CHAPTER

03
Liberalisation, Privatisation
and Globalisation:
AnAppraisal
- In this Chapter...
" Economic Crisis of 1991 Globalisation
Liberalisation Assessment or Apraisal of LPG Policies
" Privatisation

Economic Crisis of 1991 In 1991, India faced an economic crisis relating to

Since independence, India followed the mixed its external debt.
economy framework by combining the The following points highlight the economic crisis
advantages of the capitalist economic system of 1991
with those of the socialist economic system.
" The government was not able to make
However, some scholars argue that this policy
had resulted in the establishment of a variety repayments on its borrowings from abroad.
of rules and laws, which were aimed at " Foreign exchange reserves which are used to
controlling and regulating the economy but import petroleum and other important items,
ended up hampering the process of growth and were only enough to last for two weeks.
development. " The prices of essential goods were rising.
Other scholars state that the increasing role of Thus, the government initiated a new set of
public sector helped India to achieve growth in economic policy measures to improve the
savings, developed a diversified industrial economic condition of India.
sector and has experienced sustained
The government initiated a variety of policies
expansion of agricultural output which has which fall under three heads, viz. liberalisation,
ensured food security. privatisation and globalisation.
Liberalisation. Privatisation and Globalisation: An Appraisal 55

(Uses Responsible forthe Economic Crisis

of
No attempt was made to control such use.
Sufficient steps were not taken to encourage
The origin economic crisis can be traced from exports and reduce imports, so that foreign
e inefficient management of the Indian
economy in the 1980s. The following are the exchange reserves could be built.
ases responsible for the economic crisis 4. Unproductive Public Sector The government
assigned an important role to the public
Causes Responsible for Economic Crisis sector post independence, however its
performance was very poor.
Rising deficit
Except for a few Public Sector Undertakings
Unproductive spendings (PSUs), the majority of themn were incurring
+Unproductive use of debt
Unproductive public sector huge losses which the government had to
bear.
,Risingprices
Inefficient management t 5. Rising Prices The general price level in the
country wasexhibiting inlationary pressure
1. Rising Deficit Budget deficit signifies the due to increase in money supply. There was
excess of government expenditure over its also a shortage of essential goods in the
income. During the 1980s, the revenues market.
earned by the government were quite low. 6. Inefficient Management The government was
The government was forced to spend excess not able to manage the economy in an
of its revenues to meet challenges like efficient way which is evident from its
unemployment, poverty and population unproductive spendings, unable to generate
explosion. adequate revenue and rise in government's
Rising budget deficit forced the government expenditure.
to borrow from banks, from people within the
country and also from international financial Emergence of
institutions. NEP after Economic Crisis
In the late 1980s, government expenditure The Indian Government was forced to approach
began to exceed its revenue by such large the International Bank for Reconstitution and
margins that meeting the expenditure Development (|BRD), popularly known as World
through borrowings also became Bank and International Monetary Fund (IMF) for
unsustainable. financial assistance, due to the crisis.
This increased the debt burden on the These institutions provided $ 7 million as loan to
manage the crisis. In return, these international
economy. The deficit in balance of payment
also depleted the foreign exchange reserves agencies expected India to liberalise and open up
of the country. economy by removing restrictions on private
sector and removing trade restrictions between
2. Unproductive Spendings The government India and other countries.
spent a huge part of its revenues on
development programmes, social sectors and India agreed to conditions of World Bank and
defence. These areas do not generate any IMF and announced the New Economic Policy
returns. The rest of the revenue was also (NEP). This policy consisted of wide range of
Spent in an inefficient manner. economic reforms.

S. Unproductive Use of Debt The foreign The main aim of thepolicy was towards creating
a more competitive environment in the economy
Cxchange borrowed from other countries and
international financial institutions was spent and removing the barriers to entry and growth of
on meeting consumption needs. firms.
 Liberalisation, Privatisation and Globalisation: An Appraisal 57

