CBSE Class 11 Economics Chapter 3 Economic Reforms Since 1991

Class Notes of Chapter 3: Economic Reforms Since 1991

Class 11th Economics

Economic Reforms Since 1991 

      Topics:

• Economic Reforms
• Liberalization
• Privatization
• Globalization
• An Appraisal of LPG Policies
• Negative Impact
• World Trade Organisation(WTO)
• NCERT Solutions

Economic Reforms

Economic reforms or structural adjustment is a long-term multi-dimensional package of various policies (Liberalisation, privatization, and globalization) and programme for the speedy growth, efficiency in production and make a competitive environment. Economic reforms were adopted by Indian Govt. in 1991.

Factor’s responsible for Economic reforms:

• Fall in foreign exchange reserve: as imports grew faster than exports
• Adverse balance of payments resulted in a repayment crisis
• Mounting fiscal deficit as govt. expenditure grew faster than revenue
• The rise in prices, which has a negative impact on Investment.
• Failure of public enterprises:- very low return on high Investment
• Gulf crisis increases crude oil prices which negatively affected BOP.
• The high rate of deficit financing
• The collapse of the Soviet block.

New Economic Policy:- It refers to economic reforms introduced since 1991 to improve the productivity and profitability of economy and to make it globally competitive.

Measures of New Economic Policy

• Stabilization measures: These are short-run measures introduced by Govt to control the rise in price, adverse balance of payment and fall in foreign exchange reserve.
• Structural adjustment: These are long-run policies, aimed at improving the efficiency of the economy and increasing its international competitiveness by removing the rigidity in various segment of the Indian economy.

In the new economic policy 1991, Structural reforms can be seen with respect to.
1. Liberalization.
2. Privatization

3. Globalization.


Liberalization

Liberalization means removing all unnecessary control and restrictions like permits licenses, protectionist duties quotas etc. In other words, It may be defined as loosening of govt. regulation in a country to allow for private sector companies to operate business transactions with fewer restrictions.

Objectives of Liberalisation :

1. To decrease the debt burden of the country
2. To expand the size of the market
3. To increase competition among domestic industries
4. To encourage the export and import of goods and services.

Economic reforms under Liberalisation.

• Industrial sector reforms

1. Abolition of Industrial Licensing
2. Contraction off Public Sector
3. Freedom to Import capital goods

• Financial sector reforms.

1. Reducing various Ratios(SLR, CRR)
2. Change in the role of RBI from the regulator to facilitator
3. De-regulation of interest rates

• Fiscal reforms/Tax reforms

• Foreign exchange reforms

1. Devaluation of rupee

• Trade and investment reforms.

Privatization

Privatization is the general process of involving the private sector in the ownership or operation of state-owned enterprises.

Policies adopted for privatization:

1. Contraction of the public sector.
2. Abolish the ownership of Govt. in the management of public enterprises.
3. Sale of shares of public enterprises.

Objectives of Privatisation:

1. Raising funds from Disinvestment
2. Improving the financial condition of the govt.
3. Bringing healthy competition within an economy
4. Making Way for Foreign Direct Investment

Globalization

Globalization may be defined as a process associated with increasing openness, growing economic interdependence and deepening economic integration in the world economy.

Policy promoting globalization.

1. Increase in equity limit of foreign investment.
2. Partial convertibility.
3. Long-term trade policy.
4. Reduction in tariff.

An Appraisal of LPG Policies

1. Increase in foreign investment.
2. Increase in foreign exchange reserves.
3. A check of inflation.
4. Increase in national income.
5. Increase in exports.
6. Consumer sovereignty.

Negative Impact

1. Neglect of agriculture.
2. Jobless growth.
3. Increase income inequalities.
4. The adverse effect of disinvestment policy.
5. The spread of consumerism.
6. Cultural erosion.
7. Encourages economic colonialism

World Trade Organisation(WTO)

World Trade Organisation, as an institution was established in 1995. It replaced the General Agreement on Trade and Tariffs (GATT) which was in place since 1946.

The overriding objective of the World Trade Organisation is to help trade flow smoothly, freely, fairly and predictably; to meet its objective WTO performs the following functions:-

1. Administering W.T.O Trade Agreements.
2. Acting as a Forum for trade negotiations.
3. Settling and Handling Trade disputes
4. Monitoring  and reviewing national trade policies,
5. Assisting the member in trade policies through technical assistance and training programmes
6. Technical assistance and training for developing countries.
7. Co-operation with other International Organisation

NCERT Solutions

Question 1. Why were reforms introduced in India?

Answer. In 1991, India was facing a severe economic crisis. The foreign exchange reserve was so low that it could have paid for only a fortnight of imports. The government was running on deficit financing. The price rise was too much and there was a high unemployment rate. To tackle this financial crisis; it was the need of the hour to introduce financial reforms in India.

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

Answer. WTO (World Trade Organisation) is a body which formulates rules and regulations regarding international trade. If a country becomes a member of the WTO, it gets access to a global market. Access to the global market has many benefits. To avail these benefits, it is necessary that a country becomes a member of the WTO.

Question 3. Why did RBI have to change its role from the controller to facilitator of the financial sector in India?

Answer. RBI allowed the financial sector to take a certain decision without its approval. It raised the limit of foreign investment in banks to 50%. It also some banks (which fulfilled certain criteria) to open new branches without its approval. It was necessary for RBI to become a facilitator from a controller of the financial sector so that much-needed reforms in the financial sector could be brought. Hence, RBI had to change its role from the controller to facilitator of the financial sector in India.

