Chapter – 3

Economic Reform since 1991

Economic Reforms Since 1991 Or New Economic Policy
- Syllabus Features and appraisals of liberalization, privatization and globalization (LPG policy).
- Concepts of demonetization and GST Major causes were responsible for the change in the economic
policies:

1. Mounting fiscal deficit: Fiscal deficit means difference between the total expenditure and total receipts
minus loans. It is equivalent to the total borrowings by the government. A substantial rise in non: development
expenditure was the root cause behind the mounting fiscal deficit. In 1981-82 it was 5.4% of GDP and in 1990-
91 it rose up to 8.4% of GDP.
In 1980-81 interest payment on public debt was 10% of total govt, expenditure which became 36.4% in 1991.
Due to persistence rise in fiscal deficit, there was corresponding rise in public debt and interest payment liability

2. Adverse balance of payment: Balance of payment is the difference between total receipts and total payments
of country on account of its economic transactions with the rest of the world When outflow of foreign exchange
is more than inflow of foreign exchange balance becomes adverse. Before 1991, values of exports were less due
to poor quality of imports were more despite of heavy tariff and quotas.

3. Gulf Crises: On account of Iraq war in 1990-91, prices of petrol shot up. India used to foreign huge amount
of remittances from gulf countries in foreign exchange, In the wake of war, this took a serious hit. Gulf crisis
thus further deepened the Bop crisis.

4. Fall in Foreign Exchange reserves: These are the reserves of foreign assets like foreign currencies, foreign
securities etc. Foreign exchange reserves were extensively used to meet consumption requirements and
developmental projects. Foreign exchange reserves declined to a level that was not adequate to finance imports
for more than two weeks) Them was also not sufficient foreign exchange to pay the interest (on borrowings) to
international money lenders. Also, no country or international funder was willing to lend to India.
Foreign exchange reserves of India in March 1991 $55.8 Billion
Foreign Exchange reserves in Aug 2021 $ 620 Billion
Gold Reserve with RBI in March 1991 47 tons
Gold Reserves with RBI in Aug 2021: 705.6 tons (June 2021)
Gold Reserves with the Federal Bank of USA in 2021133 tons

5. Rise in Prices (inflation): In the year 1991, lack of economic growth leads to the shortage of essential
commodities made a consistent rise in price level. The inflation rate was 16.7%. One of the major reasons of
inflation was deficit financing I, e. borrowings, by the government from RBI to meet its deficit. It leads to more
money supply in the economy which increases the level of aggregate demand and if aggregate supply cannot
increase at the same rate, prices are bound to rise.

6. Poor performance of Public Sector Undertaking: The industrial sector, business sector and agricultural
sector became well diversified by 1990 largely due to the public sector, yet overall performance was
disappointing. Many PSU's incurred huge losses but continued to function because it is difficult to close a
government undertaking even if it is a drain on the nation's limited resources.

7. Inefficient Management: The origin of financial crises can be traced from the inefficient management of
the Indian economy in the 1980s, Government expenditure was constantly greater than its revenue. It was due
to lack of finances, defective policies and inefficient administration which led to the need for economic reforms.

ECONOMIC REFORMS SINCE 1991-NEW ECONOMIC POLICY (NEP)

India approached the International Bank for Reconstruction and Development (IBRD), popularly known as
World Bank and the International Monetary Fund (IMF) and received US $ 7 billion as loan to manage the
crisis. For availing the loan, these international agencies expected India to liberalise and open up the economy
by:
- Removing restrictions on the private sector.
- Reducing the role of government in many areas.
- Removing trade restrictions.
Economic Reforms: It is a long-term multi-dimensional package of various policies and programmes for
further economic development. The NEP can be broadly classified into two kinds of measures:
1. Stabilizing Measures: They refer to short term measures which aim at:
- Correcting weaknesses of the balance of payments by maintaining sufficient foreign exchange reserves; and -
- Controlling inflation by keeping the rising prices under control.
2. Structural Reform Measures: They refer to long term measures which aim at: Improving the efficiency of
the economy; and Increasing international competitiveness by removing the rigidities in various segments of
Indian economy. It includes reforms in agricultural sector, industrial sector, financial sector, fiscal sector,
international trade etc.
PGT ECONOMICS – BHAVESH SONI (8349965291)
 The objectives of New Economic Policy are:
(a) To reduce fiscal deficit and to have relative price stability.
(b) To reduce the area of operation of the public sector and to open up more areas for the private sector.
(c) To liberalise industrial policy and abolish industrial licensing for most of the private sector industries.
(d) To encourage inflow of foreign ovate sector, capital by granting mora concession to foreign direct
investment.
(e) To liberalise foreign trade by reducing tariff duties and abolishing quota restrictions in case of many imports.

NEP-Policy of Liberalisation, Privatisation and Globalisation (LPG)

1. Liberalisation
2. Privatisation
3. Globalisation
LIBERALISATION
Liberalisation: Liberalisation of the economy means its freedom from direct or physical controls imposed
by the government.
OR
Liberalisation means removing all unnecessary control restrictions like permits, licenses, protection, duties,
quotas, etc. imposed by the government.

Objectives of Liberalisation:
1. To raise internal competitiveness of industries production
2. To raise foreign investment and technology
3. To reduce debt burden of the country
4. To get an opportunity to export to developed countries and to import capital goods and machinery from them.

