Liberalisation, Privatisation and Globalisation: An Appraisal - Class 11 Economics - Chapter 3 - Notes, NCERT Solutions & Extra Questions
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Notes - Liberalisation, Privatisation and Globalisation: An Appraisal | Class 11 Indian Economic Development | Economics
Liberalisation, Privatisation, and Globalisation: An Appraisal – Class 11 Notes
Introduction to Economic Reforms in India
In 1991, India experienced a significant shift in its economic landscape. The country's deteriorating financial condition led the government to introduce the New Economic Policy (NEP). This article delves into these pivotal economic reforms, their components, impacts, and the broader implications for the Indian economy.
Historical Context of Economic Reforms
India’s Economic Crisis in 1991
By the late 1980s, India faced a severe economic crisis marked by overwhelming external debt, declining foreign exchange reserves, and soaring inflation. In 1991, the situation reached a tipping point where the government could barely import essentials for two weeks.
Steps Taken to Manage the Crisis
The government approached international financial institutions like the International Monetary Fund (IMF) and the World Bank, securing a loan to stabilise the economy. However, this financial aid came with stipulations that led to the announcement of the New Economic Policy.
Understanding the New Economic Policy (NEP)
Stabilisation Measures
Stabilisation measures are short-term actions aimed to rectify economic weaknesses, stabilise foreign exchange reserves, and control inflation.
Structural Reform Measures
Structural reforms are more extensive, long-term policies designed to enhance economic efficiency by removing structural barriers.
What is Liberalisation?
Liberalisation refers to the relaxation of government controls in various sectors to encourage private enterprise and free markets.
Background and Need for Liberalisation
Prior to 1991, India's economic policies imposed stringent controls on industrial activities. These regulations stifled growth and prompted the need for liberalisation.
Key Reforms in the Industrial Sector
Significant deregulation occurred, removing licensing restrictions for most industries, except for a few specific categories like hazardous chemicals and aerospace.
Financial Sector Reforms
The financial sector underwent reforms to encourage competition and efficiency. Banks were allowed more autonomy, and foreign investment limits were increased.
Tax Reforms
Reforms aimed to simplify the tax structure, reducing tax evasion and promoting transparency. The introduction of Goods and Services Tax (GST) was a pivotal change.
Foreign Exchange Reforms
Exchange rates were freed from government control, allowing market dynamics to determine the value of the rupee.
Trade and Investment Policy Reforms
Reforms reduced import tariffs, dismantled export-import restrictions, and promoted foreign investments and technology transfer.
What is Privatisation?
Privatisation involves the transfer of ownership or management from the public sector to private enterprises.
Measures for Privatisation in India
Privatisation was implemented through disinvestment in public sector enterprises (PSEs), targeting improved efficiency and modernisation.
Concepts of Maharathnas, Navratnas, and Miniratnas
Special status was granted to certain PSEs to grant them managerial autonomy and enhance operational efficiency.
Maharathnas, Navratnas, and Miniratnas
graph LR
A[Maharathnas, Navratnas, Miniratnas]
A --> B(Maharathnas)
A --> C(Navratnas)
A --> D(Miniratnas)
B --> E(Indian Oil Corporation)
B --> F(Steel Authority of India)
C --> G(Hindustan Aeronautics Limited)
C --> H(Mahanagar Telephone Nigam Limited)
D --> I(Bharat Sanchar Nigam Limited)
D --> J(Airport Authority of India)
Understanding Globalisation
Globalisation refers to the integration of a country’s economy with the global market, transcending economic, social, and geographic boundaries.
Role and Impact of Globalisation on India
Globalisation has opened Indian markets to international trade, enhanced technological advancements, and increased competition.
Importance of Outsourcing
Outsourcing involves hiring external services, often from other countries, which has become a significant outcome of globalisation.
Influence of the World Trade Organisation (WTO)
WTO plays a crucial role in establishing a rule-based international trading system, impacting India's trade policies and practices.
Economic Performance Post-Reforms
GDP Growth Trends
The post-reform period saw a sustained increase in GDP growth, primarily driven by the service sector.
Sector-specific Analysis: Agriculture, Industry, and Services
- Agriculture: Growth has been inconsistent, with a notable decline in recent years.
