Liberalisation, Privatisation and Globalisation: An Appraisal Class 12 Important Questions and Answers Indian Economy Chapter 3

Important Questions of Liberalisation, Privatisation and Globalisation: An Appraisal Class 12 Indian Economy Chapter 3

Question 1.
State any two reasons why economic reforms were initiated in India.
Answer:
Two reasons responsible for the initiation of economic reforms in India are

Increase in fiscal deficit
Unfavourable Balance of Payments

Question 2.
Why does government needs funds?
Answer:
The government needs to generate funds to implement various policies and to meet its general administration expenses.

Question 3.
Indian Government become unsustainable in 1991. Why?
Answer:
Government expenditure began to exceed its revenue by very large margins. This was the main cause to make the government unsustainable.

Question 4.
Why was the Indian Government compelled to borrow from international organisations?
Answer:
A severe financial crisis due to unsustainable fiscal deficit, fall in foreign exchange reserves and liability to pay interest to international lenders forced Indian Government to borrow from international organisations.

Question 5.
Structural reforms are also referred to as ‘micro economic structural adjustment measures’. Why?
Answer:
Structural reforms are also referred to as ‘micro economic structural adjustment measures’ as they are targeted at specific sectors of the economy. These measures are related to the changes made in industrial policy, trade policy, public sector policy, price policy and tariff policy.

Question 6.
What is the meaning of ‘retaining the golden share’?
Answer:
It means to withhold a part of shareholding of the PSU by the government to enable it to enjoy future profit. Golden share depends on individual cases. Presently it is 26% for PSUs.

Question 7.
State the limit of automatic approval for direct foreign investment.
Answer:
Automatic approval was granted for direct foreign investment upto 51% in a wide range of industries.

Question 8.
Why should government remove tariff and non-tariff barriers to promote globalisation?
Answer:
Tariff and non-tariff barriers restrict the free flow of trade between two countries. Therefore, these barriers should be removed to promote globalisation.

Question 9.
Which organisation facilitates bilateral and multilateral trade agreements?
Answer:
World Trade Organisation (WTO) facilitates bilateral and multilateral trade agreements.

Question 10.
Name any two services outsourced in India.
Answer:
Voice-based business process and banking services are the two services outsourced in India.

Question 11.
Why are tariffs imposed? (NCERT)
Answer:
Tariffs are taxes imposed on the imports by a country for providing protection to its domestic industries. Imposition of tariffs increases the price of imported goods in the domestic country. The rise in price discourages consumption of imported goods by consumers and thus, domestic industries are able to compete with imports from other countries. Tariffs may also be imposed on those imported goods which are socially undesirable. For example, in India custom duty is imposed on imports.

Question 12.
State any two objectives behind demonetisation.
Answer:

It was an attempt to India corruption free.
It was expected to curb black money.

Question 13.
State any two drawbacks of privatisation.
Answer:
The drawbacks of privatisation are

Socialist pattern of society is disturbed.
Privatisation leads to disparity in incomes.

Question 14.
Stabilisation measures are also referred to as ‘macro economic stabilisation measures’. Why?
Answer:
Stabilisation measures are also referred to as ‘macro economic stabilisation measures’, as these measures affect the economy as a whole. These measures relate to the changes made in the monetary policy, fiscal policy and exchange rate policy.

Question 15.
Why were reforms introduced in India? (NCERT)
Answer:
Since independence, India followed the mixed economy framework by combining the advantages of the market economic system with those of the planned economic system. But over the years, this policy resulted in the establishment of a variety of rules and laws which were aimed at controlling and regulating the economy. These rules ended up hampering the process of growth and development. The economy was facing problems of declining foreign exchange, growing imports without matching rise in exports and high inflation. India changed its economic policies in 1991 due to the financial crisis and pressure from international organisations like the World Bank and IMF.

Question 16.
Does India has scope in handloom and handicrafts exports? (NCERT)
Answer:
A developing country like India still does not have the access to the markets of developed countries because of non-traiff barriers. Our country has removed all quota restrictions on textile industry but developed coutries like the USA has not removed quota restriction on imports of textiles from India. In this situation, I do not think that India has much scope in handloom and handicrafts exports.

Question 17.
What is the meaning of Quantitative Restrictions? (NCERT)
Answer:
Quantitative Restrictions (QRs) are the limits imposed on the quantity of goods that are imported or exported. It includes import quotas and Voluntary Export Restraints, which are signed by the exporters of foreign countries. Quantitative restrictions are imposed to discourage imports and thus, protect domestic industries from competition with cheaper and technologically advanced goods manufactured by other nations. Quantitative restrictions have been abolished by WTO in a phased manner to facilitate world trade.

