Liberalisation: Useful Essay on Liberalisation in India!

In 1985, Prime Minister Rajiv Gandhi called for a review of these policies. He wanted the economy to open up to foreign competition and wished for a more proactive role for the private sector. He was not able to see his reforms through because of his assassination in 1991, when he was campaigning for the coming general elections.

His Congress Party was critical of the public sector and recommended that its role should be restricted to only core or basic sectors. What was more important was that it scrapped the licensing system in almost all sectors and encouraged foreign investment. The New Industrial Policy of 1991 was a landmark because it laid the foundation for liberalisation of the economy.

This policy was a radical departure from the earlier industrial policies. Its focus was on opening up of Indian industry by allowing inflow of foreign capital and technology which meant relaxing controls on foreign investment. It also narrowed the role of the public sector to select areas such as infrastructure, while encouraging disinvestment in other areas such as power.


The public sector came in for criticism in this policy statement, being denigrated as unproductive, corrupt, inefficient, and so on. The role of the government thereafter was reduced considerably, while the private sector was allowed to thrive.

The state had repeatedly asserted that the interest of labour would be protected in two ways: firstly, workers displaced from their jobs would be retained and deployed in alternative better jobs, and, secondly, those who cannot be retrained or redeployed would be provided a ‘safety net’ in the form of liberal compensation.

This policy was admitting an exit policy through the back door. After the liberalisation policy came into effect, employers’ organisations insisted that liberalisation could be effective only if government allowed industrial units to close down if deemed necessary, bypassing provisions of the ID Act.

The Ministry of Company Affairs appointed the Goswami Committee to examine this issue of closure, and it submitted its recommendations in two months. The report strongly recommended an exit policy. It reasoned that liberalisation had removed the licence regime and this would encourage foreign investment in industry as it was easier now to set up an industry.


In the earlier dispensation, if a company wanted to shut down its operations it would have to undergo a lengthy process, which would deter foreign investors from investing in India. The committee recommended that both entry and exit should be made easier. The government was inclined to accept these recommendations but it hesitated because of strong opposition anticipated from the central trade union federations, including its own trade union wing, INTUC.

The 1991 policy seemed to be a refutation of the state-sponsored planned economy which had existed until then. On the other hand, one can argue that the policy was a continuation of the earlier policies. When India became independent, the capitalist class in India was at a nascent stage. There were a handful of capitalists such as the Tata’s, Birla’s and some others.

Indian capitalism was not in a stage to take over the challenge of developing the country. The state, therefore, took on the role of the capitalist to develop the economy. This could be called state capitalism. Later, after the infrastructure had been set up through the heavy industries established by the state, the capitalist class started developing and expanding. When it had matured, the state handed over development work to the private sector through its liberalisation policies.

One can observe a similar trend in countries like the UK, whose economy had been shattered after WWII. The post-war period was a period of nationalisation. Core industries such as gas, coal, rail and road transport, and some heavy industries were run by the state.


Later, in the 1980s, when Margaret Thatcher became the Prime Minister, the nationalised industries were thrown up for privatisation. In other words, after WWII, the capitalist class had weakened but in this intervening period, it was able to strengthen itself and, hence, industries were handed back to them. Thus it may be argued that the state has its own class character which does not favour the labouring classes.

An interesting feature is that the principle of privatisation has been accepted by major political parties and the past governments. Hence though there may be differences between the major political parties in the country, the policy of privatisation is not in dispute.

For example, the National Democratic Alliance (NDA) government (headed by Atal Behari Vajpayee as prime minister) was at one time interested in privatising the petroleum companies. This was deferred because of sharp resistance from some of the alliance partners. The NDA government had appointed a minister, Arun Shourie, to speed up the process of privatisation, and under his aegis there was rapid sale of profit-making public sector enterprises.

Many of them were sold at prices well below the value of their assets (Balco, Modern Bakery, Videsh Sanchar Nigam Limited (VSNL), Centaur Hotels in Mumbai, etc.). Centaur Hotels was sold to an industrialist for Rs 400 crores, and within six months that person sold the hotel to another party for Rs 1,200 crores. VSNL which had contributed Rs 1,200 crores to the government as its share in the capital was sold to an Indian MNC at Rs 1,250 crores.


In most cases, sell-offs resulted in large-scale retrenchments and lay-offs due to mergers of the former public sector units (PSUs) with the buying company. The Economic Review for 2005 showed that the public sectors share in employment had reduced by 1 per cent, and around one million workers in the formal sector had lost their jobs. Representatives of industry were happy with these developments and one business magazine honoured Shourie with the title of’ Man of the Year’.

A curious feature of industrialisation that was observed was the growth of informal employment within the formal sector. A study of eight large-scale industries in 1993 showed that between 30-50 per cent of the employment was through contract or casual labour.

The study was initiated by a researcher, Sarath Davala (1993), and the industries that the study covered were tea, jute, coal, ports and docks, engineering, power, chemical and pharmaceutical industries. Other more recent studies have shown that many industries employ more contract workers than permanent workers, and in many factories, a large number of young workers are employed as apprentices.

These people perform the work of a regular worker but are paid a stipend as remuneration. A study in the automobile industry showed that the large multinational companies operating from India routinely employed a large number of contract workers and apprentices. In one factory, the researchers (Gartenberg and Bandekar 2011) found that only 20 per cent of the workers were permanent. The other workers, especially the apprentices, had to perform the most hazardous tasks without adequate protective gear.