Economic Reforms

ECONOMIC REFORMS SINCE 1991

Q. What is meant by economic reforms ?

Ans. By Economic Reforms, we mean a change in the set of policies from one period of time to another. It includes reforms in the agriculture sector, industrial sector, financial sector, fiscal sector, and even in international trade, etc.

So in 1991, Govt. India has introduced diverse economic reforms to pull the country out of economic crises and to accelerate the rate of growth. These reforms depend upon

  1. The policy of liberlisation (L) in place of licencing (L) for the industrial trade.
  2. The policy of privatisation (P) in the place of Quotas (Q) for the industrialist.
  3. The policy of globalisation (G) in place of permits (P) for expors and imports.

These reforms are often described as the new economic policy or the policy of LPG in place of the policy of LQP.

Q. Discuss the needs or Reasons for Economic reforms or New economic policy ?

In 1991, India met with an economic crisis relating to its external ‘debt. The government was not able to make repayments on its borrowing from abroad. Foreign exchange reserve, which we generally maintain to import petrol and other important items dropped to levels that were not sufficient for even a fortnight. The crisis was further compounded by the rising prices of essential goods. All these led the government to introduce a new set of policy measures which change the direction of our development strategies.

The main reasons for New Economic Policy are :

  1. Increase in fiscal deficit : The continued spending on social sector, defence and development programmes of the govt. did not generate additional revenue. Moreover, the govt. was not able to generate sufficiently from internal sources such as taxation. So, there was a need to utilise the rest of the its revenue in a highly efficient manner.
  2. Adverse Balance of Payment (BOP) : Deficit in balance of payments arises when foreign payments for imports are inexcess of foreign receipts from exports. Even after imposing heavy tariffs and fixing quo-

tas, there was a sharp rise in imports. On the other hand, there was a slow growth of exports due to the low quality and the high price of Indian goods in the international market.

  1. Gulf crisis : On a account of Iraq was is 1990-91 prices of petrol shootup. India used to receive huge amount o f remittances from gulf countries in foreign exchange, all that stopped totally. Gulf crisis thus further accentrated already adverse BOP position.
  2. Fall in foreign exchange Reserve : In 1991, foreign exchange reserves fell to the lowest level and it led to the foreign exchange crisis in the country. Foreign exchange reserves, needed to import petrol and other important items, dropped to levels, that were not sufficient for even a fortnight.
  3. Rise in prices : There was a consistent rise in the general price level in the economy. The rise in prices was mainly due to increase in money supply in the economy and shortage of essential goods. The increase in the supply of money occurred due to Deficit Financing. The rate of inflation rose from 6.7% To 16.7%. Such a high level of inflation adversely affected the demand for Indian products in the domestic as well as foreign market.
  4. Poor performance of public sector undertaking (PSUs) : In the 40 years period (1951-90), public sector was assigned an important role to work for the economic development of India. The number of public enterprises increased from 5 in 1951 to 232 in 1991. Except few public enterprises, the overall performance wasvery disappointing. Considering the huge amount of losses incurred by a good number of public sector enterprises, the Government recognised the need for making necessary reforms.

So, to meet these deficits India approached the international bank for reconstruction and development (IBRD) also known as World Bank, and International Monetary Fund (IMF) for loans. But to avail of these loans, these international agencies expected India to liberalize and open up the economy by removing restrictions on the private sector reduce the role of govt. in many areas and also remove trade restrictions between India and other countries.

Objectives of NEP 1991

The objectives of New Economic Policy are:

  1. To reduce fiscal deficit and to have relative price stability
  2. To reduce the area of operation of the public sector and to open up more areas for the private sector.
  3. To liberalise industrial policy and abolish industrial licensing for most of the private sector industries.
  4. To encourage inflow of foreign capital by granting more concessions to foreign direct investment.
  5. To liberalise foreign trade by reducing tariff duties and abolishing quota restrictions in case of many imports.

The New Economic Policy is also called the policy of ‘Economic Reforms’ since it seeks to remove the inefficiencies in the economic system.