Industrial licensing was abolished for The banks could also open new branches, after
almost all product categories except fulfilling certain conditions without the
alcohol, cigarettes, hazardous chemicals. consultation of RBI.
industrial explosives, electronics, 3. Increase in Limit on Foreign Investment The
aerospace and drugs and limit on foreign investment in banks was
pharmaceuticals. increased to around 74%.
9 Contraction of Public Sector The number Due tothis, Foreign Institutional Investors
of industries reserved for the public sector (FIls) such as merchant bankers, mutual
was reduced. Presently, only three funds and pension funds were allowed to
industries are reserved for public sector. invest in Indian financial markets.
They are railways, atomic energy
generation and defence.
3. Dereservation of Production of Goods
Fiscal/Tax Reforms
These reforms are concerned with the reforms in
Prior to 1991,production of many goods government's taxation and public expenditure
was reserved for the Small Scale
policies. These policies are collectively known as
Industries (SSIs). These were dereserved fiscal policy.
that enabled the participation of any scale There are two types of taxes
of business in these production areas.
1. Direct Tax It consists of taxes on incomes of
4. Price Fixation and Distribution of
individuals, as well as, profits of business
Products A control was established on
enterprises.
price fixation and distribution of selected
industrial products. In many industries, 2. Indirect Tax It refers to the tax imposed on the
the market has been allowed to determine persons for consumption of goods and services.
the prices. The following tax reforms were introduced
1. Simplification in the Direct Tax Structure
Finuncial Sector Reforms " Since 1991, there has been a continuous
Financial sector includes financial reduction in the taxes on individual incomes
institutions such as commercial banks, as it was felt that high rates of income tax
investment banks, stock exchange and were an important reason for tax evasion.
foreign exchange market. In India, financial It is now widely accepted that moderate rates
Sector is controlled by the Reserve Bank of of income tax encourage savings and
voluntary disclosure of income.
India (RBI). The following reforms were
initiated in this sector " The rate of corporation tax, which was very
high earier, has also been gradually
1. Competition from New Private Sector reduced.
Banks The banking sector was now
" To encourage better compliance on the part
opened for the private sector banks, of taxpayers, many procedures have been
Indian as wellas foreign. This led to an simplified.
increase in competition and expansion of 2. Reduction in Indirect Tax Rates
Services for consumers.
2 Change in the Role of Reserve Bank of " The rates of various indirect taxes, such as
the tax levied on commodities had been
ndia (RBI) RBI's role ischanged from a reduced considerably.
Tegulator' to a facilitator' of the financial
sector. " In 2016, the Indian Parliament passed
This enabled the financial sector to take Goods and Services Tax Act, 2016 to
decision on several matters without simplify and introduce a unified indirect tax
consulting RBI. system in India. It came into effect from July,
2017.
 58 Allinone Economics Class 12h

Foreign Exchange Reforms Recent Reforms

These reforms were related to foreign exchange Introduced under Liberalisation
and foreign trade. These reforms were as follows Recently thefollowing reforms were introduced
1. Devaluation of Rupee Devaluation implies a to encourage the process of liberalisation
fall in the value of domestic currency against
some foreign currency. Demonetisation
In 1991, as an immediate measure to resolve It means removing the status of a currency note
the balance of payments crisis, the rupee was as a legal tender due to which it would no longer
devalued against foreign currencies. This led be acceptable in the market.
to an increase in the inflow of foreign India faced its first demonetisation in 1946 and
exchange. second one in 1978. On both the occasions, the
2. Determination of Exchange Rate by Market reason was tocombat black money that was
Forces Post 1991, India moved to a system of circulating wide and large.
flexible exchange rate, where the exchange On 8th November, 2016, India witnessed its
rate was to be determined on the basis of
third phase of demonetisation, wherein Prime
demand and supply of foreign exchange. The Minister Narendra Modi banned 500 and
government was to have very little or no 1,000 currency notes with immediate effect.
control on the determination of exchange
rate.
Objectives of Demonetisation
Trade and Investment Policy Reforms According to the government, the objectives
These reforms aimed to liberalise foreign trade behind demonetisation policy are
and promote the efficiency of the local industries " To make India corruption free.
by encouraging them to adopt modern " To curb black money.
technologies. " To control escalating price rise.
Earlier, inorder to protect domesticindustries, " To stop fund flow to illegal activity.
India was following policy of quantitative To make people accountable for every rupee
restrictions. It reduced efficiency and they poSsess and pay income tax return.
competitiveness which led to slow growth of " To make a cashless society and create a
manufacturing sector. Digital India.
These reforms were
" Import quotas or restrictions on the quantity of Effects of Demonetisation
goods that can be imported, were abolished. "With banning of 500and 1,000 notes, the
Tariff rates were reduced. country moved one step towards digitalisation.
In the age where almost every person uses a
Policy of import licensing was abolished except mobile phone, the concept of online wallets
incase of hazardous and environmentally came out to be very successful.
sensitive industries. Onlinewallet refers toan electronic device that
" Export duty was completely removed to allows an individual to make electronic
transactions.
increase the competitive position of Indian
goods in the international markets. " The announcement of the demonetisation of the
currency has caused huge inconvenience to the
" Quantitativerestrictions on imports of people.
manufactured consumer goods and Cash crunch became a major problem due to
agricultural products were also completely the unavailability of small currency
denominations.
removed.
Liberalisation,
Privatisation and Globalisation: An Appraisal 59

