Indian Economic
Development Chapter 3
Unit II- Liberalisation,
Privatisation and Globalisation
1. Why were reforms
introduced in India?
Since independence India followed mixed economic system.
a) It adopted centralized
planning system,
b) State interference in
market,
c) Expansion of public sector and restriction of
private sector,
d) Protectionist policy in
foreign trade etc
Over the
years the above mentioned policies hindered economic growth and resulted in
economic crisis.
In 1991 India was experiencing huge fiscal deficits,
large balance of payment deficits, high inflation level and an acute fall in
the foreign exchange reserves.
Moreover, the
gulf crisis of 1990-91 led to an acute rise in the prices of fuel which further
pushed up the inflation level.
Because of
the combined effect of all these factors, economic reforms became inevitable
and were the only way to move Indian economy out of this crisis.
2. Why is it necessary to
become a member of WTO?
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 advocates for the removal of tariff and
non-tariff barriers, thereby, promoting healthy and fair 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
Prior to liberalisation, RBI used to regulate and
control the financial sector (financial institutions like commercial banks,
investment banks, stock exchange operations and foreign exchange market). With
the economic liberalisation and financial sector reforms, RBI shifted its role
from a controller to facilitator of the financial sector so that the financial institutions
were free to make their own decisions on many matters without consulting the
RBI. The main objective behind the financial reforms was to encourage private
sector participation, increase competition and allowing market forces to
operate in the financial sector.
4. How is RBI controlling
the commercial banks?
RBI controls the commercial banks through 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. The rates that are fixed by RBI are
mandatory for all the commercial banks to follow. All these measures control the commercials
banks' operations and also control money supply in Indian economy.
5. What do you understand
by devaluation of rupee?
Devaluation implies deliberate official lowering of
the value of the country's currency with respect to the foreign currency.
This implies that value of rupee has fallen and the
value of foreign currency has risen. It means after devaluation one US$ can be
exchanged for more rupees.
This encourages exports and discourages imports as
the former is cheaper now for foreign countries and the latter is expensive for
Indians.
6. Distinguish between
the following
(i)
Strategic and Minority sale
(ii)
Bilateral and Multi-lateral trade
(iii)
Tariff and Non-tariff barriers.
Strategic sale refers to the sale of 51% or more stake of a PSU to
the private
sector to the highest bidder
while minority sale refers to the sale of less than
49% stake of a PSU to the private sector.
Under strategic sale, the ownership of PSU is handed over to the
Private sector while under minority sale the ownership remains with the
government.
Trade agreement between two countries is known as bilateral trade
Trade agreement between more than two countries is known as
multilateral trade.
Bilateral trade provides equal opportunities to both the countries
where as Multilateral trade provides equal opportunities to all the member
countries.
Tariff Barriers refers to
the tax imposed on imports by a country to protect its domestic industries
where as restrictions other than taxes imposed such as quotas and licenses are
called Non-tariff barriers.
Tariffs includes custom duties and it is
imposed on the value of goods while Non –tariff barriers is imposed on the
quantity and quality of the goods imported.
7. Why are tariffs imposed?
*Tariffs are imposed to make imports from foreign
countries relatively expensive than domestic goods and it discourages imports
indirectly.
*These are imposed to protect the infant domestic
firms from foreign competition.
*Tariffs facilitate the domestic firms to survive
and grow.
*Tariffs are also imposed on socially unwanted goods
which will be a burden on the scarce foreign exchange reserves.
Quantitative Restrictions (QRs) refer to the
restrictions in the form of quotas on the amount of commodities that can either
be imported or exported. QRs usually on imports are imposed to discourage
imports of foreign goods and to reduce Balance of Payment (BOP) deficits. The
imposition of QRs protects and enables the domestic firms to survive, grow and
expand in a protective and lesser competitive environment.
9. Those public sector
undertakings which are making profits should be privatised. Do you agree with
this view? Why?
A loss making PSUs should be privatized since it exerts
unnecessary burden on the government's scarce revenues and further may lead to
budget deficit but It is not advisable to
privatise a profit making PSU.
Privatising a PSU may lead to concentration of
monopoly power in the private hands.
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.
Instead of privatisation of profit-making PSUs,
government can allow more degree of autonomy and accountability in their
operations, which will increase their
productivity, efficiency and enhance
their competitiveness .
10. Do you think
outsourcing is good for India? Why are developed countries opposing it?
Yes, outsourcing is good
for India. The following points suggest that outsourcing is good for India.
1. It leads to generation of newer and higher
paying jobs.
2. Outsourcing enables the
exchange of ideas and technical know-how of sophisticated and advanced
technology from developed to developing countries.
3. Outsourcing earns foreign exchange to India . It also enhances India's international worthiness credibility which
increases the inflow of investment to India.
