“Success is Never End, Failure is Never Final”

SESSION : 2021-22
FOR - XII
CHAPTER - 3
LIBERALISATION, PRIVATISATION &
GLOBALISATION AN APPRAISAL
By: -
LALIT PARIHAR
ECO. (H)
9810092022

“Continuously delivering the result for last 25 years.” Economics By Technique

“Converting your potential to performance.” LALIT PARIHAR
Eco. (Hons.), Delhi University
9810092022
 “Success is Never End, Failure is Never Final”

“Continuously delivering the result for last 25 years.” Economics By Technique

“Converting your potential to performance.” LALIT PARIHAR
Eco. (Hons.), Delhi University
9810092022
 “Success is Never End, Failure is Never Final”

CHAPTER - 3
LIBERALISATION, PRIVATISATION &
GLOBALISATION AN APPRAISAL

Q.1. Give the meaning of Liberalisation.

Ans. Liberalisation means removal of entry and growth restrictions on the private sector.

Q.2. Give the meaning of Privatisation.

Ans. Privatisation means transfer of ownership, management and control of Public sector enterprises
to the entrepreneurs in the private sector.

Q.3. Explain Globalisation.

Ans. Globalisation means integrating the National economy with the world economy through removal
of barriers on international trade and capital movements.

Q.4. Mention any three causes, which were responsible for the economic reforms.
Ans.  The economic condition of India in the year 1991 was very miserable.
 It was due to the cumulative effect of number of reasons:
Reasons of Economic Reforms
1. Poor performance of Public Sector
In the 40 years period (1951-90), public sector was assigned an important role to work for
the economic development of India.
 Except for few public enterprises, the overall performances was vary disappointing.
 Considering the huge losses incurred by a good number of Public sector enterprises, the
Government recognized the need for making necessary reforms.
2. Deficit in Balance of Payments
 Deficit in BOP arises when foreign payments for imports exceed foreign receipts from
exports.
 Even after imposing heavy tariffs and fixing Quotas, there was a sharp rise in imports.
 On the other hand, there was a slow growth of exports due to low quality and high prises
of Indian goods in the international market.
3. Huge Burden of debts
 The expenditure of the government was much higher than revenue.
 As a result, government had to borrow money from banks, public and from international
financial institutions.
4. Fall in foreign exchanges reserves
 In 1991, foreign exchanges reserves fell to the lowest level and it led to the foreign
exchange crisis in the country.

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“Converting your potential to performance.” LALIT PARIHAR
Eco. (Hons.), Delhi University
9810092022
 “Success is Never End, Failure is Never Final”

5. Inflationary Pressures There was a consistent rise in the general prices level in the economy
due to increase in money supply and shortage of essential goods.
6. Inefficient Management
 The origin of the financial crisis can be traced from the inefficient management of the
Indian economy.
 The government was not able to generate sufficient revenue from internal sources such as
taxation, running of public sector enterprises etc.
 Government expenditure began to exceed its revenue by such large margins that it
became unsustainable.
 At times, the foreign exchanges borrowed from other countries and international financial
institutions was spent on meeting consumption needs.

Q.5. What do you understand by devaluation of rupee?

Ans. Devaluation refers to reduction in the value of domestic currency by the government to promote
export and discourage import.

Q.6. What is the most important function of RBI?

Ans. The most important function of RBI is to issue currency and to undertake credit control measures
in the country.

Q.7. Why are tariffs imposed?

Ans. Tariffs are imposed on imports to make them relatively costly and to protect the domestic
production.

Q.8. Briefly discuss the two kinds of measures, in which new economic policy can be classified.
Ans.  The new Economic Policy (NEP) was announced to create a more competitive environment
in the economy and remove barriers to entry and growth of firms.
 The new Economic policy can be broadly classified into two kinds of measures (i)
Stablisation measures (2) structural Reform measures.
1. Stablisation Mearsures
They refer to short-term measurers which can at:
(a) Correcting weakness of the balance of payments by maintaining sufficient foreign
exchange reserves.
(b) Controlling inflation by keeping the rising prices under control.
2. Structural Reform Measures
They refer to long-term measures which aim at :
(a) Improving the efficiency of the economy.
(b) Increasing international comeptitiveness by removing the rigidities in various segments
of the Indian economy.

Q.9. Name the three Principal features of the New Economic policy.
Ans. The three principal features of the New Economic policy are:
(a) Liberalisation (b) Privatisation (c) Globalisation

2 “Continuously delivering the result for last 25 years.” Economics By Technique

“Converting your potential to performance.” LALIT PARIHAR
Eco. (Hons.), Delhi University
9810092022
 “Success is Never End, Failure is Never Final”

Q.10. What was the purpose of Liberalisation?