Components of NEP 1991

The two components of NEP 1991 are:

  1. Macroeconomic Stabilisation-Demand Side Management Macroeconomic stabilisation policies are short-run measures to return to low and stable inflation and a sustainable fiscal and balance of payments position. Thus, stabilisation policies brings about demand side management – which includes measures like :
    1. Control of inflation
    2. Fiscal correction
    3. Improvement in a balance of payments situation.
  2. Structural Adjustment-Supply Side Management

Structural adjustment policies are long-run measures to remove the bottlenecks and obstacles in the growth path of an economy These policies bring about supply-side management which includes measures like :

  1. Trade and capital flow reforms
  2. Industrial deregulation
  3. Public sector reforms and disinvestment
  4. Financial sector reforms

The goals of structural reforms are to abolish controls, eliminate bureaucratic hurdles, and red-tapism and make the decision-making process efficient and transparent.

Q. Explain the meaning and objectives of Liberalisation?

Liberalization

It means removing all unnecessary controls and restrictions like permits, licenses, protectionists, duties, quotas, etc. imposed by the govt.

Prior to 1991, Govt. was enforcing the regulation in any way

  1. Industrial licensing (in this every enterpreneur has to get permission from govt. to start a firm, expand a firm or to start production of a new good).
  2. Private sector was not allowed in many industries.

(iii)Some goods could be produced only in small-scale industries.

  1. Foreign exchange control.
  2. Import license
  3. Restriction on investment by big business house etc. But these controls resulted in –

(1) Consumption delays (2) Inefficiency (3) Losses and (4) High-cost economy

Objectives of Liberalisation

It is believed that market forces be moving effective and could perform in a better manner through liberalization; countries like Korea, Singapore, and Thailand gained rapid economic development due to liberalization had set an example :

(i) To raise internal competitiveness of Industrial production (ii) To raise foreign investment and technology.

(iii)To reduce the debt burden of the country.

(iv) To get an opportunity to export to developed countries and to import capital goods and machinery from them liberalization Measures were introduced in many areas in July 1991.

Q. Discuss the liberalization measures in different: Ans.1. Industrial Sector Reforms

  1. Liberalisation in the Financial Sector
  2. Liberalisation in Tax Rates
  3. Liberalisation in Foreign Exchange Rules
  4. Liberalisation in Trade Policy
Also Read, India’s Foreign Trade [ 1947 – 1990 ]

Q. Discuss the industrial sector reforms used NEP?

  1. Industrial Sector Reforms : In includes :-

(a) Abolition of industrial licensing: Industrial license was abolished for all projects except for 6 industries related to security and strategic concern, social reasons, hazardous, chemical, and over-riding environmental reasons. These industries are (i) Liquor (ii) Cigarettes (iii) Industrial explosive (iv) Defence equipment (v) Drugs and pharmaceuticals (vi) Dangerous chemicals etc. Contractions of the public sector: The industries exclusively reserved for the public sector have been reduced from 17 to 3. The only industries reserved for the public sector are defense equipment, atomic energy generation, and railways transport. Dereservation of small-scale industries: Many goods produced by small-scale industries have been de-reserved. The investment limit for small-scale industries has also been increased from 5 lakh to 1 crore. The market has been allowed to decide prices instead of govt. setting the prices.

Explain the liberalization reform introduced in financial sector? Financial Sector Reform: Financial sector includes financial institutional such a commercial banks, investment banks, stock exchange operations and foreign exchange market. The financial sector in India is controlled by Reserve Bank of India (RBI) following reforms were made in financial sectors – Reduction in the role of RBI: Earlier RBI was having total control over banks and financial institution with various rules and regulations. Now role of RBI was only to suprise the financial sector. This means that the financial sector was allowed to take decisions on many matters without consulting the RBI. Establishing private sector banks: NEP led to establishment of private sector banks, India as well as foreign for e.g. ICICI, HDFC are Indian Pvt. banks and City Banks, Standard Chartered are foreign banks. Increase in Foreign Investment limit upto 51%: Foreign institutional investment (F11) such as merchant bankers, mutual funds and pension funds are now freely allowed to invest in Indian Financial market. Freedom to setup branches: Those banks which fulfill conditions have been given freedom to set a new branches without the approval of RBI.