4. Outsourcing
not only benefits the service sector but also helps other related sectors like
industrial and agricultural sector.
5. Outsourcing
helps in the development and formation of human capital by training
6. 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.
Demerits to the Developed
countries:
Outsourcing leads to the outflow of investments and
funds from the developed countries to the less developed countries.
MNCs contribute more to the development of the host
country than the home country.
outsourcing reduces the employment generation in the
developed countries as the same jobs can be done in the less developed
countries at relatively cheap wages. Moreover, this leads to job insecurity in
the developed countries as at a point of time jobs can be outsourced to the
developing countries.
11. India has certain advantages which make it a favourite
outsourcing
destination. What are these advantages?
The following points
qualify India to be the favourite spot for outsourcing by various MNCs.
1. Easy Availability of
Cheap Labour.
2. Indians have fairly
reasonable degree of skills and techniques that need low training period and, thus,
low cost of training.
3. India has a fair
international worthiness and also credibility. This enhances the faith of the
foreign investors in India..
4. The democratic political
environment in India provides a stable and secured environment to the MNCs
to expand and grow.
5. MNCs gets various types of lucrative offers from the Indian
government like tax holidays, low rate of tax, easy tax policies, etc. All
these policies enable the MNCs to retain a major portion of their earnings in
the form of savings that they can invest to grow and expand their business.
6. Indian government has
invested heavily in the past two decades in the infrastructural sector.
Various steps have been taken for connecting remote and rural areas to the
metropolitan and other major cities. This has not only reduced the cost of
production of the MNCs but also helped them operate efficiently and
effectively.
12 . Do you think the navaratna policy of the government helps
in improving the performance of public sector undertakings in India?
How?
To improve efficiency, infuse professionalism and to
enable PSUs to compete effectively in the market, government awarded the status
of 'navaratnas' to the following nine PSUs:
1)
Indian Oil Corporation Ltd (IOCL)
2)
Bharat Petroleum Corporation Ltd (BPCL)
3)
Hindustan Petroleum Corporation Ltd (HPCL)
4)
Oil and Natural Gas Corporation Ltd (ONGC)
5)
Steel Authority of India Ltd (SAIL)
6)
India Petro-chemicals Corporations Ltd (IPCL)
8)
National Thermal Power Corporation (NTPC)
9)
Videsh Sanchar Nigam Ltd (VSNL)
These corporations were granted a greater degree of
financial, managerial and operational autonomy.
This boosted their efficiency and effectiveness.
They also became highly competitive and some of them are becoming the giant
global players. Consequent to their better performance, government retained
them under public sector and enabled them to grow themselves not only in the
domestic market but also in the international market.
These corporations are self-reliant and financially
self-sufficient. Thus, the navaratnapolicy has certainly improved the
performance of these PSUs.
13. What are the major
factors responsible for the high growth of the service sector?
The major factors that
led to the growth of service sectors in India are as follows;
1. business outsourcing from the developed
countries to India resulted in very high demand for services especially for banking, computer
service, advertisement and communication which led to a
high growth rate of service sector.
2. The liberalisation and
various economic reforms that were initiated in 1991 led to huge inflow of foreign capital, foreign direct investments and
outsourcing to India. This encouraged the service sector growth.
3. Due to structural transformation (shift of economic dependence from primary to tertiary sector),
there was increased demand of services by other sectors which boosted the
service sector.
4. The advancements and
innovations in the IT sector enabled the use of internet, telecommunication,
mobile phone and electronic transactions across different countries. All these
contributed to the growth of the service sector in India.
5. Low
tariff and non-tariff barriers on imports by India are also responsible for
high growth rate of service sector. .
6. Due
to the availability of cheap labour and reasonable degree of skilled man
power in India, developed countries found outsourcing to India feasible and
profitable. This led to the growth of service sector.
14 . Agriculture sector appears to be adversely affected by the
reform process. Why?
The economic reforms of 1991 did not benefit the
agricultural sector significantly. The following are the reasons that explain
the adverse effects of the economic reforms on India's agriculture sector:
a) The removal of
fertilizer subsidy resulted in rise in the cost of production which affected
the small and marginal farmers.
b) Reduction in import
duties as well as lifting of quantitative restrictions on agricultural produce
affected the Indian farmers.
c) Export policy in
agriculture encouraged the farmers to grow cash crops which have led to rise in
prices of food grains.
15. Why has the industrial sector performed poorly in the reform
period?
a) On account of cheaper imports the demand for domestic
industrial products fell.
b) Globalization affected
domestic industries and employment.
c) Several SSI had to be
closed.
16 . Discuss economic
reforms in India in the light of social justice and welfare.
*The economic reforms have enabled India to access
and compete in the international markets.
*The increased inflows of foreign capital and
investment to India have eliminated the shortage of foreign exchange to finance
the imports of sophisticated and advanced technologies to India.
