Economic Reforms(chapter 3 ) Indian economic development

Economic reforms or structural adjustment is a long term multi dimensional

package of various policies (Liberalisation, privatisation and globalisation) 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.

1. Fall in foreign exchange reserve: as imports grew faster than exports
2. Adverse balance of payments resulted repayment crisis
3. Mounting fiscal deficit as govt. expenditure grew faster than revenue
4. Rise in prices, which have the negative impact on Investment.
5. Failure of public enterprises:- very low return on high Investment
6. Gulf crisis increases crude oil prices which negatively affected BOP.
7. High rate of deficit financing
8. Collapse of 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
Stabilisation measures: These are short run measures introduced by Govt to control rise in price,
adverse balance of payment and fall in foreign ex-change reserve.

Structural adjustment : These are long run policies, aimed at improving the efficiency of the economy
and increasing its international competiveness 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. Liberalisation.
2. Privatisation
3. Globalisation.

Liberalisation
Liberalisation means removing all unnecessary control and restrictions like permits licences,
protectionist duties quotas etc. In other words, It may 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 debt burden of the country
2. To expand size of the market
3. To increase competition among domestic industries
4. To encourage export and import of goods and services.
Economic reforms under liberalisation.
1. Industrial sector reforms
  Abolition of Industrial Licensing
 Contraction off Public Sector
 Freedom to Import capital goods
2. Financial sector reforms.

 Reducing various Ratios(SLR, CRR)

 Change in role of RBI from regulator to facilitator
 De-regulation of interest rates
3. Fiscal reforms/Tax reforms
4. Foreign exchange reforms

 Devaluation of rupee
5. Trade and investment reforms.

Privatisation
Privatisation is the general process of involving the private sector in the ownership or operation of state
owned enterprises.
Policies adopted for privatisation
1. Contraction of 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

Globalisation
Globalisation may be defined as a process associated with increasing openness, growing economic
interdependence and deepening economic integration in the world economy.
Policy promoting globalisation.
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. Adverse effect of disinvestment policy.
5. 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 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:-

 Administering W.T.O Trade Agreements.

 Acting as a Forum for trade negotiations.
 Settling and Handling Trade disputes
 Monitoring and reviewing national trade policies,
 Assisting the member in trade policies through technical assistance and training programmes
 Technical assistance and training for developing countries.
 Co-operation with other International Organisation.
NCERT TEXTUAL QUESTIONS WITH ANSWERS

1. Why were reforms introduced in India?

Answer. In 1991, economic reforms were introduced in India because 1991 was the year of crisis for the
Indian economy. It is clear from the following facts:
(a) National income was growing at the rate of 0.8%.
(b) Inflation reached the height of 16.8%.
(c) Balance of payment crisis was to the extent of 10,000 crores.
(a) India was highly indebted country. It was paying 30,000 crores interest charges per year.
(e) Foreign exchanges reserves were only 1.8 billion dollars which were sufficient for three weeks.
(f) India sold large amount of gold to Bank of England.
(g) India applied for the loan from World Bank and IMF to the extent of 7 billion dollars.
(h) Fiscal deficit was more than 7.5%.
(i) Deficit financing was around 3%.
(j) Trade relation with Soviet block had broken down.

(k) Remittances from non-residence Indians stopped due to war in Arab countries.
(l) Price of petroleum products was very high.

2. How many countries are members of the WTO?

Answer. At present there are 149 countries which are members of WTO.

3. What is the most important function of RBI?

Answer. There was a substantial shift in role of the RBI from ‘a regulator’ to ‘a facilitator’ of the financial
sector. Earlier as a regulator, the RBI would itself fix interest rate structure for the commercial banks.
After liberalisation in 1991, RBI as a facilitator would only facilitate free play of the market forces and
leave it to the commercial banks to decide their interest rate structure. Thus, with liberalisation
competition prevails rather than controls.
4. How was RBI controlling the commercial banks?
Answer. Prior to 1991, banking institutions were subject to too much control by the RBI through high
bank rate, high cash reserve ratio and statutory liquidity ratio.
Financial sector includes:
(a) banking and non-banking financial’institutions,
(b) stock exchange market, and
(c) foreign exchange market.
In India, financial sector is regulated and controlled by the RBI (Reserve Bank of India).
There was a substantial shift in role of the RBI from ‘a regulator’ to ‘a facilitator’ of the financial sector.
Earlier as a regulator, the RBI would itself fix interest rate structure for the commercial banks. After
liberalisation in 1991, RBI as a facilitator would only facilitate free play of the market forces and leave it
to the commercial banks to decide their interest rate structure.

5. What do you understand by devaluation of rupee?

Answer. Devaluation refers to lowering in the official value of a currrency with respect to gold or foreign
currency. It results in costlier imports and cheaper exports.

6. Distinguish between the following:

(i) Strategic and Minority sale
Answer. Government has been disinvesting by many methods. Two main methods are:
(a) Minority sale. In this method, equity is offered to investors through domestic public issue.
(b) Strategic sale. In this method, government offloads above 51 per cent in strategic sale.
(ii) Bilateral and Multi-lateral trade
Answer. Trade agreements involving more than two countries are referred to as multilateral trade
agreements.
Trade agreements involving two countries are referred to as bilateral trade agreements.
(iii) Tariff and Non-tariff barriers
Answer. Tariff Barriers. Tariff barriers are imposed on imports to make them relatively costly as a
measure to protect domestic production.
Non-Tariff Barriers. They are imposed on the amount of imports and exports.