Question 16.
Those Public Sector Undertakings which are making profits should be privatised. Do you agree with this view? Why? (NCERT)
Answer:
No, I do not agree with this view. Even though disinvestment would increase the revenue of the government, the profit making industries should be retained in the public sector because the profits of these undertakings add to the revenues of the government and can be used to develop other PSUs and the infrastructure of the company. Also, if the assets of the profit making industries are undervalued, it will lead to a substantial loss to the government, if sold to the private sector. Also, the government should retain the strategic profit making industries to avoid emergence of any monopoly in the private sector.

Question 17.
Do you think outsourcing is good for India? Why are developed countries opposing it? (NCERT)
Answer:
Outsourcing is good for India since it has generated new employment opportunities in the Indian economy, contributed to GDP and has increased the foreign reserves of the country. The developed countries are opposing outsourcing services to India because it results in loss of employment opportunities in these countries.

Question 18.
Do you think the Navratna policy of the government helps in improving the performance of public sector undertakings in India? How? NCERT
Answer:
The government identifies PSUs and declares them as Maharatnas, Navratnas and Miniratnas in order to improve their efficiency and enable them to compete globally. They are given greater managerial and operational autonomy in taking various decisions. In 2011, about 90 public enterprises were designated with different status. The granting of this special status resulted in better performance of these companies.

Question 19.
What are the advantages of privatisation to the economy?
Answer:
Advantages of privatisation are

It will introduce efficiency and profitability in Public Sector Undertakings (PSUs).
It promotes consumer’s sovereignty. High degree of consumer’s sovereignty implies wider choice and better quality of goods and services.
It will reduce budgetary deficits which result from expenditure on loss making PSUs.

Question 20.
Give your views on the reforms introduced in the financial sector under the New Economic Policy.
Answer:
Financial sector includes financial institutions such as commercial banks, investment banks, stock exchange and foreign exchange market.
The following reforms were initiated in this sector:

The banking sector was opened for the private sector. This led to an increase in competition and expansion for services for consumers.
RBI’s role underwent a change from a ‘regulator’ to a ‘facilitator’.
These reforms were much needed and subsequent to these changes, this sector has witnessed tremendous growth and helped in the development of the economy as a whole.

Question 21.
Discuss briefly the meaning of economic reforms. Explain the main economic reforms.
Answer:
Economic reforms refer to the changes made in the economy with a view to deregulate it and to solve the prevailing economic problems of the country.
In India, economic reforms were introduced in 1991, with the implementation of New Economic Policy. These reforms can be categorised as

Stabilisation reforms These reforms were short-term measures which intended to correct disequilibrium in BoP and to check inflation.
Structural reforms These are long-term measures which intend to bring efficiency in the working of the economy. These reforms can be categorised as liberalisation, privatisation and globalisation.

Question 22.
What are the main objectives of liberalisation policy?
Answer:
The main objectives of liberalisation policy are

To increase competition among domestic industries.
To increase foreign capital formation and ‘ improve the technology.
To decrease the debt of the country.
To encourage cross-border trade.
To expand the size of the market.

Since, the NEP aims to achieve all the above stated objectives, therefore it is said that, NEP is liberal.

Question 23.
Why was trade and investment liberalised in 1991?
Answer:
Liberalisation of trade and investment was initiated to increase international competitiveness of industrial production and also the flow of foreign investments and technology into the economy. Prior to these reforms, in : order to protect domestic industries, India was following a regime of quantitative restrictions on imports and restrictions of foreign investments. The trade policy reforms aimed at:

dismantling of quantitative restrictions on imports and exports.
reduction of tariff rates.
removal of licensing procedures for imports. Liberalisation led to economic growth by increasing the level of investment in the country.

Question 24.
State the measures that were taken towards privatisation in 1991.
Answer:
The New Economic Policy was introduced with the objective to deregulate the economy and ensure economic development. So, privatisation was crucial for the success of this policy as it insures high productivity, a competitive environment which promotes innovation and efficiency, diversification of activities and consumer sovereignty.
In order to encourage private sector, following measures have been adopted

The government through its economic policy reduced the number of industries reserved for public sector from 17 to 3 at present.
It has now been planned to reduce the share of public sector investment to 45%. It increases the share of private sector to 55%.
Financial corporations cannot force the industries for conversion of their loans into equity shares.
It has now been decided to increase the participation of general public and workers by selling them the shares of public enterprises.

Question 25.
State the main objectives of privatisation.
Answer:
The most common and important objectives of privatisation are

Improving the financial condition of the government.
Raising funds through disinvestment.
Reducing the workload of public sector.
Increasing the efficiency of the government undertakings.
Providing better goods and services to consumers.
Bringing healthy competition within an economy.
Making way for Foreign Direct Investment (FDI).

