CHAPTER 3 LIBERALISATION PRIVATIZATION AND GLOBALISATION

After learning this chapter LEARNERS

• Will understand the background of the reform policies introduced in Indiain 1991
• understand the mechanism through which reform policies wereintroduced
• comprehend the process of globalization and its implications for India
• be aware of the impact of the reform process in various sectors.
INTRODUCTION
Since independence, India followed the mixed economic system, by combining the
advantages of capitalist economy with those of the socialist economy.
Some scholars point out that by establishing variety of rules and laws which aimed at
controlling and regulating the economy ended up in hampering the process of growth
and development but according to some scholars, the increasing role of public sector
has helped Indian economy to: (i) Achieve growth in savings; (ii) Develop a diversified
Industrial sector; and (iii) Achieve food security through sustained expansion of
agricultural output.
Why was there a need for NEP?
1. Poor performance of Public Sector except for few public enterprises, the overall
performance was very disappointing. The income from public sector undertakings
was not very high to meet the growing expenditure. Though the revenues were
low, the government had to spend more to meet the challenges like
unemployment, poverty and population explosion.
2. Deficit in balance of Payments (BOP): Deficit in BOP arises when foreign
payments for imports exceed foreign receipts from exports. Even after imposing
heavy tariffs and quotas, there was a sharp rise in imports. On the other hand,
there was slow growth of exports due to low quality and high prices of Indian goods
in the international market.
3. Inflationary pressures: There was a consistent rise in the general price level in
the economy due to increase in money supply and shortage of essential goods
4. Fall in Foreign exchange reserves: in 1991, foreign exchange reserves fell to
the lowest level and it led to the foreign exchange crisis in the country. Foreign
exchange reserves declined to a level that was not adequate:
▪ To finance imports for more than two weeks
▪ To pay the interest that needs to be paid to international lenders.
5. Huge burden of debts: The expenditure of the government was much higher
than revenue. As a result, government had to borrow money from banks, public
and from international financial institutions
6. Inefficient Management: The origin of the financial crisis can be traced from the
inefficient management of the Indian economy.
▪ The government was not able to generate sufficient revenue from internal sources
such as taxation, running of public sector enterprises, etc.

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 ▪ Government expenditure began to exceed its revenue by such large margins that
it became unsustainable.
▪ At times, the foreign exchange borrowed from other countries and international
financial institutions was spent on meeting consumption needs.
▪ Neither was an attempt made to reduce such wasteful spending nor sufficient
attention was given to boost exports to pay for the growing imports
▪ Neither was an attempt made to reduce such wasteful spending nor sufficient
attention was given to boost exports to pay for the growing imports

Crisis of 1991 Forced India for Financial help from IMF and World Bank
To manage the economic crisis of 1991, Indian Government approached the
International Bank for Reconstruction and Development (IBRD), popularly known as
World Bank and the International Monetary Fund (IMF) and received 7 billion dollar as
loan.
For availing the loan, these international agencies expected India to libralise and open up
the economy by:
▪ Removing restrictions on the private sector;
▪ Reducing the role of the government in many areas; and
▪ Removing trade restrictions.
India agreed to the conditions of World Bank and IMF and announced the New Economic
Policy in 1991.
The thrust of these policies was towards creating a more competitive environment in the
economy and removing barriers to entry and growth of firms.
The New Economic Policy (NEP) was announced in July 1991
The set of policies can be classified into 2 groups as stablisation measures and
structural measures
1. Stabilisation Measures: They refer to short-term measures which aim at;
(i) Correcting weaknesses of the balance of payments by maintaining sufficient
foreign exchange reserves; and
(ii) Controlling inflation by keeping the rising prices under control.
2. Structural Reform Measures: They refer to long-term measures which aim at;
(i) Improving the efficiency of the economy; and
(ii) Increasing international competitiveness by removing the rigidities in various
segments of the Indian economy.
Main Features of the New Economic Policy
The government initiated a variety of policies which fall under three heads:
1. Liberalisation 2.Privatisation 3.Globalisation
Out of liberalisation, privatisation and globalisation, the first two are policy strategies and
the third one is the outcome of these strategies.

INTEXT QUESTIONS
1. Name the 2 institutional organization whom India approached for loan to
manage the crisis?
2. Why were reforms introduced in India?
3. What was the thrust of the New Economic policy in 1991?

