Liberalisation, Privatisation And Globalisation: An AppraisalClass 11 Indian Economic Development NCERT Solutions
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Q1EXERCISES
Why were reforms introduced in India?
Solution
Economic reforms were introduced in India in 1991 primarily due to a severe economic crisis. The key factors that necessitated these reforms were:
- Balance of Payments Crisis: The government was unable to make repayments on its borrowings from abroad. Foreign exchange reserves dropped to a level that was not sufficient to pay for imports for even a fortnight.
- High Fiscal Deficit: In the late 1980s, government expenditure consistently exceeded its revenue by large margins. This deficit was financed by borrowings, which became unsustainable.
- Rising Inflation: There was a sharp rise in the prices of essential goods, which compounded the economic crisis and affected the general population.
- Inefficient Management: The origin of the crisis was traced to the inefficient management of the Indian economy. Government spending on development programmes did not generate adequate revenue, and income from public sector undertakings was not high enough to meet growing expenditures.
- Pressure from International Institutions: To manage the crisis, India had to approach the International Monetary Fund (IMF) and the World Bank for a loan. These institutions expected India to liberalise and open up its economy as a condition for providing financial assistance. This led to the announcement of the New Economic Policy (NEP).
Q2EXERCISES
Why is it necessary to became a member of WTO?
Solution
It is necessary for a country to become a member of the World Trade Organisation (WTO) for several reasons, as it plays a crucial role in the global economy:
- Rule-Based Trading Regime: The WTO establishes a rule-based trading system where nations cannot place arbitrary restrictions on trade. This provides a predictable and stable environment for international commerce.
- Greater Market Access: Membership provides all countries with equal opportunities and greater access to international markets for trading purposes. The WTO agreements aim to facilitate international trade by removing both tariff and non-tariff barriers.
- Dispute Settlement: The WTO provides a forum for negotiating trade agreements and a mechanism for settling trade disputes among member countries, preventing trade conflicts from escalating.
- Promoting Fair Competition: As an important member, India has been able to participate in framing fair global rules and advocating for the interests of the developing world, ensuring that the trade regime does not unfairly favour developed nations.
- Economic Growth: By promoting free trade, the WTO aims to enlarge the production and trade of goods and services, which can lead to economic growth and optimum utilisation of world resources.
Q3EXERCISES
Why did RBI have to change its role from controller to facilitator of financial sector in India?
Solution
The Reserve Bank of India (RBI) had to change its role from a controller to a facilitator of the financial sector as a key component of the economic reforms initiated in 1991. Before the reforms, the RBI exercised tight control over the financial sector, deciding interest rates, lending norms, and the amount of money banks could keep with themselves.
This regulatory framework was seen as a hindrance to the growth and efficiency of the financial sector. The main objective of the financial sector reforms was to create a more competitive and efficient environment. By shifting its role to that of a facilitator, the RBI allowed financial institutions to make decisions on many matters without direct consultation. This change was intended to:
- Encourage competition by allowing the establishment of private sector banks, both Indian and foreign.
- Promote efficiency by giving banks more freedom to set up new branches and manage their networks.
- Allow market forces to play a greater role in determining interest rates and other financial decisions.
In essence, the shift was necessary to liberalise the financial sector and integrate it with the broader goals of the New Economic Policy, which aimed to reduce rigid government controls and promote a market-oriented economy.
Q4EXERCISES
How is RBI controlling the commercial banks?
Solution
Although the economic reforms of 1991 shifted the RBI's role from a strict controller to a facilitator, it still retains significant regulatory control over commercial banks to safeguard the interests of account-holders and the nation. According to the source text, the RBI controls commercial banks in the following ways:
- Setting Reserve Ratios: The RBI decides the amount of money that commercial banks must keep with themselves as reserves, which influences their lending capacity.
- Fixing Interest Rates: The RBI continues to fix key interest rates, which influences the overall interest rate structure in the economy.
- Regulating Lending: The RBI determines the nature of lending to various sectors, ensuring that credit flows to priority areas of the economy.
- Norms and Regulations: All banks and financial institutions in India are regulated through various norms and regulations set by the RBI.
