Assignment115

DAVPE_XI_Eco LPG: An Appraisal Page 1 of 9
CLASS XI
INDIAN ECONOMY
CHAPTER 3
LIBERALISATION, PRIVATISATION & GLOBALISATION: AN APPRAISAL
THE RATIONALE OF ECONOMIC REFORMS – CRISIS OF 1991
Domestic Economy:
1. There was inefficient management of the Indian economy in the 1980s.
The govt expenditure was more than the govt. revenue. Govt. was not
able to generate sufficient revenue from internal sources such as taxation.
2. To finance the deficit the government borrowed heavily from banks,
people of the country and international financial institutions.
3. Development policies required that even though the revenues were low,
govt. still had to spend to solve the problems like unemployment, poverty
and population explosion. Such programmes did not generate additional
revenue.
4. Prices of many essential goods rose sharply.
5. The income from PSUs was also not high enough meet additional
expenditure. Many PSUs were suffering losses.
Foreign Trade
1. Imports grew at a very high rate without matching growth of exports.
2. Sufficient attention was not paid to boost exports to pay for the growing
imports.
3. Scarce foreign exchange was spent on meeting consumption needs.
4. Foreign exchange reserves dropped to levels that were not sufficient for
even a fortnight.
5. The government was not able to make repayments on its borrowings from
abroad.
6. There was not sufficient foreign exchange to pay the interest on
international loans.
Govt. approached IBRD (International Bank for Reconstruction & Development
commonly called World Bank) and IMF (International Monetary Fund) for long
term loans. While granting the loan, the World Bank and IMF insisted on major
changes in development policies. In this way the idea of New Economic Policy
(NEP) germinated. NEP included three main polices namely, Liberalisation,
Privatisation and Globalisation (LPG).
LIBERALISATION
Liberalisation means freeing the economy from govt. control. It put an end to all
the rules and laws which were aimed at regulating the activities of private sector.
Following are the major changes taking place in important areas under the
liberalisation policy:

1. Deregulation of Industrial Sector
• Industrial licensing was abolished for almost all industries except
alcohol, cigarettes and hazardous chemicals. Private sector was
allowed in the industries which were earlier reserved for public
sector. Only industries now reserved for public sector are atomic
energy, defence equipments and railways.
• Many goods reserved for SSI have been de-reserved.
• In most of the industries market has been allowed to determine the
prices.
2. Financial Sector Reforms
• The role of RBI changed from regulator to facilitator.
• Financial sector was allowed to take decisions on many matters
independently.
• The government allowed establishment of private sector banks,
Indian as well as foreign.
• Freedom was given to banks to set up new branches without the
prior approval of RBI
• Foreign Institutional Investors (FII) such as merchant bankers,
mutual funds and pension funds are now allowed to invest.
3. Tax Reforms
• The government reduced the Income tax and corporation tax rates.
Higher taxation rate was thought to be causing tax evasion.
• The government tried to broaden the tax net in various ways in
order to raise the tax revenue.
• Simplification of tax procedures was done to remove the hassles for
the tax payers.
4. Foreign Exchange Reforms
• Devaluation of Rupee in 1991 led to increase in the inflow of foreign
exchange
• The exchange rates were allowed to determine by the market
forces. The govt. intervention in the matter was progressively
removed.
5. Trade and Investment Policy Reforms
Liberalisation of trade and investment policies was initiated to promote the
efficiency of the local industries and the adoption of modern
technologies.The reforms included:
• Removal of quantitative restrictions on exports and imports
• Reduction of tariff rates
• Import licensing was abolished except in case of hazardous and
environmentally sensitive industries.
Reserve Bank of India and Financial Institutions
There has been a shift in the role of the RBI from a regulator to facilitator. Earlier
as a regulator, commercial banks and other financial institutions were completely