Ans. The purpose of liberalization was:
1. The unlock the economic potential of the country by encouraging private sector and
multinational corporations to invest and expand.
2. To introduce much more competition into the economy and creating incentives for increasing
efficiency of operations.

Q.11. State the economic reforms taken by the Government under liberalization.
Ans. The economic reforms taken by the Government under liberalization:
1. Reduction in industrial licensing
 The new policy abolished industrial licensing for all the projects, expert for a short list of
industries (like liquor, defence equipments, industrial explosives etc.)
 No licences were needed to set up new units.
 Licence is required for certain industries, related to security and strategic considerations.
2. Decrease in role of Public Sector
 The striking features was the substantive reduction in the role of the public sector in the
future industrial development of the country.
 The number of industries exclusively reserved for the public sector, reduced from 17 to
following 3 industries (i) defence equipments (ii) Atomic Energy generation (iii) Railway
transport.
3. De-Reservation under small-scale industries
Many goods produced by small scale industries have now been de-reserved.
 The investment ceiling on plant and machinery for small undertakings enhanced for
rupees one crore.
 In many industries, the market was allowed to determine the prices through forces of the
market.

Q.12. What is meant by Privatisation? What are the two ways in which privatization can be
done?
Ans.  Privatisation means trasnsfer of ownerships, management and control of Public sector
enterprises to the entrepreneurs in the private sector.
 Privatisation implies greater role of the private sector in the economic activities of the
country.
 Over the years, Indian Government has diluted its stake in several public enterprises,
including IPCL, IBP, Maruti Udyog etc.

Privatisation can be done in two ways:

1. Transfer of ownership and management of Public sector companies from the government to
the private sector.
2. Privatisation of the Public sector undertakings (PSU) by selling off part of the equity of PSUs
to the Public. This process is known as disinvestment.
3. The purpose of privatization was mainly to improve financial discipline and facilitate
modernization.
4. It was also believed that promote sector capital and managerial capabilities will help in
improving performance of the PSUs.

3 “Continuously delivering the result for last 25 years.” Economics By Technique

“Converting your potential to performance.” LALIT PARIHAR
Eco. (Hons.), Delhi University
9810092022
 “Success is Never End, Failure is Never Final”

Q.13. Economic Reforms were widely criticized because it neglected agricultural sector. Explain.
Ans. New economic policy neglected the agricultural sector as compared to industry, trade and
services sector.
1. Public investment in agriculture sector was reduced in the reform period.
2. Removal of fertilizer subsidy increased the cost of production, which adversely affected the
small and marginal farmers.
3. After commencement of WTO, a number of policy changes were made.
(a) Reduction in import duties on agricultural product.
(b) Removal of minimum support price.
(c) Lifting of quantitative restrictions on agricultural product. All these policies adversely
affected the Indian farmers as they now have to face increased international competition.
4.  Due to export-oriented policy strategies in agriculture the production shifted from food
grains to cash crops for the export market.
 It led to rise in the prices of food grains.

Q.14. What do you understand by the term ‘Globalisation’? Mention any four changes made by
the globalization of the Indian Economy?
Ans. Globalisation means integrating the National economy with the world economy through removal
of barriers on international trade and capital movements.
1. The new economic policy prepared a specified list of high technology and high investment
priority industries, in which automatic permission will be available for foreign direct
investment upto 51 per cent of foreign equity.
2.  In respect of foreign technology agreements, automatic permission is provided in high
priority industry upto a sum of rupees 1 crore.
 No permission is now required for hiring foreign technicians.
3.  In order to make international adjustment of Indian currency, rupee was devalued in July
1991 by nearly 20 per cent.
 It stimulated exports, discouraged imports and raised the influx of foreign capital.
4. To integrate Indian economy with world, the union budget 1992-93 made Indian rupee
partially convertible and then the rupee was made fully convertible in 1993-94 budget.
5.  A few year export-import policy (1992-97) was announced by the Government to
establish the framework of globalization of India’s Foreign trade.
 The Policy removed all restrictions and controls on the external trade and allowed market
forces to play a greater role in respect of exports and imports.

Q.15. Explain positive as well as negative results of globalization.

Ans. 1. Positive results of Globalisation
 Greater access to global markets.
 Advanced technology.
 Better future prospectus for large industries of developing countries to become
important players in the international arena.

2. Negative Results of Globalisation

 Benefits of globablisation accrue more to developed countries as they are able to
expand their markets in other countries.

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“Converting your potential to performance.” LALIT PARIHAR
Eco. (Hons.), Delhi University
9810092022
 “Success is Never End, Failure is Never Final”

 Globablisation compromises the welfare and identity of people belonging to poor

countries.
 Market-driven globalization increase the economic disparities among Nations and
people.

Q.16. Name any two industries which are exclusively reserved for the public sector.
Ans. (i) Defence equipments (ii) Atomic Energy Generation.

