Bookmark and Share

Indian Economy and Financial Markets since Liberalization

0 Comment

 Major Developments Post Policy Change of 1990

There is hardly any aspect of economic life which is not altered since the inception of the new policy in the year 1990’s. The twin forces of globalization and deregulation have breathed a new life full of motivation and energy to private business. The most important aspect of such reform resulted is that the long-protected industries in India are now facing both the challenge of foreign competition as well as the opportunities of world markets.

Other major developments seen post policy change is put down in the following key points:

  1. The upward trend of the growth rate which has continued the higher trajectory started in 1980. Also this has resulted in the surging of the GDP which has nearly doubled in constant prices.
  2. The end of the “Licence Raj” has marked the inception of new era and has removed major obstacles from the path of new investment. The effect is clearly visible to us as it can be seen by the ratio of capital formation in the private sector to that in the public sector for a decade preceding liberalization and for the period following it.
  3. The change in financial market is also seen at large. The inception of new stock exchanges after independence is one of the biggest examples. With only four stock exchanges in India post independence to a whooping 23 exchanges now shows the growth trend India as an economy is following.
  4. The private sector’s march towards attaining the “commanding heights” of the economy is worth mentioning. For example: Reliance Industries which is India’s largest conglomerate in private sector whose chairman and MD, Mr. Mukesh Ambani is ranked as the second richest man in Asia and Ninth Richest man globally.
  5. In terms of price stability, the average rate of inflation (which is the increase in general level of prices for goods and services and is measured as an annual percentage increase) since liberalization has stayed close to the preceding half decade except in the last few years when inflation has declined to significantly lower levels.
  6. The biggest structural change in India’s macro-economy, apart from the rise in growth rate, is the steep and continuous decline in the interest rates. Interest rates have fallen to almost half in the period following the reforms. It resulted in bringing down the corporate cost of capital significantly and thus has increased the competitiveness of Indian companies in the global market.

It is worth mentioning that the external sector and the outside world along with deregulation, and globalization policies have played a key role in transforming the Indian economy and has changed the face of Indian Economy totally in the past dozen years. A quick and easy way to measure and see the rise in India’s integration with the world economy is the degree of “openness” – the importance of foreign trade in the national income, India has shown.

Also Read on GWI 12th Five Year Plan – Its implications on Economic Growth and Investor Sentiment.

The massive rise in the share of imports and exports in India’s GDP since 1990-91itself tells us about the change the policy has in pocket for the economy.  The share of foreign trade in India’s GDP has increased by over 50% in just over a decade since liberalization which is yet another milestone worth mentioning. While imports increased steadily and continued to exceed exports, the rise in the latter also has been almost proportional which is in contradictory to the “export pessimism” tag which was marked on India’s foreign trade policy.

The inflow of foreign investment to India and its decomposing into FDI and portfolio investment is yet another topic of interest which cannot be neglected. Both kinds of flows have shown remarkable growth rates. As a result of huge capital inflows in the economy, the foreign exchange reserves situation for India has improved beyond the wildest imagination. The equity markets were not important as a source of funding for the non-state sector until as recently as the early 1980s. The ratio of India’s market capitalization to GDP rose from about 3.5% in the early 1980’s to over 59 % in 2005, which ranks 40th among 106 countries.

The Present Scenario of the Indian Financial Market

The Indian financial market is currently going through a tough time. With the Euro Zone experiencing a second recession and slow growth in US economy, there is a downturn in the stock market. The developed economies are not well prepared for favorable growth. India is rising on its fiscal deficit which is a major concern. These issues have resulted in the falling of Indian market.

Thankfully though, unlike the western world, the problems afflicting India are more cyclical in nature than structural and hence, any tendency on the part of the markets to overreact should be looked upon as an opportunity to buy into the long term India story.

Challenges of the Financial Market and the Indian Economy

Following points are the biggest challenge for the market and the economy:

  • Bureaucracy
  • Poor infrastructure
  • Rigid labour laws
  • An unfavourable and unorganized tax structure in India

Nevertheless this difference should be viewed more as indicative for the future growth opportunities in FDI inflows provided India properly carries out its reforms and make herself stand out of the crowd to attract the foreign investors largely.


Sneha Shah

I am Sneha, the Editor-in-chief for the Blog. We would be glad to receive suggestions, inputs & comments on GWI from you guys to keep it going! You can contact me for consultancy/trade inquires by writing an email to

No Responses so far | Have Your Say!