NCERT Solutions for Class 12 Economics Part B Chapter 3 Liberalisation, Privatisation And Globalisation: An Appraisal

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    1. Why were reforms introduced in India?

    Ans. Economic reforms were introduced back in 1991 in India to combat economic crisis. Economic Crisis of 1991 was a result of the policy failure in the preceding years. It was in that year the Indian government had experienced huge fiscal deficits, large balance of payment deficits, high inflation level and an acute fall in the foreign exchange reserves. Furthermore, the Gulf crisis of 1990-91 resulted in an acute rise in the prices of fuel which had further pushed up the inflation level. Because of the effect of all these factors, collectively, economic reforms became inevitable and became the only way to move Indian economy out of this crisis.

    The following are the factors that necessitated the need for the economic reforms:

    (i) Huge Fiscal Deficit: During 1980s, fiscal deficit worsend due to the huge non-development expenditures which rose the gross fiscal deficit. Subsequently, a major portion of this deficit was financed by borrowings (both from external and domestic source).
    In increased public debt and mounting interest, payment obligations were the consequences of increased borrowings. The domestic borrowings by government also rose during 1980-81 to 1990-91. Moreover, the interest payments obligations accounted for 39.1% of total fiscal deficit. As a result of which, India lost its financial worthiness in the international market and, eventually fell into a vicious debt trap. Thus, economic reforms were needed urgently.

    (ii) Weak BOP Situation: BOP is described as the excess of total amount of exports over total amount of imports. In the wake of competitiveness of Indian products, India was unable to earn enough foreign exchange through exports to finance the country’s imports. The current account deficit rose of GDP during 1980-81 to 1990-91. India government had to seek a huge loan to the international market in order to finance this huge current account deficit. Consequently, the external debt increased from 12% to 23% of GDP during the same period. On the other side, the Indian exports were not potent enough to earn sufficient foreign exchange to repay these external debt obligations. This BOP crisis compelled the need for the economic reforms.

    (iii) High level of Inflation: The high fiscal deficits forced the central government to monetise the fiscal deficits by borrowings from RBI. RBI printed new money that pushed up the inflation level, thereby, making the domestic goods more expensive. The rate of inflation rose during 1980s to 1990-91. To lower the inflation rate, government in 1991 had to opt for the economic reforms.

    (iv) Sick PSUs: Public Sector Undertakings took the prime role of industrialisation and removal of inequality of income and poverty. But the following years witnessed the failure of PSUs in performing those assigned roles efficiently and effectively. Instead of being a revenue generator for the central government, these became liability. The sick PSUs turned out to be extra financial burden on the government’s budget.

    Hence, due to all these reasons, the economic reforms became inevitable to introduce.

    2. Why is it necessary to become a member of WTO?

    Ans. It is important for any country to become a member of WTO (World Trade Organisation) for the following reasons:

    (i) Equal opportunities are provided to all the member countries to trade in the international market by WTO.

    (ii) It serves its member countries a fairly large scope to produce at large scale to fulfill to the needs of people across the international boundaries. This enables enough scope to utilise world's resources optimally and provides greater market accessibility

    (iii) It puts emphasis on the removal of tariff and non-tariff barriers, thereby, promoting healthier and fairer competition among different producers of different countries.

    (iv) The countries of similar economic conditions being the members of WTO have the option to raise the issue of safeguarding their common interest.

    3. Why did RBI have to change its role from controller to facilitator of financial sector in India?

    Ans. Before liberalisation, RBI regulated and controlled the financial sector which consists of financial institutions like commercial banks, investment banks, stock exchange operations and foreign exchange market. With the given economic liberalisation and financial sector reforms, RBI have shift its role from a controller to facilitator of the financial sector. This means that the financial organisations were free to make their own decisions on different matters without consulting the RBI. This opened up the gateway of financial sectors for the private players. The basic motive behind the financial reforms was to encourage private sector participation, increase competition and allowing market forces to operate in the financial sector. Therefore, it can be said that before liberalisation, RBI was liable to control the financial sector operations whereas in the post-liberalisation period, the financial sector operations were primarily based on the market forces.

    4. How is RBI controlling the commercial banks?

    Ans. RBI controls the commercial banks with the help of varied instruments like Statutory Liquidity Ratio (SLR), Cash Reserve Ratio (CRR), Bank Rate, Prime Lending Rate (PLR), Repo Rate, Reverse Repo Rate and fixing the interest rates and deciding the nature of lending to various sectors. These ratios and rates are fixed by RBI and it is strictly mandatory for all the commercial banks to adhere to these rates. All these measures not only control the commercials banks' operations but also control money supply in an Indian economy.