Liberalisation Measures:
Liberalisation was introduced in many areas in July 1991. These were:

1. Industrial Sector Reforms:

Government announced the New Industrial Policy in 1991. The main industrial reforms were:
(a) Abolition of Industrial Licensing: Industrial licensing was abolished for all projects except for 6 industries
related to security and strategic concerns, social reasons, hazardous chemicals and overriding environmental
reasons and items of elitist consumption. These industries are: (i) alcohol, (ii) cigarettes, (iii) hazardous
chemicals (iv) industrial explosives, (v) electronics (vi) Aerospace & Defense equipment’s, (vii) drugs and
pharmaceuticals.
(b) Contraction of Public Sector: The number of industries exclusively reserved for the public sector has been
reduced from 17 to 2. Now it is only two i.e. atomic energy generation and some core activities in railway
transport.
(c) Reforms in Small Scale Industries: According to the new policy investment limit of small-scale industries
has been increased to five crores with a view to modernise them. Many goods produced by SSI units have now
been de-reserved. Forces of market are allowed to determine allocation of resource to different uses rather than
the directive policy of the government.
(d) Freedom to import Capital Goods: Under the policy of liberalisation Indian industries will be free to
import machines and raw material from abroad in order to expand and modernize themselves.
(e) Price Determination by Market: Before 1991, there were controls on price fixation and distribution of
selected industrial products. After 1991 in many industries, the market has been allowed to determine the prices.
(f) Expansion of production capacity: Earlier production capacity was linked with licensing. Now, freedom
from licensing implied freedom from capacity constraints. What to produce and how much to produce was now
a matter of producer's choice depending on market conditions.
(g) Monopolies and Restrictive Trade Practices (MRTP) Act: With the introduction of liberalisation and
expansion schemes, the requirement for large companies, to seek prior approval for expansion, establishment
of new undertakings, merger, amalgamations, etc., were eliminated. MRTP Act has been replaced by
Competition Act, 2002, which is more liberal. The Competition Act, 2002 was amended by the Competition
(Amendment) Act, 2007 and again by the Competition (Amendment Act, 2009.

2. Financial Sector Reforms: Prior to 1991, banking institutions were subject to foo much control by the RBI
through high bank rate, high cash reserve ratio and statutory liquidity ratio. This sector is controlled by Reserve
Bank of India (RBI). Reforms in financial sector aimed at providing greater autonomy to the financial
institutions.
Financial sector includes:
(a) Banking and non-banking financial institutions,
(b) Stock exchange market, and
(c) Foreign exchange market.

Following reforms are introduced in Financial Sector:

(a) Role of RBI: There was a substantial shift in role of the RBI from 'a regulator to a facilitator' of the
financial sector. This means that the financial sector may be allowed to take decisions on many matters without
consulting the RBI. Earlier commercial banks. After liberalisation in 1991, RBI as a facilitator Would only
PGT ECONOMICS – BHAVESH SONI (8349965291)
 facilitate free play market forces and leave it to the commercial thanks to decide their interest rate structure.
Both Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) have reduced to increase availability of
funds with commercial banks to nee more credit. Bank rate has been reduced. It lowered the interest rate charged
by the commercial banks thus, encouraging credit.
(b) Foreign Investment: Prior to 1991, foreign investment in Indian financial markets was restricted. Now,
foreign investment limit in banks was raised to amount 74%. Foreign Institutional Investors (FII) such as
merchant bankers, mutual funds and pension funds are now allowed to invest in Indian financial markets under
strict guidelines of RBI. Though have been given permission to generate resources from India and abroad,
certain managerial aspects have been retained with the RBI to safeguard the interests of the account-holders and
the nation.
(c) Establishment of private sector banks: There was establishment of private sector banks, Indian as well as
foreign. It increased the size of competition and provided better services to the consumers.
(d) Setting up new branches: Prior to 1991, approval of RBI was required to set up new branches by the banks.
Now, those banks which fulfil certain conditions are given freedom to set up new branches without the approval
of RBI and existing branch networks.
(e) The stock market (SEBI) has been made a statutory body: The Securities and Exchange Board of India
(SEBI) was established in 1988 with defined responsibilities for development and regulation of the stock market.

3. Fiscal Reforms:
Fiscal policy refers to the public expenditure and revenue polices of the government. Tax reforms are the
principal component of fiscal reforms. Broadly, taxes are classified as (a) Direct Tax and (b) Indirect Tax.
Direct Taxes are those taxes, the burden of which cannot be shifted onto others. Ex. Income Tax, Wealth Tax.
Indirect Taxes are those taxes, burden of which can be shifted onto others. Ex. Sales tax, Service tax.

After Liberalisation policy of 1991-

I. Reform in Direct Taxes:
Since 1991, there has been a continuous reduction in the taxes on individual incomes as it was felt that high
rates of income taxes and corporation tax were important reasons for tax evasion.
It is now widely accepted that moderate rates of income tax encourage savings and voluntary disclosure of
income.
II. Reforms in Indirect Taxes: Reforms are also made in indirect taxes so that common national market of
goods and services can be established.
III. Simplified Process: In order to encourage better compliance on the part of taxpayers many procedures have
been simplified and the rates also substantially lowered.
IV. Goods and Service Tax (GST): The Parliament has passed a law GS Tract July 201 simplify and Goods
and Services Tax (GST); the in India. This law came into effect from July 2017. This is expected to generate
additional revenue for the government, reduce tax evasion and create 'one nation, one tax and one market.

4. Foreign Exchange Reforms:

The important reforms made in the foreign exchange market are:
(a) Devaluation of Currency: When a country brings down the value of its currency, in terms of foreign
currency by a government order, it is called devaluation. In 1991, as an immediate measure to solve the balance
of payments crisis, the rupee was devaluation against foreign currencies. This made our goods cheaper in foreign
market and increased inflow of foreign exchange.
(b) Market determination of exchange rate: The government allowed rupee value to be free control. As a
result, market forces of demand and supply determine the exchange the Indian rupee terms of foreign currency.
After Liberalisation policy of 1991:
(a) Approval was given for direct foreign investment up to 51% foreign equity in high priority industries.
(b) Automatic permission was given for foreign technology agreements in high priority industries up to a lump
sum payment of Rs. 1 crore.