Question 26.
Write a short note on foreign exchange reforms.
Answer:
The first important reform in the external sector was made in the foreign exchange market.
In 1991, as an immediate measure to resolve the Balance of Payments (BoP) crisis, the rupee was devalued against foreign currencies.
This led to an increase in the inflow of foreign exchange. After liberalisation policy of 1991

approval was given for direct foreign investment upto 51% foreign equity in high priority industries.
automatic permission was given for foreign technology agreements in high priority industries upto a lumpsum payment of ₹ 1 crore.

Question 27.
What do you understand by devaluation of rupee? (NCERT)
Answer:
Devaluation of rupee means a deliberate downward adjustment in the official exchange rate of rupee relative to other currencies. For example, if the dollar-rupee exchange rate which was $ 1 = ₹ 50, is changed to $ 1 = ₹ 60, under fixed exchange rate system by the government, then in such an instance, rupee is said to be devalued.

There were two important implications of devaluation of rupee in 1991. First, devaluation made India’s exports relatively less expensive for foreigners and increased their competitiveness and second, it made foreign products relatively more expensive for domestic consumers, discouraging imports.

Question 28.
Industrial sector has performed poorly in the reform period. Why?
Answer:
The industrial sector has performed poorly in the reform period because of reasons enumerated below:

Cheaper imports have decreased the demand for domestic industrial goods.
Globalisation created conditions for the free movement of goods and services from foreign countries that adversely affected the local industries and employment opportunities in developing countries.
There was inadequate investment in infrastructural facilities such as power ,supply.

Question 29.
Discuss economic reforms in India in the light of social justice and welfare. NCERT
Answer:
The economic reforms initiated through NEP had benefitted the country in many ways. They helped the country to become a vibrant economy, have stimulated industrial production, helped to check fiscal deficit and inflation. They also led to a substantial increase of foreign exchange reserves and foreign investment. However, these reforms have led to an increase in the income of those who were already rich. Quality of consumption of only high income groups has increased and economic growth has not trickled down to the poorer sections of the society.

Growth has been concentrated only in some selected areas in the service sector such as telecommunication, information technology, finance, entertainment, travel, hospitality services, real estate and trade. Vital sectors, such as agriculture and industry, which provided livelihood to millions of people in the country have not been benefitted much from reforms thereby increasing income disparities. Besides, large scale production has been promoted under reforms at the cost of small scale industries, again leading to concentration of economic power with large industrial houses and MNCs. So, we can conclude that economic reforms in India have not promoted social justice and welfare.

Question 30.
Critically discuss the fiscal reforms initiated under NEP of 1991.
Answer:
Fiscal reforms are concerned with the reforms initiated in government’s taxation and public expenditure policies.
The following reforms were introduced in this category

The fiscal reforms simplified the tax structure and lowered the rates of taxation. The maximum rate of income tax was brought down to 30% from 51%.
The rates of various indirect taxes, such as custom duty, excise duty etc were reduced considerably.
The government decided to reduce subsidies so that it can control expenditure.
Conscious efforts were made by the government to control its expenditure so that a mounting deficit could be controlled.

These measures helped to reduce tax evasion and increased government’s revenues. By controlling its expenditure and by increasing revenues, the government succeeded to a certain extent in controlling the budget deficit.

Question 31.
Briefly discuss the measures that have been taken for globalisation of Indian economy.
Answer:
The following measures have been taken for globalisation of Indian economy

Increase in equity limit of foreign investment Equity limit in general, has been raised from 40% to 51%. Also, in 47 high priority industries and in export trading houses, Foreign Direct Investment (FDI) is allowed upto the extent of 100%.
Partial convertibility It means sale and purchase of foreign currency at a price determined by the market forces of demand and supply. It is called partial convertibility because it is allowed 100% in current account transactions but it is only 51% for capital account transactions.
Liberal foreign trade policy A long-term liberal trade policy has been implemented which encourages free trade among countries.
Reduction in tariffs Custom duties have been reduced drastically. Pre 1991, custom duties were as high as 400%, but post 1991, maximum rate of duty is just 10%.
Withdrawal of quantitative restrictions The quantitative restrictions on all import items have been totally withdrawn from 2001, in conformity with the guidelines issued by World Trade Organisation (WTO).

Question 32.
Write a brief note on International Monetary Fund and state its objectives.
Answer:
IMF was conceived at the Bretton WoodsConference held in 1944 and set-up in 1946. The main objective of setting up of such an organisation was to administer a code of good conduct in international liquidity of its member countries and to grant short-term loans to economies, experiencing temporary deficit in Balance of Payments (BoP). IMF started to function from March 1947.