What are the important reforms introduced in foreign exchange market? 1. External sector reforms in the form of Devalution of rupee: Devaluation means fall in the value of domestic currency which is delibrately done by the govt. In order to solve BOP crises when the ruppee is devalued, it becomes cheaper for foreigners to purchase Indian goods. So, this resulted in an increase in the inflow of foreign exchange. Hence the problem of BOP deficit was solved to certain extend. 2. Determination of foreign exchange rate: Earlier the govt. was fixing the foreign exchange rate but now it was allowed to fix freely in the market on the basis of demand and supply of foreign exchange. Discuss the trade and investment policy reforms under N.E.P. Trade and investment policy reforms: The aim of these reforms were to promote the efficiency of the local industries and the adoptation of foreign modern technologies. The reforms made in the sector was as follows: Removal of restrictions on import and export: Earlier, tarrifs and quotas were imposed by the govt. in order to discourage imports but now such restrictions were removed. Removal of export duties: Export duties have been removed to increase the competitive position of Indian goods the international markets. (iii)Abolition of import license: Import licensing was abolished in case of hazardeous and enviornmentally sensitive industries. This encouraging the domestic industries to import raw material to better prices which in turn improved their efficiency in production. Discuss the fiscal reforms introduced in NEP of 1991? Fiscal Reforms: It includes the reforms relating to govt. expenditure and receipts. This basically consists of taxes reforms. There are two types of taxes i.e., direct tax and indirect tax.  Direct Tax: It consists of taxes on income of individual and profits of business enterprises. The burden and liability to pay the tax is on the same person. The burden of this tax cannot be shifted to another person. For ex. Income tax, wealth thax, corporate tax.  Indirect tax: Indirect taxes are taxes which are imposed on goods and services. The liability of paying this tax is on the produce of goods and servicesbut he can shift the burden to consumers e.g. Sales tax, Excise duty. The following tax reforms were made  Reduction in taxes: Since 1991, there has been a continuous reduction in the taxes on individuals income as it was feel that high rates of Income tax were an important reason for tax evasion. So, it is not clear to the govt. that high rates of taxes should not be imposed which will encourage savings by the people and they will willingly disclose their income and assets.

  1. Reforms indirect taxes : The govt. has also tried to reforms the indirect taxes in order to facilitate the establishment of a common national market for goods and services.
  2. Simplifying proceducers : In order to encourage better compliance by tax payers many procedures have been simplified.

Q. What is meant by privatization? What are the two ways in which privatisation can be done ?

Privatisation means givng the ownership and management of public sector companies to the private sector. The privatisation in our economy was done in two ways

  1. Transfer of ownership and managment of govt. companies from govt. to private sector.
  2. Sales of public sector companies to the pvt. sector which is known as disinvestment.

So, disinvestment basically means selling the equity shares of PSUs to the private sector.

Objectives of Privatisation

  1. Improving the government financial composition by:
    • raising funds from the sales of enterprises or their assets;
    • making the enterprises raise internal resources and from capitalmarkets,
  2. Improving the performance of an enterprise through:
    • increasing efficiency;
    • requiring enterprises to meet performance objectives;
    • greater responsiveness to consumers, in terms of quantity quality,diversity or services;
    • relief from public sector financial constraints;
    • more managerial autonomy

Besides the above two broad objectives, privatisation would help in reducing the burden on public administration by reducing the size of the public sector, strengthening market forces and competition within an economy and promoting wider share ownership among public.

Explain the merits and demerits of privatisation ? Arguments in favour of privatisation Reduction in budget deficit : Privatisation helped in reducing the financial burden of the govt. because earlier PSUs were incurring huge losses. Healthy competition : Privatisation helped in reducing the monopoly of public sector and this improved their competitive strength and their efficiency. Better management : The management of industries was free from political pressure and govt. interferences. Removal of Red Tapism : There was more efficiency and quick decision making. Argument Against Privatisation Social welfare neglected : Social welfare negleted as private sector was more interested in profit maximisation, which was no guarantee of social welfare. Imbalance Economic Development : Only these project were undertaken which were profitable, less risky and had low gestation period. Concentration of economic power : One negative impact was that although private sector helped in reducing public sector monopoly but some private sector monopolies came into existence. Less job security and hence unemployment : Under privatisation, there is more exploitation of the workers and hence their is more exploitation of the workers and hence their is a fear of job retrenchment (laid off the workers).