5. Trade and Investment Policy Reforms:

Prior to 1991, India followed a protectionist police marked by quantitative restrictions and high tariffs on
imports, import licensing and export duties.
(a) Removal of Quantitative Restrictions: Prior to 1991, India followed a policy of quantitative restriction on
imports and exports. This was done t rough rigid control over imports and by keeping the tariffs very high.
Now, Liberalisation aimed at removal of quantitative restrictions on imports and exports. Quantitative
restrictions on imports of manufactured consumer goods and agricultural products were also fully removed from
April 2001.
(b) Reduction of tariff rates: There were very high tariffs imposed on imports to favor the policy of protection
prior to 1991. Now tariff on imports on enhance the domestic trade and achieve economic growth.
(c) Removal of licensing procedures for imports: Prior to 1991, there were huge restrictions to obtain import
license in order to keep strict control over imports. Now, import licensing was abolished except in case of
hazardous and environmentally sensitive industries.
(d) Removal of export duties: Prior to 1991, there were heavy export duties imposed to encourage domestic
production for domestic demand only. Now, export duties have been removed to increase the competitive
position of Indian goods in the international market. The trade policy reforms aimed at:
(a) Abolition of import licensing system except in case of hazardous and environmentally sensitive industries;
PGT ECONOMICS – BHAVESH SONI (8349965291)
 (b) Removal of quantitative restrictions on imports;
(c) Reduction in tariff rates;
(d) Strengthening of export promotion structure.

PRIVATISATION
Privatisation is defined as the transfer of a function, activity or organisation from the public to the private sector.

Objectives of Privatisation:
(a) Improving the government financial composition by: Raising funds from the sales of enterprises or their
assets, Making the enterprises raise internal resources and from capital markets.
(b) Improving the performance of an enterprise through: Increasing efficiency; Requiring enterprises to
meet performance objectives; Greater responsiveness to consumers, in terms of quantity, quality, diversity or
services; Relief from public sector financial constraints; More managerial autonomy.

Arguments in Favor of Privatisation:

1. Privatisation will introduce efficiency and profitability in Public Sector Undertakings/PSUs)
2. It will reduce budgetary deficits which result from expenditure on loss making PSUs.
3. It will help in reviving sick units which are a burden on public sector.
4. It will help in bringing about globalisation by opening out of an economy and increasing its competitiveness
in international market.
5. It will use modem techniques of production.
6. It will introduce accountability and responsibility in PSUs.

Arguments against Privatisation:

1. Privatisation encourages growth of monopoly power in the hands of big business houses. This result in greater
inequalities of income and wealth.
2. Private enterprises may not show any interest in buying shares of sick units.
3. Private sector produces with profit motive and has no consideration for social welfare motive.
4. Private sector is not interested in those projects which take long time to complete and have low profitability.
5. Private sector is not interested in taking up risky projects.

Privatisation Measures:
1. Disinvestment: Disinvestment is sale of a part of equity holdings held by the government in any public sector
undertaking to private investor Government has been disinvesting by many methods. Two main methods are
(a) Minority sale, in this method, equity is offered to investors through domestic public issue.
(b) Strategic sale: in this method, government offloads above 51 per cent in strategic sale.
2. Policy for Navratnas: The government has decided to give special treatment to some of the important profit-
making PSUs and they were given the status of Navratnas. These navratnas - were granted financial and
operational autonomy in the working of the companies. These navratnas are:
Indian Oil Corporation Ltd. (IOCL) Bharat Petroleum Corporation Ltd. (BPCL) Hindustan Petroleum
Corp. Ltd. (HPCL) Oil and Natural Gas Corporation Ltd. (ONGC) Steel Authority of India Ltd. (SAIL)
Indian Petrochemicals Corp. Ltd. (IPCL). Bharat Heavy Electricals Ltd. (BHEL). National Thermal
Power Corp. (NTPC). Mahanagar Telephone Nigam Ltd. (MTNL). Gas Authority of India Ltd. (GAIL)
Videsh Sanchar Nigam Ltd. (VSNL)
Government has granted greater operational, financial and managerial autonomy to 97 other profit-making
enterprises, called mini ratans.

Box 3.1: Navratnas and public Enterprise Policies

In order to improve efficiency, infuse professionalism and enable them to compete more effectively in the
liberalised global environment, the government identifies PSEs and declare them as Maharatans, Navratans and
Miniratans. They were given greater managerial and operational autonomy, in taking various decisions to run
the company efficiently and thus increase their profits. Greater operational, financial and managerial.
The Central Public Sector Enterprises are designated with different status. A few examples of public enterprises
with their status are as follows:
(i) Maharatans- (a) Indian Oil Corporation Limited, and (b) Steel Authority of India Limited,
(ii) Navratans (a) Hindustan Aeronautics Limited, (b) Mahanagar Telephone Nigam Limited, and
(iii) Miniratans (a) Bharat Sanchar Nigam Limited, (b) Airport Authority of India (c) Indian Railway Catering
and Tourism Corporation Limited.
Many of these profitable PSEs were originally formed during the 1950s and 1960s when self-reliance was
important element of public policy. They were set up with the intention of providing infrastructure and direct
employment to the public so that quality end-product reaches the masses at a nominal cost and the companies
themselves were made accountable to all stakeholders.

The granting of status resulted in better performance of these companies. Scholars allege that instead of
facilitating public enterprises in their expansion and enabling them to become global players, the government
partly privatised them through disinvestment. Of late, the government has decided to retain them in the public
sector and enable them to expand themselves in the global markets and raise resources by themselves from
financial markets.
PGT ECONOMICS – BHAVESH SONI (8349965291)
 GLOBALISATION
Globalisation refers to growing economic interdependence among countries in the world with regards to
technology, capital, information, goods, services, etc.

The term Globalisation has four parameters:

(a) Reduction of trade barriers to permit free flow of goods and services across national frontiers.
(b) Creation of an environment in which free flow of capital can take place. Transfer of wealth across to national
boundaries, particularly financial transfers, is made possible by large organisational network and new electronic
technologies.
(c) Creation of an environment to allow free flow of technology among the nation states.
(d) Creation of an environment in which free movement of labour can take place in different countries of the
world.

