Economic Environment in India - Liberalisation, Privatisation, Globalisation

What is the Economic Environment?

The economic environment encompasses all economic factors that influence business and consumer behaviour. It refers to the external economic conditions that affect consumer buying habits and market trends, thereby impacting business production.

As part of the economic reforms in India, the government announced a new industrial policy in July 1991. The key features of this policy included:

• A reduction in the number of industries under compulsory licensing to just six.
• A shift in the role of the public sector, with its importance limited to only four industries of strategic importance.
• Implementation of disinvestment in several public sector industrial enterprises.
• An expanded approach towards foreign investment, with an increase in the percentage of foreign equity partnerships. In many sectors, 100 percent foreign direct investment (FDI) was permitted.
• Automatic approval for technology agreements with foreign companies.
• The establishment of the Foreign Investment Promotion Board (FIPB) to promote and guide foreign investment in India.

The Era of Liberalisation

The economic reforms aimed at liberalising the Indian business sector from unnecessary restrictions. This marked the end of the license-permit-quota regime. The liberalisation of the Indian business sector was achieved through the following:

• The removal of licensing requirements in most industries, with a few exceptions.
• Freedom to determine the scale of business operations, without any restrictions on expansion or consolidation.
• Removal of restrictions on the movement of goods and services.
• Freedom to determine the price of goods and services.

The Shift to Privatisation

The new economic reforms aimed at giving a significant role to the private sector in the process of nation-building, thereby reducing the role of the public sector. This marked a shift from the development policy followed by Indian policymakers until then. To achieve this, the government redefined the role of the public sector in the 1991 industrial policy, adopted a policy of disinvestment of the public sector, and referred loss-making and sick industries to the Board of Industrial and Financial Reconstruction (BIFR).

Learn more: Understanding the objectives of Privatisation

The Wave of Globalisation

Globalisation refers to the integration of various world economies towards the creation of a cohesive global marketplace. Until 1991, the Indian government followed a policy of strict control over imports in terms of both price and quantity. These regulations included:

• Licensing of imports
• Tariff barriers
• Quantitative restrictions

The new economic reforms aimed at trade liberalisation focused on import liberalisation, export promotion through rationalisation of the tax structure, and changes in foreign exchange regulations to ensure integration with the global economy.

Also, explore: The five elements of the Business Environment

This article provides an overview of the economic environment in India, beneficial for class 12 commerce students. For more such informative content, stay tuned.