A cycle of Reversal – on India’s Protectionist Policies

Source– The post is based on the article “A cycle of Reversal” published in “Business Standard” on 12th August 2023.

Syllabus: GS3- Effects of Liberalization on the Economy

Relevance: Issues related to protectionist policies

News– The article explains the significance of competition for businesses. It also explains the impact of protectionist policies on Indian consumers in the pre-liberalisation era.

What is the impact of competition on businesses?

In the absence of competition, businesses tend to become complacent. Service providers often lower their standards, and manufacturers may compromise on quality.

Businesses charge higher prices than warranted, and take advantage of guaranteed markets and the lack of competition.

How protectionist policies in the pre-liberalisation era impacted Indian consumers?

Between 1947 and 1991, the country’s economic policy exhibited a distinct trend toward isolationism. The introduction of red tape through licensing increased, import tariffs rose, and the prohibition of various imported goods was common practice.

During this period, only a handful of companies held manufacturing licenses, and innovation was stifled.

Even minor inventions, like a new design for a bicycle lamp, required licensing. Additionally, major sectors like banking, aviation, mining, and telecommunications were nationalized and transformed into government monopolies. This further restricted competition.

Indian consumers had just two car models to choose from. Potential car buyers were obliged to place a deposit and endure months of waiting for delivery. Obtaining a new telephone connection took up to three years to become operational

In case of air travel, Indian Airlines was the sole option. It imposed higher fares compared to other prominent global airlines.

The telephone service was expensive, was also of poor quality and one of the priciest globally. Almost everything manufactured in India exhibited subpar quality. Plugs wouldn’t fit into outlets correctly.

Most household appliances were absent. Microwaves, washing machines, dishwashers, high-performance bicycles, fashionable designer attire were non-existent.

Importing goods posed considerable challenges. Stringent controls were imposed on foreign exchange, and a significant number of items were prohibited. Indians traveling abroad were only allowed an annual allowance of $50.

Even individuals who earned scholarships to pursue education abroad struggled with obtaining foreign exchange for their studies.

How things changed after liberalization?

Remarkably, quality improvements were noted in various sectors as competition was permitted. New players differentiated themselves by offering higher quality products at lower prices.

Telecom market, swiftly transformed into the most affordable. Consumers gained access to over 100 models from numerous automobile companies.

Students could secure loans from private banks to pursue education abroad, even if they didn’t come from affluent backgrounds.