" It is based on the principle of destination based

Goods ond Services Tax (GST)
defined in Article 366 consumption tax.
The term GST has been " Import of goods and services is subjected to
of goods or
/12A)to mean any tax on supply IGST alongwith applicable custom duties.
services or both except taxes on supply of the
" There are four tax slabs under GST. They are
alcoholic liquor for human consumption,'
tax is a value added tax
5%, 12%, 18% and 28%. Apart from these,
The goods and services for zero-rated tax is applicable on SEZ areas.
levied on most goods and services sold " A business whose aggregate turnover in a fiscal
domestic consumption.
based year exceeds 20 lakh has to get itself
Itis considered as a destination compulsorily registered under GST. For North
consumption tax as the final seller in the supply Eastern States and hilly areas, this limit is set
the
chain passes on the added GST to at 10 lakh.
consumer.
" It has subsumed 17 indirect taxes and 23
However, it is remitted to the government by the cesses.
businesses selling the goods and services. GST
" It provides the benefit of input tax credit. Input
is expected to generate additional revenue for tax credit means to subtract taxes paid on
the government, reduce tax evasion and create
inputs from taxes paid on outputs.
'one nation, one tax and one market'.
" It has provisions related to anti-profiteering. For
Objectives of GST proper implementation of these provisions, a
The various objectives of GST are National Anti-Profiteering Authority (NAA) has
been constituted.
"To eliminate classification dispute between
goods and services. Types of Taxes under GST
" To bring uniformnity in tax rates and There are following three taxes under GST
automated compliances. 1. Central Goods and Services Tax (CGST) It is
"To ensure availability of input tax credit levied on intra-state transactions related to
across the value chain and avoid cascading goods and services by the centre.
effect.
2. State Goods and Services Tax (SGST) It is
Toensure simplification of registration, filing levied on intra-state transactions related to
of return, tax administration and compliance. goods and services by the states.
" To harmonise tax base, laws and
3. Integrated Goods and Services Tax (IGST) It is
administration procedures across the country. levied on inter-state transactions related to
" To minimise tax rate slabs and prevent goods and services and is collected by the
unhealthy competition among states. centre. It is equivalent to the sum total of
To ensure free movement of goods across the CGST and SGST.
cOuntry without any additional tax.
CHECK POINT 02
Characteristics of GST
The following are the characteristics of GST 1. State any one objective of liberalisation.
2. Under trade and investment reforms, policy of import
It is applicable to the whole of India including licensing was
Jammu and Kashmir. 3. There are three tax slab rates under GST. (T/F)
" It is 4. When was rupee first demonetised in India?
applicable on the supply of goods and industries are reserved for
services and not on sale or production of 5. Presently only
goods and services. public sector.
 60
Allinone Economics Class 12th

Privatisation " Providing better goods and services to

Consumers.
It is the process of transferring the ownership or
management of the public sector units to the Encouraging healthy competition within an
private sector. economy.
" Making way for Foreign Direct Investmnent (FDI
The government companies can be converted
into private companies in the following two ways
" By withdrawal of the government from Globalisation
ownership and management of public sector It means integrating the domestic economy with the
Companies. world economy.
" By outright sale of public sector It is an outcome of the set of various policies that
companies
through disinvestment, i.e. selling off the part are aimed at transforming the world towards
of equity shares of Public Sector Enterprises greater interdependence and integration.
(PSEs) to the public. Further, disinvestment It involves creation of network to link up
may be done in two ways
economic, social and geographical boundaries of
(a) Minority Sale In minority sale, upto 26% of the world. It is the process of turning the whole
the shares are sold. world into one borderless world.
(b) Strategic Sale In strategic sale, more than
The objectives of globalisation are as follows
51% and upto 74% of the share capital is
sold to private business houses. " To help the economy to adopt new and flexible
methods of production.
To increase the flow of foreign capital into the
Moharatnos, Navrainas and Miniratnas country.
The Government of India accorded the status of
" To improve the quality of goods produced in
Maharatna, Nauratna and Miniratna to certain the economy.
Public Sector Undertakings (PSUs) which fulfil
certain eligibility criteria. To improve the working of the banking and the
These PSUs were given greater managerial and foreign sector.
" To accelerate the rate of human
operational autonomy in taking various decisions in the country.
development
to run the company efficiently and thus increase
their profits. A few examples of PSUs which have " To enhance global integration and create a new
been granted this status are as follows world order which encourages free trade
" Maharatnas Indian Oil Corporation Limited and between nations.
Steel Authority of India Limited.
" Navratnas Hindustan Aeronautics Limited and Steps to Promote Globalisation
Mahanagar Telephone Nigam Limite. The government undertook the following steps to
" Miniratnas Bharat Sanchar Nigam Limited,
Airport Authority of India, Indian Railway promote globalisation in the economy
Catering and Tourism Corporation Limited. 1. Increase in Equity Limit of Foreign
Investment Equity limit in general has been
Objectives of Privatisation raised from 40% to 51%. In 47 high priority
The objectives of privatisation are as follows industries and in export trading houses,
" Improving the financial condition of the Foreign Direct Investment (FDI) is allowed
government. upto the extent of 100%.
" Raising funds through 2. Partial Convertibility It means sale and
" Reducing the workload of
disinvestment.
public sector. purchase of foreign currency at a price
" Increasing the efficiency of the determined by the market forces of demand
government and supply.
undertakings.
Liberalisation, Privatisation and Globalisation: An Appraisal
61