- Industry: Experienced fluctuations, initially growing robustly but slowing down due to increased competition from imports.
- Services: Showed significant growth, becoming the primary driver of GDP.
Impact on Foreign Direct Investment and Foreign Exchange Reserves
Post-reforms, India saw a substantial increase in foreign direct investment (FDI) and foreign exchange reserves, reflecting enhanced global economic integration.
Criticisms and Challenges
Issues in Agricultural Reforms
Agricultural reforms have not adequately addressed the sector’s challenges, such as insufficient infrastructure investment and high production costs.
Industrial Growth Challenges
Domestic industries face stiff competition from imported goods and inadequate investment in infrastructure.
Employment Concerns
Although GDP growth has been notable, it has not translated into sufficient employment opportunities.
Fiscal Policy Challenges
Tax reductions during the reform period have not significantly increased government revenue, limiting developmental expenditures.
Fiscal Policy Diagram
graph TD
A[Economic Reforms]
A --> B[Tax Reductions]
B --> C[Reduced Government Revenue]
C --> D[Limited Development Expenditures]
Conclusion
Recap of Major Points
The economic reforms initiated in 1991 under the New Economic Policy (NEP) introduced transformative changes through liberalisation, privatisation, and globalisation. While these reforms have spurred GDP growth and increased foreign investment, they have also faced criticism for not adequately addressing employment and sectoral deficiencies.
The Future Outlook of Economic Reforms in India
As India continues to navigate its economic landscape, future reforms will need to balance growth with equitable development, addressing the needs of all sectors and demographics.
By understanding the intricacies of these reforms, students can better appreciate the impacts and future directions of India's economic policies.
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Why were reforms introduced in India?
Economic Crisis: In 1991, India faced a severe economic crisis with high inflation and depleting foreign exchange reserves sufficient for only two weeks of imports.
Balance of Payments: The crisis was largely due to inefficiencies in managing the economy, leading to an unsustainable balance of payments situation.
International Assistance: India sought financial help from international agencies like the International Monetary Fund (IMF) and the World Bank, which provided loans contingent on economic reforms.
Liberalization Needs: There was a pressing need to relax stringent regulations that were hindering economic growth and to open up the economy to improve competitiveness and efficiency.
Global Integration: The reforms aimed to integrate India into the global economy, facilitating foreign investment and technology inflow to boost economic development.
Why is it necessary to became a member of WTO?
Becoming a member of the World Trade Organization (WTO) offers several benefits for a country, including:
Market Access: Membership provides guaranteed access to the markets of other member countries on most-favored-nation (MFN) terms, reducing tariffs and other trade barriers.
Legal Framework and Dispute Resolution: WTO membership offers a legal and institutional framework for trade relations and a formal mechanism to resolve disputes arising between member countries, promoting stability and predictability.
Trade Liberalization: It helps countries engage in trade liberalization, boosting economic growth by increasing exports and imports, leading to more efficient resource allocation.
Policy Support: Being part of the WTO helps countries implement and adhere to more consistent and transparent trade policies, encouraging investment and economic cooperation.
Capacity Building and Technical Assistance: WTO offers technical assistance and training to developing countries to help them build their trade capacity and understand complex trade issues.
Global Influence: Members have a say in shaping global trade rules and standards, allowing them to influence the international trading system in their favor.
Why did RBI have to change its role from controller to facilitator of financial sector in India?
- Economic Reforms: With liberalization policies initiated in 1991, there was a strategic shift towards creating a market-driven economy. This necessitated the transformation of RBI's role to support these changes.
- Increase in Competition: By reducing its controlling functions, RBI aimed to foster competition within the financial sector, encouraging efficiency and innovation among banks and financial institutions.
- Global Integration: Facilitating integration with global markets needed an ecosystem where the financial sector could operate with greater autonomy and less bureaucratic control.
- Encourage Private and Foreign Investments: Reducing direct control was crucial to attract private and foreign investment in the banking sector, essential for economic growth.
- Adapt to Rapid Changes: The fast-evolving global financial landscape required a more dynamic approach from the central bank, focusing on regulation and supervision rather than direct control.
How is RBI controlling the commercial banks?
The Reserve Bank of India (RBI) controls commercial banks through various mechanisms to ensure financial stability and to safeguard the interests of depositors. Key methods include:
- Regulation of Liquidity: RBI mandates the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) which banks must maintain to ensure they have sufficient liquidity.
