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Effects of Liberalization on Indian Economy
Table of Content
Education Sector & Health Sector
We have seen landmark shift in Indian Economy since the adoption of new
economic policy in 1991. This had far reaching impacts on all spheres of life
in India. There can be no concrete conclusions about their impact on Indian
people. This turns out to be more of an ideological debate like capitalism vs
Socialism. But there is no doubt in the fact that those reforms were
unavoidable and very compelling. There was in fact, similar wave all across the
globe after disintegration of USSR and end of the Cold War. Many Post-colonial
democratic regimes, which were earlier sheltered by USSR, lost their umbrella.
They had no option, but to fall in line to new unipolar world order dictated by
USA. Even China in late 1980’s adopted ‘Open Door Policy’ through which it liberalized
its economy by shedding communist mentality completely. South East Asian
economies also reformed their economy and started engaging more with global
economy. These along with China, pursued export led growth whereas Indian
economy still relies almost wholly on domestic consumption.
Note changing Sectoral composition of India
economy since independence
Composition – Services – Steady significant
Increase (was more marked after reforms), Industry – Less marked increase
(stagnated after reforms) , Agriculture Significant Decline
Patterns in the above graph explain inequity of Indian growth story. As
per principle of economics, when a particular sector performs
disproportionately higher than average growth rate, economic wealth starts
concentrating into that sector. In this case that sector is Service sector.
Within this sector, highest growth is marked by sectors such as financial
services, Real estate services etc. , which are least employment elastic.
Consequently, Growth of past decade was limited to upscale areas of the
countries as almost whole service industry, operates from these areas. Majority
of India got spillover or trickle down growth from here. This accelerated
migration to urban areas. This in turned created array of social problems associated
with urbanization. It fundamentally changed pattern of Indian Society.
Now we have ultra-modern and ultra-primitive society coexisting and
conflicting with each other. On one side Social institutions like Personal Law
boards, Khaps & kangaroo courts etc. tries to uphold their control over
their respective community members, on other hand there is western wave pulling
out these very members.
Undoubtedly strongest revolution of new century has been one of
Information Technology, which started in last years of past century. This
revolution was different because it made globalization even more obvious and
stark. It made possible transfer of real time human labor across nations,
without transfer humans themselves. Further, it erased all boundaries which
hinder free flow of information. This has benefited sharing, nurturing and
development of knowledge in societies which earlier had access only to
substandard or non-updated information. As always package is coupled with some
grim realities too.
Governments all across the world has lost their capacity to regulate and
ward of against malicious, false, sensitive information and content. Rise of
Islamic State demonstrates that, IT revolution has helped development of global
Terrorist links more than anything. Moreover, explicit content is freely
available on web, to which unmatured children have unrestricted access
GDP growth rate – India’s annual average
growth rate from 1990 – 2010 has been 6.6 % which is
almost double than pre reforms era. GDP growth rate surpassed 5% mark in early
1980’s. This made impact of 1990’s reforms on growth unclear. Some believe that
1980’s reforms were precursor to LPG reforms. Other things apart, it is clear
that 1980 reforms led to crash of economy in 1991, which was remedied by LPG
reforms which were quite more comprehensive. It was IMF loan which gave
government to adjust its economy. It was largest ever loan given by IMF.
Initially there were global doubts on India’s credibility for loan, but India
has been so far a disciplined borrower.
Industrial Growth Rate – Barring few years
industrial growth rate has been not much impressive. Share of Industry still
remains stagnantly low at 25%. Worst is that India has transitioned to be a
service led economy, directly from an agrarian one. One expiation of this is
end of policy of imports substitution which derived industrial growth upto
1990. Foreign companies got free access to Indian markets and made domestic
products uncompetitive. They obviously had better access to technology and
larger economies of scale.
India’s position also lagged on account of Research and innovation.