Q. Explain the measures taken for privatisation ? Private Measures Disinvestment : It is sale of a part of equity holding held by the govt. in any public sector undertaking it private industry. Govt. has been disinvesting by many mothods. The main methods are : Minority sale : In this method, equity is offered to investors through domestic public issue. Strategic sale : In this method govt. affloads above 51% in strategic sale. Policy for navaratnas The govt. has decided to give special treatment to some of the impor-

tant profit making PSUs and they were given the status of Navaratnas. These navratnas were granted financial and operational autonomy in the working of the companies

Total number of Navratna companies was 16 in Nom 2010. These navratnas are :

  1. Bharat Electronics Limited (BEL).
  2. Bharat Heavy Electricals Limited (BHEL). (c) Bharat Petroleum Corporation Limited (BPCL) (d) Coal India Limited (CIL).
  1. Gas Authority of India Limited (GAIL).
  2. Hindustan Aeronautics Limited (HAL).
  3. Hindustan Petroleum Corporation Limited (HPCL).
  4. Mahanagar Telephone Nigam Limited (MTNL).
  5. National Aluminium Company Limited (NALCO).
  6. National Mineral Development Corporation Limited (NMDC).
  7. Oil India Limited (OIL).
  8. Power Finance Corporation Limited (PFCL)
  9. Power Grid Corporation of India Limited (PGCIL)
  10. Rashtriya Ispat Nigam Limited
  11. Rural Electrification Corporation Limited (REC)
  12. Shipping Corporation of Indian Limited (SCI)

The granting of navratna status resulted in better performance of these companies. The government partly privatised these companies through disinvestment Government has granted greater operational financial and managerial autonomy to 62 other profit making enterprises, called mini ratnas.

Q. What is meant by Globalisation ? Mention 4 changes made by Globalisation of the Indian Economy ?

Ans.It means opening our economy for world market by removing all barriers on international trade and capital movement.

The following changes were made for globalisation of Indian economy

  1. The FDI limit was increased form 40% to 51% and then to even 100% in some area.
  2. The custom duties and tariffs imposed on imports and exports were reduced.
  3. In foreign technology agreement of Rs. 1 crores or more no perimission is required for hiring foreign technicians or testing technolgoy.
  4. Partial convertibility of Indian rupee was allowed which means to buy

or sell foregin currencies like dollars or pounds for foreign transactions at the market price of these currencies. For e.g. If an Indian receives remittances from his relative staying abroad in dollars he can get it converted into rupees at the market rate of dollar.

Q. The process of Globalisation has produced positive as well as negative result ? Comment ?

Ans.Case in favour of Globalisation

Global economic integration is one of the most pronounced development of the late 20th century, specially in underdeveloped and developing countries by :

  1. Adoptation of new flexible production methods globalisation will raise allocation efficiency specially in underdeveloped and developing countries.
    1. reducing capital – output ratio
    2. rising labour productivity
    3. developing export culture
    4. raising capital flow
    5. Modernising technology
    6. Increasing the competitive edge of firms.
  2. Restructure of production and trade patterns : Globalisation will help in restructing production and trade practies in accordance with the factor intensity of a country.
  3. Raise foreign capital : Globalisation will attract foreign capital which will lead to technological upgradation.
  4. Quality improvements : In order to with stand competition offered by other firms, quality enhancment’ll take place.
  5. Rise in employment : It is expected that integration between different sectore’ll lead to more production in the home country. This’ll raise employment opportunities.
  6. Rise in banking and foreign sector efficiency : Banking and foreign sector of the home country’ll raise their competition skills and efficiency.
  7. Creation new world order : The creation of new world order and widespread adoption of structural adjustment programmmes’ll lead to a new policy framework for a global free trade region.
  8. Accelerate Human Development : Education and skill training are the most important components of globalisation knowledge and technol-

ogy rules the global market. To face the competition offered by global market the quantity and quality of education will improve.

  1. Reduce Poverty : With globalisation many micro-credit programmes’re being implemented to prioritise the needs of the poor.
  2. Enchance integration : Continued export growth is sure to benefit from globalisation. This requisation diversification into goods and services for which demand is more. To raise integration there should be rise in the level of trade a capital flows and fall in risk interest in greater economic openness.

Case Against Globalisation

Many of the economists have criticised the globalistion that its inequities and adverse effects are suffered by the poor nations and poor people.

