India began liberalizing its economy in the late 1980s. GDP growth rates were high during this period, averaging 7.6% annually from 1988-1991. Liberalization measures included raising investment limits for industries, expanding the number of commodities that did not require an import license, and allowing more machinery imports. These reforms aimed to make exports more competitive and attract more domestic investment. As a result, gross fixed investment as a share of GDP and merchandise imports both increased substantially. However, liberalization also contributed to growing current account deficits and external debt levels throughout the 1980s and 1990s that accelerated India's foreign debt.

1. The Phase of Liberalisation
• Growth rates during 1988-91 :
GDP at factor cost: 10.5, 6.7, 5.6.
Average Growth Rates (1988-91): 7.6 GDP at
factor cost
Agriculture: 7 percent.
Industry: 9.1 percent.
Services: 7.1 percent.
Agriculture growth during 1984-88: 0.1 %.
Liberalisation, expansionary fiscal policy with
foreign borrowing.

2. Role of liberalisation
• In 1989-90, the exemption limit on license
free investment in fixed assets for new
undertakings or expansion of existing capacity
was raised from 50 to 150 million rupees for
investment in non-backward areas and 500
million rupees in backward areas.
• Expansion of Open General License (OGL) 329
commodities has been added in 1988 and
another 82 in 1990.

3. What is OGL?
• The first step towards liberalisation was the
rationalisation of licensing regime in 1978-79
based on P.C. Alexander Committee report in
1978. The Alexander committee strongly
recommended that the products not
produced domestically be freed from licensing
through inclusion in the OGL list that had been
revived in 1976.

4. • Import of machinery were relaxed.
• Real exchange rate was allowed to depreciate in
order to make export more attractive to
entrepreneurs.
• Different economic surveys:
• Gross fixed investment as a proportion of GDP
rose from 10.2 percent in 1986-87 to 11.5
percent in 1987-88, 12 percent in 1988-89 and
13.9 percent in 1990-91.
• The merchandise imports to GDP ratio rose from
6.3 percent in 1987-88 to 7.6 percent in 1990-91.

5. • Throughout the 1980s, India ran large current
account deficits. The deficit became large
during second half of the decade.
• From 1980-81 to 1984-85, it ranged from 1.3
and 1.9 percent of the GDP. In 1985-86, it
jumped to 2.4 percent, fell back to 2 percent
in 1987-88 and then shot up to 3.1 percent in
1988-89, 2.6 percent in 1989-90 and 3.4
percent in 1990-91.

6. • Foreign borrowing reflected in CAD made a
positive contribution to growth by allowing
domestic investment to exceed domestic savings,
it also led to a rapid accumulation of foreign debt,
which rose from 20.6 billion dollar in 1980-81 to
64.4 billion dollar in 1989-90.
• Net long term borrowing rising from the annual
average of $1.9 billion during 1980-81 to 1984-85
to $3.5 billion from 1985-86 to 1989-90. The
external debt to GDP ration rose from 17.7
percent in 1984-85 to 24.5 percent in 1989-90.