controlled by RBI. RBI would fix the interest rate structure for the commercial
banks. The banks required prior approval of RBI on all policy issues including
opening of new branches, Now the role of RBI is more of a facilitator. The banks
and financial institutions are given more autonomy, which more independence in
deciding the policy matters. The interest rates and foreign exchange are allowed
to be determined by market forces.
PRIVATISATION
Government companies can be converted into private companies in two ways:
1. By withdrawal of the government from ownership and management of
Public Sector Undertakings (PSUs).
2. By outright sale of public sector companies
Disinvestment: Privatisation of PSUs by selling off part of the equity (share) to
the public is known as disinvestment.
The purpose of Disinvestment is to improve financial discipline and to facilitate
modernization. Private capital and managerial capabilities would improve the
efficiency of PSUs.
Government adopted following two main methods for disinvestment:
1. Minority Sale: Equity is offered to investors through domestic public
issue. The govt transfers minority share to private persons. The
management control is not transferred.
2. Strategic Sale: Govt sells majority share above 51% to the private sector.
It is called strategic as management is transferred to the private sector as
a matter of strategy.
Profit making PSUs, however, should not be disinvested. They are not only
earning profit which means revenue for the government, they are also serving
social welfare. There is a need to modernise them and make them more
competitive and efficient.
Therefore profit making PSUs were given autonomy in taking managerial
decisions. They were given special status such as Navratnas and Mini Ratnas
Navratnas
In 1996 the government chose nine PSUs and declared them as Navratnas. The
following PSUs were given the special status of Navratnas
o IOC (Indian Oil Corporation)
o BPCL (Bharat Petroleum Corporation Limited)
o HPCL (Hindustan Petroleum Corporation Limited)
o ONGC (Oil and Natural Gas Corporation)
o SAIL (Steel Authority of India Limited)
o IPCL (Indian Petrochemicals Corporation Ltd.)
o BHEL (Bharat Heavy Electricals Limited)

o NTPC (National Thermal Power Corporation)
o VSNL (Videsh Sanchar Nigam Limited)
Later two more PSUs were added to the list
o GAIL (Gas Authority of India Ltd.)
o MTNL (Mahanagar Telephone Nigam Limited)
97 other profit making PSUs were given the status of Mini Ratnas
These PSUs were given greater autonomy to run the company efficiently and to
increase the profits. It resulted in better performance of the PSUs. This policy has
proved to be better than disinvestment.
GLOBALISATION
Globalisation means integration of the country with the world economy. It aimed
at transforming the world towards greater interdependence and integration. It
involves creation of networks and activities transcending economic and, social
and geographical boundaries. It aspires to turn the world into one whole or
creating a borderless world.
Outsourcing:
In outsourcing a company hires regular service from external sources, mostly
from other countries, which was previously provided internally or from within
the country (like legal advice, computer service, medical transcription
advertisement, security etc.). Growth of fast modes of communication
particularly the growth of IT – led to establishment of BPO or call centres.
Outsourcing benefitted the Indian economy as it has generated a lot of
employment opportunities and brought valuable foreign exchange which was
in shortage earlier.
India is a favourite outsourcing destination because of the following reasons:
1. India has a ready supply of skilled people at low wages at relatively lo
wages.
2. India has the advantage of time difference as it is located on the other side
of the developed countries.
World Trade Organisation (WTO)
World Trade Organisation was founded in 1995. It was earlier called GATT
(General Agreement on Trade & Tariff) which was established in 1948. 149
nations are the members of WTO including India. The major policies WTO
imposed on the member nations are:
1. To administer multilateral agreements rather than bilateral agreements
2. Providing greater market access to all member countries
3. Providing equal opportunities to all countries for trading purposes
4. Removal of trade restrictions by all member nations – removal of tariff and
non-tariff trade barriers
5. To enlarge production and trade of services
6. To ensure optimum utilisation of world resources
7. To protect the environment

8. To ensure greater sharing of new technology especially for the benefit of
developing countries.
Bilateral and Multilateral trade
Trade agreement between two countries is called bilateral trade. Such
trade is beneficial for the developing countries as all the countries are able
to sell something or the other in international market.
Trade agreement between three or more countries is called multilateral
agreement. Such agreement benefits the developed countries. The
developing countries are unable to sell as they cannot compete with
developed countries.
Tariff and Non-tariff barriers
Tariff Barriers: Tariff barriers means increased tariff, which is tax on
imported goods. It is imposed on imports to make them relatively costlier.
Tariffs are imposed to protect domestic industry from foreign competition.
Non-tariff Barriers: Measures other than tariff to protect the domestic
industry from foreign competition are called non-tariff barriers. The
examples are quantitative restrictions (quota) on exports and imports.
ASSESSMENT OF NEW ECONOMIC POLICY
Positive Impact
1. The growth of GDP increased from 5.6% during 1980-91 to 6.4% during
1992-2001. The Tenth Plan (2002-2007) has projected the GDP growth
rate at 8%.
2. Foreign investment increased from about US $ 100 million in 1990-91 to
US $ 150 billion in 2003-04.
3. Foreign exchange reserves increased from about US $ 6 billion in 1990-91
to US $ 125 billion in 2004-05.
4. The growth of agriculture and industrial sector has declined whereas the
growth of service sector has gone up.
5. India became a successful exporter of auto parts, engineering goods, IT
software and textiles.
There has been high growth of the service sector in India, There is increase in
demand for services because:
1. It is more profitable for the other countries to contract services from
developing countries.
2. There is easy availability of skilled manpower at lower wage rate.
Negative Impact
 Not being able to solve the basic problems facing our economy in the
areas of employment, agriculture, industry, infrastructure development and
fiscal management