Question 4. How is RBI controlling the commercial banks?

Answer. RBI formulates broad policy guidelines to govern the banking sector in India. It decides how much money a bank can keep. It also fixes interest rates from time to time; according to the economic situation of the country. To protect the interest of account holders, RBI also reserves certain managerial rights of the banks to itself.

Question 5. What do you understand by the devaluation of rupee?

Answer. The US dollar is the currency against which currencies of other nations are benchmarked. This is the currency for payment wherever international trade is involved. Like any other currency; rupee has certain value against a US dollar. At the time of the beginning of economic reforms in India, the rupee was overvalued against the US dollar. As a corrective measure, its value against US dollar was reduced. This can happen for any currency in the world and this process is called devaluation of the currency.

Question 6: Distinguish between the following:

Strategic and Minority sale

Answer. When a small stake is sold in a company, it is called minority sale. When the stake is sold to such an extent that the ownership of the company is also transferred, it is called strategic sale. Most of the disinvestments in PSUs have been of strategic nature.

Bilateral and Multi-lateral trade

Answer. Trade between two countries is called bilateral trade, while trade among multiple countries is called multilateral trade.

Tariff and Non-tariff barriers

Answer. Trade barriers which are in the form of duties (like custom duty) are called tariff barriers. Sometimes, other kinds of barriers are also implemented. These barriers are not monetary in nature. These are called non-tariff barriers. For example; America puts barriers on textiles imports from India and China and cites some trivial issues to do that. Sometimes, US may raise the issue of child labour or the issue of health in hygiene to restrict certain imports from a nation.

Question 7. Why are tariffs imposed?

Answer. Tariffs are usually imposed to restrict imports in the country. This is done in order to protect the domestic industry from outside competition. Additionally, tariffs are also imposed to earn revenues to the exchequer.

Question 8. What is the meaning of quantitative restrictions?

Answer. Quantitative restrictions involved restrictions on quantities being produced or procured. During the pre-liberalisation period in India, it was the government which enforced how much product a company was going to produce.

Question 9. Those public sector undertakings which are making profits should be privatized. Do you agree with this view? Why?

Answer. There can be two views on this issue. One of the views is if a PSU is making a profit then there is no need for its privatization because the organization is giving revenue to the government. Another viewpoint says that the government should focus on governance because that is what the government is supposed to do. The government has no business of producing bread or even cars. Hence, all the PSUs should be privatized in the long run. Since we are now living in the post-reform period hence most of the people would agree with the privatization of all the PSUs.

Question 10. Do you think outsourcing is good for India? Why are developed countries opposing it?

Answer. Outsourcing has opened up many new employment opportunities in India. Jobs which were unheard of earlier have become part of the common lingo. This has also helped in raising the disposable income of people in India. Hence, it can be said that outsourcing is good for India. In many developed countries; like in the USA; many people have lost their jobs because India is an attractive outsourcing destination. This has resulted in an increased level of unemployment in developed countries. Due to this, the developed countries are opposing outsourcing.

Question 11. India has certain advantages which makes it a favorite outsourcing destination. What are these advantages?

Answer. India is a favorite outsourcing destination because of the following reasons:

1. There is a huge number of educated people who have very good communication skills in English.
2. India is a leading country in terms of IT skill.
3. Wages in India are a fraction of what they are in most of the developed countries.
4. Latest developments in IT and telecommunications have made it possible to transmit data in real time across the world.

Question 12. Do you think the Navaratna policy of the government helps in improving the performance of public sector undertakings in India? How?

Answer. The Navaratnas are examples of efficiency, productivity, and profitability. These are the PSUs which have not only earned revenue but have also made available various products and services to the masses at low prices. For other PSUs, the Navaratnas can work as a benchmark and thus can help in improving performance.

Question 13. What are the major factors responsible for the high growth of the service sector?

Answer. The major factors which are responsible for the high growth of the service sector in India are as follows:

1. Latest developments in telecommunications.
2. Awareness about education means there is ever increasing number of qualified people which provides the much needed human resources.
3. Business process outsourcing by various MNCs to India.

Question 14. Agriculture sector appears to be adversely affected by the reform process. Why?

Answer. The reform process has resulted in some of the benefits which were earlier given to the farmers have been either withdrawn or reduced. For example; subsidy on fertilizers and farm equipment has been reduced. The benefits of progress could only reach big farmers and the small farmers could not be benefitted. Moreover, public investments in agriculture-related infrastructure have also decreased. Hence, agriculture appears to be adversely affected by the reform process.

Question 15. Why has the industrial sector performed poorly in the reform period?

Answer. There are many factors which are responsible for poor performance of the industrial sector in the reform period. Reform could only facilitate seamless movement of goods and it resulted in imports becoming cheaper. Cheaper imports have given tough competition to locally produced goods. Moreover, proper development of infrastructure; like power generation, road network, dedicated freight corridor, etc. could not take place during the reform period.

Question 16. Discuss economic reforms in India in the light of social justice and welfare.

Answer. Some critics argue that economic reforms are doing no good to social justice and welfare in India. The government is no longer focusing on social justice and welfare. Since liberalization is largely market-driven hence it is having a negative impact on social welfare. Some other critics believe that liberalization has helped in opening up new avenues of employment. Many people have got gainful employment in emerging sectors. Many products which were earlier available for a handful of people now can even be found in remote villages. Such changes in consumption pattern reveals that prosperity has reached even small towns and villages and this could be possible because of economic reforms.