Economic reforms launched in 1991 were mainly designed to convert India’s economy into a market-oriented, open economy. This transition involved the gradual removal of most of the physical controls such as industrial licensing, exchange control and import controls over a wide area, and the phased abolition of price controls. Another important aspect of liberalization has been a steep reduction of investment in public enterprises, public sector disinvestment, and the opening of most industries to the private sector.
As a result of these policy changes, state governments, no less than private enterprises, have had their spheres and freedom of action enhanced. Each state now is free to develop its economic, social, and intellectual infrastructure in such a way as to attract and develop industries best suited to its natural and human endowments and geographic location. With the abolition of industrial licensing by the central government, states now have the power to approve of the establishment of large industries. States are also in a position to compete for foreign direct investment, with automatic approval of such investment assured in most areas. All these developments represent considerable decentralization of economic decision making.
Since a major part of current investment in the economy is by the private sector, the Central Planning Commission’s control over investment has been drastically reduced. State government investments in sectors such as education, health, power, roads, and irrigation are (in most cases) only nominally under the scrutiny of the Central Planning Commission. These are areas in which a major part of public sector investment will take place in the future, all mainly in the sphere of the states.
One can conclude that liberalization in India has not only led to a much more efficient economic system but has strengthened federalism. The state governments now enjoy powers that, in the spirit of the Constitution, they were meant to enjoy, but which the central government, in order to implement centralized planning, had previously prevented them from using.