liberalization process that began as part of the 1991 economic reforms −

  • The country’s previously existing License Raj was annulled.
  • Interest rates and tariffs on imports and export were lowered.
  • The public sector’s existing monopoly over various segments of the economy was removed.
  • Foreign investment in different industries was sanctioned.
  • Integration of the above features was enacted to waive off several restrictions from the economy to make it more private sector-friendly.

Key Objectives of Liberalization of India

The main reasons for the liberalization of India were as mentioned below.

  • Solving India’s impending balance of payment crisis.
  • To bolster the economy through the private sector’s participation in India.
  • To increase the volume of foreign direct investment (FDI) in India’s businesses.
  • To introduce competition in India’s domestic businesses.
  • To usher in globalization in the Indian economy.
  • To maximize the economic potential by encouraging Indian and foreign multinational and private companies to expand.
  • To regulate export and import in order to promote foreign trade.

Impact of Liberalization on Indian Economy

The economic liberalization in India impacted the economy in many ways. It was, however, a good step because it brought India to the forefront of the competition among world economies.

Following impacts were noticed after liberalization −

  • Indian companies became capable to bank with huge funds from foreign investors as all restrictive barriers to International Investing were removed.
  • An unrestricted flow of capital came to India and it became one among other big nations. This removed the country’s inefficient resource allocation.
  • It helped Indian companies to gain a competitive advantage. The companies could stray local but their products could be sold globally. This is popularly termed glocalization.
  • The Indian stock market appreciated hugely ever since liberalization.
  • The political risks were reduced to a large extent due to liberalization. Moreover, the political or governmental intervention was reduced heavily which helped the private sector companies grow and provide more in terms of taxes.
  • The investors in India were diversified and they could choose their vivid portfolio due to liberalization. This offered more options to investors who could not avail such diverse options before.

Benefits of Liberalization

Liberalization is usually considered good for the economy. It helps the economy gain momentum due to the active participation of private parties. Moreover, as public sectors need to compete with private sectors, it creates a transparent atmosphere for all sectors participating in the economy.

Some of the benefits of Liberalization are as follows −

Free Capital Flow in the Economy

One of the most notable advantages of Liberalisation is that it allowed free movement of capital, allowing companies to access big funds easily from investors. In the pre-liberalization period, undertaking costly projects was not possible for firms due to the dearth of capital. This was rectified in 1991, initiating higher growth rates for private firms and therefore the economy.

Diversification of Investor Portfolio

After liberalization, investors got the option to invest in a diversified portfolio, thus generating more profit. This also attracted more investors to the markets. Therefore, both domestic and international investment grew by a large margin in India.

Improvement of Stock Market Performance

Relaxation of economic laws means there will be a rise in the stock market and stock value. This is enough to encourage more trading among investors.

Impact on the Agricultural Sector

Although liberalization and agricultural outputs cannot be linked directly, there has been notable growth in both patterns and production in the agricultural sector post-liberalization in India.

Disadvantages of Liberalization

Liberalization has not been that sweet for government and small businesses. Public sectors and small businesses have seen a downfall due to the entry of powerful MNCs into the Indian market. As the financial strength of these firms is very strong, small businesses cannot compete with the MNCs even if they wish to do so.

Let us see the disadvantages of liberation as mentioned below.

Economic Destabilization

A sudden economic reform led to the redistribution of political and economic power. This created an imbalance in socio-political factors that destabilized the Indian economy to quite a large extent.

Increased Competition from MNCs

The allowance of Multinational Companies (MNCs) to operate in India threatened the existence of several smaller firms. These MNCs were very strong in terms of funds which could not be matched by the smaller firms in India. Therefore, the smaller businesses had to succumb due to the power of capital of MNCs.

FDI impact on Banking Sector

The government’s stake in banking and insurance fell sharply after lifting restrictions on foreign direct investment in these sectors.

Increase in Acquisitions and Mergers

There has been an increased number of mergers and acquisitions in the post-liberalization period. It has posed a threat to the employees of smaller firms. In the cases of mergers with larger firms, employees of the smaller firms need to go through rigorous re-skilling which leads to productivity stagnation.

Fields in which reforms were made

  • Industrial Sector Deregulation
  • Foreign Trade Policy
  • Trade and Investment Policy
  • Taxation
  • Finance Industry
  • International Finance
  • External Sector
  • Forex


Liberalization in India has a more positive impact than a detrimental one. The reputed Indian businesses have flourished in the post-liberalization period indicating that liberalization has impacted the Indian businesses positively. Liberalization helped many Indian companies that were previously resource-deprived gain momentum with the aid of foreign investments. So, in general, liberalization has impacted India more positively.


Qns 1. When was the process of liberalization initiated in India? Who initiated it?

Ans. Liberalization was initiated in India in 1991 by the then finance minister Manmohan Singh.

Qns 2. What has been the effect of liberalization on the stock market?

Ans. The stock market has improved hugely after liberalization which means that both domestic and foreign investment has improved many times due to liberalization.

Qns 3. For which sector is liberalization most satisfactory?

Ans. Liberalization is most satisfactory for the private sector.

Updated on 13-Oct-2022 11:19:47