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LIBERALISATION
Prior to 1991, there were large number of government restrictions in India in the
areas of licensing, import and export trade, dealings in foreign exchange, etc. In
July 1991, a package of economic reforms was announced, which marked the beginning
of process of “Liberalisation” in India. Liberalisation means removal of entry and
growth restrictions on the private sector

Deregulation of industrial sector

Prior to reforms, in India regulatory mechanisms were enforced in various ways
1. Industrial licensing under which every entrepreneur had to get permission from
government officials to start a firm, close a from or decide the amount of goods
2. Private sector was not allowed in many industries
3. Some goods could be produced only in small scale industries.
4. Controls on price fixation and distribution of selected industrial products. The
reform policies introduced in and after 1991 removed many of these restrictions.

▪ Liberalization involves deregulation and reduction of government controls and greater

autonomy (freedom) of private investment, to make economy more competitive.
▪ Under this process, business is given free hand and is allowed to run on commercial
lines.
▪ The purpose of liberalization was:
❖ To unlock the economic potential of the country by encouraging private sector and
multinational corporations to invest and expand; and
❖ To introduce much more competition into the economy and creating incentives for
increasing efficiency of operations
▪ The economic reforms taken by the Government under liberalization include the
following:
(i) Industrial Sector Reforms (ii) Financial Sector Reforms (iii)Tax
Reforms iv) Foreign Exchange Reforms v) Trade and Investment Policy
Reforms

Industrial Sector Reforms

In order to make necessary reforms in the industrial sector, the Government introduced
is new industrial policy on July 24, 1991. The various measures under industrial policy
reforms include;
1. Reduction in Industrial Licensing: The new policy abolished industrial licensing for
all the projects, except for a short list of industries (like liquor, defenceequipments,
industrial explosives, etc).
▪ No licenses were needed (i) To set up new units; or (ii) Expand or diversify the
existing line of manufacture.
▪ However, license is required for certain industries, related to security and
strategic considerations.
2. Decreasing in role of Public Sector: One of the striking features was the substantive
reduction in the role of public sector in the future industrial development of the country.

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 The number of industries, exclusively reserved for the public sector, reduced from
17 to following 3 industries: (i) Defenceequipments; (ii) Atomic energy generation; and
(iii) Railway Transport.

3. De-reservation under small-scale industries: Many goods produced by small scale

industries have now been de-reserved.
▪ The investment ceiling on plant and machinery for small undertakings enhanced
to rupees one crore.
▪ In many industries, the market was allowed to determine the prices through forces
of the market (and not by directive policy of the government).
4. 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,
amalgamation, etc. were eliminated.

Financial Sector Reforms

(i) Change in Role of RBI: The role of SBI was reduced from regulator to facilitator of
financial sector. As a result, financial sector was allowed to take decisions on many
matters, without consulting the RBI.
(ii) Origin of Private Banks: The reform policies led to the establishment of private
sector banks, Indian as well as foreign. For example, Indian banks like ICICI and
foreign banks like HSBC increased the competition and benefitted the consumers
through lower interest rates and better services.
(iii) Increase in limit of foreign investment: The limit of foreign investment in banks
was raised to around 74 per cent. Foreign Institutional Investors (FII) such as
merchant bankers, mutual funds and pension funds were now allowed to invest in
Indian financial markets.
Though banks have been given permission to generate resources from India and
abroad, certain aspects have been retained with the RBI to safeguard the interests
of the account-holders and the nation.
(iv) Ease in Expansion Process: Banks were given freedom to set up new branches
(after fulfillment of certain conditions) without the approval of the RBI.

Tax Reforms
Tax reforms refer to reforms in government’s taxation and public expenditure policies,
which are collectively known as its ‘Fiscal Policy.’ Taxes are of two types:
▪ Direct Taxes consist of taxes on income of individuals as well as profits of business
enterprises. For example, Income tax and Corporate tax.
▪ Indirect Taxes refer to those which affect the income and property of persons
through their consumption expenditure. Indirect taxes are generally imposed on
goods and services. For example, GST
The major Tax Reforms made are:
1. Reduction in Taxes: Since 1991, there has been a continuous reduction in income
and corporate tax as high tax rates were an important reason for tax evasion. It is now
widely accepted that moderate rates of income tax encourage savings and voluntary
disclosure of income,

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2. Reforms in Indirect Taxes: Considerable reform have been made in indirect taxes
to facilitate establishment of common national market for goods and commodities.
3. Simplification of Process: In order to encourage better compliance on the part of
taxpayers, many procedures have been simplified.
4. Introduction of GST: In 2016, the Indian parliament passed a law, goods and
services tax (GST) act 2016, to simplify and introduce a unified indirect tax
system 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.