    5. What do you understand by devaluation of rupee?

    Ans. Devaluation of Rupee is defined as the fall in the value of rupee in terms of foreign currency. In other words, it implies deliberate official lowering of the value of the country's currency with respect to the foreign currency. Devaluation usually prevails under the fixed exchange rate regime. This means that value of rupee has fallen and the value of foreign currency has risen. It means that now (after devaluation) one US $ can be exchanged for more rupees. This gives a boost to the 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.


    (i) Strategic Sale Strategic Sale
    (a) Strategic Sale is referred as the sale of 51% or more stake of a PSU to the private sector. Minority Sale is defined as to the sale of less than 49% stake of a PSU to the private sector.
    (b) The ownership of PSU is then handed over to the private sector. The ownership of PSU still remains under the purview of the government as it holds 51% of stakes.
    (ii) Bilateral Trade Multilateral Trade
    (a) It is defined as a trade agreement between the two countries. It refers to a trade agreement among more than two countries.
    (b) This is an agreement that provides an equal opportunity to both the countries. This is an agreement that provides an equal opportunity to all the member countries in the international market.
    (iii) Tariff Barriers Non-tariff Barriers
    (a) It is the tax to be imposed on the imports by the country to protect its domestic industries. These are the restrictions other than taxes, to be imposed on imports by the country.
    (b) It includes custom duties, export-import duties. It includes quotas and licenses.
    (c) It is imposed on the physical units (like per tonne) or on value of the goods imported. It is imposed on the quantity and quality of the goods imported.

    7. Why are tariffs imposed?

    Ans. Tariffs are imposed in order to make imports from foreign countries relatively more expensive than domestic goods, thereby, discouraging imports indirectly. These impositions provide a safe and protective environment to the established domestic firms from their technologically advanced foreign counterparts. Tariffs also help and facilitate the domestic firms to survive and grow. Tariffs are also imposed on those goods that are perceived by the government to be socially unwanted and imports of which will create an unnecessary burden on the scarce foreign exchange reserves.

    8. What is the meaning of quantitative restrictions?

    Ans. Quantitative Restrictions (QRs) are defined as the restrictions which are imposed in the form of limits or quotas on the amount of commodities that can either be imported or exported. QRs usually on imports (refers to non-tariff measures) are imposed to discourage imports of foreign goods and to bring down the level of Balance of Payment (BOP) deficits. The imposition of QRs provides impetus to the domestic firms in order 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?

    Ans.An efficient and profit earning PSU is a revenue generating unit for the government. But, if a PSU is an inefficient and loss making one, then the same PSU creates unnecessary burden on the government's scarce revenues and simply adds to the budget deficit. The loss making PSUs are recommended to be privatised whereas it would not be fair to privatise a profit making PSU. Privatising a PSU often leads to concentration of monopoly power in the private hands. Further some of the PSUs like, water, railways, etc. contribute to the welfare of nation and is meant to serve general public against a very nominal cost. Privatisation of such important PSUs will lead to loss of welfare of poor people. Hence, only less important PSUs are 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?

    Ans. Yes, outsourcing is good for India. The following points suggest that outsourcing is good for India:

    (i) Employment: For a developing country like India, employment generation is an important concern to be addressed and outsourcing proves to be an answer for creating more employment opportunities. It leads to the generation of newer and higher paying jobs.

    (ii) Exchange of technical know-how: Outsourcing allows the exchange of ideas and technical know-how of sophisticated and advanced technology from developed to developing countries.

    (iii) International worthiness: Outsourcing to India also improves India’s international worthiness credibility. This increases the inflow of investment to India.

    (iv) Encourages other sectors: Outsourcing not only benefits the service sector evidently but also affects other associated sectors like industrial and agricultural sector through various backward and forward linkages.

    (v) Contributes to human capital formation: Outsourcing catalysts the development and formation of human capital by training, imparting them with advanced skills, thereby, enhancing their future scope and their eligibility for high ranked jobs.

    (vi) Better standard of living and eradication of poverty: By creating better and higher paying jobs, outsourcing had led to an improvement in the standard and quality of living of the people in the developing countries. It had also evidently helped in reducing poverty.

    (vii) Greater infrastructural investment: Outsourcing to India comes with the condition of having better quality infrastructure. Therefore, this had led to the modernisation of the economy and larger investment by the government to develop quality infrastructure and improve the quality human capital.

    However, Outsourcing to India is good but developed countries are not much in favour of this as outsourcing leads to an outflow of investments and funds from the developed countries to these less developed countries. Also the MNCs contribution is more towards the development of the host country than the development of the home country. Further, outsourcing had evidently reduced the employment generation in the developed countries as the same jobs can be done in the less developed countries at relatively cheaper wages. Furthermore, this had created a sense of job insecurity in the developed countries because jobs can be outsourced to the developing countries.