- Retaining Managerial Aspects: The text mentions that certain managerial aspects have been retained with the RBI to ensure the stability and security of the banking system.
Q5EXERCISES
What do you understand by devaluation of rupee?
Solution
Devaluation of the rupee refers to a deliberate reduction in the value of the Indian rupee in relation to foreign currencies, undertaken by the government. As mentioned in the text, in 1991, the rupee was devalued against foreign currencies as an immediate measure to resolve the balance of payments crisis.
The primary effect of devaluation is that it makes Indian goods cheaper for foreign buyers, thus boosting exports. Simultaneously, it makes foreign goods more expensive for Indian consumers, which helps to reduce imports. The intended outcome, as stated in the chapter, was to increase the inflow of foreign exchange into the country, which was critically low at the time.
Q6EXERCISES
Distinguish between the following
(i)
Strategic and Minority sale
(ii)
Bilateral and Multi-lateral trade
(iii)
Tariff and Non-tariff barriers.
Solution
(i) Strategic and Minority Sale
- Minority Sale: This occurs when the government sells a part of the equity (a minority stake, i.e., less than 51%) of a Public Sector Enterprise (PSE) to the public or private sector. In this case, the government retains ownership and management control of the enterprise. This process is also known as disinvestment.
- Strategic Sale: This involves the government selling a majority stake (51% or more) of a PSE to a private sector entity. This leads to a transfer of both ownership and management control to the private buyer. The text refers to this as a form of privatisation through the withdrawal of government from ownership and management.
(ii) Bilateral and Multi-lateral Trade
- Bilateral Trade: This refers to trade agreements and commercial relations between two countries. These agreements are negotiated directly between the two nations to govern their trade in goods and services.
- Multi-lateral Trade: This refers to trade agreements involving more than two countries, typically administered by an international body. The World Trade Organisation (WTO) is the prime example, as it administers trade agreements among all its member countries, establishing a common set of rules for global trade.
(iii) Tariff and Non-tariff Barriers
- Tariff Barriers: These are taxes or duties imposed on imported goods. The purpose of a tariff is to make imported products more expensive, thereby protecting domestic industries from foreign competition and generating revenue for the government. The text mentions that before 1991, India kept tariffs very high.
- Non-tariff Barriers: These are trade restrictions other than taxes. They include measures like quotas, licensing requirements, and quality standards that restrict the quantity of imported goods. The text gives the example of 'quantitative restrictions' and 'import licensing' that India used before the reforms to control imports.
Q7EXERCISES
Why are tariffs imposed?
Solution
Based on the provided text, tariffs are imposed for two primary reasons:
-
To Protect Domestic Industries: The main purpose of imposing tariffs is to protect a country's domestic industries from foreign competition. By placing a tax on imported goods, tariffs make them more expensive for consumers. This encourages people to buy goods produced within the country, thus protecting local businesses and jobs. The text explicitly states that India kept tariffs very high "in order to protect domestic industries."
-
To Generate Revenue for the Government: Tariffs on imports, also known as customs duties, are a source of revenue for the government. The text implies this by stating that the reform policies involving tariff reduction "curtailed the scope for raising revenue through custom duties."
Q8EXERCISES
What is the meaning of quantitative restrictions?
Solution
Quantitative restrictions are non-tariff barriers to trade that limit the maximum quantity or value of a commodity that can be imported or exported during a specific period. These restrictions are a direct form of control over the volume of international trade, as opposed to tariffs which influence trade through price changes. Before the 1991 reforms, India followed a regime of quantitative restrictions on imports, along with import licensing, to tightly control the inflow of foreign goods and protect its domestic industries. The trade policy reforms aimed at dismantling these restrictions to liberalise the economy.
Q9EXERCISES
Those public sector undertakings which are making profits should be privatised. Do you agree with this view? Why?
Solution
The view that profitable Public Sector Undertakings (PSUs) should be privatised is a debatable issue, and the text provides arguments for both sides.
Arguments for Privatising Profitable PSUs:
One could agree with this view based on the government's perspective mentioned in the chapter. The purpose of privatisation was to improve financial discipline, facilitate modernisation, and enhance performance by utilising private capital and managerial capabilities. It is argued that even profitable PSUs can become more efficient and competitive in a global environment under private management. The revenue generated from the sale could be used by the government to finance other developmental activities.