Foreign Exchange Reforms

The important reforms made in the foreign exchange market are;
▪ Devaluation of Rupee: Devaluation refers to reduction in the value of domestic
currency by the government. To overcome Balance of Payments crisis, the rupee
was devalued against foreign currencies. This led to an increase in the inflow of
foreign exchange.
▪ Market Determination of Exchange Rate: The Government allowed rupee value to
be free from its control. As a result, market forces of demand and supply determine
the exchange value of the Indian rupee in terms of foreign currency.

Trade and Investment Policy Reforms

Before 1991, a lot of restrictions were imposed on imports to protect the domestic
industries. However, this protection reduced the efficiency and competitiveness of
domestic industries and led to the slow growth. So, the reforms in the trade and
investment policy were initiated:
• To increase the international competitiveness of industrial production
• To promote foreign investments and technology into the economy
• To promote efficiency of local industries and adoption of modern technologies.
The important trade and investment policy reforms include:
1. Removal of Quantitative restrictions on Imports and Exports: Quantitative
restrictions on imports of manufactured goods and agricultural products were fully
removed from April, 2001.
2.Removal of Export Duties: To increase the competitive position of Indian goods in the
international market.
3. Reduction in Import Duties:Import duties were reduced to improve the position of
domestic goods in the foreign market. The important trade and investment
4. Relaxation in Import Licensing System: The Import licensing was abolished, except in
case of hazardous and environmentally sensitive industries. This encouraged domestic
industries to import raw materials at better prices, which raised their efficiency and
made them more competitive.

Intext questions
1. Give the meaning of liberalization
2. Name the areas in which a few liberalized measures were introduced in 1980s

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 3. Name 3 industries which were reserved for the public sector even after
liberalization
4. Industrial licensing was abolished for almost all products except few categories
Enumerate them.
5. Why did RBI have to change its role from controller to facilitator of financial
sector in India
6. How is RBI controlling the commercial banks
7. What is fiscal policy
8. State 2 types of taxes
9. Why did the parliament pass a law GOODs and services tax act 2016?
10. What do you understand by devaluation of rupee
11. Why was the liberalization of trade and investment regime initiated?
12. Why are tariffs imposed
13. What is meaning of quantitative restrictions?

PRIVATISATION

Privatsation means transfer of ownership, management and control of public

sector enterprises to the entrepreneurs in the private sector.

Privatisation implies greater role of the private sector in the economic activities of the
country. Over the years, Indian Government has diluted its stake in several public
enterprises, including IPCL, IBP, Maruti Udyog, etc.
Privatisation can be done in two ways;
1. Transfer of ownership and management of public sector companies from the
government to the Private Sector.
2. Privatisation of the public sector undertakings (PSU) by selling off part of the equity
of PSUs to the public. This process is known as disinvestment.

Advantages of privatization and disinvestment

It was envisaged that private capital and managerial capabilities could be
effectively utilized to improve the performance of PSUs.
The government envisaged that privatization could provide strong impetus to the
inflow of FDI

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 Navaratnas and Mini Ratnas
The government also made to improve the efficiency of public sector undertakings by giving
them autonomy in taking managerial decisions.
▪ For instance, some PSUs have been granted special status as navaratnas and mini ratnas.
▪ In order to infuse professionalism and enable PSU’s to compete more effectively in the
liberalised global environment, government chose nine PSU’s (BHEL, BPCL, SAIL, etc.)
and declared as ‘Navratnas’ in 1996.
▪ They were given managerial and operational autonomy in taking various decisions, to run
the company efficiently and to increase their profits.
▪ The granting of navratna status resulted in better performance of these companies.
▪ Apart from this, other profit-making enterprises were granted greater operational, financial
and managerial autonomy and they were referred as “Mini Ratnas’.

Intext Questions
1. Give the meaning of privatization
2. What is disinvestment
3. What is the purpose of disinvestment

GLOBALISATION
Globalisation means integrating the national economy with the world economy
through removal of barriers on international trade and capital movements.

▪ Globalisation is the outcome of the policies of liberalisation and privatisation.