 Growth and Employment: NEP has not generated sufficient employment
opportunities

 Adverse effect on agriculture: The growth rate in agriculture has been
decreasing during the reform period because of the following reasons:
1. There has been reduction in public investment in agriculture
especially in infrastructure which includes irrigation, power, roads,
research and development (R&D)
2. Removal of fertilizer subsidy has led to increase in the cost of
production – adversely affected small and marginal farmers
3. Increased international competition had an adverse effect on
farmers because of
i. Reduction in import duties on agricultural products
ii. Removal of minimum support prices
iii. Lifting of quantitative restrictions on agricultural
products
4. There has been a shift from production for the domestic market
towards production for the export market. The focus of the farmers
is on cash crops rather than food grains. This has created pressure
on prices of food grains
 Adverse effect on Industrial Sector
1. Industrial growth has recorded a slow down because of cheaper
imports and inadequate investment in infrastructure.
2. Foreign Competition resulted in cheaper imports (especially
Chinese goods) replacing the demand for domestic goods
3. Infrastructure facilities, including power supply remained
inadequate due to lack of investment
4. No access to developed countries markets because of non-tariff
barriers. India removed quota restrictions on import of textiles from
USA and other developed countries. However USA has not
removed their quota restriction on import of textiles from India and
China.
 Disinvestment
1. The assets of PSUs have been undervalued and sold to the private
sector. It has resulted in substantial loss to the government.
2. Funds collected from disinvestment were used to finance the
budget deficit (to fill the gap between government expenditure and
government revenue). It should have been used for the
development of PSUs and building social infrastructure.
 Reforms and Fiscal Policies
1. Tax reductions have not resulted in increase in tax revenue.
2. Tariff reduction have curtailed the scope for raising revenue
through custom duties
3. Tax concessions given to promote foreign investment further
reduced the scope for raising tax revenues

Critique of Globalisation Policy
Globalisation was seen as an opportunity in terms of greater access to global
markets, latest technology and increased possibility of large industries to become
important players in international sphere.
However globalisation has proved to be a strategy of the developed countries to
expand their markets in other countries. Following are the negative
consequences of the globalisation policy:
1. It has compromised the welfare and identity of people belonging to
poor countries.
2. It has widened the disparities (inequality) between people and nations.
3. It increased the income and quality of consumption of high-income
groups only. The middle class and the poor persons did not get much
benefit.
4. Growth has been concentrated in selected areas in the service sector
especially telecommunications, information technology, finance,
entertainment, travel and hospitality services, real estate and trade.
5. It ignored vital sectors of the economy like agriculture and industry
which provide livelihood to millions.
QUESTIONS
1. Why were reforms introduced in India?
2. How many countries are members of the WTO?
3. What is the meaning of liberalisation? Explain the following component
policies of the liberalisation:
a. Deregulation of the industrial sector
b. Financial sector reforms
c. Tax reforms
d. Foreign exchange reforms
e. Trade and Investment Policy Reforms
4. What is disinvestment? What was the purpose of disinvestment?
5. Why is the disinvestment policy being criticised?
6. What do you understand by privatisation?
7. What is the globalisation policy? What it tries to achieve?
8. What is the most important function of the RBI?
9. How was RBI controlling the commercial banks?
10.What do you understand by devaluation of rupee?
11.Distinguish between the following:
a. Strategic and Minority sale
b. Bilateral and Multilateral trade
c. Tariff and Non-tariff barriers
12.Why are tariffs imposed?
13.What is the meaning of quantitative restrictions?

14.Those public sector undertakings which are making profits should be
privatised. Do you agree with this view? Why?
15.Do you think outsourcing is good for India? Why are developed countries
opposing it?
16.India has certain advantges which makes it a favourite outsourcing
destination. What are these advantages?
17.Do you think the Navratna policy of the government helps in improving the
performance of Public Sector Undertakings (PSUs) in India? How?
18.What are the major factors responsible for the high growth of the service
sector?
19.Agriculture sector appears to be adversely affected by the reform process.
Why?
20.Why has the industrial sector performed poorly in the reform period?
21.Discuss economic reforms in India in the light of social justice and welfare.
22.Discuss the positive impact of the New Economic Policy.
23.Discuss the negative impact of the New Economic Policy.
24.Write a short note on Navratnas and Mini Ratnas.
25.Name any four Public Sector Undertakings (PSUs) who have been given
the status of Navratnas. Write full names.
26.How far the fiscal policy been successful during the reform period?
27.When was the World Trade Organisation established?
28.Write full name of WTO and GATT.
29.What were the major policies imposed by World Trade Organisation?
30.Do you think globalisation policy has delivered what it promised? Explain
with suitable reasons.

Assignment115

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