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Liberalization: where it has lead us and where it is headed

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Introduction

Liberalization: where it has lead us and where it is headed Since 1991, the Indian economy has been running under the mantra of "liberalization". While there has been almost unanimous approval amongst the more affluent sections of the population for liberating the consumer goods sector from the "License Raj" of the previous decades, external liberalization has been subject to far more scrutiny, and has generated considerable controversy and debate. The extent to which the economy should be decontrolled with respect to the international sector is not only of economic relevance but goes to the whole issue of national sovereignty and security. External Liberalization Whereas domestic industrialists and investors come under the purview of national laws - and are therefore subject to a modicum of democratic control - that can rarely be said of foriegn investors. Numerous case studies from the experience of other developing countries show that the dependance on foriegn capital has invariably led to sacrificing national policy goals in favor of the demands and conditions of international lending agencies and other powerful agents of international finance coporations like credit rating companies, analysts for banks and mutual funds, and representatives of insurance companies. The examples from Mexico, and now from South East Asia all show that even before rapid economic growth can begin to trickle down to the poorest sections of the economy - the economies end up in debt traps, and then even those sections of the population that had benefitted from the process of external liberalization go through increasing hardship. External "Conditionalities", Cutting Import Tarriffs As already mentioned, international lenders rarely lend without conditions. Pivotal to the issue of external liberalization has been the demand to lower import duties and this was one of the veiled "conditions" that the Congress Government of Mr Narasimha Rao accepted in 1991 when the IMF negotiated it's loan package for India. Although this step was taken under "duress", it was rationalized by the wealthiest sections of the Indian population as being necessary to introduce "competition" and "improve quality". ...read more.

Middle

during the quinquennium 1985-86 to 1990-91, the rate for the eight years 1991-92 to 1998-99 (on the assumption that the growth rate observed during April-December of 1998-99 holds for the year as a whole) comes to 5.7 per cent. This slowing down clearly is a secular phenomenon, not just a short-term consequence of stabilization. It is an expression of the loss of expansionary stimulus that a 'liberalised' economy entails, through the decline of public investment, through higher interest rates, and through the shrinkage of demand owing to import liberalization. Table 2: Industrial growth rate (percentages) 1991-2 0.66 1995-6 12.82 1992-3 2.39 1996-7 5.56 1993-4 5.93 1997-8 6.58 1994-5 8.4 1998-9 (April-Oct.) 3.5 Note: New series with base 1993-94 = 100. Source: Economic Survey, 1998-99. A slowdown is also evident in the agricultural sector, where the growth rate in the production of foodgrain in particular has declined sharply. For a long time now the Indian economy has experienced a secular growth rate of foodgrain production of around 2.5 percent per annum which was a little higher than the population growth rate. Even during the 12 year period 1978-9 to 1990-1 (both being good agricultural years are comparable), the rate of growth of foodgrain production was 2.4 percent which was above the population growth rate. However, over the period 1990-1 to 1997-8 (again both good agricultural years), the growth rate of foodgrain production dropped to 1.2 percent which was distinctly lower than the population growth rate. This is the lowest average rate since the mid-1950s, and a very dramatic drop compared to the earlier decades. In such a context, increased volumes of exports (both foodgrain and cash crop) along with higher rupee prices of such exports because of rupee devaluation, have also meant rapidly rising prices of food in the domestic market. Further, the period of the 1990s, besides exhibiting the usual fluctuating pattern in agricultural output, is marked by two years of substantial decline in the relatively recent past. ...read more.

Conclusion

There has been a marked slowdown in FDI and a net outflow of FII portfolio investment in 1998-99. There has also been a large outflow of NRI deposits. One point which is often missed in discussions on Indian balance of payments is the critical role that has been played by workers' remittances. Such inward flows, which are classified under invisible receipts, have contributed more over the 1990s than all forms of foreign investment (FDI, portfolio capital, Euro-equities and external commercial borrowing and foreign aid) since the early 1990s. The total amount of all form of foreign investment inflow into the country between 1992-93 and 1997-98 amounted to $ 25 billion, while the net receipts on invisible payments on current account in the same period came to $ 36 billion - that is 44 per cent more. In the latest year for which data are available, 1998-99, remittances alone account for more than $ 11 billion, more than all foreign investment inflows put together. Despite these inflows that have kept the current account deficit under control, the balance of payments situation is not exactly comfortable at present. The deceleration of exports and worsening trade balance suggest that it may be only a matter of time before some degree of payments difficulty is experienced. Also, while the reliance on short-term flows in India has been far short of the levels in the crisis-affected Southeast Asian countries, it remains substantial enough to be a source of concern and to put pressure on domestic policy-making in terms of the need to placate and reassure international investors (who, incidentally, may be domestic in origin as well). But to a significant degree, the controls that still do remain on the capital account, and the absence of full convertibility of the rupee, have constrained both the uninhibited inflow of foreign capital which Southeast Asia experienced, as well as the possibility of reversal of investor confidence leading to huge and sudden outflows. This is not to say that such possibilities do not exist at all, as is considered once again in Section IV below. ...read more.

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