▪ Globalisation is generally understood to mean integration of the economy of the
country with the world economy.
▪ However, it is a complex phenomenon. It is an outcome of the set of various policies
that aim to transform the world towards greater interdependence and integration.
▪ It involves creation of networks and activities to overtake economic, social and
geographical boundaries. In short, globalization aims to create a borderless world.

Positive and Negative Traits of Globalisation

The process of globalisation through liberalisation and privatization policies, has
produced positive as well as negative results, both for India and other countries.

In Favour of Globalisation
Globalisation resulted in:
▪ Greater access to global markets;
▪ Advanced technology;
▪ Better future prospects for large industries of developing countries to become
important players in the international arena,
Against Globalisation
Globalisation has been criticized by some scholars because according to them:

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▪ Benefits of globalisation accrue more to developed countries as they are able to
expand their markets in other countries.
▪ Globalisation compromises the welfare and identity of people belonging to poor
countries.
▪ Market-driven globalisation increases the economic disparities among nations and
people.
Outsourcing
Outsourcing refers to contracting out some of its activities to a third party which
were earlier performed by the organisation. For example, many companies have
started outsourcing security service to outside agencies on a contractual basis.
▪ Outsourcing is one of the important outcomes of the globalisation process.
▪ It has intensified in recent times because of the growth of fast modes of
communication, particularly the growth of Information Technology (IT).
▪ With the help of modern telecommunication links, the text, voice and visual data in
respect of these-service is digitized and transmitted in real over continents and
national boundaries.
▪ India has become a favourable destination of outsourcing for most of the MNC’s
because of low wage rate and availability of skilled manpower. For example, Indian
Business Process Outsourcing (BPO) companies are already gaining prominence and
earning precious foreign exchange.

▪ Some of the services outsourced to India include:

(i) Voice-based business processes (known as BPO or Call Centres);
(ii) Record Keeping;
(iii) Accountancy;
(iv) Banking services;
(v) Music Recording;
(vi) Film editing;
(vii) Book transcription;
(viii) Clinical advice, etc.
World Trade Organisation (WTO)
Origin of World Trade Organisation (WTO)
Prior to WTO, General Agreement on Trade and Tariff (GATT) was established as global
trade organisation, in 1948 with 23 countries. GATT was set up to administer all
multilateral trade agreements by providing equal opportunities to all countries in the
international market. WTO was founded in 1995 as the successor organisation to the
GATT.
▪ The WTO agreements cover trade in goods as well as services, to facilitate
international trade.
▪ At present, there are 164 member countries of WTO and all the members are required
to abide by laws and policies framed under WTO rules.
▪ An important member of WTO, India has been in the front position of framing fair global
rules, regulations and advocating the interests of the developing world.

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▪ India has kept its commitments make to the WTO. India has taken reasonable steps
to liberalise trade by removing quantitative restrictions on imports and reducing tariff
rates.
▪ Some major Functions of WTO:
1. Facilitate international trade through removal of tariff as well as non-tariff barriers;
2. Raising production capacity and ensure optimum utilization of world resources
3. Environment Protection
4. Increasing greater market access to all member countries

Should India be a member of WTO?

Some of scholars are of the view that there is no use for a developing country like India
to be a member of the WTO. According to them;
(i) Major volume of international trade occurs among the developed nations; and
(ii) Developing countries are being cheated as they are forced to open up their
markets for developed countries and are not allowed access to markets of
developed countries.

Important Terms:
Bilateral Trade: Trade between two countries is known as Bilateral Trade.
Multi-lateral Trade: Trade between more than two countries is known as Multi-lateral
Trade.
Tariff barriers: The barriers which are imposed on imports to make them relatively costly
and to protect the domestic production, are known as Tariff barriers.
Non-Tariff barriers: The barriers which are imposed on the amount of imports and
exports are known as Non-Tariff barriers.

AN APPRAISAL OF LPG POLICIES (ECONOMIC REFORMS)

Economic reforms created mixed reactions at different levels. Let us discuss some of the
positive and negative aspects of economic reforms.