*Moreover,
the boom in the outsourcing and the service sector led India's economic growth
and GDP to increase by many folds. But
on the other side, *agriculture that employed a significant proportion of
population, failed to be benefited by these economic reforms.
*The
reforms favoured the high income group population at the cost of their poor
counterparts. This resulted in wide and still increasing economic and social
inequalities among different section of population.
*The
economic reforms developed the areas that were well connected with the
metropolitan cities leaving the remote and rural area undeveloped.
Consequently, there were wide regional disparities.
*The
boom in the service sector, 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.
Thus,
it can be concluded that the economic reforms failed to provide social justice
and enhance welfare of the general public of India.
Extra questions
1. Answer the following questions
in a sentence each: 1 mark
1. What do you mean by economic reform?
Economic reforms refer to the changes in the economic policies introduced
by the Indian government since 1991 to improve the economy of the country.
2. What is meant by liberalization?
Liberalization refers to the removal of government’s control and
restrictions on economic activities. It
implies allowing greater freedom to economic agents.
3. State the meaning of devaluation of rupee.
Deliberate and official reduction in the external value of a
currency
4. What is Globalization?
Globalization means opening the economy of a country to the world
market or greater integration between economies of the world.
5. Who controls the financial sector?
The Reserve bank of India.
6. Why are tariffs imposed?
Tariffs are imposed to protect the local industries as well as to
earn revenue.
7. Expand GATT.
General Agreement on Tariffs and Trade. It came into existence in 1948.
8. Give an example of direct tax.
Income tax, corporation tax, wealth tax, profession tax, capital
gains tax.
9. Expand WTO
World Trade Organization.
It came into existence on 1st January1995.
10. Define outsourcing.
Outsourcing refers to the practice of having certain job functions
done outside a company or in other words a company hires a service from
external sources.
11. Define privatization.
Privatization refers to transfer of ownership of public
enterprises to private people.
12. Expand LPG
Liberalization, Privatization, Globalization.
13, Define a multi-national
corporation
A company or a corporation which functions and operates in many
nations is called a multi-national corporation.
14. Define direct tax
Direct taxes are those which are directly paid to the government
by the tax payer.
15. Define indirect tax
Indirect taxes are collected indirectly from consumers by the
government through intermediaries.
16. Define a Tax.
Tax is a compulsory contribution made by every citizen of a country
without expecting any direct benefit for the amount paid.
17. Give examples of indirect taxes.
Central Sales Tax, GST( Goods and services Tax), Service Tax, STT (Security Transaction Tax), Excise Duty, Custom
Duty.
II. Answer the following
questions in four sentences each: 4
marks.
1. What are the major reforms of financial
sector?
a) The main aim was to reduce the
role of RBI from a regulator to facilitator of financial sector.
b) Banks were given freedom to
fix their own interest rates, to open new branches as well as to raise funds
within the country and abroad.
c) New private banks and foreign
banks were allowed to function.
d) Foreign investment limit in
banks was increased to 50%
e) Foreign institutional
Investors are allowed to invest in Indian financial markets.
2. Why did the government remove trade barriers?
The government removed trade barriers since it felt that
competition would improve the quality of the goods within the country.
3. Do you think FDI is necessary for India? Why?
Some scholars argue that FDI is necessary since it brings capital,
technical expertise and access to foreign markets. Others feel that FDI destroys local
industries.
4. What do you mean by Structural adjustment
programmes? Name any two of them.
Programmes which bring structural change in the economy to improve
its productivity are called Structural adjustment programmes. Example: Industrial sector reforms, trade reforms, public
sector reforms and so on. These are
micro in nature which affects only the concerned sectors.
5. Agricultural sector appears to be adversely
affected by the reform process why?
a) The removal of
fertilizer subsidy resulted in rise in the cost of production which affected
the small and marginal farmers.
b) Reduction in import
duties as well as lifting of quantitative restrictions on agricultural produce
affected the Indian farmers.
c) Export policy in
agriculture encouraged the farmers to grow cash crops which have led to rise in
prices of food grains.
III. Answer the following
questions in about 15 sentences each: 6marks
1. Explain the background of
economic reforms in India.
a) During 1980’s the government’s expenditure exceeded its
revenue.
b) The revenue was spent to meet the problems like poverty,
unemployment and rapid growth of population.
c) The development programmes did not result in revenue generation
d) Profit from public sector was insufficient.
e) This forced the government to borrow from Public banks and
International financial institutions.
f) At times external borrowing was spent on consumption.
g) Our imports could not be reduced and exports could not be
increased.
h) Inflation increased and foreign exchange reserves decreased.
i) India approached the World Bank and IMF for a loan.
j) India received $7 billion to manage the crisis with a direction
to liberalize and open the economy.
k) The then Prime minister, Sri P.V. Narasimha Rao along with
Finance Minister Dr. Man Mohan Singh formulated a package of economic reforms
called “The New economic policy” which was announced in July 1991.