convertibility as . There has been a tremendous growth in the

In India, there is partial
there are restrictions on capital
account Information Technology (IT) industry in India.
transactions, though the rupee is fully
convertible in the current account.
Global Footprint
2Liberal Foreign Trade Policy A long-term As a result of globalisation, many Indian
liberal foreign trade policy has been companies have expanded their operations to other
implemented which encourages free trade countries. Prominent among them are
among countries. " ONGC Videsh, a subsidiary of the
Indian public
sector enterprise, Oil and Natural Gas
A Reduction in Tariffs Custom duties have Corporation has projects in 16 countries.
been reduced drastically. Before 1991. Tata Steel, a private company established in
Custom duties were as high as 400%, but 1907, is one of the top ten global steel
post 1991, maximum rate of duty is only companies in the world having operations in 26
countries and sell its products in 50 countries.
10%.
" HCL Technologies, one of the top five IT
companies in India has offices in 31 countries
Outsourcing: and employs about 15,000 persons abroad.
An Outcome of Globalisation "Dr Reddy's Laboratories has manufacturing
plants and research centres across the world.
Outsourcing refers to contracting out some of its
activities, which were earlier performed by an
organisation, to a third party. International Organisations
In outsourcing, a company hires regular service Promoting Globalisation
from external sources (mostly from other The following international organisations play a
countries),which were previously provided crucial role in the process of globalisation
internally or from within the country like legal
advice, computer service, advertisement, etc. World Trade Organisation (WTO)
In other words, outsourcing means getting work WTO is the only international organisation
done on contract from someone outside. concerned with international laws on trade
between nations.
Asa form of economic activity, outsourcing has
intensified in recent times, because of the growth The main objective is to ensure that trade flows
of fast modes of communication and the growth smoothly and freely and to promote multilateral
of Information Technology (1T). trade agreements.
Many services such as voice-based business It was founded in 1995 as the successor
organisation to the General Agreement on Trade
Processes (popularly known as BPO or call
centres), record keeping, accountancy, banking and Tariff (GATT). GATT was established in 1948
Services, musicrecording, film editing, book with 23 countries as the global trade
transcription, clinical advice or even teaching are organisation to administer all multilateral trade
being outsourced by companies in developed agreements by providing equal opportunities to
COuntries to India. allcountries in the international market.
OSt multinational corporations and even smal TheWTO agreement covers the following
vOmpanies are outsourcing their services to India important points
trading
because of the following reasons It is expected to establish a rule-based
In India, skilled workers can be availed at a regime in which nations cannot place arbitrary
Cheaper cost or low wage rates. restrictions on trade.
 wins.nown
onference, as is Bank
ternationalfor conomies, onductConference
eficitbuntries nain t
econstruction function rganisation "nternationalwas markets
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developing " being "liberalisation
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Some and regulations,
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popularly
set-up agriculturalwhile among a has the Greater
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an throughresources
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Ensuring
as in objective conceived
major reducing
scholarsa
and in
Balance developed kept forefront
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sister to member
along
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which held ofbutopen the
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1944
known was its removal goods
the
stitutions and March, grant to Monetary
of
in
developed countriesdeveloped
aresubsidies question tariff safeguards
commitments of
optimumand
with of setting-up to at their of developing
trade, of trade
under memnber
Development as
Payments wereadminister 1944 the not countries ofthe
rates. framing access protecting
of
and
IMF, World short-term international
experiencing Brettoncountries. markets feel (bilateral
tariff utilisation
services
1947. liquidity allowed restrictionsmade
WTO
Bretton and Fund givennations, the and to
henceor
of cheated
file usefulness as
world. fair of all as the
Bretton Bank (BoP). set-up
sucha Woods(IMF) access for in advocating WTO,
towards in
well
the global member and to
Woods (BRD) loans of code complaints
their and environment. of
these developed trade facilitate
which its an in as on
WTO, India as world
temporaryIMF multilateral)
Woods of countries, imports rules, non-tariff
two
mnemberto good 1946. to they
of countries.
started the
ocCurs th e has
India by
are are over been
The