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Arguments in Favour of Economic Reforms

The following are some of the important arguments advanced in favour of economic
reforms:
1. Increase in rate of Economic Growth: The growth of GDP increased from 5.6 per
cent during 1980-91 to 8.2 per cent during 2007-2012. This shows that there has
been an increase in the overall GDP growth in the reform period.
▪ Agriculture recorded a high growth rate during 2013–14, this sector witnessed negative growth
in the subsequent year.
▪ While the service sector continued to witness a high level of growth — higher than the overall
GDP growth in 2014– 15, this sector witnessed the high growth rate of 9.8 per cent. The
industrial sector witnessed a steep decline during 2012–13, in the subsequent years it began to
show a continuous positive growth
2. Inflow of foreign Investment: The opening up of the company has led to the rapid
increase in foreign direct investment (FDI). The foreign investment (FDI and foreign
institutional investment) increased from about US 100 million dollar in 1990-91 to US
30 billion dollar in 2017-2018.
3. Rise in Foreign Exchange Reserves:There has been an increase in the Foreign
Exchange Reserves from about US $ 6 billion in 1990-91 to about US $ 413 billion in
2018-19. At present, India is one of the largest foreign exchange reserve holder in
the world.
4. Rise in Exports: During the reform period, India experienced considerable increase
in exports of auto parts, engineering goods, IT software and textiles.
5. Control on Inflation: Increase in production, tax reforms and other reforms helped
in controlling the inflation. The annual rate of inflation reduced from the peak level of
17 per cent in 1991 to around 7,6 per cent in 2012-13.
6. Increase in role of private Sector: Abolition of licensing system and removal of
restrictions on entry of the private sector, in areas earlier reserved for the public
sector, have enlarged the area of operation of the private sector.

CRITCISMS.
EFFECT ON GROWTH AND EMPLOYMENT
Growth of an economy is measured in terms of its GDP the growth of GDP
increased from 5.6 per cent to 8.2 %. During 2007-2012.
Though GDP growth rate increased in the reform period. It has not generated
sufficient employment opportunities in the country.
REFORM IN AGRICULTURE: The new economic policy has neglected the agricultural
sector as compared to industry, trade and services sector.
(i) Reduction of public investment: Public investment in agriculture sector,
especially in infrastructure, which includes irrigation, power, roads market

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 linkages and research and extension (which played a crucial role in the Green
Revolution), has been reduced in the reform period.
(ii) Removal of subsidy:Removal of fertilizer subsidy increased the cost of
production, which adversely affected the small and marginal farmers.
(iii) Liberalisation and reduction in import duties:After the commencement of WTO,
a number of policy changes were made; (a) Reduction in import duties on
agricultural products; (b) Removal of minimum support price; (c) lifting of
quantitative restrictions on agricultural products. All these policies adversely
affected the Indian farmers as they have to face increased international
competition.
(iv) Shift towards cash crops:Due to Export-oriented policy strategies in agriculture,
the production shifted from food grains to cash crops for the export market. It
led to rise in the prices of food grains.
REFORM IN INDUSTRY: Industrial growth recorded a slowdown due to the following
reasons:
(i) Cheaper Imported Goods: Due to globalisation, there was a greater flow of
goods and capital from developed countries and as a result, domestic
industries were exposed to imported goods. Cheaper imports replaced the
demand for domestic goods and domestic manufacturers started facing
competition from imports. For example, cheaper Chinese goods pose a big
threat to Indian manufacturers.
(ii) Lack of infrastructure facilities: The infrastructure facilities, including power
supply, have remained inadequate due to lack of investment
(iii) Non-tariff Barriers by Developed countries: All quota restrictions on exports of
textiles and clothing have been removed from India. But some developed
countries, like USA have not removed their quota restrictions on import of
textiles from India.
DISINVESTMENT:The government has always fixed a target for disinvestment of
PSUs. For instance, in 1991-92, the target was rupees 2,500 crore, whereas,
government was able to mobilise rupees 3,040 crore more than the target.
In 2017-18,the target was about Rs. 1,00,000 crore, whereas, the achievement
was about Rs. 1,00,057 crore.
However, according to some scholars, the disinvestment policy of government
was not successful because:
▪ The assets of public sector undertakings (PSUs) were under-valued and sold to
the private sector.
▪ Moreover, such proceeds from disinvestments were used to compensate shortage
of government revenues rather than using it for the development of PSUs and
building social infrastructure in the country.
REFORM AND FISCAL POLICY: The tax reduction in the reform period was done to
generate larger revenue and to curb tax evasion. But, it did not result in increase in
tax revenue for the government.
▪ Tariff reduction decreased the scope for raising revenue through customs duties.
▪ Tax incentives provided to foreign investors to attract foreign investment further
reduced the scope for raising tax revenues.