Its headquarters is located in Washington DC. There are 189 member countries including India. The highest authority of the IMF is the Board of Governors, which consists of the most part of Ministers of Finance or Central Bank Governors of the member countries. Each member country appoints one Governor. The board generally meets only once in a year. The main objectives of IMF are as follows

To promote international monetary cooperation.
To promote exchange stability.
To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions.
To give confidence to members by making the general resources of the fund temporarily available to them under adequate safeguards.

Question 33.
Write a brief note on International Bank for Reconstruction and Development (IBRD).
Answer:
It is popularly known as World Bank which was also set-up in 1944 under Bretton Woods Conference, alongwith IMF, hence these two are known as sister institutions or Bretton Woods’ twins. World Bank is also headquartered at Washington DC and has 189 members.
The World Bank focuses on making loans to government in order to rebuild railroads, highways and other infrastructure, i.e. the areas where private sector enterprises do not take interest.

The main objectives of IBRD are as follows:

To help reconstruction of member countries after the Second World War.
To facilitate the investment of foreign capital for productive purpose.
To maintain balance growth of international trade and to attain equilibrium in BoP account.
Motivating governments to act on preventing climate change, controlling communicable diseases, managing international financial crises and promoting free trade.

Question 34.
Why is it necessary to become a member of WTO? (NCERT)
Answer:
It is necessary to become a member of WTO because of the following reasons:

Rule based trading WTO is formed to establish a rule based trading system in which arbitrary restrictions cannot be placed on trade by different nations. This helps in making the trade environment more stable.
Equality of opportunities Under WTO, the member countries confer the status of Most Favoured Nation (MFN) to all other member countries. Thus, WTO provides equal opportunities to all countries in the international market for trading purposes.
Multilateral negotiations The WTO agreements cover trade in goods as well as services to facilitate international trade through multilateral trade negotiations leading fo removal of tariff as well as non-tariff barriers. This helps in providing greater market access to all member countries.

Question 35.
Why did KBI have to change its role from controller to facilitator of financial sector in India? (NCERT)
Answer:
RBI used to control and regulate all the banks and other financial institutions in India prior to 1991. The RBI used to decide the amount of money that the banks can lend and the amount they should keep as reserves, determine the interest rates and prioritises lending to various sectors apart from regulating foreign exchange. However, all this changed with the declaration of the New Industrial Policy (NEP). One of the major aims of financial sector reforms was to transform the role of RBI from regulator to facilitator of financial sector.

This means that greater autonomy may be granted to the financial sector in taking decisions on various matters without consulting the RBI. The reform policies led to establishment of private sector banks. Banks have been given freedom to set up new branches and determine the rate of interest to be offered on various deposits. Banks have been given permission to generate resources from India and abroad through capital market. All this has led to a substantial growth in the financial sector.

Question 36.
How is RBI controlling the commercial banks? (NCERT)
Answer:
RBI controls the commercial banks through the following measures
(i) RBI fixes the bank rate and repo rate: Bank rate is the interest rate at which the RBI lend funds to other commercial banks in the country. It is also called the discount rate. In order to control the supply of currency in the economic system RBI often uses the bank rate. On the other hand, repo rate is the rate at which commercial banks will borrow the funds from the RBI against the securities. In order to make credit dearer, RBI increases these rates.

(ii) Variable reserve ratios: The commercial banks have to keep a certain proportion of their total assets in the form of liquid assets so that they are always in a position to honour the demand for withdrawal by their customers. Generally, the following two reserves are required to be kept

Cash Reserve Ratio (CRR) It refers to the percentage of deposits of the commercial banks which they have to maintain with the RBI in cash form.
Statutory Liquidity Ratio (SLR) It refers to the percentage of deposits to be maintained as reserves in the form of gold.or foreign securities by commercial banks. By varying reserve ratios lending capacity of commercial banks can be affected.

(iii) Fixing margin requirements The margin refers to the “proportion of the loan amount which is not financed by the bank”. By increasing or decreasing margin requirements the RBI tries to control the lending capacity of banks.

(iv) Credit rationing RBI can fix the upper iimit of credit amount to be granted for various purposes. This can help in lowering the credit exposure of commercial banks to undesirable sectors.