Import substitution required certain degree of investment and efforts in
domestic production. It was carried out even when imports were cheaper. This
resulted in good and better capacity building upto that time. This was coupled
with constant technology denial by west, which further pushed government to
spend on R&D. Technology Denial ended with liberalization and
globalization. Till that time Indian Industry was better and modern than that
of China. But in two decades China has surpassed India by huge margin in case
of both Industry and innovation.
Impact on Small Scale in India
This impact shall be studied right from the beginning of colonization in
18th century. Colonization can
be considered as 1st wave of globalization. In pre colonization era, India’s textiles and
handicraft was renowned worldwide and was backbone of Indian economy. With
coming of industrial revolution along with foreign rule in India, Indian
economy suffered a major setback and much of its indigenous small scale cottage
Industry was destroyed.
After independence, government attempted to revive small scale sector by
reserving items exclusively for it to manufacture. With liberalization list of
reserved items was substantially curtailed and many new sectors were thrown
open to big players.
Small scale industry however exists and still remains backbone of Indian
Economy. It contributes to major portion of exports and private sector employment.
Results are mixed, many erstwhile Small scale industries got bigger and better.
But overall value addition, product innovation and technology adoption remains
dismal and they exist only on back of government support. Their products are
contested by cheaper imports from China. Policies of government toward SSI were
covered in previous article access here and here
Impact on Agriculture
As already said, share of agriculture in domestic economy has declined
to about 15%. However, people dependent upon agriculture are still around 55%.
Cropping patterns has undergone a huge change, but impact of liberalization
can’t be properly assessed. We saw under series relating to agriculture that
there are still all pervasive government controls and interventions starting
from production to distribution.Gobal agricultural economy is highly distorted.
This is mainly because imbalance in economic and political power in hands of
farmers of developed and developing countries. In developed countries,
commercial and capitalistic agriculture is in place which is owned by
influential Agri corporations. They easily influence policies of WTO and
extract a better deal for themselves at cost of farmers of developing world.
Farming in developing world is subsistence and supports large number of
poor people. With globalization there has been high fluctuation in commodity
prices which put them in massive risk. This is particularly true for cash crops
like Cotton and Sugarcane. Recent crises in both crops indicate towards this
Also there is global Food vs. Fuel confusion going on. Sugar and corn
are used to manufacture ethanol which is used as fuel. In USA Corn is produced
mainly for this purpose, as sugar cane is in Brazil. Now there are
apprehensions that what if converting food into fuel is more remunerative for
producers? More than 1 billion people still live in hunger, much more are just
hand to mouth. It is futile to expect that free market will take care of these
people, who don’t have any purchasing power. Clearly, Agriculture is biggest
market failure, but is rarely discussed for being so in WTO.
Another global debate born out of globalization is one of GM crops. Here
too powerful MNCs like Monsanto hold the key. USA allows unhindered use of GM
crops, but EU bans it. In India field trails are going on. On the positive
note, India’s largely self-sufficient and high value distinguished products
like Basmati Rice are in high demand all over. Generally speaking, India is
better placed to take up challenge of globalization in this case. If done in
sustainable and inclusive manner, it will have a huge multiplier impact on
whole economy. Worldwide implicit compulsion to develop Food processing
Industry is another landmark effect of globalization.
Apart from these, Farm Mechanization i.e. use of electronic/solar pumps,
Tractors, combines etc. all are fruits of globalization. Now moving a step
further, Information technology is being incorporated into agriculture to
Impact on Services Sector
In this case globalization has been boon for developing countries and
bane for developed ones. Due to historic economic disparity between two groups,
human resources have been much cheaper in developing economies. This was
further facilitated by IT revolution and this all culminated in exodus of
numerous jobs from developed countries to developing countries. Here US have to
jealously guard its jobs as we guard our agriculture.
Software, BPO, KPO, LPO industry boom in India has helped India to
absorb a big chunk of demographic dividend, which otherwise could have wasted.