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SPREAD OF CONSUMERISM: The new policy has been encouraging a dangerous trend
of consumerism by encouraging the production of luxuries and items of superior
consumption.
UNBALANCED GROWTH: Growth has been concentrated only in some select areas in
the services sector, such as telecommunication, information technology, finance,
entertainment, travel and hospitality services, real estates and trade, rather than vital
sectors, such as agriculture and industry, which provide livelihood to millions of people in
the country.

Changes made by the Globalisation of the Indian Economy

1. The New Economic Policy prepared a specified list of high technology and high
investment priority industries, in which automatic permission will be available for
foreign direct investment up to 51 per cent of foreign equity.
2. In respect of foreign technology agreements, automatic permission is provided in
high priority industry upto a sum of rupees 1 crore. No permission is now required
for hiring foreign technicians or for testing indigenously developed technology
abroad.
3. In order to make international adjustment of Indian currency, rupee was devalued
in July 1991 by nearly 20 per cent. It stimulated exports, discouraged imports and
raised the influx of foreign capital.
4. To integrate economy with world, the Union budget 1992-93 made Indian rupee
partially convertible and then the rupee was made fully convertible in 1993-
94.budget.
5. A few five year export-import policy (1992-97) was announced by the Government
to establish the framework of globalisation of India’s foreign trade. The policy
remove all restrictions and controls on the external trade and allowed market
forces to play a greater role in respect of exports and imports.
6. In order to bring the Indian economy within the ambit of global competition, the
government has modified the customs duty to a considerable extent. Accordingly,
the peak rate of customs duty has been reduced from 250 per cent to 10 per cent
in 2007-2008 budget.

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 NCERT QUESTION AND ANSWERS

1.Why were reforms introduced in India?

Ans. The various reasons for introduction of reforms in India are;
1. Poor performance of Public Sector:In the 4 decades the overall performance of
public sector was very poor as huge losses incurred by a good number of public
sector enterprises.
2. Deficit in balance of Payments (BOP): Even after imposing heavy tariffs and
quotas, there was a sharp rise in imports. On the other hand, there was slow
growth of exports due to low quality and high prices of Indian goods in the
international market. It led to deficit in BOP.
3. Inflationary pressures:There was a consistent rise in the general price level in the
economy due to increase in money supply and shortage of essential goods.
4. Fall in Foreign exchange reserves:In 1991, foreign exchange reserves fell to the
lowest level and it led to the foreign exchange crisis in the country. Foreign
exchange reserves declined to a level that was not adequate:
▪ To finance imports for more than two weeks; and
▪ To pay the interest that needs to be paid to international lenders.

5. Huge burden of debts:The expenditure of the government was much higher than
revenue. As a result, government had to borrow money from banks, public and
from international financial institutions.

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 6. Inefficient Management: The government was not able to generate sufficient
revenue and the expenditure began to exceed its revenue by large margins.

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

It provides equal opportunities to all countries in the international market for
trading purposes.
It ensures optimum utilization of resources
WTO agreements cover trade in goods as well as services to facilitate
international trade. Through removal of tariff as well as non tariff barriers.
3.why did RBI have to change its role from controller to facilitator of financial
sector in India?
RBI had to change its role from controller to facilitator of financial sector in india
to allow banks to take independent decisions on many matters without consulting
and to allow the establishment of private sector banks both Indian as well as
foreign banks.
4.How is RBI controlling the commercial banks?
It controls the commercial banks through CRR, SLR and bank rates.

5.Distinguish between strategic and minority sale, bilateral and multilateral trade
and tariff and non tariff barrier.

Strategic and minority sale

Strategic sale involves the sale of minimum 51% stake of a public sector
undertaking to the private sector. The control and management of PSU is
transferred to the private sector.
Minority sale involves the sale of less than 49% stake of PSU to the private
sector. The control and management of PSU remains with the government as it
holds the majority stake.
Bilateral and multilateral trade
The trade between more than two countries is known as multi-lateral trade, whereas,
bilateral trade is the trade between two countries.
Tariff and non tariff barriers
(iii) The barriers which are imposed on imports to make them relatively costly and
to protect the domestic production are known as tariff barriers. On the other
hand, non-tariff barriers are imposed on the amount of imports and exports.

6.Why are tariffs imposed?