    11. India has certain advantages which make it a favourite outsourcing destination. What are these advantages?

    Ans. The following points qualify India to be the favourite spot for outsourcing by various MNCs.

    (i) Easy Availability of Cheap Labour: As the wage rates in India are lower as compared to that in the developed countries, therefore, MNCs find it economically feasible to outsource their business in India.

    (ii) Reasonable Degree of Skills: Indians have enough skills and techniques and hence, need low training period and low cost of training.

    (iii) International worthiness: India also enjoys a fair international worthiness and credibility. This enhanced the faith of the foreign investors in India.

    (iv) Stable Political Environment: The democratic political environment in India is providing a stable and secured environment to the MNCs which is favourable for them to expand and grow.

    (v) Favourable Government Policies: The most important element that had made India as one of the most favourite spots for outsourcing is the favourable government and tax policies. MNCs get various types of lucrative offers as provided by the Indian government like tax holidays, low rate of tax, easy tax policies, etc. All these policies collectively enable the MNCs to retain a major portion of their earnings in the form of savings that they can reinvest in order to grow and expand their business.

    (vi) Lack of Competitive Competitors: Another most important element for the MNCs in India is that they don’t have to face stiff competition from the Indian domestic industries. This allows them to enjoy a monopoly status in the Indian markets.

    (vii) Reasonable Degree of Infrastructural Investment: Indian government had made heavy investments in the past two decades in the infrastructural sector. A series of steps have been taken for connecting remote and rural areas to the metropolitan and other major cities. This has significantly reduced the cost of production of the MNCs allowing them to operate efficiently and effectively

    (viii) Cheap and Abundant Availability of Raw Materials: India is blessed with enriched natural resources. This ensures the MNCs with cheap availability of raw material and undisturbed and perennial supply of raw materials. This enables proper and seamless operation of MNCs.

    12. Do you think the navaratna policy of the government helps in improving the performance of public sector undertakings in India?

    Ans. In order to improve efficiency, infusion of professionalism and efficient PSUs to compete effectively in the market, government has awarded the status of ‘navaratnas’ to the following nine PSUs:
    (i) Indian Oil Corporation Ltd (IOCL)
    (ii) Bharat Petroleum Corporation Ltd (BPCL)
    (iii) Hindustan Petroleum Corporation Ltd (HPCL)
    (iv) Oil and Natural Gas Corporation Ltd (ONGC)
    (v) Steel Authority of India Ltd (SAIL)
    (vi) India Petro-chemicals Corporations Ltd (IPCL)
    (vii) Bharat Heavy Electricals Ltd (BHEL)
    (viii) National Thermal Power Corporation (NTPC)
    (ix) Videsh Sanchar Nigam Ltd (VSNL)
    These corporations were given a greater degree of financial, managerial and operational autonomy. This has boosted their efficiency and effectiveness. They have also become highly competitive and in fact, some of them are becoming the giant global players. As a result of their better performance, government has decided to retain them under public sector and supported them to grow themselves not only in the domestic market but also in the international market. These corporations are fairly self-reliant and also financially self-sufficient. Thus, 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?

    Ans. The major factors that led to the growth of service sectors in India are as follows:

    (i) High demand for services as final product: India has provided a virgin market for service sector. So, when service sector was booming due to the business outsourcing from the developed countries to India, there was a very high demand for such services especially in banking, computer service, advertisement and communication sectors. Consequently, this high demand in turn led to a high growth rate of service sector.

    (ii) Liberalisation and economic reforms: The growth of Indian service sector is also a remarkable result of the liberalisation and various economic reforms that were initiated back in 1991. Various restrictions on the movement of international finance were minimised because of these reforms. This had consequently led to huge inflow of foreign capital, foreign direct investments and outsourcing to India. This encouraged the service sector growth.

    (iii) Structural transformation: Indian economy is witnessing a structural transformation which implies a shift of economic dependence from primary to tertiary sector. Due to this transformation, there was an increased demand of services by other sectors which boosted the service sector.

    (iv) Advanced technology and growth of IT: The advancements and innovations in the IT sector had enabled the use of internet, telecommunication, mobile phone and electronic transactions across different countries. All of it collectively had contributed to the growth of the service sector in India.

    (v) Increased volume of trade: Low tariff and non-tariff barriers on imports by India are also one of the effective reasons for high growth rate of service sector. The foreign trade reforms allowed the domestic products to interact and compete in the international markets.