policiesPositive
MainGlobalisation)
and period. since
performance The
Assessment
Appraisal or infrastructure.
1. 03 rebuild and
1. 5. 4. 3. 2. CHECK POINT on World
The tworapidvibrant
the2007-12.Centdecades. LPG A reform WhichStateWhatState its
Twins?
negative providing has
wthindustrial The "
Agriculture
itnegative
decline during
During highlights
Vibrant its share
began growth growth policies. during LPG
introduction. any isany railroads, Bank
during two 188
growth
economy
Effects process ofinstitutions meant
one one in
means
2012-15, (Liberalisation, of members. is
in in2013-14,
to growth rates
Economy
reforms
effects
Policies the
LPG objectivemethod
the
that
loans
headquartered
the the 1980-91 of After in showing by PSUs
highways
show recorded GDP of Policies globalisation? the to
nt of GDP
with on Indian LPG
has
growth
duringsector
but there Let to to government
indifferent
but increased 1991, India are thehave completed are of governmernt
private The
Economics
caass1hAllinone
a on positive privatise.
nuous the to the Poliieseconomy economy us known WTO.
this a has given had
Privatisation and World
8.2 a now
witnessed
subsequent high India
introduction
continual has enterpreneurs at
per both other
ars. sector sectors been as Washington
in fo
Bank
becomebelow effects lookthree has
growth from Bretton
cent witnessed of during sold order

pos2012-
itive 13,sudden witnessed setback
a positive at focuses
a 5.6 basis India.
during of and decadesthe Wood.
100% to
ye rate per of a LPG this of
Dc
in 1or a

Libe
 Liberalisation, Privatisation and
Globalisation: An Appraisal 63

The service sector continued to

witness a
high level of growth which was higher
the overall GDP growth in than Negative Effects of LPG Policies
2014-15. This Main points showing negative effects of LPG
sector witnessed the high growth rate of policies during reforms are given below
9.8 per cent.
1. Neglect of Agriculture There has been
Growth of GDP and Major Sectors (in %) decline in agricultural growth rate.
1980- 1992-2002-2007-2012
Sector
1991 2001 2007 2012 2013
2013
2014
2014 This decline is the main cause of the problem
2015 of rural distress that reached crisis in some
Agriculture 3.6 3.3 2.3 3.2 1.5 4.2
7.1 6.5
-0.2* parts of the country.
Industry 9.4 7.4 3.6 5 -7.0*
Services 6.7 8.2 7.8
Following points highlight the same
8.1 7.8 9.8* "Public investment in agriculture sector
Total 5.6 6.4 7.8 8.2 5.6 6.6 7.4 especially in infrastructure which includes
Sources Economic Survey for various years, irrigation, power, roads, market linkages
Ministry of Finance, Government of India. and research and development has been
reduced in the reform period.
Note *Data pertaning to Gross alue Added (GVA), The
GVA is estimated from GDP by adding subsidies on " The removal of fertiliser subsidy has led to
production and subtracting indirect taxes. increase in the cost of production which
2. Flow of Private Foreign Investment Private has severely affected the small and
marginal farmers.
foreign investment has increased
" This sector has been experiencing a
considerably with the introduction of LPG number of policy changes such as
policies, both in the form of FDI and reduction in import duties on
portfolio investment. agricultural products, low minimum
Foreign investment which includes Foreign support price and lifting of quantitative
Direct Investment (FDI) and Foreign restrictions on the imports of agricultural
Institutional Investment (FII) has increased products.
from about US $ 100 million in 1990-91 to These have adversely affected Indian
US $ 30 billion in 2017-18. farmers as they now have to face increased
J. Increase in Foreign Exchange Reserves international competition.
Foreign exchange reserves have risen from " Due to export oriented policy strategies in
about US $ 6billion in 1990-91 to about US agriculture, there has been a shift from
$ 413 billion in 2018-19. India is presently production for the domestic market
towards production for the export market
One of the largest foreign exchange reserve focusing on cash crops in lieu of
holders in the world. This encourages
international confidence in our country. production of food grains. This led to the
rise in prices of food grains.
*.A Stimulant to Industrial Production These 2. Uneven Growth in Industrial Sector
policies have stimulated the process of
Industrial sector registered uneven growth
Industrial production, leading to increased during this period. Cheaper imports have
Productivity. The export of autoparts, decreased the demand for domestic
engineering goods, IT software and textiles, industrial goods and domestic
increased. manufacturers are facing competition from
D. Role of Private Sector The role of imports.
private
Sector increased after the abolition of Due tolack of investment, infrastructural
Industrial licensing system and removal of facilities such as power supply, have
Testrictions for the entry of private sector. remained inadequate.
 Alinone Economics Class12th
64