Arguments Against Privatising Profitable PSUs:
On the other hand, one could disagree with this view. Critics, as mentioned in the text, allege that the assets of PSEs have been undervalued and sold to the private sector, resulting in a substantial loss to the government. These profitable PSUs are valuable national assets, and their profits contribute to the government's revenue. Many were originally set up with social objectives, such as providing infrastructure and employment, which might be compromised under a profit-driven private management. The text also points out that policies like granting 'Navratna' status, which gives greater autonomy, have already resulted in better performance of these companies, suggesting that privatisation is not the only way to improve efficiency.
Q10EXERCISES
Do you think outsourcing is good for India? Why are developed countries opposing it?
Solution
Why Outsourcing is Good for India:
Yes, outsourcing is good for India. As described in the text, it is one of the important outcomes of the globalisation process and has provided significant benefits:
- Employment Generation: It has created vast employment opportunities, especially in services such as voice-based business processes (BPOs or call centres), record keeping, accountancy, and banking services.
- Economic Growth: Outsourcing contributes to economic growth by bringing in foreign exchange and developing the service sector.
- Skill Development: It has helped in the development of a skilled workforce that can compete globally. India has become a favoured destination for outsourcing due to its low wage rates and the availability of skilled manpower.
Why Developed Countries Oppose It:
Developed countries often oppose outsourcing because it leads to the loss of jobs in their own countries. When a multinational corporation in a developed country outsources its services to a country like India to take advantage of cheaper labour, the jobs that were previously performed by their citizens are effectively transferred abroad. This can lead to unemployment and economic insecurity for workers in the developed nations, resulting in social and political opposition to the practice.
Q11EXERCISES
India has certain advantages which makes it a favourite outsourcing destination. What are these advantages?
Solution
According to the chapter, India has become a favourite destination for global outsourcing due to the following key advantages:
- Low Wage Rates: India can provide services at a much cheaper cost compared to developed countries. This cost-effectiveness is a major driver for companies to outsource their operations to India.
- Availability of Skilled Manpower: India has a large pool of well-educated and skilled professionals, particularly those with proficiency in English and technical expertise. This ensures that the outsourced work is performed with a "reasonable degree of skill and accuracy."
- Growth of Information Technology (IT): The text highlights that outsourcing has intensified because of the growth of fast modes of communication, especially IT. India's advanced IT infrastructure allows for the seamless transfer of voice, text, and visual data across continents in real time, making it an ideal location for IT-enabled services.
Q12EXERCISES
Do you think the navaratna policy of the government helps in improving the performance of public sector undertakings in India? How?
Solution
Yes, the Navratna policy of the government helps in improving the performance of Public Sector Undertakings (PSUs) in India. The text explicitly states that "The granting of status resulted in better performance of these companies."
How the Policy Helps:
The policy works by identifying PSEs that have a comparative advantage and declaring them as 'Maharatnas', 'Navratnas', or 'Miniratnas'. This status grants them significant autonomy. The policy helps improve performance in the following ways:
- Greater Autonomy: These PSUs are given greater managerial and operational autonomy. This freedom allows them to make various decisions to run the company more efficiently without waiting for government approvals.
- Infusion of Professionalism: Greater autonomy helps in infusing professionalism in the management of these companies.
- Enhanced Competitiveness: This freedom enables them to compete more effectively in the liberalised global environment. They can expand, modernise, and even raise resources by themselves from financial markets to fund their growth.
By empowering the management of these PSUs, the policy allows them to function more like efficient private enterprises, leading to increased profits and better performance.
Q13EXERCISES
What are the major factors responsible for the high growth of the service sector?
Solution
The high growth of the service sector in the post-reform period can be attributed to several major factors that are highlighted or implied in the text:
- Economic Reforms: The liberalisation policies introduced in 1991 opened up various sectors. Financial sector reforms led to the growth of banking and financial services. Deregulation in areas like telecommunication and information technology also spurred rapid expansion.
- Globalisation and Outsourcing: The integration of the Indian economy with the world economy made India a prime destination for outsourcing. The growth of IT enabled Indian companies to provide a range of services like BPOs, call centres, accounting, and banking services to companies in developed countries, leading to a boom in the service sector.