Case in Favour of Globalisation: Advocates on globalisation justify it on the following grounds:

(a) Adoption of New, Flexible Production Methods: Globalisation will raise allocation efficiency, especially
in underdeveloped and developing countries by Reducing capital-output ratio; Raising labour productivity,
developing export culture: Raising capital flow: Modernising technology, and Increasing the competitive edge
of firms.
(b) Restructure of Production and Trade Patterns: Globalisation will help in restructuring production and
trade practices in accordance with the factor intensity of a country.
(c) Raise Foreign Capital: Globalisation will attract foreign capital which will lead to technological
upgradation
(d) Quality Improvement: In order to withstand competition offered by other firms, quality enhancement will
take place.
(e) Rise in Employment: It is expected that integration between different sectors will lead to more production
in the home country. This will raise employment opportunities.
(f) Rise in Banking and Foreign Sector Efficiency: Banking and foreign sector of the home country will raise
their competitive skill and efficiency in order to have a competitive edge over foreign banks.
(g) Creation of New World Order: The creation of new world order and widespread adoption of structural
adjustment programmes will lead to a new policy framework for a global free trade regime.
(h) Reduce Poverty: With globalisation, many micro-credit programmes are being implemented to priorities
the needs of the poor.

Case against Globalisation: Major points against globalisation are:

(a) Devastation of Local Producers: Globalisation has devastated local producers since they are unable to
compete with cheap imports.
(b) Mounting Strikes: Globalisation has led to mounting workers unrest. Workers have protested against low
wages, poor working conditions, autocratic management rule, long work days and fall in social benefits.
(c) Public Employees are Worse Off: Globalisation has made public employees worse off. Public employees
are adversely affected by budget cuts, privatisation and massive loss of purchasing power.
(d) Small Business is Adversely Affected: Small business class is adversely affected by fall of public
(e) Decline in Income: During the globalisation phase, about half a billion people in South Asia have subsidies,
de-industrialisation and floods of cheap imports experienced a decline in their income.
(f) Weak Social Safety Net Provisions: Since the government is unable to help the victims of globalisation,
the provisions of social safety net have been weakened.
(g) Raising Depth of Inequality: The global village appears deeply divided between the street of the haves and
those of the have-nots.

Outsourcing
Outsourcing means obtaining goods and services by contract from an outside source.
There has been high growth of the service sector in India. It is because there is too much demand for services
for:
It is more profitable to contract services from developing countries. There is easy availability of skilled
manpower at lower wage rate. India is a favourite outsourcing destination.
The advantages that India has are:
India can provide a ready supply of skilled people at relatively lower price. India has the advantage of time
difference as it is located on the other side of the developed countries. India has 65% share of the global offshore
market and a 46% share of global business process offshore (BPO) industry.

PGT ECONOMICS – BHAVESH SONI (8349965291)

 World Trade Organisation (WTO)
The WTO was founded in 1995 as the successor organisation to the GATT. The General Agreement on Tariffs
and Trade (GATT) was established in Geneva to pursue the objective of free trade in order to help in the growth
and development of al l member countries in 1948, 23 countries signed GATT as the global trade organisation
to administer all multilateral trade agreements by providing equal opportunities to all countries in the
international market for trading purpose. India was one of the founder members of GATT. In 1994, 118
countries were members of GATT.

Features:
The main features of the WTO are:
(a) The WTO is global in its membership. At present there are 149-member countries.
(b) It is the main organ of implementing the Multilateral Trade Agreement (MTA).
(c) It has a much wider scope than its predecessor GATT.
(d) The representatives of the members and all officials of the WTO enjoy international privileges.
(e) Each member of WTO has a single voting right.
(f) It is a full-fledged international organisation in its own right.
(g) The WTO administers a unified package of agreements to which members are committed.

Functions:
- WTO agreements coven trade in goods and services to facilitate international trade.
- It facilitates the implementation, administration and operation of the objectives of the Multilateral Trade
Agreements.
- It administers the 'Trade Review Mechanism'
- It administers the understanding rules and procedures governing the settlement disputes.
- It co-operates with IMF, IBRD and its affiliated agencies to achieve better place in global economic policy
making.
- Trade disputes that cannot be solved through bilateral talks are forwarded to the WTO dispute settlement
court.
- It is a management consultant for world trade. Its economists keep a close watch on the activities of the
global economy and provide studies on the main issues of the day.

Objectives of WTO
- To raise the standard of living in member countries by ensuring full employment and by expanding
production and trade in goods and services;
- To develop an integrated, viable and durable multilateral trading system,
- To promote sustainable development in member countries by the optimal use of resources; To help the
developing countries to get a share in the growth of international trade;
- To reduce tariff and non-tariff barriers and to eliminate discriminatory treatment in international trade
relation.
- To ensure linkages between trade policies, environmental policies and sustainable development.

Main Criticism of WTO (in case of India):

Developing countries (including India) have experienced loss of autonomy in policy making. These counts are
not able to use their legitimate policy instruments to pursue their own development goals. The WTO overloaded
agreements with a built-in agenda and harsh terms for developing countries to adjust to.
It is argued that the WTO agenda is shaped, paced and driven by the US, European Union and other developed
countries which have negotiating capabilities and economic strength.

Table No. 3.1 Growth of GDP and Major Sectors (in %)

SECTOR 1980-91 1992-2001 2002-07 2007-12 2012-13 2013- 14 2014-15
Primary 3.6 3.3 2.3 3.2 1.5 4.2 -0.2*
Secondary 7.1 6.5 9.4 7.4 3. 5 7.0*
Service 6.7 8.2 7.8 10 8.1 7.8 9.8*
Total 5.6 6.4 7.8 8.2 5.6 6.6 7.4

Note: *Data pertaining to Gross Value Added (GVA). The GVA is estimated from GDP by adding subside on
production and subtracting indirect taxes.