7. Why are tariffs imposed?

Answer. Tariffs are imposed on imports to make them relatively expensive. This will protect
domestically produced goods.

8. What is the meaning of quantitative restrictions?

Answer. Quantitative restrictions refers to non-tariff barriers imposed on the amount of imports and
exports.

9. Those public sector undertakings which are making profits should be privatised. Do you agree with
this view? Why?
Answer. No, if profit making PSUs are privatised then there will be only loss making PSUs left.
Government
needs the profit of the profit. Making PSUs to modernise them, to make them, more competitive and
more efficient.
10. Do you think outsourcing is good for India? Why are developed countries opposing it?
Answer. Outsourcing is good for India because it provides employment to large number of unemployed
Indians. Developed countries oppose it because :
(a) They-are not sure about the sincerity of Indian workers.
(b) It will narrow down the income disparity between the two countries.

11. India has certain advantages which makes it a favourite outsourcing destination. What are these
advantages?
Answer. India is a favourite outsourcing destination. The advantages that India has are:
(a) India can provide a ready supply of skilled people at relatively lower price.
(b) India has the advantage of time difference as it is located on the other side of the developed
countries.

12. Do you think the navratna pdlicy of the government helps in improving the performance of public
sector undertakings in India? How?

Answer. The government has decided to give special treatment to some of the important profit making
PSUs and they were given the status of navratnas. These navratnas were granted financial and
operational autonomy in the working of the companies. These navratnas are:
1. Indian Oil Corporation Ltd. (IOCL)
2. Bharat Petroleum Corporation Ltd. (BPCL)
3. Hindustan Petroleum Corporation Ltd. (HPCL)
4. Oil and Natural Gas Corporation Ltd (ONGC)
5. Steel Authority of India Ltd. (SAIL)
6. Indian Petrochemicals Corporation Ltd. (IPCL)
7. Bharat Heavy Electricals Ltd. (BHEL) –
8. National Thermal Power Corporation (NTPC)
9. Mahanagar Telephone Nigam Limited (MTNL)
10. Gas Authority of India Limited (GAIL)
11. Videsh Sanchar Nigam Limited (VSNL)

The granting of navratna status resulted in better performance of these. companies. The ‘government
partly privatized these companies through disinvestment.

13. What are the major factors responsible for the high growth of the service sector?
Answer. There has been high growth of the service sector in India. There is too much demand for
services because:
(a) It is more profitable to contract services from developing countries.
(b) There is easy availability of skilled manpower at lower wage rate.

14. Agriculture sector appears to be adversely affected by the reform process. Why?
Answer. There has been deceleration in agricultural growth. This deceleration is the root cause of the
problem of rural distress that reached crisis in some parts of the country. Farmers find themselves into
crippling debt due to low farm incomes combined with low prices of output and lack of credit at
reasonable prices. This has led to widespread distress migration.
Economic reforms have not been able to benefit the agricultural sector because:
(a) Liberalisation has forced the small farmers to compete in a global market where prices of goods have
fallen while removal of subsidies has led to increase in the cost of production. It has made farming more
expensive.
(b) Various policy changes like reduction in import duties on agricultural products, removal of minimum
support price and lifting of quantitative restrictions have increased the threat of international
competition to the Indian farmers.
(c) The export-oriented growth has favoured increased production of cash crops rather than food grains.
This has increased the prices of food grains.
(d) Public investment in agriculture sector especially in infrastructure which includes irrigation, power,
roads, market linkages and research has been reduced in the reform period.

15. Why has the industrial sector performed poorly in the reform period?
Answer. The post-reform period shows that industrial growth has slowed down. This was due to:
(a) Globalisation created conditions for free movement of goods and services from foreign countries. It
adversely affected the local industries and employment in developing countries.
(b) Globalisation led to decrease in demand for domestic industrial products due to cheaper imports.
(c) There was inadequate investment in infrastructural facilities such as power supply.
(d) A development country like India still does not have the access to markets of developed countries
due to high non-tariff barriers.

16. Discuss economic reforms in India in the light of social justice and welfare.
Answer. Economic reforms have been criticised on the following grounds:
(a) Privatisation encourages growth-ofunonopoly power in the hands of big business houses. It results in
greater inequalities of income and wealth.
(b) Globalisation has devastated local producers since they are unable to compete with cheap imports.
(c) Economic reforms have led to mounting workers unrest. Workers have protested against low wages,
poor working conditions, autocratic management rule, long work days and fall in social benefits.
(d) These have made public employees worse off. Public employees are adversely effected by budget
cuts, privatisation and massive loss of purchasing power.
(e) Small business class is adversely affected by fall of public subsidies, de-industrialisation and floods of
cheap imports.
(f) During the globalisation phase, about half a billion people in South Asia have experienced a decline in
their income. Data shows that it is the poor who have suffered most.
(g) Since the government is unable to help the victims of globalisation, the provisions of social safety net
have been weakened.

(h) The global village appears deeply divided between the street of the haves and those of the havenots.
The average person in Norway (which has highest human development) and the average person in
countries such as Niger (which has lowest human development) certainly live in different human
development districts of the global village