Major points against globalisation are :

  1. Devastation of local producers : Globalisation has devasted local producers since they’re unable to compete with cheap imports.
  2. Mounting strikes : Globalisation has led to mounting workers have protested against low wages, poor working conditions, autocratic management rule long work days and fall in social benefits.
  3. Public employees are worse off : Globalisation has made public employees worse off. Public employees are adversely effected by budget cuts, privatisation and massive loss of purchasing power.
  4. Small business are adversely affected : Small business class is adversely affected by fall of public subsidies de-industrialisation and floods of cheap imports.
  5. Decline income : During the globalisation phase about a half a billion of ppl. in South Asia have experiened decline in their income Data shows that it is the poor who’ve suffered most.
  6. Weak social safety net provisions : Since the govt. is unable to help the victims of globalisation, the provisions of social safety net have been weakened.
  7. Raising depth of inequality : The global village appears deeply divided between the street of the haves and those of the have nots. The average person in Norway and average person in countries such as Niger certainly live in different human development districts of the global village.

Q. Discuss the concept of outsourcing ? Name some services, which are out sourced by developed countries ?

Outsourcing : This is one of the important outcomes of the globalisation process In outsourcing. a company hires regular service from external sources, mostly from other countries which was previously provided internal or from within the country. Outsourcing’ve became very popular mainly because of fast means of communication. Most of the foreign Co.’s are outsourcing their services to India because of the two main reasons :

  1. Availability of cheap labour for our country. Even the skilled workers are available at much lower wage rates.
  2. A revolutionary growth of information technology industry in our country. With the help of modern telecommunication like the internet, the text, voice and visual data can be transmited in no time over continents and national boundaries.

India is becoming an attractive destination for outsourcing particularly in business process outsourcing (BPO) or call centre and has gained efficiency specially in the following services :

  1. Record keeping
  2. Banking services

(iii)Music recording

  1. Firm editing
  2. Book transcription
  3. Clinical advice
  4. Teaching

Most multinational corporation and even small companies are outsourcing their services to India.

Q. Mention the major functions of WTO ?

World Trade Organisation

The WTO was founded in 1995. As the succession organisation to the General agreement on trade and tariff (GATT). WTO holds great promise for globalisation of the world economies. At present, there are 149 member countries of WTO and all the members’re required to follow rules and regulations framed by the organisation.

Functions of WTO

  1. To establish a rule-based trading regime in which countries cannot place arbitrary restrictions on trade.
  2. To enlarge production and trade of services throughout the world.
  3. To ensure optimum utilisation of world resources.
  4. To protect the environment.
  5. To facilitate international trade by removing all barriers.
  6. Providing greater market acess to all countries.
  7. It is a watchdog of international trade. It examines the trade regions of individual members.
  8. Trade disputes that cann’t be solved through bilateral tasks are forward to the WTO dispute settlment ‘court’.

Features

  1. The WTO is global in its membership.At present there’re 149 members countries.
  2. It is the main organ of implementing the multilateral trade agreement (MTA).
  3. It has a much wider scope than its predecessor GATT.

The representatives of the members and all official of the WTO enjoy international privelages.

  1. Each member of WTO has a single voting rights.
  2. It is full fludged international org. in its own right.
  3. The WTO administers a unified package of agreement to which members are committed.
  4. It is the forum for negotiations among its members whereby member nations discuss issue related to the MTA and associated legal instrument.

Objective of WTO

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

Main Criticism of WTO (in case of India)