PGT ECONOMICS – BHAVESH SONI (8349965291)

 ACHIEVEMENTS OF THE POLICY OF LPG
(a) Rise in GDP Growth: Since the introduction of economic reforms in 1991 country has shown rise in GDP
growth rate. The growth of GDP increased from 5-6 per cent during 1980-91 to 8.2 per cent during 2007-12
(b) Rise in Foreign Exchange Reserves: Foreign exchange reserves from about US $ 6 billion in 1990-to about
US $ 413 billion in 2018-19.
(c) Control of Inflation: The plus point of economic reforms in that it has controlled inflation from 16.8% 1991
to 5.74% in May 2015 (CPI)
(d) Rise in Inflow of Foreign Capital. One of the benefits derived from global integration is the increased
inflow of foreign direct investment (FDI). FDE has increased from about US $100 million in 1990-91 to $30
billion in 2017-18.
(e) Rise in Integration with the World Economy: India is now much more integrated with the world economy
and has benefited from this integration in many ways.
(f) Rise in Competitiveness of Industrial Sector: Sectors such as auto components, textiles and
pharmaceuticals are the pillars which show the strength of the industrial sector.
(g) Structural Changes: it refers to shirt of contribution from primary sector to secondary sector and tertiary
sector, during thin reform period, it was noticed that growth rate of about 8% is mainly driven by growth service
sector.
(h) Consumer's Sovereignty: It has been expanded over time. This is evident from the fact that a large variety
of goods and services from a diverse global market are now within the easy reach of the buyers and Producers
are widely responding to the consumer's choice and preferences.
(i) Recognition of India as an Emerging Economic Power: It is owing to LPG policies and the consequent
rise in the overall level of economic activity, that India is now being recognised as an emerging economic power
in the world. This recognition not rises India's economic ranking in the world but boosts confidence of the global
investors in the Indian Economy as their preferred destination of investment.

CHALLENGES OF THE POLICY OF LPG:

Major challenges or failures of economic reforms are:
(a) Agricultural Crisis: There has been deceleration in agricultural growth. Economic reforms have not been
able to benefit the agricultural sector because:
Public investment in agriculture sector especially in infrastructure which includes irrigation, power, road market
linkages and research has been reduced in the reform period. Liberalisation has forced the small farmers to
compete in a global market where prices of goods have fallen while removal of subsidies has led to increase in
the cost of production. It has made farming more expensive.
Various policy changes like reduction in import duties on agricultural products, removal of minimum support
price and lifting of quantitative restrictions have increased the threat of international competition to the Indian
farmers.
The export-oriented growth has favored increased production of cash crops rather than food grains. This has
increased the prices of food grains.
(b) Changing Employment Pattern: There is inadequacy of widely dispersed and sustainable off-farm
productive employment opportunities. This is a basic cause of most divides and disparities. Growth without
jobs can neither be inclusive nor can it bridge divides.
(c) Providing Essential Public Services to the Poor: We cannot be satisfied with only universal primary
education-the challenge is to provide universal secondary education as soon as possible.
(d) Inadequacy of Physical Infrastructure: Our roads, railways, ports, airports, power supply. communication
is not comparable to the standards prevailing in competitor countries.
(e) Protecting the Environment: Our concern for environment issues is growing along the lines of global
concerns. The threat of climatic changes poses a real challenge to future generation.
(f) Slowdown in Industrial Growth: The post-reform period shows that industrial growth has slowed down.
This was due to:
- Globalisation created conditions for free movement of goods and services from foreign countries. It
adversely affected the local industries and employment in developing countries.
- Globalisation led to decrease in demand for domestic industrial products due to cheaper imports.
- There was inadequate investment in infrastructural facilities such as power supply. A developing country
like India still does not have access to markets of developed countries duel high non-tariff barriers.
(g) Fall in Tax Revenue: In the post-reform period, there has been falling tax revenue. This was due to:
- The tax reductions in the reform period have not resulted in increase in tax revenue for the government.
- The reform policies involving tariff reduction have reduced the scope for raising revenue through customs
duties.
- To attract foreign investment, tax incentives were provided to foreign investors which further reduced the
scope for raising tax revenues.
- This has a negative impact on developmental and welfare expenditures.

SOLUTION: SECOND GENERATION REFORMS

The economic reforms initiated in 1991 are now called 'First Generation Reforms'. Although the strength
enumerated are real yet several challenges remains Second Generation Reforms are development driven and
include measures such as:
Corrective policies to focus or small, marginal, middle and large farmers who suffer from productivity
stagnation, generate employment opportunities, including those that can be provide by micro and small
PGT ECONOMICS – BHAVESH SONI (8349965291)
 enterprise. To provide essential public services to the poor and to establish accountability of service providers.
To develop quality infrastructure.
To expand vocational training institutes not only in terms of number persons they train but also in terms of
number of different skills and trades they teach for meeting industry requirements, Reforming labour laws. To
reduce public debt and consequently, the burden of interest and debt servicing charges. To widen tax base and
bring agricultural income under the tax net. To protect the environment. The literacy rate must be increased to
85% and the gender gap in literacy narrowed to 10% points.

Demonetisation
Demonetisation refers to withdrawal of the status of legal tender' to the currency in circulation.

Features of Demonetisation:
1. Demonetisation is viewed as a 'Tax Administration Measure'. Cash holding arising from declared income
was readily in banks and exchanged for new notes. However, people holding black money had to declare their
unaccounted wealth and pay taxes at a penalty rate.
2. It also interpreted as a shift on the part of government indicating that Tax Evasion will no longer be tolerated
or accepted.
3. Demonetisation also led to channelizing saving into the formal financial system. Though, much of the cash
deposited in the banking system is bound to be withdrawn. But, some of the new deposits schemes offered by
the banks will continue to provide base loans, at lower interest rates.
4. It aims to create a less-cash or cash-lite economy, i.e. channeling more savings through the formal financial
system and improving tax compliance.
5. However, digital transactions require internet connectivity as they need cell phones for customers and Point-
of-Sale (PoS) machines for merchants.
6. On the contrary, these disadvantages are counterbalanced an understanding that it helps people into the formal
economy, thereby increasing financial saving and reducing tax evasion.

