Revision summary
1991 liberalisation opened trade, capital, and technology after the licence-permit years. Goods exports diversified and IT services became a strong surplus line; merchandise often stays in deficit. FEMA replaced FERA; FDI is stickier than portfolio flows that can reverse fast. Technology entered through joint ventures and TRIPS-era rules, but chips and modules still show import dependence. The net effect is faster open growth plus external and capability risk.
Model answer
Introduction
Liberalisation after 1991 opened trade, capital, and technology that a licence-permit economy had rationed. Globalisation is that opening plus India’s insertion into world production and finance. The effects are higher growth and choice, and also external vulnerability and uneven capability.
Body
Foreign trade
- Tariffs fell, quantitative restrictions were largely wound down, and India joined a WTO-era goods and services market.
- Merchandise exports diversified into engineering, chemicals, gems, and later electronics assembly; services exports — especially IT and ITeS — became a durable surplus line.
- Import of oil, gold, electronics, and capital goods rose with growth, so the merchandise account often stays in deficit even when services help the current account.
- Firms gained scale and quality from export discipline; uncompetitive small units faced cheap imports, which is adjustment, not a free lunch.
Capital flows
- FERA gave way to FEMA (1999): current-account convertibility and a managed capital account replaced a criminalised foreign-exchange regime.
- Foreign direct investment brought longer-term plant, while foreign portfolio investment brought stock- and debt-market liquidity that can reverse in a risk-off week.
- External commercial borrowing and NRI deposits widened the finance menu; they also import global interest-rate shocks.
- The effect is cheaper capital and deeper markets, paid for with exchange-rate and sudden-stop risk that 1991 itself had advertised.
Technology transfer
- Joint ventures, FDI, and TRIPS-era patent rules sped the inflow of process and product know-how in auto, pharma, telecom, and later renewables.
- Reverse engineering and a strong generic-pharma base show that transfer is not only a multinational gift; domestic absorptive capacity decides what sticks.
- Dependence on imported chips, machine tools, and solar modules shows the other face: globalisation can freeze a country as assembler unless industrial policy rebuilds the ladder.
Liberalisation therefore globalised opportunity and risk together. Trade, capital, and technology all moved; capability did not move equally.
Flow diagram
flowchart TD L[1991 liberalisation] --> T[Trade WTO goods services] L --> C[Capital FDI FPI FEMA] L --> K[Technology FDI TRIPS] T --> G[Higher growth choice] C --> R[Sudden stop risk] K --> A[Absorptive capacity]
Conclusion
Globalisation and liberalisation opened India’s trade, capital, and technology after 1991. Trade grew and services exports matured; capital became cheaper and more flighty under FEMA; technology arrived through FDI and TRIPS, yet strategic imports remain. The effect is faster, more open growth that still needs domestic capability so the current account and the shop floor are not permanently borrowed.
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Next question in the 2022 paper (Q14). View answer →
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Did liberalisation only help services?
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Is all foreign capital the same?
No. FDI is longer-term. Portfolio flows and short debt can leave in a global scare.
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