Sirdila Tragedy
Moreover, a developing country like India still
does not have the access to developed Privatisation of power supply in Andhra Pradesh
rates
Countries' markets because of high non-tariff resulted in substantial increase in power
to shutdown :
This caused many powerlooms
barriers. small town Sircilla, in
Andhra Pradesh. As a
e-g. although allquota restrictions on exports of this, 50workers
committed suicide in Sirr result
livelihood. This
of textiles and clothing have been removed in because of loss in means of
Sircilla Tragedy.
India, USA has not removed their quota incident is known as
restriction on import of textiles from India
and China.
Conclusion
3. Less Employment Opportunities Though the through
GDP growth rate has increased in the reform The process of globalisation
liberalisation and privatisation policies has
period, yet this growth has not generated produced positive as well as negative results for
sufficient employment opportunities in the India and other countries.
country.
Some scholars see globalisation as an opportunity
4. Failure of Disinvestment Policies The
disinvestment policy initiated by the in terms of greater access to global markets, high
technology, etc. while critics argue that
government was not successful. The globalisation is a strategy of developed countries
government was not able to achieve the
targets set for disinvestment. The assets of
toexpand their markets in other countries.
Viewed from the Indian context, some studies
PSEs have been undervalued and sold to the
private sector. have stated that

Also, the earnings from disinvestment are " Crisis erupted in the early 1990s was an
used to balance the shortage of revenues of outcome of deep rooted inequalities in Indian
government instead of using it for the society and economic reform policies initiated
by government further aggravated the
development of PSEs and building social
infrastructure in the country. inequalities.
5. Failure of Fiscal Policies The reforms
" It has increased the income and quality of
introduced in fiscal policies have also not consumption of high income groups only.
been able to provide desired results. Tax Growth has been concentrated only in some
evasion is still high. select areas in the services sector like
Tariff reduction has reduced the scope of telecommunication, finance, travel and
raising revenue through custom duty. Tax hospitality services, etc.
incentives given to foreign investors further
reduced the scope for raising tax revenues. CHECK POINT 04
6. Concentration of Growth Process Growth 1. State any one positive effect of LPG policies.
has been concentrated only in selected areas 2. With the introduction of LPG policies, the growu
in the service sector such as telecomnm rate of GDP has increased to

unication, IT, finance, entertainment, travel 3. LPG policies have failed to check inflation. (1/(T/F)
and hospitality services, real estate and 4. The LPG policies have neglected agriculture.
developing
5. Globalisation has not been fair for the
trade rather than vital sectors such as countries. Do you agree?
agriculture and industry.
NCERT FOLDER
1Why were reforms introduced in India?
(iii)
There were many reasons due to which economic
reforms were a necessity in our country.
Multilateral Negotiations
agreements cover The WTO
services to facilitatetrade goods as well as
in
through multilateral international
These were
trade
() Poor Performance of Industries Before +ha trade
leading to removal of tariff negotiations
1990s, the industries were mostly tariff barriers. This helps inas well as non
gOvernment-owned. The employees did not
feel the need to be either greater market access to all providing
member
countries.
effective because their jobscompetitive or
were secure. 3 Why did RBI have to
The state had the ultimate
(ii) Adverse Balance of authority. controller to facilitatorchange its role from
of financial sector in
biggest factors Payments One of the India?
that played a major role in Ans Before
bringing about the
the fact that India'seconomic of
reforms was liberalisation, RBI used to
control the financial sector that manage and
balance payments finance related incorporates
were unsustainable. It was also true that
the little foreign
establishments like commercial
banks, investment banks, stock trade
was not enough.
exchange with the country and foreign exchange market. activities
With the economic
sector reforms, RBIliberalisation
(iii) Rising Fiscal Deficit India's fiscal and financial
was constantly rising due to the wrong
deficit expected move its job
to
from a regulator to facilitator of the budgetary
policies and improper implementation of the segment. This infers that financial
reforms between 1950 to 1990s. were allowed to settle on their
own
organisations
numerous issues without speaking choices
on
(iv) Rising Inflation The rate of
inflation at the with the RBI.
time was immense. Poor and marginalised This opened up the entry ways of financial
people of the society did not have enough sectors for the private players. The
access to food. goal behind the financial changes wasfundamental
to
At a massive 13.88%, this inflation rate support private area participation, increment in
could not be borne anymore. Liquidity had competition and permitting market force to work
to be poured into the economy and had to in the financial segment.
be done very quickly. The reform policies led to establishment of
private sector banks. Banks have been given
2 Why is it necessary to become a member of freedom to set up new branches and determine
WTO? the rate of interest to be offered on various
Ans lt is necessary to become a member of WTO deposits.
because of the following reasons Banks have been given permission to generate
) Rule Based Trading WTO is formed to resources from India and abroad through
establish a rule based trading system in capital market. All this has led to a substantial
which arbitrary restrictions cannot be growth in the financial sector.
placed on trade by different nations. This 4 How is RBI controlling the commercial banks?
helps in making the trade environment Ans RBI controls the commercial banks through the
more stable. following measures
(1) Equality of Opportunities Under WTO, (i) RBI Fixes the Bank Rate and Repo
the member countries confer the status of Rate Bank rate is the interest rate at
Most Favoured Nation (MFN) to all other
member countries. which the RBI lend funds to other
commercial banks in the country. It is also
Thus, WTO provides equal opportunities to called the discount rate. In order to control
all countries in the
international market for the supply of currency in the economic
trading purposes. system, RBI often uses the bank rate.
66 Allinone Economics Class 12th