    (vi) Cheap labour and reasonable degree of skill in India: Developed countries found outsourcing to India feasible and profitable because of the availability of cheap labour and desired level of skilled man power in India. The business outsourcing in itself has provided substantial encouragements (like development of human capital that requires services like good coaching centers and reputed institutions, etc.) to the growth of service sector.

    14. Agriculture sector appears to be adversely affected by the reform process. Why?

    Ans. The economic reforms of 1991 did not turned out to beneficial for the agricultural sector.

    The following are the reasons that explain the adverse effects of the economic reforms on India’s agriculture sector:

    (i) Reduction of Public Investment: There has been a substantial decrease in the volume of public investment in the agricultural sector. An acute cutback from the Indian government has also been witnessed to provide sufficient irrigation facilities, electricity, information system, market linkages and roads. Furthermore, investment in agricultural research and development was not as extensive as it was during the times of green revolution.

    (ii) Removal of Subsidies: Removal of subsidies on fertilisers shot up the cost of agriculture produce. This made farming significantly more expensive, thereby, adversely affecting the poor and marginal farmers.

    (iii) Liberalisation and Reduction in Import Duties on Agricultural Products: In order to adhere WTO commitments, Indian government had to reduce the import duties on agricultural products that forced the poor and marginal farmers to compete with their foreign counterparts in the international markets. Hence, Stiff competition in the international market along with the traditional techniques of farming adversely affected the poor farmers.

    (iv) Shift towards Cash Crops and Lack of Food Grains: The export oriented production strategies had led the agricultural produce to shift from food grains to the production of cash crops like cotton, jute, etc. This consequently reduced the availability of food grains and lowered the nutritional values which further reduced their productivity.

    (v) Inflationary Pressures on Food Grains: The shift towards cash crops production along with the removal of subsidies gave rise to a situation of inflationary pressures on the prices of food grains. This further, adversely affected the agricultural sector’s performance by making the cost of producing food grains more expensive.

    15. Why has the industrial sector performed poorly in the reform period?

    Ans. Similar to the agricultural sector, industrial sector’s performance was not at par. The poor performance of industrial sector may be attributable to the following reasons:

    (i) Cheaper Imports: The demand for industrial output reduced because of cheaper imports. 
    The imports from the developed countries were cheaper as the import tariffs were removed. These cheaper and quality foreign imports led to the fall in the demand of domestic goods.

    (ii) Lack of Investment: Due to the lack of adequate investment in infrastructure facilities (including power supply), the domestic firms were unable to compete with their developed foreign counterparts in terms of cost of production and quality of goods. This inadequate infrastructural investment raised the cost of production of the domestic producers and, consequently, led to the non-feasibility of their growth prospectus.

    (iii) High Non-tariffs Barriers by the Developed Countries: It was almost impossible to access the developed countries market due to the prevalence of high non-tariff barriers being maintained by the developed countries. For instance, US did not remove quota restrictions on imports of textiles from India and China.

    (iv) Vulnerable and Infant Domestic Industries: During the pre-liberalised period, the domestic industries were provided a protective environment which allowed them to grow and expand. But at the time of liberalisation, the domestic industries were still not developed enough up to the extent it was thought, and consequently they were unable to compete with the multi-national companies. The dependence of domestic industries on traditional technologies which were neither cost effective nor quality effective was one of the basic reasons for their poor growth. Therefore, the domestic industries were adversely affected by liberalisation.

    16. Discuss economic reforms in India in the light of social justice and welfare.

    Ans. The economic reforms have undoubtedly enabled India to access and compete in the international markets. This led to a smooth movement of goods and services across the international boundaries. In addition to this, the increased inflows of foreign capital and investment to India have reduced 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 had become another important reason behind India’s economic growth and GDP to increase by many folds. But on the other side, agriculture that was employing a significant proportion of population, failed to be benefited by these economic reforms. Also the reforms evidently favoured the high income group population at the cost of their poor counterparts. This resulted in wide and increasing economic and social inequalities among different section of population. In addition to this, the economic reforms developed the areas that were well connected and were in sync with the metropolitan cities leaving the remote and rural area undeveloped. Consequently, regional disparities had increased manifolds. The boom in the service sector, especially in the form of quality education, superior health care facilities, IT, tourism, multiplex cinemas, etc. were clearly inacessible for the poor section of the population. The population which was actively engaged in the agricultural and allied sectors has still not been able to share the fruits of advanced technology and modern techniques and prosperity of the nation. Further, the high income group has experienced a significant increase in income, thereby, appreciating the quality of their consumption basket, leaving behind the low and middle income group to fight hard to earn their livelihood. Thus, it can be clearly stated that the economic reforms failed to provide social justice and enhance welfare of the general public of India.

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