Q.17. When was the ‘New Economic Policy’ announced?

Ans. July 1991.

Q.18. Explain outsourcing. Name some of the services, which are being outsourced to India by
the developed countries.
Ans. Outsourcing refers to contracting out some of its activities to a third party which were earlier
performed by the organization.
Example
Many companies have started outsourcing security service to outside agencies on a contractual
basis.
 Outsourcing is one of the important outcomes of the globalization process.
 It has intensified in recent times because of the growth of fast modes of communication,
particularly the growth of information technology.
 With the help of modern telecommunication links, the text, voice and visual data in respect of
these services in digitized and transmitted in real time over continents and National
boundaries.
 India has become a favourable destination of outsourcing for most of the MNC’s because of
low wage rate and availability of skilled manpower.
Some of the services outsources to India include:
1. Voice-Based business processes (call centres)
2. Accounting
3. Record Keeping
4. Banking Services
5. Music Recording
6. Film Editing
7. Book Transcription
8. Clinical Advice

Q.19. Distinguish between the following:

(i) Tariff and Non-Tariff barriers.
(ii) Bilateral and Multi-lateral trade.
Ans. (i) Tariff: The barriers which are imposed on imports to make them relatively costly and to
protect the domestic production are known as tariff barriers.
Non-Tariff Barriers are imposed on the amount of imports and exports.

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“Converting your potential to performance.” LALIT PARIHAR
Eco. (Hons.), Delhi University
9810092022
 “Success is Never End, Failure is Never Final”

(ii) Bilateral Trade: The trade between two countries is known as Bilateral Trade.
Multi-Lateral Trade: The trade between more than two countries is known as Multi-
lateral trade.

Q.20. Discuss the tax reforms introduced under the New Economic Policy of 1991.
Ans. Tax reforms refer to reforms in government is taxation and public expenditure policies, which are
collectively known as its ‘Fiscal Policy’.
Taxes are of two types:
1. Direct Taxes consist of taxes on incomes of individuals as well as profits of business
enterprises. For e.g. : Income Tax, Property Tax, Profit Tax.
2. Indirect Taxes refer to those taxes which affect the income and property of persons through
their consumption expenditure.
 Indirect taxes are generally imposed on goods and services.
 For example, sales tax, production tax, value added tax. Now, all these taxes are merge in
goods and service tax (GST)
The Major Tax Reforms made are:
1. Reduction in Taxes
 Since 1991, there has been a continuous reduction in income and corporate tax as high tax
rates were an important reason for tax evasion.
 It is now widely accepted that moderate rates of income tax encourage savings and
voluntary disclosure of income.
2. Reforms in Indirect Taxes
 Considerable reforms have been made in indirect taxes to facilitate establishment of
common national market for good and commodities.
3. Simplification of Process
 In order to encourage better compliance on the part of tax payers many procedures have
been simplified.

Q.21. Mention the major functions of World Trade Organization.

Ans.  Prior to WTO, General Agreement on trade and Tariff (GATT) was established as global
trade organization, in 1948 with 23 countries.
 GATT was set up to administer all multilateral trade agreements by providing equal
opportunities to all countries in the international market.
 WTO was founded in 1995 as the successor organization to the GATT.
The Major functions of World Trade Organization are:
1. To facilitate international trade (both bilateral and multi-lateral trade) though removal of
tariff as well as non-tariff barriers.
2. To establish a rule-based trading regime, in which Nations cannot place arbitrary restrictions
on trade.
3. To enlarge production and trade of services.
4. To ensure optimum utilization of world resources.
5. To protect the environment.

6 “Continuously delivering the result for last 25 years.” Economics By Technique

“Converting your potential to performance.” LALIT PARIHAR
Eco. (Hons.), Delhi University
9810092022
 “Success is Never End, Failure is Never Final”

Q.22. India has certain advantages which make it a favourite outsourcing destination. What are
these advantages?
Ans. India has become a favourable destination of outsourcing for most of the MNC’s because of
following reasons:
1. Easy Availability of Cheap Labour
 The wage rates in India are comparatively lower than that of in the developed countries.
 As a result, MNC’s outsource their business in India.
2. Availability of Skilled Man Power
India has vast skilled Manpower, which enhances the faith of MNC’s.
3. Favourable Government Policies
MNC’s gets various types of lucrative offers from the Indian government like tax holidays, low
tax rates, etc.
4. International Worthiness
India has a fair international worthiness and credibility.

7 “Continuously delivering the result for last 25 years.” Economics By Technique

“Converting your potential to performance.” LALIT PARIHAR
Eco. (Hons.), Delhi University
9810092022
 “Success is Never End, Failure is Never Final”

“Continuously delivering the result for last 25 years.” Economics By Technique

“Converting your potential to performance.” LALIT PARIHAR
Eco. (Hons.), Delhi University
9810092022