- Foreign Direct Investment (FDI): The opening of the economy led to a rapid increase in FDI, a significant portion of which was channelled into service sectors such as telecommunication, IT, finance, and hospitality.
- Skilled Manpower: The availability of a large, educated, and skilled workforce, particularly those proficient in English, provided a competitive advantage, especially in the IT and IT-enabled services industries.
Q14EXERCISES
Agriculture sector appears to be adversely affected by the reform process. Why?
Solution
The agriculture sector has been adversely affected by the reform process for several reasons, as detailed in the chapter:
- Decline in Public Investment: Since 1991, public investment in the agriculture sector, especially in crucial infrastructure like irrigation, power, roads, market linkages, and research, has fallen. This has hampered the sector's long-term growth potential.
- Removal of Subsidies: The partial removal of subsidies, particularly on fertilisers, has led to an increase in the cost of production. This has severely affected the economic viability of farming for small and marginal farmers.
- Increased International Competition: The reduction in import duties on agricultural products and the lifting of quantitative restrictions have exposed Indian farmers to increased competition from global markets, where they often have to compete with subsidised products from developed countries.
- Shift to Cash Crops: The export-oriented policy strategies have encouraged a shift from the production of food grains for the domestic market towards the production of cash crops for the export market. This has put pressure on the prices of food grains, affecting food security.
Q15EXERCISES
Why has the industrial sector performed poorly in the reform period?
Solution
The industrial sector has recorded a slowdown and performed poorly in the reform period due to a combination of factors:
- Competition from Cheaper Imports: With the liberalisation of trade and reduction of tariffs, cheaper imported goods became more readily available. This replaced the demand for domestic goods, making it difficult for local manufacturers to compete.
- Inadequate Investment in Infrastructure: The infrastructure facilities, including power supply, have remained inadequate due to a lack of sufficient investment. This has been a significant constraint on industrial production and growth.
- Vulnerability to Global Markets: Globalisation compelled India to open up its economy to a greater flow of goods from developed countries, which rendered domestic industries vulnerable to foreign competition.
- Lack of Access to Developed Markets: While India opened its markets, it did not get reciprocal access to the markets of developed countries. These countries often use high non-tariff barriers to restrict imports. For example, the text mentions that the USA has not removed its quota restrictions on the import of textiles from India.
Q16EXERCISES
Discuss economic reforms in India in the light of social justice and welfare.
Solution
The economic reforms in India, while successful in accelerating GDP growth and stabilising the economy, have faced significant criticism when viewed in the light of social justice and welfare.
Negative Impacts on Social Justice and Welfare:
- Jobless Growth: A major criticism is that the reform-led growth has not generated sufficient employment opportunities. This means that the benefits of growth have not been widely distributed among the population.
- Adverse Impact on Agriculture: The reforms have negatively affected the agriculture sector, upon which a majority of the population depends for its livelihood. The decline in public investment, removal of subsidies, and increased international competition have led to agrarian distress, impacting the welfare of millions of farmers.
- Widening Inequalities: The reforms have been criticised for increasing the income and consumption of only high-income groups. Growth has been concentrated in select areas of the service sector like IT and finance, while vital sectors like agriculture and industry, which provide livelihoods to the masses, have lagged. This has widened economic disparities among people and regions.
- Reduced Public Expenditure on Social Sectors: The fiscal policies associated with the reforms, such as tax reductions and tariff cuts, have placed limits on the growth of public expenditure. This has negatively impacted government spending on social sectors like health and education, which are crucial for public welfare.
Positive Implications:
On the other hand, it can be argued that the high economic growth achieved during the reform period is essential for poverty reduction in the long run. The reforms also helped in controlling rising prices, which benefits the poor, and built up foreign exchange reserves, providing economic stability.
Conclusion:
In summary, while the economic reforms were necessary to overcome the 1991 crisis and spur growth, their impact on social justice and welfare has been mixed and largely critical. The process has been accused of compromising the welfare of the poor and agricultural workers, widening inequalities, and failing to create enough jobs, thereby not adequately addressing the core issues of social justice.