What is Liberalisation?

Transcript

What is Liberalization? Liberty It means Freedom (Removing restrictions) Liberalization It means Promoting a Free Market Economy (Removing Restrictions in Economy) When did Liberalisation Start in India? Till 1990 Govt Imposed No of Restrictions on Trade, Industry, Commerce Example License Raj Strict Control of RBI High Rate of Tax From 1991 Different Restrictions were Removed by Starting Different Reforms Example Industrial Sector Reforms Financial Sector Reforms Tax Reforms Different Industrial Sector Reforms (Liberalization Measures for Industry) Earlier (Till 1990) Industrial Licensing was Required To Set up New Industry To Increase Production To Diversify Private Sector was not allowed in many industries Example Heavy Machinery Reservation for SSI Some goods could be produced only by Small Scale industries (Example-Ice cream, Biscuits) Prices were fixed by Govt of many commodities Example-Sugar From 1991 Onwards Industrial Licensing was Removed Except for some sectors like Alcohol, cigarettes, hazardous chemicals etc. Private Sector was allowed in all sectors Except 8 industries like Defense, Atomic Entergy, Rail Transport Goods De-reserved Such goods were De-reserved (can now be manufactured by large industries also) Prices determined by market of many commodities Tax Reforms in India Direct Tax Indirect Tax Tax Paid by Tax-Payer Directly Example Income Tax, Corporation Tax Tax Collected from Customer Example Sales Tax, Service Tax, GST DIRECT TAX REFORMS Earlier income Tax Rates Were very High So Less People Paid tax People did tax Evasion Now (From 1991) Income Tax Rates Reduced More People Paid Tax Better Tax Compliance INDIRECT TAX REFORMS Earlier Different Taxes On Sales-Sale Tax On Service-Service Tax On Manufacturing-Excise Different Rules in Different States Now (From 2017) Common Tax-GST On Sales Service Manufacturing Same Rules all Over India Financial Sector Reforms What is Financial Sector? Financial Sector includes financial institutions like Commercial Banks Investment Banks Stock Exchange Operations Foreign Exchange Operations All these are regulated by RBI Example RBI decides amount of Money other banks can keep RBI Fixes Rate of Interest RBI Fixes Nature of Lending (Which sectors should be given loans and which not) Financial Sector Reforms Earlier RBI was Regulator of Financial Sector Permission of RBI was Required for all matters Example SBI required permission from RBI to open new Branches Take Permission SBI Wants to Open 10 Branches Gets Permission for 4 Branches SBI Opens 4 new branches Now RBI became facilitator of Financial Sector Decisions may be taken by banks without consulting RBI Example SBI can open new branches without taking Permission from RBI Wants to Open 10 Branches SBI Opens 10 new branches (No Permission Required) Financial Sector Reforms Earlier Only Govt Banks Allowed (No Private Banks) Earlier No Foreign Investment in Bank Only Indian Investors invested in Indian Financial Market Indian Investors Indian Bank Now Private Banks were Also Allowed along with Govt Banks Now Foreign Investors also allowed FDI Limit as 74% Indian Investors (Any Amt) Foreign Investors (Max 74%) Indian Bank Indian Bank Foreign Exchange Reforms Exchange Rate of Dollar Till June 1991  1$= Rs 21/Dollar 1/21 $ = 0.047$ = Rs1 By July 5, 1991 1$ =Rs 25.95/Dollar 1/25.95 $ = 0.385 $ = Rs 1 EARLIER (Till June 1991) India faced Balance of Payment Crisis (Imports of Country were Much more than Exports) No Foreign Exchange to import Petrol for even 2 Weeks Rupee Devalued Effect Become cheaper to Invest in India More Foreign Exchange Received by India Imports to India became Expensive Exports from India became Cheaper After 1991 Reforms India devalued its currency More foreign exchange entered India due to Increase in Foreign Investment, Exports After devaluation, Markets were free to determine exchange rate Exchange Rate fluctuated daily on basis of changes in demand and supply. Trade and Investment Policy Reforms Reform 1: Import Restrictions Removed Earlier High Custom duty charged on Imports to make them expensive Imported Goods Price 1000 Custom Duty 200% 2000 Total Price 3000 Imported Goods became very expensive, could not compete with domestic goods Now Custom duty Reduced on Imports to reduce their prices Imported Goods Price 1000 Custom Duty (Waived) 0 Total Price 1000 Imported Goods became cheaper, provided competition to domestic goods, which now had to improve their quality Reform 2: Quantitative Restrictions Removed Earlier (Quantitative Restrictions Imposed) Max Quantity Allowed to be Imported 10000 tonnes (Quantitative Restrictions Imposed to discourage Imports) Now (Quantitative Restrictions Removed) Max Quantity to Allowed to be Imported Unlimited (Quantitative Restrictions Removed to encourage imports) Trade and Investment Policy Reforms Reform 3: Requirement of Import License waivedEarlier License Requirement for all goods Strict Control of Govt to Regulate Imports License Required for import of All Goods Now License Requirement waived for almost all goods except some License Required for only Some goods like Hazardous goods, Environmentally sensitive goods No License Required For all other goods Trade and Investment Policy Reforms Reform 4: Export Restrictions Removed Earlier Custom duty charged on Exports, So Exported Goods were costlier Exported Goods Price 1000 Custom Duty 30% 300 Total Price 1300 Now Custom duty Removed on Exports, So Exported Goods were cheaper Exported Goods Price 1000 Custom Duty (Waived) 0 Total Price 1000 Goods became expensive Less Demand Done to discourage Exports Goods became cheaper More Demand Done to encourage Exports Reform 5: Quantitative Restrictions Removed Earlier (Quantitative Restrictions Imposed) Max Quantity Allowed to be Exported 10000 tonnes (Quantitative Restrictions Removed) Max Quantity to Allowed to be Exported Unlimited (Quantitative Restrictions Imposed to discourage exports) (Quantitative Restrictions Removed to encourage exports) Summary - Trade and Investment Policy Reforms Earlier (Till 1990) There were lot of Restrictions on Imports Example: Quantitative Restrictions on Imports (Govt restricted the quantity which could be imported) Tariff Rates were too high (Custom Duty on Imports were very high to make imported goods expensive compared to domestic industry) Import Licensing License was required to import various goods Export Restrictions Custom Duty was charged on exports and there were Quantitative restrictions also Trade policy Reforms were undertaken to remove restrictions on imports Example Quantitative Restrictions on Imports Removed (Now even bulk quantity of item could be imported) Tariff Rates were Reduced Hence, imported goods became cheaper Domestic Industry had to make their products efficient to compete with domestic goods Import Licensing was Abolished License was not required for importing goods Exception - Import licensing continue to exist for hazardous industries, environmentally sensitive industries Export Duty Removed for Most goods This lead to Indian goods becoming cheaper as compared to Foreign Made Goods Quantitative restrictions were removed so export could be made in large quantities What is Liberalization? Liberty It means Freedom (Removing restrictions) Liberalization It means Promoting a Free Market Economy (Removing Restrictions in Economy) When did Liberalisation Start in India? Till 1990 Govt Imposed No of Restrictions on Trade, Industry, Commerce Example License Raj Strict Control of RBI High Rate of Tax From 1991 Different Restrictions were Removed by Starting Different Reforms Example Industrial Sector Reforms Financial Sector Reforms Tax Reforms