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

Q. Critically examine the Economic reforms ?

Arguments in favour of Economic Reforms

  1. Increase in rate of economic growth : Since the introduction of economic reforms in 1991, country has shown rise in GDP growth rate. In 1991-92, growth rate of GDP was 1.3%. In the 9th Plan GDP grew at 5.5% and in 10th Plan at 7.2%. In 013-14, it grew at 12.3%.
  2. Increase in foreign investment : Foreign exchange reserves which were only US 5.8 billion dollars in 1991 have shown a tremendous rise to US 304.2 billion dollars in 2013-14. FDI and Foreign institutional investment (FII) has increased from about US $100 million in 1990-91 to US $150 billion is 2003-04.
  3. Increase in foreign exchange reserves : There has been an increase in the foreign exchange reserves from about US $6 billion in 1990 to US $125 billion in 2004-05. At present India is the sixth largest foreign exchange reserve holder in the world having US 304.2 (Billion Dollar in 2013 – 14)
  4. Rise in export : India is seen as a successful exporter of autoparts, engineering goods, IT software and textile in the reform period.
  5. Price stability : Rising price’ve also been kept under control annually. The rate of inflation reduced from 17% in 1991 to 6.5% in 1993 and 4.4% in 2007-08. 9.7% in 2013 – 14.
  6. Rise in competitiveness of industrial sector : Sector such as auto components textiles and pharmceuticals are the pillars which show the strength of the industrial sector.
  7. Growth of service sector : During the reform period, the growth of agriculture and industrial has declined where as the growth of service sector has gone up.

Arguments Against Economic Reforms

  1. Growth and Employment : Though the GDP growth rate has increased in the reform period but has not able to generate sufficient employment opportunities in the country.
  2. Reforms in Agriculture : Reforms’ve not been able to benefit agriculture, where the growth rate has been declarating public investment in agriculture sector especially in infrastructure, which includes irrigation, power, roads has been reduced in the reform period.
  3. Low level of industrial growth : It has also recorded a slowdown. This is because of decreasing demand of industrial products due to various reasons such as cheaper imports, inadequate investment in infrastructure etc.

Cheaper imports’ve replaced the demand for domestic goods. Domestic manufactures’re facing competition from imports. The infrastructure facilities are inadequate due to lack of investment.

Globalisation has thus, adversely affected the local industries and employment opportunities in developing countries.

  1. Reforms and fiscal policies : Economic reforms have placed limits on the growth of public expenditure especially in social sectors. The tax reduction in the reform period, aimed at yielding larger revenue and to curb tax evasion, have not resulted in increase in tax revenue for the govt. Also the reform policies involving tariff reduction have curtailed the scope for raising revenue through custom duties. In order to attract foreign investment, tax incentive were provided to foreign investors which further reduced the scope for raising tax revenues. This has a negative impact on developmental and welfare expenditure.
  2. Disinvestment : The govt. also fixed a target for disinvestment every year and during disinvestment the assets of PSU have been under valued and sold to the pvt. sector. So, there has been substantial loss to the govt. Moreover, the proceeds from disinvestment were used to offset the shortage of govt. revenues rather than using it for the developemnt of PSUs and building social infrastructure in the country.

SOLUTION: SECOND GENERATION REFORMS

The economic reforms initiated in 1991 are now called ‘First Generation Reforms.’ These reforms comprising of long- term multi-dimensional package of various policies and programmes have put the economy on the path of economic development. We have achieved success in achieving macroeconomic stability, control of inflation, rise in foreign exchange reserves, privatisation and so on. Although the strength enumerated above are real yet several challenges remain. Second Generation Reforms are development driven and include measures, such as :

  1. Corrective policies to focus on small, marginal, middle and large farmers who suffer from productivity stagnation.
  2. Generate employment opportunities, including those that can be provided by micro and small enterprise.
  3. To provide essential public services to the poor and to establish accountability of service providers.
  4. To develop quality infrastructure.
  5. To expand vocational training institutes not only in terms of number of persons they train but also in terms of number of different skills and trades they teach for meeting industry requirements.
  6. Reforming labour laws.
  7. To reduce public debt and consequently the burden of interest and debt-servicing charges.
  8. To widen tax base and bring agricultural income under the tax net.
  9. To protect the environment – that is, to improve air quality, to have clean rivers and water bodies and to raise energy efficiency.
  10. The literacy rate must be increased to 85% and the gender gap in literacy narrowed to 10% points.

Q. Why were reforms introduced in India?

Ans. In 1991, economic reforms were introduced in India because 1991 was the year of crisis for the Indian economy It is clear from the following facts:

  1. National income was growing at the rate of 08%.
  2. Inflation reached the height of 16.8%
  3. Balance of payment crisis was to the extent of 10,000 crores.
  4. India was highly indebted country It Was paying 30,000 crores interest charges per year.
  5. Foreign exchanges reserves were only 1.8 billion dollars which Were sufficient for three weeks.
  6. India sold large amount of gold to Bank of England.
  7. India applied for the loan from World Bank and IMF to the extent of 7 billion dollars.
  8. Fiscal deficit was more than 7.5%.
  9. Deficit financing was around 3%.
  10. Trade relation with Soviet block had broken down,
  11. Remmittances from non-residence Indians stopped due to War in Arab countries.
  12. Price of petroleum products was very high,

Q. How many countries are members of the WTO?

Ans. At present there are 149 countries which are members of WTO.