Question 37.
Distinguish between the following
(i) Strategic and minority sale
(ii) Bilateral and multi-lateral trade
(iii) Tariff and non-tariff barriers (NCERT)
Answer:
(i) Differences between strategic and minority sale

Basis	Strategic sale	Minority sale
Meaning	Strategic sale involves the sale of minimum 51% stake of a Public Sector Unit (PSU) to the private sector.	Minority sale involves the sale of less than 49% stake of a PSU to the private sector.
Control	The control and management of PSU is transferred to the private sector.	The control and management of PSU remains with the government as it holds the majority stake.
Process	It is done through a process of competitive bidding and subsequent sales to the partner.	Minority disinvestments are made via public offers.

(ii) Differences between bilateral and multi-lateral trade

Basis	Bilateral trade	Multi-lateral trade
Meaning	It is a trade agreement between two countries.	It is a trade agreement among more than two countries.
Negotiations	Separate negotiations are required to be done with different countries on one to one basis.	Negotiations are done with many countries together, which saves time.
Economic Cooperation	Encourages economic cooperation between two countries.	Encourages globalisation, integrating many countries of the world.

(iii) Differences between tariff and non-tariff barriers

Basis	Tariff barriers	Non-tariff barriers
Meaning	It refers to the taxes imposed on the imports by a country for providing protection to its domestic industries.	It refers to the restrictions other than taxes, imposed on imports by a country for providing protection to its domestic industries.
Purpose	Tariff barriers are allowed by the World Trade Organisation (WTO) to be imposed by its member countries, though at reasonable rates.	Non-tariff barriers like import quotas and voluntary export restraints are now abolished under WTO regime.
Nature	Tariff barriers are more explicit.	Non-tariff barriers are not explicit.

Question 38.
India has certain advantages which makes it a favourite outsourcing destination. What are these advantages? (NCERT)
Answer:
Most multinational corporations and even small companies are outsourcing their services to India because of the following advantages

Availability of cheap labour India is a country with a large population and thus, abundant supply of labour. Due to this reason, labour in India is available at low wage rates. This helps foreign companies in reducing cost of operation by outsourcing their business processes to India.
Skill and accuracy India has a wide pool of talent in the form of educated and trained youth who have the required skill and can work with accuracy in the business processes such as accounting, record keeping, IT consultancy etc.
Continuity and risk management Periods of high employee turnover add uncertainty to the operations of a company. Outsourcing will provide a level of continuity to the company while reducing the risk that a substandard level of operation would bring to the company.
Reduced overhead Overhead costs of performing back office functions are extremely high but due to the outsourcing these costs can be reduced.

Question 39.
What are the major factors responsible for the high growth of the service sector? (NCERT)
Answer:
The major contribution to GDP in India comes from the service sector which has grown impressively since liberalisation. The major factors responsible for the high growth of the service sector are as follows:

High income elasticity of demand It has been noticed that income elasticity of demand for services is more than one. Hence, the demand for services increases at a faster rate than demand for commodities, with the increase in income.
Technical and structural changes The technical and structural changes in the economy, have made it an attractive destination for outsourcing, contributing towards the growth of service sector.
Information technology revolution With the advent of the information technology revolution, it has become possible to deliver services over long distance at a reasonable cost. Thus, trading in services has increased worldwide, also benefitting India.
Economic reforms in 1991 Economic reforms initiated in 1991, increased demand for manufacturing industry, thereby benefitting the service sector also. Liberalisation of financial sector boosted the growth of financial services. Reforms in certain segments of infrastructure also contributed to the growth of services.

Question 40.
Briefly discuss the benefits of globalisation.
Answer:
Globalisation results in the following benefits for the economy

It helps the economy to adopt new and flexible methods of production.
It results in raising the productivity of the industrial sector by reducing capital output ratio, increasing exports, raising the efficiency of the workforce, modernising the technology used and increasing capital flow in the country.
It helps in restructuring the production units of the country towards the production of those goods which the country can produce effectively and efficiently with the use of the domestically available factors of production.
It helps to increase the flow of foreign capital into the country.
It helps to improve the quality of goods produced in the economy.
It helps to address the problem of unemployment.

Question 41.
Agricultural sector appears to be adversely affected by the reform process. Why? (NCERT)
Answer:
Due to following reasons, agricultural sector appears to be adversely affected by the reform process

Public investment in agricultural sector especially in infrastructure which includes irrigation, power, roads, market linkages and research and extension has been reduced in the reform period.
The removal of fertiliser subsidy has led to increase in the cost of production, which has severely affected the small and marginal farmers.
Various changes in policies like reduction in import duties on agricultural products, removal of Minimum Support Price (MSP) and lifting of quantitative restrictions on agricultural products have increased the threat of international competition to the Indian farmers.
Export-oriented policy strategies in agriculture have marked a shift from production for the domestic market towards production for the export market focusing on cash crops in lieu of production of foodgrains.