Merits:
1. It helps to find out black money.
2. Reduction of black money leads to shrinkage of shadow economy.
3. When Shadow money shrinks, tax evasion is reduced, government revenue tends to rise.
4. It compels people to deposit their demonetised notes with the banks. Accordingly, financial base of the
banking tends to expand.
5. A check on funding to terrorist helps combat anti-social activities in the economy.
6. with cash almost disappearing from the market, people were driven to digital mode of transaction. this was a
big move towards cashless economy. It also promoted banking habits of the people, a big leap towards
financial inclusion.

Demerits:
leap towards financial inclusion.
1. In an underdeveloped economy like India, people are used to cash transaction with demonetisation, people
are deprived of cash in hand it disturbs their routine transaction therefore, their normal living
2. Cash-crunch jolts production activity in the shadow economy. Accordingly, jobs are lost and poor people are
further marginalised.
3. A jolt to production activity in the shadow economy activities in the economy. The economy starts facing
slowdown
4. Nearly 90% of the workforce in India is engaged informal economy for their livelihood. This section of the
economy is highly cash dependent and cash sensitive.
5. Exchange of demonetised currency with the valid currency leads to long queues at the banks Accordingly,
consumption is lowered and inducement to investment is lost.

Goods and Services Tax (GST)

GST is a comprehensive Indirect Taxes which has replaced 17 indirect Taxes in India. The GST Act was passed
in the Parliament on 29 March 2017 the Act came into effect on 1" July 2017. It is a comprehensive, multi stage,
destination-based tax that levied on every value addition.

Features:
1. Tax apart from being a source of revenue growth also plays a key role on making the State accountable to its
tax payers. Effective taxation ensures that public funds are effectively employed in fulfilling social objectives
for sustainable development.
2. It is expected to improve the ease of doing business in tax compliance, reduce the tax burden by eliminating
tax-on-lax, improve tax administration, mitigate tax evasion, broaden the organised segment of the economy
and boost tax revenues
3. It has replaced 17 indirect taxes (Value Added Tax, Service Tax, Excise Duty, Sales Tax etc.) and 23 cesses
of the Central and States, thereby eliminating the need for filling multiple returns and assessments. It has
rationalised the tax treatment of goods and services along the supply chain from producers to consumers.
4. GST is charged at each stage of value addition and the supplier off-sets the levy on inputs in the previous
stages of value chain through the tax credit mechanism.
PGT ECONOMICS – BHAVESH SONI (8349965291)
 5. The last dealer in the supply chain passes on the added GST to the consumer, making GST a destination-
based consumption tax.
6. The provision of availing input credit at each stage of value chain helps in avoiding the cascading effect under
GST, which is expected to reduce prices of commodities and benefit the consumers.

Types of taxes under GST:

1. Central Goods and Services Tax (CGST): It is the GST levied on the 'Intra-State' supply of goods and
services by the Centre.
2. State Goods and Services Tax (SGST): It is the GST levied on the "Intra-State' supply of goods or services
by the State (including Union Territories with legislature).
3. Integrated Goods and Services Tax (IGTS): It is the GST levied on the 'Inter-State supply of goods and
services and is collected by the Centre. IGST is equivalent to the sum total of CGST and SGST.

GST Council:
1. Constitution: As per Article 279A of the amended Constitution, the GST Council which will be joint forum
of the Centre and the States, shall consist of the following members:
Chairperson: Finance Minister.
Vice Chairperson: Chosen amongst the Ministers of State Government.
Members: MoS (Finance) and all Ministers of Finance/Taxation of each State.
2. Quorum: 50% of total number of Members of the Goods and Services Tax Council shall constitute the
quorum at its meetings.
3. Majority required for taking Decisions: Every decision of the GST Council shall be taken at a meeting, by
a majority of not less than 75% of the weighted votes of the members present and voting. in accordance with
the following principles, namely:
- Vote of the Central Government shall have a weightage of two-third of the total votes cast, and
- Votes of all the State Governments taken together shall have a weightage of two-thirds of the total votes cast,
in that meeting.

Q1. Write three observations distinguishing liberalisation from a Laissez-Faire System

Ans: (a) Liberalisation refers to a situation in which economy is free from direct or physical controls imposed
by the government. Laissez-faire, on the other hand, refers to a system in which there is no government
intervention in the functioning of an economy.
(b) Under liberalisation, direct participation of the government (in the economic growth process) is not ruled
out. But under laissez-faire, the government plays no role in the growth process.
(c) Under laissez-faire, there is a free play of the market forces of supply and demand. Liberalisation, on the
other hand, does not rule out of regulation of the market forces by the government.

Q2. What is demonetisation? How is demonetisation linked with financial inclusion?

Ans.: Demonetisation refers to withdrawal of the status of legal tender to the currency in circulation.
Demonetisation policy carried a provision that the people could deposit their banned notes in the banks.
Accordingly, millions of people (who were alien to banking) opened their bank accounts to deposit their cash.

Q3. Give a brief description of the structure of GST.