On the other hand, Repo Rate is the rate at Basis Strategic Sale
which commercial bankS will borrow the Minority Sale
Control The control and The control and
funds from the RBI against the securities. management of PSU
In order to make credit dearer, RBI management of PSU
is transferred to the remains with the
increases these rates. private sector. government as it
(ii) Fixing Margin Requirements The margin holds the majority
stake.
refers to the proportion of the loan amount
which is not financed by the bank. By (ii) Differences between bilateral and
increasing or decreasing margin multilateral trade are
requirements, the RBI tries to control the Bilateral
lending capacity of banks. Basis
Trade
Multilateral
Trade
(iüi) Credit Rationing RBI can fx the upper
Meaning It is a trade It is a trade
limit of credit amount to be granted for agreement
various purposes. between two
agreement among
more than two
This can help in lowering the credit COuntries. countries.
exposure of commercial banks to Economic
undesirable sectors. Encourages Encourages
Cooperation economic globalisation,
5What do you understand by devaluation of cooperation integrating many
between two countries of the
rupee? countries. world.
Ans Devaluation of rupee means a deliberate
downward adjustment in the official exchange (iii) Differences between tariff and non-tariff
rate of rupee relative to other currencies. barriers are
e.g. if the dollar-rupee exchange rate which was Basis Tariff Barriers Non-tariff Barriers
$ 1=750, is changed to $ 1 = 60, under fixed
Meaning It refers to the taxes It refers to the
exchange rate system by the government, then imposed on the restrictions other
in such an instance, rupee is said to be
devalued.
imports by a country than taxes, imposed
for providing on imports by a
There were two important implications of protection to its country for providing
devaluation of rupee in 1991 domesticindustries. protection to its
(i) First, devaluation made India's exports domestic industries.
relatively less expensive for foreigners and Purpose Tariff barriers are Non-tariff barriers
increased their competitiveness. allowed by the World like import quotas
(i) Second, it made foreign products relatively Trade Organisation and voluntary export
more expensive for domestic consumers, (WTO) to be imposed restraints are now
by its member abolished under
discouraging imports. countries, though at WTO regime.
6 Distinguish between the following. reasonable rates.
() Strategic and minority sale 7 Why are tariffs imposed?
(ii) Bilateral and multilateral trade Ans Tariffs are taxes imposed on the imports by a
(iii) Tariff and non-tariff barriers country for providing protection to its domestic
Ans i) Differences between strategic and minority industries. These are imposed to increase
sale are the price of imported goods in the domestic
Basis country.
Strategic Sale Minority Sale The rise in price discourages consumption of
Meaning Strategic sale Minority sale involves imported goods by consumers and thus,
involves the sale of the sale of less than domestic industries are able to compete with
minimum 51% stake 49% stake of a PSUto
of a Public Sector imports from other countries. Tariffs may also
the private sector.
Unit (PSU) to the be imposed on those imported goods which are
private sector. socially undesirable. e.g. in India custom duty is
imposed on imports.
Liberalisation.Privatisation and Globalisation: An Appraisal 67

