Liberalization of countries in emerging markets provides new opportunities for investors to increase their diversification and profit. Economic liberalization refers to a country “opening up” to the rest of the world with regards to trade, regulations, taxation, and other areas that generally affect business in the country.
We have seen landmark shift in Indian Economy since the adoption of new economic policy in 1991. This had far reaching impacts on all spheres of life in India.
As a general rule, you can determine to what degree a country is liberalized economically by how easy it is to invest and do business in that country.
Economic liberalization is generally thought of as a beneficial and desirable process for developing countries.
1. Removal of Barriers to International Investing
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.
2. Unrestricted Flow of Capital
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.
3. Stock Market Appreciation
In general, when a country becomes liberalized, stock market values also rise. Fund managers and investors are always on the lookout for new opportunities for profit. The situation is similar in nature to the anticipation and flow of money into an initial public offering (IPO).
4. Reduced Political Risks
Liberalization reduces the political risk to investors. For the government to continue to attract more foreign investment.
5. Diversification for Investors
Investors can benefit by being able to invest a portion of their portfolio into a diversifying asset class.
6. GDP growth rate
India’s annual average growth rate from 1990 – 2010 has been 6.6 % which is almost double than pre reforms era. GDP growth rate surpassed 5% mark in early 1980’s. It is clear that 1980 reforms led to crash of economy in 1991, which was remedied by LPG reforms which
were quite more comprehensive.
7.Industrial Growth Rate
Barring few years industrial growth rate has been not much impressive. Share of Industry still remains stagnantly low at 25%. Worst is that India has transitioned to be a service led economy, directly from an agrarian one.
Foreign companies got free access to Indian markets and made domestic products uncompetitive. They obviously had better access to technology and larger economies of scale.
8. Impact on Small Scale in India
India’s textiles and handicraft was renowned worldwide and was backbone of Indian economy. With coming of industrial revolution along with foreign rule in India, Indian economy suffered a major setback and much of its indigenous small scale cottage Industry
was destroyed.
Small scale industry however exists and still remains backbone of Indian Economy. It contributes to major portion of exports and private sector employment. Results are mixed, many erstwhile Small scale industries got bigger and better. But overall value addition, product innovation and technology adoption remains dismal and they exist only on back of government support.
9. Impact on Agriculture
Share of agriculture in domestic economy has declined to about 15%. However, people dependent upon agriculture are still around 55%. Cropping patterns has undergone a huge change.
Farming in developing world is subsistence and supports large number of poor people. With globalization there has been high fluctuation in commodity prices which put them in massive risk. This is particularly true for cash crops like Cotton and Sugarcane.
Apart from these, Farm Mechanization i.e. use of electronic/solar pumps, Tractors, combines etc. all are fruits of globalization.
10. Impact on Services Sector
In this case globalization has been boon for developing countries and bane for developed ones. Due to historic economic disparity between two groups, human resources have been much cheaper in developing economies.
11. IT industry
Software, BPO, KPO, LPO industry boom in India has helped India to absorb a big chunk of demographic dividend, which otherwise could have wasted. Now India is better placed to become a truly Knowledge Economy. Exports of these services constitute big part of India’s
foreign Exchange earnings.
12. Banking
Further, 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.
13. Telecom Sector
Conventionally, 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.
14. Education and Health Sector
It should be noted that food, Health and education are among basic necessities, which every human being deserves and can’t do without.
There has been world class education available in India and Deregulation has resulted in Mushrooming of private engineering and Medical Colleges. But in reality, this had far reaching devastating effect on society.