Ans: GST is a multi-tier taxation across different goods and Services, its structure includes four categories of
goods and services attracting different rate of taxation. This is besides one 'exemption' category attracting zero
taxation. Details are as under
(a) 0% GST (or GST exempt) category. It includes items of common man consumption. These are like sanitary
napkins, food grains, fresh fruits and vegetables.
(b) 5% GST category. This includes items of miss consumption, such as sugar, tea and medicines as well as
transport services.
(c) 12% GST category. This includes items like cell-phones, Ayurvedic medicine and spectacles.
(d) 18% GST category. Pasta, pastries and cakes, detergents are items of this category.
(e) 28% GST category. This is highest GST slab and includes items like automobiles, dishwasher and vending
machines

Box 3.2: Global Footprint

Owing to globalisation, you might find many Indian companies have expanded their wings to many other
countries. For example, ONGC Videsh, a subsidiary of the Indian public sector enterprise. Oil and Natural Gas
Corporation engaged in oil and gas exploration and production has projects in 16 countries. Tata Steel, a private
company established in 1907, is one of the top ten global steel companies in the world which have operations
in 26 countries and sell its products in 50 countries. It employs nearly 50,000 persons in other countries. HCL
Technologies, one of the top five IT companies in India has offices in 31 countries and employs about 15000
persons abroad. Dr. Reddy's Laboratories, initially was a small company supplying pharmaceutical goods to big
Indian companies, today has manufacturing plants and research centers across the world.

Box 3.3: Siricilla Tragedy

Power sector reforms in many India states led to do away with the supply of electricity at subsidised rates and
steep rise in power tariff. This has affected workers engaged in small industries. Power loom textile industry in
PGT ECONOMICS – BHAVESH SONI (8349965291)
 Andhra Pradesh is an example. Since the wages of the power loom workers are linked to the production of cloth,
power cut means cut in the wages of weavers who were already suffering from hike in tariff. This led to a crisis
in the livelihood of the weavers and 50 power loom workers committed suicide in a small town called 'Siricilla'
in Andhra Pradesh.

QUESTION & ANSWER

1. Why were reforms introduced in India?
Answer- The economic reforms were introduced in the year 1991 in India to combat economic crisis, relating
to its external debt:
→ Various rules and plans introduced by the government for controlling and regulating the economy resulted
in hampering the process of growth and development National income was growing at the rate of 0.8%.
→ India was highly indebted country and government was not able to make repayments of loan from abroad.
→ Foreign exchange reserves collapsed as import is more than the export.
→ The inflation level reached 16.8% which ultimately increases the prices of essential goods.
→ India took loan from IMF and World bank to the extent of 7 billion dollars. In pressure, government have to
liberalise its market.
2. Why is it necessary to become a member of WTO?
Answer- It is important for any country to become a member of WTO (World Trade Organisation) for the
following reasons:
→ WTO provides equal opportunities to all its member countries to trade in the international market.
→ It provides its member countries with larger scope to produce at large scale to cater to the needs of people
across the international boundaries. This provides ample scope to utilize world resources optimally and provides
greater market accessibility.
→ It advocates for the removal of tariff and non-tariff barriers, thereby, promoting healthier and fairer
competition among different producers of different countries.
→ The countries of similar economic conditions being members of WTO can raise their voice to safeguards
their common interests.
3. Why did RBI have to change its role from controller to facilitator of financial sector in India?
Answer- After economic liberalisation and financial sector reforms, RBI needed to shift its role from a
controller to facilitator of the financial sector. This means that the financial sector may be allowed to take
decisions on many matters without consulting the RBI. The reform policies led to the
establishment of private sector banks, Indian as well as foreign.
4. How is RBI controlling the commercial banks?
Answer- All the banks in India are controlled through various norms and regulations of the RBI. It controls the
commercial banks via various instruments like Statutory Liquidity Ratio (SLR), Cash Reserve Ratio (CRR),
Bank Rate, Prime Lending (PLR), Repo Rate, Reverse Repo Rate and fixing the interest rates and deciding the
nature of lending to various sectors. These are those ratios and rates that are fixed by RBI and it is mandatory
for all the commercial banks to follow or maintain these rates.
5. What do you understand by devaluation of rupee?
Answer- Devaluation of Rupee refers to the fall in the value of rupee in terms of foreign currency. This means
that value of rupee has fallen and the value of foreign currency has risen.
6. Distinguish between the following
(i) Strategic and Minority sale
Strategic Sale Minority Sale
Strategic Sale refers to the sale of 51% or Minority Sale refers to the sale of less than
more stake of a PSU to the private sector 49% stake of a PSU to the private sector.
who bids the highest.
The ownership of PSU is handed over to the The ownership of PSU still remains with
private sector. the government as it holds 51% of stakes.
(ii) Bilateral and Multi-lateral trade
Bilateral Trade Multilateral Trade
It is a trade agreement between two It is a trade agreement among more than
countries. two countries.
This is an agreement that provides equal This is an agreement that provides equal
opportunities to both the countries. opportunities to all the member countries in
the international market.
(iii) Tariff and Non-tariff barriers.
Tariff Barriers Non-tariff Barriers
It refers to the tax imposed on the imports It refers to the restrictions other than taxes,
by the country to protect its domestic imposed on imports by the country.
industries.
It includes custom duties, export-import It includes quotes and licenses.
duties
It is imposed on the physical units (like per It is imposed on the quantity and quality of
ton) or on value of the goods imported. the goods imported.

