With reference to developing countries, this term denotes to opening of their economic borders to multinationals and foreign investment. Many economists explained that economic liberalization is “opening up” to the rest of the world with regards to trade, regulations, taxation and other areas that generally affect business in the country.

Conditions that led to liberalization of Indian Economy:

• Rise in Prices:
  • Price rise continuously in India. The inflation rate increased from 6.7% to 16.7%. Due to inflation country’s economic position became worse. Main reason for inflation was rapid increase in money supply. It was due to deficit financing Deficit financing means borrowing from Reserve Bank of India by Government to meet its deficit.
• Rise in Fiscal Deficit:
  • Due to increase in non- development expenditure fiscal deficit of the Govt. had been increasing. To cover the fiscal deficit, the Govt. has to raise loans and pay interest on it. Due to rise in fiscal deficit there was rise in public debt and interest. In 1991 interest liability became 36.4% of total govt. expenditure. The Govt. caught in debt trap. So Govt. has to resort to economic reforms.
• Increase in Adverse Balance of Payments:
  • When foreign exchange falls short for payment otherwise total imports exceed total exports, problem of adverse balance of payments arise. Though incentives are given for export promotion yet the desired results cannot be achieved. It is due to the fact that our export goods could not compete in price and quality. Liability of loan and its interest payment goes as increasing. It made balance of payments adverse.
• Iraq War:
  • In 1990-91, war in Iraq broke, and this led to rise in petrol prices. The flow of foreign currency from Gulf countries stopped and this further aggravated the problem.
• Dismal Performance of Public Sector Undertakings:
  • PSU’s are enterprises wholly owned by Govt. have invested crores of Rs. in these enterprises. These are no performing well due to political interference and became big liability for Govt.
• Fall in Foreign Exchange Reserves:
  • Indians foreign exchange reserve fell to low ebb in 1990-91 and it was insufficient to pay for an import bill for 2 weeks. In 1986-87 foreign exchange reserves were Rs. 8151 crores ad in 1989-90, it declined to Rs. 6252 crores. Then Govt. had to sell Gold to meet the import liability.

Impact of Liberalization on international business environment:

• Investing in emerging market countries can sometimes be an impossible task if the country you’re investing in has several barriers to entry.
• These barriers can include tax laws, foreign investment restrictions, legal issues and accounting regulations, all of which make it difficult or impossible to gain access to the country.
• The economic liberalization process begins by relaxing these barriers and relinquishing some control over the direction of the economy to the private sector. This often involves some form of deregulation and privatization of companies.
• Foreign companies got free access to Indian markets and made domestic products un-competitive. They obviously had better access to technology and larger economies of scale.
• The primary goals of economic liberalization are the free flow of capital between nations and the efficient allocation of resources and competitive advantages. This is usually done by reducing protectionist policies such as tariffs, trade laws and other trade barriers.
• One of the main effects of this increased flow of capital into the country is it makes it cheaper for companies to access capital from investors. A lower cost of capital allows companies to undertake profitable projects they may not have been able to with a higher cost of capital pre-liberalization, leading to higher growth rates.
• Software, BPO, KPO, LPO industry boom in India has helped India to absorb a big chunk of demographic dividend, which otherwise would have wasted. Best part is that export of services result in export of high value.
• In banking too India has been a gainer. Since reforms, there have been three rounds of License Grants for private banks. Private Banks such as ICICI, HDFC, Yes Bank and also foreign banks, raised standards of Indian Banking Industry. Now there is cut through competition in the banking industry, and public sector banks are more responsive to customers.
• Stock Markets are platforms on which Corporate Securities can be traded real time. It provides mechanisms for constant price discovery, options for investors to exit from or enter into investment any time. These are back bone of free markets these days and there is robust trade going all over the world on stock exchanges.
• Telecom sector was a government owned monopoly and consequently service was quite substandard. After reforms, private telecom sector reached pinnacle of success. And Indian telecom companies went global. However, corruption and rent seeking marred growth and outlook of this sector.

Conclusion:

In the Indian case the term liberalisation is used to show the direction of the economic reforms-with decreasing influence of the state or the planned or the command economy and increasing influence of free market or the capitalistic economy. It is a move towards capitalism. India is attempting to strike its own balance of the ‘state-market mix’. It means even if the economic reforms have the direction towards market economy it can never be branded a blind-run to capitalism. Since the economy was more like the state economy in the former years, it has to go for a greater degree of mix of the market.