Q. What is the most important function of RBI?

Ans. There was a substantial shift in role of the RBI from ‘a regulator’ to ‘a facilitator’ of the financial sector. Earlier as a regulator, the RBI would itself fix interest rate structure for the commercial banks. After liberalisation in 1991, RBI as a facilitator would only facilitate free play of the market forces and leave it to the commercial banks to decide their interest rate structure. Thus, with liberalisation competition prevails rather than controls.

Q. How was RBI controlling the commercial banks?

Ans. Prior to 1991, banking institutions were subject to too much control by the RBI through high bank rate, high cash reserve ratio and statutory liquidity ratio.

Financial sector includes:

(a) banking and non-banking financial institutions, (b) stock exchange market, and (c) foreign exchange market.

In India, financial sector is regulated and controlled by the RBI (Reserve Bank of India).

There was a substantial shift in role of the RBI from ‘a regulator’ to ‘a facilitator’ of the financial sector. Earlier as a regulator, the RBI would itself fix interest rate structure for the commercial banks. After liberalisation in 1991, RBI as a facilitator would only facilitate free play of the market forces and leave it to the commercial banks to decide their interest rate structure.

Q. What do you understand by devaluation of rupee?

Ans. Devaluation refers to lowering in the official value of a currency with respect to gold or foreign currency. It results in costlier imports and cheaper exports.

Q. Distinguish between the following:

  1. Strategic and Minority sale

Ans. Government has been disinvesting by many methods, Two main methods are :

  1. Minority sale. In this method, equity is offered to investors through domestic public issue.
  2. Strategic sale. In this method, government offloads above 51 per cent in strategic sale.
  3. Bilateral and Multi-lateral trade

Ans. Trade agreements involving more than two countries are referred to as multilateral trade agreements.

Trade agreements involving two countries are referred to as bilateral trade agreements.

  1. Tariff and Non-tariff barriers

Ans. Tariff Barriers. Tariff barriers are imposed on imports to make them relatively costly as a measure to protect domestic production. Non-Tariff Barriers. They are imposed on the amount of imports and exports.

Q. What are the major factors responsible for the high growth of the service sector?

Ans. There has been high growth of the service sector in India. There is too much demand for services because :

  1. It is more profitable to contract services from developing countries.
  2. There is easy availability of skilled manpower at lower wage rate.

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

Ans. The post-reform period shows that industrial growth has slowed down.

This was due to:

  1. Globalisation created conditions for free movement of goods and services from foreign countries. It adversely affected the local industries and employment in developing countries.
  2. Globalisation led to decrease in demand for domestic industrial products due to cheaper imports.
  3. There was inadequate investment in infrastructural facilities such as power supply.
  4. A development country like India still does not have the access to markets of developed countries due to high non-tariff barriers.

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

Ans. Economic reforms have been criticised on the following grounds :

  1. Privatisation encourages growth of monopoly power in the hands of big business houses. It results in greater inequalities of income and wealth.
  2. Globalisation has devastated local producers since they are unable to compete with cheap imports.
  3. Economic reforms have led to mounting workers unrest. Workers have protested against low wages, poor working conditions, autocratic management rule, long work days and fall in social benefits.
  4. These have made public employees worse off. Public employees are adversely effected by budget cuts, privatisation and massive loss of purchasing power.
  5. Small business class is adversely affected by fall of public subsidies, de-industrialisation and floods of cheap imports.
  6. During the globalisation phase, about half a billion people in South Asia have experienced a decline in their income, Data shows that it is the poor who have suffered most.
  7. Since the government is unable to help the victims of globalisation, the provisions of social safety net have been weakened.
  8. The global village appears deeply divided between the street of the haves and those of the havenots. The average person in Norway (which has highest human development) and the average person in countries such as Niger (which has lowest human development) certainly live in different human development districts of the global village.

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