Tariff are imposed to make them relatively costly and to protect the domestic
production
7. What is meaning of quantitative restrictions?

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 Quantitative restrictions are non-tariff barriers imposed on the amount of imports
and exports.
8. Those public sector undertakings which are making profits should be privatised.
Do you agree with this view? Why?
Ans. No, I do not agree with this view. Profit making Public Sector undertakings (PSUs)
are the revenue generator and government needs their profits to make them more
competitive and efficient. However, if a PSU is an inefficient and loss making, then
it may be privatised, provided, such PSU is not meant to serve welfare of general
public. Privatisation of such important PSUs will lead to loss of welfare of poor
people. Hence, only less important PSUs should be privatized and core PSUs
should continue to be owned by the public sector.
Q.9 Do you think outsourcing is good for India? Why are developed countries opposing
it?
Ans. Yes, outsourcing is good for India. The following points justify this:
(i) Employment: It provides employment to a large number of unemployed
Indians.
(ii) Exchange of technical know-how: Outsourcing enables the exchange of
ideas and technical know-how of sophisticated and advanced technology.
(iii) International worthiness: Outsourcing also enhances India’s international
worthiness credibility.
(iv) 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.
However, developed countries oppose outsourcing to India because of following
reasons:
(i) Outsourcing leads to outflow of funds from the developed countries to India,
which reduces the income disparities between the two countries.
(ii) Outsourcing reduces the employment generation and creates job insecurity
in the developed countries.
Q.10. India has certain advantage which makes it a favourite outsourcing destination.
What are these advantages?
Ans. India has become a favourable destination of outsourcing for most of the MNC’s
because of following reasons:
(i) Easy Availability of Cheap Labour: The wage rates in India are
comparatively lower than that of in the developed countries. As a result,
MNC’s outsource their business in India.
(ii) Availability of skilled manpower: India has cast skilled manpower, which
enhances the faith of MNC’s.
(iii) Favourable Government Policies: MNC’s gets various types of lucrative
offers from the Indian government like tax holidays, low tax rates, etc.
(iv) International worthiness: India has a fair international worthiness and
credibility.
Q.11. Do you think the navaratna policy of the government helps in improving the
performance of public sector undertakings in India? How?
Ans. Yes, the “Navaratna Policy” of the government has helped in improving the
performance of public sector undertakings in India. In order to infuse

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 professionalism and enable public sector undertakings (PSUs) to compete more
effectively in the liberalised global environment, government chose nine PSUs
(BHEL,BPCL, SAIL, etc.) and declared them as ‘Navaratnas’.
▪ These PSUs were given greater managerial and operational autonomy in
taking various decisions, to run the company efficiently and to increase their
profits.
▪ The granting of navaratna status resulted in better performance o these
companies.
▪ Encouraged by their better performance, government decided to retain the
navaratnas in the public sector and enable them to expand themselves in
the global markets and raise resources by themselves from financial
markets.
So, it can be concluded that the navaratnas policy of the government helped in improving
the performance of public sector undertakings in India.
Q.12 What are the major factors responsible for the high growth of the service sector?
Ans. The services sector has shown a high growth rate due to following reasons;
(i) Economic Reforms: Liberalisation and variouseconomic reforms initiated in
1991 reduced the various restrictions on the movement of international
finance. This led to huge inflow of foreign capital, foreign direct investments
and outsourcing to India. It led to the growth of the service sector.
(ii) Better performance of some service sectors: There was rapid growth in
select areas of the service sector, such as telecommunication, information
technology, finance, entertainment, travel and hospitality services, real
estates and trade.
(iii) Better technology and growth of IT: The advancements and innovations in
the IT sectors contributed to the growth of the service sector in India.
(iv) Cheap and skilled manpower: Due to availability of cheap and skilled
manpower India has become favourite destination for outsourcing by the
developed economics. It has led to the growth of service sector.
Q.13. Agriculture sector appears to be adversely affected by the reform process. Why?
Ans. Agriculture sector was adversely affected by the reform process in the following
manner;
(i) Reduction of public investment: Public investment in agriculture sector,
especially in infrastructure, which includes irrigation, power, roads market
linkages and research and extension (which played a crucial role in the
Green Revolution), has been reduced in the reform period.
(ii) Removal of subsidy:Removal of fertilizer subsidy increased the cost of
production, which adversely affected the small and marginal farmers.

