state the nature of market before and after liberalization
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The economic liberalisation in India refers to the economic liberalization of the country's economic policies with the goal of making the economy more market and service-oriented and expanding the role of private and foreign investment.[1][2] Indian economic liberalization was part of a general pattern of economic liberalization and modernization occurring across the world in the late 20th century.[3] Although unsuccessful attempts at liberalization were made in 1966 and the early 1980s, a more thorough liberalization was initiated in 1991. The reform was prompted by a balance of payments crisis that had led to a severe recession.[4]
Specific changes included reducing import tariffs, deregulating markets, and reducing taxes, which led to an increase in foreign investment and high economic growth in the 1990s and 2000s. From 1992 to 2005, foreign investment increased 316.9%, and India's gross domestic product (GDP) grew from $266 billion in 1991 to $2.3 trillion in 2018[5][6] According to one study, wages rose on the whole, as well as wages as the labor-to-capital relative share.[4]
Indian economic policy after independence was influenced by the colonial experience (which was exploitative in nature) and by those leaders' exposure to Fabian socialism. Policy tended towards protectionism, with a strong emphasis on import substitution industrialization under state monitoring, state intervention at the micro level in all businesses especially in labour and financial markets, a large public sector, business regulation, and central planning.[7] Five-Year Plans of India resembled central planning in the Soviet Union. Under the Industrial Development Regulation Act of 1951, steel, mining, machine tools, water, telecommunications, insurance, and electrical plants, among other industries, were effectively nationalised.[8] Elaborate licences, regulations and the accompanying red tape, commonly referred to as Licence Raj, were required to set up business in India between 1947 and 1990.[9] The Indian economy of this period is characterised as Dirigism.[10][11]
Before the process of reform began in 1991, the government attempted to close the Indian economy to the outside world. The Indian currency, the rupee, was inconvertible and high tariffs and import licensing prevented foreign goods reaching the market.[12] India also operated a system of central planning for the economy, in which firms required licences to invest and develop. The labyrinthine bureaucracy often led to absurd restrictions—up to 80 agencies had to be satisfied before a firm could be granted a licence to produce and the state would decide what was produced, how much, at what price and what sources of capital were used. The government also prevented firms from laying off workers or closing factories. The central pillar of the policy was import substitution, the belief that India needed to rely on internal markets for development, not international trade—a belief generated by a mixture of socialism and the experience of colonial exploitation. Planning and the state, rather than markets, would determine how much investment was needed in which sectors.
— BBC[13]
Licence Raj established an "irresponsible, self-perpetuating bureaucracy"[14][page needed] and corruption flourished under this system.[15] Only four or five licences would be given for steel, electrical power and communications, allowing licence owners to build huge and powerful empires without competition.[13] A huge public sector emerged, allowing state-owned enterprises to record huge losses without being shut down.[13] Controls on business creation also led to poor infrastructure development.[13]
By 1980, this had created widespread economic stagnation. The annual growth rate of the Indian economy had stagnated around 3.5% from the 1950s to 1980s, while per-capita income growth averaged 1.3%.[16] During the same period, Pakistan grew by 5%, Indonesia by 9%, Thailand by 9%, South Korea by 10% and Taiwan by 12%.[17]
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