- Monetary Policy Implementation: RBI uses instruments like repo rate and reverse repo rate to control the money supply and interest rates in the economy.
- Supervision and Audit: RBI conducts regular inspections and audits of banks to ensure compliance with regulations and assess financial health.
- Control over Interest Rates: Although banks have freedom, RBI guidelines influence the rates on deposits and lending.
- Licensing and Branch Expansion: RBI gives approval for setting up new banks, opening branches, and oversees mergers and acquisitions.
These controls help in maintaining the overall financial stability of the country.
What do you understand by devaluation of rupee?
Devaluation of the rupee refers to a deliberate downward adjustment of the currency’s value relative to another currency, group of currencies, or standard. This is often done by a government or monetary authority and typically happens in a fixed or semi-fixed exchange rate system.
Key Points:
Exchange Rate Impact: After devaluation, the rupee is worth less in terms of foreign currencies. For example, if previously 1 USD was equal to 70 INR, devaluation might change this to 1 USD = 75 INR.
Exports and Imports: Devaluation can make a country's exports cheaper and more competitive in the global market, potentially boosting export sales. Conversely, it makes imports more expensive, which can protect domestic industries from foreign competition but may also increase the cost of imported goods and services.
Inflation: The increase in import prices can lead to inflation, as the cost of goods and services rise.
Debt: For countries with debt denominated in foreign currencies, devaluation raises the local currency cost of repaying debt.
Balance of Payments: Devaluation is often used to address deficits in the balance of payments by making exports cheaper and imports more expensive, potentially improving the trade balance.
Example:
If India devalues the rupee, the value of the Indian currency falls relative to other currencies like the US dollar. This might be done to make Indian goods more competitive in international markets.
Devaluation can be contrasted with depreciation, which is a decrease in the currency's value due to market forces without government intervention.
Distinguish between the following
(i) Strategic and Minority sale
(ii) Bilateral and Multi-lateral trade
(iii) Tariff and Non-tariff barriers.
Aspect | Strategic Sale | Minority Sale |
---|---|---|
Definition | Sale of a significant share or entire business to another company for strategic purposes. | Sale of a smaller, non-controlling stake in a business. |
Objective | Often aimed at achieving synergies, expansion, or entering new markets. | Typically for raising capital without relinquishing control. |
Influence | High influence or control over the company’s operations. | Limited or no influence over the company’s operations. |
Example | Sale of a subsidiary to a competitor. | Selling 10% of shares to a private investor. |
Aspect | Bilateral Trade | Multilateral Trade |
---|---|---|
Definition | Trade between two countries. | Trade between multiple countries or within a group of countries. |
Agreement | Based on bilateral agreements between the two countries involved. | Often based on multilateral or regional agreements like WTO, NAFTA, etc. |
Complexity | Generally simpler to negotiate and enforce. | More complex due to the involvement of multiple parties. |
Example | Trade agreement between India and Japan. | Trade agreements within the European Union. |
Aspect | Tariff Barriers | Non-Tariff Barriers |
---|---|---|
Definition | Taxes imposed on imported goods. | Restrictions other than tariffs that countries use to control the amount of trade across their borders. |
Form | Duties, import taxes, customs charges. | Quotas, import licenses, embargoes, standards, and regulations. |
Impact | Directly increases the cost of imported goods. | May limit quantity, create administrative hurdles, or require specific standards. |
Example | 5% import tax on steel. | Import quota on textiles, stringent safety or quality standards. |
Why are tariffs imposed?
Tariffs are trade policies that impose a tax on imported goods. They are used for several reasons:
Protect Domestic Industries: By making imported goods more expensive, tariffs can help protect fledgling or struggling domestic industries from foreign competition.
Revenue Generation: Tariffs can be a significant source of revenue for governments, especially in countries with less developed tax systems.
Trade Policy Tools: They can be used as tools in diplomatic negotiations to promote fairer trade practices or to protect intellectual property.
Employment Protection: By protecting certain industries, tariffs can save jobs that might otherwise be lost to foreign competition.
National Security: Tariffs can protect industries critical to national security, such as defense-related manufacturing.