(iii) Liberalisation and reduction in import duties:After the commencement of

WTO, a number of policy changes were made; (a) Reduction in import
duties on agricultural products; (b) Removal of minimum support price; (c)
lifting of quantitative restrictions on agricultural products. All these policies
adversely affected the Indian farmers as they have to face increased
international competition.

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 (iv) Shift towards cash crops:Due to Export-oriented policy strategies in
agriculture, the production shifted from food grains to cash crops for the
export market. It led to rise in the prices of food grains.
Q.14. Why has the industrial sector performed poorly in the reform period?
Ans. The industrial sector performed poorly in the reform period because of following
reasons;
(i) Cheaper Imported Goods: Due to globalisation, there was a greater flow of
goods and capital from developed countries and as a result, domestic
industries were exposed to imported goods. Cheaper imports replaced the
demand for domestic goods and domestic manufacturers started facing
competition from imports.

(ii) Lack of infrastructure facilities: The infrastructure facilities, including power

supply, have remained inadequate due to lack of investment
(iii) Non-tariff Barriers by Developed countries: All quota restrictions on exports
of textiles and clothing have been removed from India. But some
developed countries, like USA have not removed their quota restrictions
on import of textiles from India.

Q.15. Discuss economic reforms in India in the light of social justice and welfare.
Ans. The economic reforms have been criticized in the light of social justice and welfare
due to following reasons;
(i) Growing Unemployment:Though the GDP growth rate has increased in the
reform period, but such growth failed to generate sufficient employment
opportunities in the country.
(ii) Removal of subsidy:Removal of fertilizer subsidy increased the cost of
production, which adversely affected the small and marginal farmers.

(iii) Rise in the prices of Food Grains: Due to export-oriented policy strategies
in agriculture, the production shifted from food grains to cash crops for the
export market, it led to rise in the prices of food grains.
(iv) Cheaper Imported Goods: Due to globalisation, there was a greater flow of
goods and capital from developed countries and as a result, domestic
industries were exposed to imported goods.
(v) Spread of Consumerism: The new policy has been encouraging a
dangerous trend of consumerism by encouraging the production of luxuries
and items of superior consumption.
(vi) Unbalanced Growth: Growth has been concentrated only in some select
areas in the services sector, such as telecommunication, information
technology, finance, entertainment, travel and hospitality services, real
estates and trade, rather than vital sectors, such as agriculture and
industry, which provide livelihood to millions of people in the country

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 16. what is meant by devaluation of rupee?
Devaluation refers to reduction in the value of domestic currency by the
government. It refers to deliberate increase in foreign exchange rate by the
government making domestic currency (rupee) cheaper. Devaluation led
to increase in exports and thus inflow of foreign exchange.

EXTRA QUESTIONS

1.Distinguish between stabilization measures and structural measures

Stabilization measures
• Short term measures
• Correct the weaknesses in the balance of payments
• Bring inflation under control by maintaining sufficient foreign exchange reserves.

• Structural reform
Long-term measures
Improving the efficiency of the economy
Increasing its international competitiveness by removing the rigidity in various
sectors.

2.In what ways regulatory mechanisms were enforced in India?

• Industrial licensing under which every entrepreneur had to get permission
from government officials to start a firm close a firm. Or decide the amount
of goods that could be produced.
• Private sector was not allowed tin many industries.
• Some goods could be produced only in small scale industries
• Controls on price fixation and distribution of selected industrial products.
3.Why do some scholars question the usefulness of being member of WTO?
A major volume of international trade occurs among the developed nations.
While developed countries file complaints over agricultural subsidies given in their
countries. Developing countries feel cheated as they are forced to open their markets for
developed countries but are not allowed access to the markets of developed countries.
4.The process of globalization through liberalization and privatization policies produced
positive as well as negative results both for India and other countries. State the positive
results of economic reforms In India?
1. opportunity in terms of greater access to global markets
2. High technology
3. Increased possibility of large industries of developing countries to become
important players in the international arena.
5. Give the meaning of privatization. In what 2 ways government companies are
converted into private companies.

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Privatsation means transfer of ownership, management and control of public
sector enterprises to the entrepreneurs in the private sector.

Privatisation can be done in two ways;

1. Transfer of ownership and management of public sector companies from the
government to the Private Sector.
2. Privatisation of the public sector undertakings (PSU) by selling off part of the equity
of PSUs to the public. This process is known as disinvestment.

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