2. Explain the liberalization measures introduced
since 1991.
Liberalization refers to the removal of government’s control and
restrictions on economic activities. It
implies allowing greater freedom to economic agents.
The important areas where liberalization measures were introduced
during and after 1991 are as follows:
1. Deregulation of Industrial sector:
a) Industrial licensing was abolished for all industries except
for few industries related to security, strategic and environmental concerns.
b) The number of industries
reserved for the public sector has been reduced from 17 to 2(atomic energy and
railway transport)
c) Goods meant to be produced by the small scale industries were
de -reserved.
2. Financial Sector reforms:
a) The main aim was to reduce the
role of RBI from a regulator to facilitator of financial sector.
b) Banks were given freedom to
fix their own interest rates, to open new branches as well as to raise funds
within the country and abroad.
c) New private banks and foreign
banks were allowed to function.
d) Foreign investment limit in
banks was increased to 50%
e) Foreign institutional
Investors are allowed to invest in Indian financial markets.
3. Tax Reforms include reforms in taxation and public
expenditure policy:
a) Since 1991 the rates of
individual income tax have been greatly reduced.
b) The rate of corporation tax has been slowly
reduced.
c) Many tax procedures have been
simplified.
d) VAT has replaced sales tax.
4. Foreign exchange reforms:
a) To solve the balance of
payments crisis, the rupee was devalued against foreign currencies in 1991.As a
result exports increased with a inflow of foreign exchange.
b) Exchange rate of rupee is
allowed to be determined by demand and supply of foreign currencies in the
foreign exchange market.
5. Reforms in Trade and investment:
a) Since 1991 the government removed trade
barriers and liberalized foreign trade and investment.
b) All quantitative restrictions
on exports and imports have been reduced.
c) Tariff rates have been
reduced.
d) Import licensing has been
abolished
e) Export restrictions have been liberalized.
3. Write a short note on outsourcing.
a) Outsourcing refers to the practice of having certain job
functions done outside a company or in other words a company hires a service
from external sources.
b) Out sourcing has increased with the growth of Information
technology.
c) Many services such as voiced based business process, record
–keeping, accountancy, music recording, teaching, banking services etc are
being outsourced to India by companies in Developed countries due to lower
cost, better skill and accuracy.
d) The availability of skilled manpower at lower wages has made
India a desired destination for global outsourcing.
4. Analyze the performance of the economy during
the reform period.
Let us assess the performance of the economy during two decades:
a) The growth rate of GDP
increased from 5.6% during 1980-81 to 7.92% during 2007 -12.
b) The growth of
agricultural sector declined, industrial sector fluctuated and service sector
increased.
c) Foreign investment and foreign exchange reserves increased.
d) Export of auto parts,
engineering goods IT software and textiles increased sharply.
e) Employment opportunities
increased for the skilled personnel and unskilled could not get better jobs.
f) The removal of
fertilizer subsidy resulted in rise in the cost of production which affected
the small and marginal farmers.
g) Reduction in import
duties as well as lifting of quantitative restrictions on agricultural produce
affected the Indian farmers.
h) Export policy in
agriculture encouraged the farmers to grow cash crops which have led to rise in
prices of food grains.
i) On account of cheaper
imports the demand for domestic industrial products fell.
j) Globalization affected
domestic industries and employment.
Several SSI had to be closed.
k) The government policy of
disinvestment has been criticized in view of undervalue of the shares sold to
the private sector. Further the proceeds
are used to cover the deficit in the revenue and not for development purposes.
l) Tax and tariff
reductions have reduced the revenue of the government substantially affecting
the development and welfare expenditure.
5. What are the objectives of WTO?
World Trade Organization came into existence on 1st
January1995.
The Objectives of WTO are:
1. To reduce Tariffs and other barriers to trade.
2. To eliminate discriminatory treatment in international trade.
3. To facilitate higher standards of living, full employment and
increase in production and trade in goods and services.
4. To ensure that least developed countries secure level of share
in the growth of international trade.
5. Optimal use of the world’s
resources for sustainable development.
6. To ensure that linkages trade policies, environmental policies
with sustainable growth and development are taken care by the member countries.
6. Write a note on privatization.
Privatization refers to transfer of ownership of public
enterprises to private people. It is
done with the following objectives:
a) To improve the
productive efficiency
b) To facilitate Modernization
c) To improve the performance
d) To earn more profit.
e) To attract FDI.
Some scholars argue that loss making public sector units can earn
profit when privatized. While others
feel that there would be no job security and it would concentrate just on
profit rather than social justice.
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