Anti-dumping Measures: Tariffs can prevent dumping, which occurs when foreign companies sell goods below market value to undercut local businesses.
Correcting Trade Imbalances: They can help correct trade imbalances by reducing the volume of imports relative to exports.
What is the meaning of quantitative restrictions?
Quantitative restrictions refer to limits imposed by governments on the amount or volume of goods that can be imported or exported during a specific time period. These restrictions can take various forms, such as quotas, embargoes, or other regulatory measures, and are typically used to control trade balances, protect domestic industries, or respond to political and economic situations.
For example:
Import Quotas: Controls the amount of a specific product that can be imported into a country.
Export Quotas: Limits the amount of a particular product that can be exported to other countries.
Embargoes: Bans on trade with specific countries due to political reasons.
These measures can directly affect the supply and demand of goods, influencing prices and availability in the domestic and international markets.
Those public sector undertakings which are making profits should be privatised. Do you agree with this view? Why?
Disagreement with Privatizing Profitable Public Sector Undertakings:
- Profit Generation: Profitable public sector undertakings (PSUs) demonstrate successful management and service delivery. Privatizing them may not be necessary as they contribute positively to the government's revenue without further burden.
- Strategic Importance: Many profitable PSUs operate in sectors critical to national security and economic stability (like energy and defence). Keeping them under government control ensures national interests are safeguarded.
- Social Objectives: PSUs often have wider social objectives beyond profit, such as employment generation and regional development. Privatization could shift the focus purely to profitability, undermining these broader goals.
- Stable Employment: PSUs usually offer more stable employment compared to the private sector. Privatization might lead to job losses or less favorable conditions for employees.
- Market Monopoly Risks: Some PSUs hold monopoly positions in their sectors. Privatizing them could lead to monopolistic practices by private entities, affecting prices and accessibility.
Do you think outsourcing is good for India? Why are developed countries opposing it?
Outsourcing can be seen as beneficial for India for several reasons:
Economic Growth: It brings in foreign investment and creates job opportunities, which enhances economic growth.
Skill Development: Workers gain exposure to new technologies and practices, improving their skill sets.
Income Generation: It can result in higher wages compared to local jobs.
International Integration: It helps India integrate into the global economy, increasing its economic influence.
However, developed countries often oppose outsourcing for these reasons:
Job Losses: Outsourcing can lead to job losses in the developed country as companies move operations abroad to reduce costs.
Wage Suppression: It can suppress wages in certain sectors as companies can threaten to outsource jobs if wage demands are considered too high.
Economic Inequality: Critics argue that it contributes to economic inequality by benefiting corporations and high-skilled workers while harming low and middle-skilled workers.
Quality and Control: Concerns about maintaining quality and control when services are provided from a different region or country.
Each side of the argument has valid points, and the impact of outsourcing varies by industry, company, and country.
India has certain advantages which makes it a favourite outsourcing destination. What are these advantages?
India is a preferred outsourcing destination for several reasons, including:
Cost Efficiency: Labor costs in India are significantly lower compared to Western countries. This allows businesses to reduce their operational costs substantially.
Skilled Workforce: India has a large pool of highly educated and skilled professionals, particularly in fields such as IT, engineering, and customer service.
English Proficiency: English is widely spoken and is a common medium of instruction in Indian education, making communication with international clients smoother.
Time Zone Advantage: The time difference between India and Western countries allows for a 24-hour work cycle, providing the ability to offer round-the-clock services.
Quality of Service: Many Indian outsourcing firms are known for delivering high-quality services and adhering to international standards and certifications.
Technological Infrastructure: India has a robust IT infrastructure with modern technology and facilities which support efficient outsourcing operations.
Government Support: The Indian government offers favorable policies, incentives, and initiatives to promote the outsourcing industry.
Flexibility and Scalability: Indian firms are known for their ability to scale their resources up or down quickly based on client requirements.
These factors collectively contribute to India's reputation as a leading outsourcing hub.
Do you think the navaratna policy of the government helps in improving the performance of public sector undertakings in India? How?
- Enhanced Autonomy: The Navaratna status grants public sector undertakings (PSUs) greater financial and operational autonomy. This allows them to make strategic decisions without excessive governmental oversight, fostering a more dynamic and competitive business environment.