Best part is that export of services result in export of high value. There is
almost no material exported which consume some natural resource. Only thing
exported is labor of Professionals, which doesn’t deplete, instead grows with
time. Now India is better placed to become a truly Knowledge Economy.
Exports of these services constitute big part of India’s foreign
Exchange earnings. In fact, the only three years India had Current Account
surplus, I.e. 2000-2002, was on back of this export only.
Further, in banking too India has been a gainer. Since reforms, there
have been three rounds of License Grants for private banks. Private Banks such
as ICICI, HDFC, Yes Bank and also foreign banks, raised standards of Indian
Banking Industry. Now there is cut through competition in the banking industry,
and public sector banks are more responsive to customers.
Here too IT is on path of bringing banking revolution. New government
schemes like Pradhan Mantri Jan dhan Yojana aims to achieve their targets by
using Adhaar Card. Having said this, Public Sector Banks still remain major
lender in the country.
Similarly Insurance Industry now offers variety of products such as Unit
Linked Insurance plans, Travel Insurance etc. But, in India life Insurance
business is still decisively in hands of Life Insurance Corporation of India.
Another major development is one of Stock Markets. Stock Markets are
platforms on which Corporate Securities can be traded real time. It provides
mechanisms for constant price discovery, options for investors to exit from or
enter into investment any time. These are back bone of free markets these days
and there is robust trade going all over the world on stock exchanges. Their
Importance can be estimated from the fact that, behavior of stock markets of a
country is strongest indicator of health and future prospects of an economy.
These markets has thrown open wide array of associated services such as
Investment Banking, Asset Management, Underwriting services, Hedging advice
etc. These collectively employ lakhs of people all over India.
Similarly there are commodities market which provides avenues for
investment and sale of various eligible commodities.
Conventionally, Telecom sector was a government owned monopoly and
consequently service was quite substandard. After reforms, private telecom
sector reached pinnacle of success. And Indian telecom companies went global.
However, corruption and rent seeking marred growth and outlook of this sector.
Entry of modern Direct to Home services saw improvements in quality of
Television services on one hand and loss of livelihood for numerous local cable
Education and Health Sector
It should be noted that food (Agriculture), Health and education (and to
lesser extent banking) are among basic necessities, which every human being
deserves and can’t do without. Unfortunately, in developing countries there is
market failure in all these sectors and majority of people can’t afford beyond
a certain limit (or can’t afford at all). Concept of free markets,
globalization, liberalization etc. fails here miserably. Free markets provide
goods and services to people who can afford paying for them, not to those who
deserve and need these.
Now if we consider these sectors from angle of our inclination towards
free markets, certainly there has been lot of progress. There has been world
class education available in India and Deregulation has resulted in Mushrooming
of private engineering and Medical Colleges. But in reality, this had far
reaching devastating effect on society.
These new colleges accommodate only a miniscule proportion of aspirants
at very high costs. Recently, an Independent organization ‘Transparency
International’ came out with report claiming that India’s medical system is
most corrupt in the world. This was no surprise, we all know from where it
starts. High fees of education forces many aspirants to take educational loans
from banks. After qualifying job market is unable to absorb majority of them.
Practice turns out to be option of last resort. Now to make a decent living and
to pay back the loans person is lured by corruption. Consequently, when many
similar cases are put together, we get a corrupt system, economy and society.
Reality is that after deregulation and liberalization, government along
with other sectors, pulled its hand from social sectors too. Now there is
Mediocre to high quality options are available in private sector which can be
availed as per one’s budget. In public Sector Less than Mediocre to Mediocre
options are available. This leaves huge proportion of aspiring students and
On Social front India’s performance is deplored all over the world and
it is probably behind all important developing economies. This lacuna has been
recognized and government has taken the charge. In case of education almost
universal enrollments has been achieved upto primary level and now impetus
should be on improving quality, so that student of public schools comes at par
with atleast average private ones.
Source : Team work for CSE-2015 - A Facebook group