PGT ECONOMICS – BHAVESH SONI (8349965291)

 7. Why are tariffs imposed?
Answer- Tariffs are imposed to make imports from foreign countries relatively expensive than domestic goods.
This discourage imports and protect domestically produced goods.
8. What is the meaning of quantitative restrictions?
Answer- Quantitative restrictions are specific limits imposed by countries on the quantity or value of goods that
can be imported or exported. It can be in the form of a quota, a monopoly or any other quantitative means.
9. Those public sector undertakings which are making profits should be privatized. Do you agree with
this view? Why?
Answer- The PSUs which are making profits should not be privatized because they are revenue generator for
the government. But if a PSU is an inefficient and loss making one, then the same PSU exerts unnecessary
burden on the government's scarce revenues and further may lead to budget deficit. The loss-making PSUs
should be privatised. Further some of the PSUs like, water, railways, etc. enhance the welfare of nation and is
meant to serve general public at a very nominal cost. Privatisation of such important PSUs will lead to loss of
welfare of poor people. Hence, only less important PSUs should be privatised while leaving the core and
important PSUs to be owned by the public sector. Instead of privatisation of profit-making PSUs, government
can allow more degree of autonomy and accountability in their operations, which will not only increase their
productivity and efficiency but also enhance their competitiveness with their private counterparts.
10. Do you think outsourcing is good for India? Why are developed countries opposing it?
Answer- Yes, outsourcing is good for India because:
→ Employment: For a developing country like India, employment generation is an important objective and
outsourcing proves to be a boon for creating more employment opportunities. It leads to generation of newer
and higher paying jobs.
→ Exchange of technical know-how: Outsourcing enables the exchange of ideas and technical know-how of
sophisticated and advanced technology from developed to developing countries.
→ International worthiness: Outsourcing to India also enhances India's international worthiness credibility. This
increases the inflow of investment to India.
→ Encourages other sectors: Outsourcing not only benefits the service sector but also affects other related
sectors like industrial and agricultural sector through various backward and forward linkages.
→ Contributes to human capital formation: Outsourcing helps in the development and formation of human
capital by training, imparting them with advanced skills, thereby, increasing their future scope and their
suitability for high ranked jobs.
→ Better standard of living and eradication of poverty: By creating more and higher paying jobs, outsourcing
improves the standard and quality of living of the people in the developing countries. It also helps in reducing
poverty.
→ Greater infrastructural investment: Outsourcing to India requires better quality infrastructure. This leads to
the modernisation of the economy and larger investment by the government to develop quality infrastructure
and develop quality human capital.
Developed countries opposing this because outsourcing leads to the outflow of investments and funds from the
developed countries to the developing nations. Also the MNCs contribute more to the development of the host
country than the home country. It also resulting in unemployment in the countries where it is located.
11. India has certain advantages which make it a favorite outsourcing destination. What are these
advantages?
Answer- The advantages which make it a favorite outsourcing destination are:
→ Easy Availability of Cheap Labour: As the wage rates in India are comparatively lower than that of in the
developed countries, MNCs find it economically feasible to outsource their business in India.
→ Skills: Indians have reasonable degree of skills and techniques also knowledge of international language,
English.
→ Stable Political Environment: The democratic political environment in India provides a stable and secured
environment to the MNCs to expand and grow.
→ Availability of raw material at cheaper rate: India is well enriched in natural resources. This ensures the
MNCs cheap availability of raw material and undisturbed and perennial supply of raw materials. This enables
proper and smooth operation of MNCs.
12. Do you think the navaratna policy of the government helps in improving the performance of public
sector undertakings in India? How?
Answer- The government has decided to give special treatment to some of the important profit-making PSUs.
The granting of navaratna status resulted in better performance of these companies They were given greater
managerial and operational autonomy, in taking various decisions to run the company efficiently and thus
increase their profits. They also became highly competitive and some of them are becoming the giant global
players. Therefore, the navaratna policy has certainly improved the performance of these PSUs.
13. What are the major factors responsible for the high growth of the service sector?
Answer- There are various factors which are responsible for the high growth of the service sector:
→ Reforms introduced in 1991, removes various restrictions on the movement of international finance which
led to huge inflow of foreign capital, foreign direct investments and outsourcing to India. This encouraged the
service sector growth.
→ Availability of cheap labour and skilled labour at lower wage rate.
→ The revolution in Information Technology (IT) field in India has also played a major role in the high growth
of the service sector.
→ Indian economy is experiencing structural transformation that implies shift of economic dependence from
PGT ECONOMICS – BHAVESH SONI (8349965291)
 primary to tertiary sector. Due to this transformation, there was increased demand of services by other sectors
which boosted the service sector.
14. Agriculture sector appears to be adversely affected by the reform process. Why?
Answer- The economic reforms of 1991 have not been able to benefit agriculture, where the growth rate has
been decelerating. The reasons are:
→ Public investment in agriculture sector especially in infrastructure, which includes irrigation, power, roads
market linkages and research and extension, has been reduced in the reform period.
→ Removal of subsidies on fertilisers pushed up the cost of production of agriculture. This made farming more
expensive, thereby, adversely affecting the poor and marginal farmers.
→ Since the commencement of WTO, this sector has been experiencing a number of policy changes such as
reduction in import duties on agricultural products, removal of minimum support price and lifting of quantitative
restrictions on agricultural products.
15. Why has the industrial sector performed poorly in the reform period?
Answer- The industrial sector has performed poorly in the reform period due to:
→ The cheaper imports of foreign goods have replaced the demand of domestic goods.
→ Due to lack of infrastructure, the domestic firms could not compete with their developed foreign counterparts
in terms of cost of production and quality of goods.
→ Developing countries like India still does not have the access to global markets of developed countries due
to high non-tariff barriers.
→ The domestic industries were given protection during the pre-liberalised period but at the time of
liberalisation, the domestic industries were still not developed up to the extent it was thought and consequently,
they could not compete with the multi-national companies.
16. Discuss economic reforms in India in the light of social justice and welfare.
Answer- If the economic reforms have given us an opportunity in terms of greater access to global markets and
high technology, it has also compromised the welfare of people belonging to poor section. It devastated the
local producers as well as the farmers. It results in the greater inequalities of income and wealth. Further, the
economic reforms developed the areas that were well connected with the metropolitan cities leaving the remote
and rural area undeveloped. It results in growth of service sector of India especially in the form of quality
education, superior health care facilities, IT, tourism, multiplex cinemas etc. were out of the reach of the poor
section of the population.

PGT ECONOMICS – BHAVESH SONI (8349965291)

 IMPORTANT DATES:-

PGT ECONOMICS – BHAVESH SONI (8349965291)