- Access to Capital: With the ability to raise capital up to a certain limit without explicit government approval, Navaratna companies can invest in modernization, expansion, and technological upgrades, enhancing their productivity and competitiveness.
- Incentive for Performance: The designation of Navaratna is contingent upon meeting specific performance criteria, which motivates companies to improve efficiency and profitability.
- Global Presence: The policy enables these enterprises to invest in foreign ventures and establish a presence in the international market, facilitating growth and diversification.
- Talent Attraction: Improved autonomy and financial status make Navaratna companies more attractive to high-quality talent, ensuring better management and innovative practices.
These factors collectively contribute to an enhanced performance of PSUs, aligning them more closely with global business standards.
What are the major factors responsible for the high growth of the service sector?
The high growth of the service sector in India can be attributed to several key factors:
- Information Technology Boom: The rapid expansion of the IT and IT-enabled services such as BPOs, KPOs, and software services has significantly contributed to the growth.
- Liberalization of the Economy: Post-1991 economic reforms that included liberalization of trade, investment, and capital flows have attracted foreign investments, enhancing the service sector.
- Skilled Workforce: Availability of a large, educated, English-speaking workforce at relatively lower wages has made India a global hub for outsourcing.
- Increased Urbanization: Migration from rural to urban areas has expanded the consumer base for various services including banking, education, and healthcare.
- Globalization: Integration with the global economy has led to an increase in demand for sectors like tourism, hospitality, and entertainment.
These factors combined have facilitated a conducive environment for the service sector to thrive in India.
Agriculture sector appears to be adversely affected by the reform process. Why?
- Decline in Public Investment: Post-1991 reforms saw reduced government funding in agriculture, particularly in crucial infrastructure like irrigation, power, and roads which previously supported agricultural growth during the Green Revolution.
- Reduction in Subsidies: Partial removal of fertilizer subsidies increased the production costs, especially burdening small and marginal farmers, making agriculture less profitable.
- Import Policies: Reduction of import duties on agricultural products and lifting quantitative import restrictions exposed Indian farmers to international competition, sometimes leading to lower prices for domestic crops.
- Focus on Cash Crops: There was a shift towards cultivation of cash crops for export markets, affecting the production of essential food grains, which impacted food security and price stability within the country.
- Inadequate Support Services: Reduced government spending also meant less support for research, extension services, and disease prevention, further hurting agricultural productivity.
Why has the industrial sector performed poorly in the reform period?
- Decreased Demand: Industry experienced reduced demand for domestic products due to cheaper imports, making consumers opt for foreign goods over local ones.
- Insufficient Investment: Lower investment, particularly in vital infrastructure like power and transport, constrained the industry's capacity to grow and become more efficient.
- Competition from Imports: Opening up the economy permitted an influx of foreign goods, leading to fierce competition that local industries struggled to withstand due to higher production costs and sometimes inferior technology.
- Vulnerable to Global Market: Exposure to global market fluctuations without adequate protective measures left domestic industries susceptible to external economic pressures.
- Non-Tariff Barriers: Despite liberalization, Indian industries faced high non-tariff barriers in developed markets, limiting their export opportunities and growth prospects.
Discuss economic reforms in India in the light of social justice and welfare.
Economic Reforms and Social Justice in India:
- Increased Inequality: Economic reforms, particularly liberalization and privatization, have led to rapid growth in sectors like IT and services but have also increased income disparities. The benefits of reforms have been unevenly distributed, favouring the urban and educated classes.
- Impact on Small Farmers: Liberalization of agriculture has exposed small farmers to global competition, often leading to reduced prices for crops. This has not adequately improved their economic condition, raising questions about equity.
- Reduction in Subsidies: Reduction in government subsidies on essentials like fertilizers and electricity under the reform policies has increased costs for farmers and affected the poor disproportionately.
- Public Sector Disinvestment: Disinvestment and privatization of public sector enterprises have raised concerns about job security for employees and the removal of welfare-oriented objectives.
- Social Sector Investment: There's a perceptible decline in government investment in social sectors such as health and education, which is crucial for equitable growth and welfare.
These points illustrate that while economic reforms have spurred growth in certain sectors, their alignment with social justice and welfare goals remains inadequate, necessitating a balanced approach that also addresses social equity and inclusion.
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