quantitative
What is the meaning of
& AMs Most multinational corporations and even small
restrictions? companies are outsourcing their services to
Quantitative restrictions are the limits imposed India because of the following advantages
s
on the quantity oft goods
that are imported or () Availability of Cheap Labour India is a
and
exported. It includes import quotas signed by country with a large population and thus,
voluntary export restraints, which are abundant supply of labour. Due to this
foreign countries.
the exporters of reason, labour in India is available at low
Quantitative restrictions are imposed to
domestic
wage rates.
discourage imports and thus, protect This helps foreign companies in reducing
cheaper and
industries from competition withmanufactured cost of operation by outsourcing their
technologically advanced goods business processes to India.
restrictions have
by other nations. Quantitative (ii) Skill and Accuracy India has a wide pool
to
heen abolished by WTO in a phased marnner of talent in the form of educated and
facilitate world trade. trained youth who have the required skill
are and can work with accuracy in the
9 Those Public Sector Undertakings which
making profits should be privatised. Do you business processes such as accounting,
record keeping, IT consultancy, etc.
agree with this view? Why? (ii) Continuity and Risk Management
though
Ans No, I do not agree with this view. Even Periods of high employee turnover add
disinvestment would increase the revenue of the uncertainty to the operations of a company.
should
government, the profit-making industries
Outsourcing will provide a level of continuity
be retained in the public sector due to the to the company while reducing the risk that a
following reasons substandard level of operation would bring to
the
(i) The profits of these undertakings add to the company.
revenues of the government and can be used
to develop other PSUs and the infrastructure 12 Do youthink the Nauratrna policy of the
government helps in improving the
of the company. performance of public sector undertakings in
(ü) If the assets of the profit-making industries India? How?
are undervalued, it will lead to a
substantial loss to the government, when Ans Yes, the Nauratna policy of the government helps
India.
sold to the private sector. in improving the performance of PSUs in
declares
(i) The government should retain the strategic The government identifies PSUs and
Miniratnas
profit-making industries to avoid emergence them as Maharatnas, Nawratnas and
efficiency and enable
of any monopoly in the private sector. in order to improve their
greater
them to compete globally. They are given taking
10 Doyou think outsourcing is good for managerial and operational autonomy in
India? Why are developed countries various decisions.
opposing it? enterprises were
In 2011, about 90 public
Ans Yes, outsourcing is good for India since it has designated with different status. The granting of
resulted in better
generated new employment opportunities in the this special status
Indian economy, contributed to GDP and has perfornance of these companies.
increased the foreign reserves of the country.
factors responsible for the
The developed countries are opposing 13 What are the majorservice sector?
outsourcing services to India because it results high growth of the
in loss of employment opportunities in these responsible for the high
countries. Ans The major factors
service sector are as
follows
growth of the
11India is often called as Income Elasticity of Demand It
High
destination' of the world.Outsourcing
(i) elasticity of
that income
Discuss the prime has been noticed ismore than one.
reasons for this name given to India. CBSE 2020 demand for services increases at
for services
Or India has certain advantages which makes it Hence, the demanddemand for commodities,
than
a favourite outsourcing destination. What are a faster rate
increase in income.
these advantages? with the
 68 Allinone Economics Class 12th

(ii) Technical and Structural Changes The

technical and structural changes in the (ii) Globalisation created conditions for the frea
economy, have made it an attractive movement of goods and services from
destination for outsourcing, contributing foreign countries that adversely affected the
towards the growth of service sector. local industries and employment
(ii) Information Technology Revolution opportunities in developing countries.
With the advent of the information (iii) There was inadequate investment in
technology revolution, it has become infrastructural facilities such as power
possible to deliver services over long supply.
distance at a reasonable cost.
(iv) A developing country like India still does
Thus, trading in services has increased not have the access to developed countries
worldwide, also benefitting India. markets because of high non-tariff barriers.
(iv) Economic Reforms in 1991 Economic 16 Discuss economic reforms in India in the light
reforms initiated in 1991, increased of social justice and welfare.
dermand for manufacturing industry,
thereby benefitting the service sector also. Ans The economic reforms initiated through NEP
Liberalisation of financial sector encouraged had benefitted the country in many ways but
the growth of financial services. Reforms in they have not promoted social justice and
welfare.
certain segments of infrastructure also
contributed to the growth of services. This can be explained in the following ways
14 Agricultural sector appears to be adversely
(i) Economic reforms helped the country to
become a vibrant economy, have stimulated
affected by the reform process. Why?
industrial production, helped to check fiscal
Or "Agriculture sector has been adversely deficit and inflation.
affected by the economic reform process." They also led to a substantial increase of
Comment. CBSE 2023
foreign exchange reserves and foreign
Ans Due to following reasons, agricultural sector has investment. However, these reforms have
been adversely affected by the reform process led to an increase in the income of those
(i) Public investment in agricultural sector who were already rich.
especially in infrastructure which includes Quality of consumption of only high income
irrigation, power, roads, market linkages groups has increased and economic growth
and research and extension has been has not trickled down to the poorer sections
reduced in the reform period. of the society.
(ü) The removal of fertiliser subsidy has led to (ü) Growth has been concentrated only in some
increase in the cost of production, which selected areas in the service sector such as
has severely affected the small and telecommunication, information technology,
marginal farmers. finance, entertainment, travel, hospitality
(ii) Export oriented policy strategies in services, real estate and trade. Vital
agriculture have marked a shift from sectors, such as agriculture and industry,
production for the domestic market towards which provided livelihood to millions of
people in the country have not been
production for the export market focusing
benefitted much from reforms thereby
on cash crops in lieu of production of increasing income disparities.
foodgrains.
(1) Large scale production has been promoted
15 Why has the industrial sector performed under reforms at the cost of small scale
poorly in the reform period? industries, again leading to concentration O
economic power with large industrial
Ans The industrial sector has performed poorly in houses and MNCs.
the reform period because of the following
reasons So, we can conclude that economic reforms in
India have not promoted social justice and
(1) Cheaper imports have decreased the welfare.
demand for domestic industrial goods.