Class 12 Economics (Indian Economic Development) Chapter 3 Liberalisation, Privatisation and Globalisation: An Appraisal

Key Concept: Organization Successor

b) General Agreement on Trade and Tariff (GATT)

[Solution Description] According to the syllabus, the WTO succeeded the General Agreement on Trade and Tariff (GATT).

Key Concept: Exchange rate determination

b) It appreciates the currency due to higher demand from incoming investments.

[Solution Description] An increase in FDI results in more foreign currency flowing into the host country, increasing the supply of foreign currency and demand for the host country’s currency. This shift leads to an appreciation of the host country’s currency. Therefore, the value of the local currency rises due to increased demand.

Key Concept: Basic Impact

b) Decreased investment in infrastructure

[Solution Description] Since the economic reforms began in 1991, there has been a noticeable decline in public investment in agricultural infrastructure as focus shifted to other sectors.

Key Concept: Basic Concepts

c) To overcome the balance of payments crisis

[Solution Description] The main goal of the 1991 economic reforms in India was to address a balance of payments crisis and to stimulate growth by liberalizing the economy, promoting foreign investments, and reducing fiscal deficits.

Key Concept: Definition Recall

a) When a country imports more than it exports.

[Solution Description] A Balance of Payments (BoP) Deficit occurs when a country’s total imports and other expenditures exceed its exports and other income over a specific period.

Key Concept: Basic Definition

c) Liberalisation, Privatisation, Globalisation

[Solution Description] The LPG model refers to Liberalisation, Privatisation, and Globalisation. These are the three fundamental components introduced during the economic reforms to foster market-oriented growth.

Key Concept: Reform Background

c) Inefficient management of the economy

[Solution Description] The economic crisis in India in 1991 was primarily due to inefficient management of the economy, which led to high fiscal deficit, balance of payments problems, and depletion of foreign exchange reserves.

Key Concept: Trade Policy Reforms

b) Removal of import licensing

[Solution Description] The trade policy reforms in India included measures such as dismantling quantitative restrictions, reducing tariff rates, and removing import licensing. Therefore, option b), removal of import licensing, is one of the components of these reforms.

Key Concept: Impact on Government Revenue

c) It results in substantial losses for the government

[Solution Description] Undervaluation of public sector enterprises during privatisation leads to selling these assets at a lower price than their actual worth. This results in a substantial loss for the government because it does not receive the full potential revenue from these sales, which could have been utilized for various developmental projects or reducing deficits.

Key Concept: Organisation Role

b) To establish a rule-based trade regime

[Solution Description]

The main objective of the WTO in the context of globalisation is to establish a rule-based international trading system, which promotes free and fair trade among nations.

Key Concept: Disinvestment Outcomes

b) Improvement in public enterprise efficiencies

[Solution Description]

Disinvestment policy aimed at reducing government stake in public sector enterprises led to the generation of resources for the government. It also aimed at improving the efficiency of these enterprises by enhancing accountability through partial privatization.

Key Concept: Basic Definition

c) Selling part of the equity of PSEs to the public

[Solution Description] Disinvestment refers to the action taken by the government to reduce its stake or ownership in public sector enterprises (PSEs). It involves either selling a part of the equity holdings to the public or other entities but does not necessarily mean complete privatization.

Key Concept: Policy Analysis

c) Encouragement of private investment and growth in industries

[Solution Description] The deregulation of the industrial sector involved the abolishment of industrial licensing and opening up to private sector participation. This encouraged private investment and growth in industries as companies had more freedom to expand and innovate without needing approvals from the government for capacity expansion or new ventures.

Key Concept: Basic Facts

c) External debt

[Solution Description]

The primary causes of the 1991 economic crisis included rising external debt, a significant depletion of foreign exchange reserves, and increasing inflation rates. Among these, one major factor was the shortage of foreign exchange reserves.

Key Concept: Comparative Analysis

d) Navratnas are allowed to invest higher amounts without government approval than maharatnas.

[Solution Description] Maharatanas are given more significant financial and operational autonomy compared to navratnas, enabling them to make larger decisions independently.

Key Concept: Cause and Effect

b) Severe balance of payments deficit

[Solution Description]

India’s economic crisis in the late 1980s was primarily due to a severe balance of payments deficit, which means that the country was importing more goods and services than it was exporting, leading to a depletion of foreign exchange reserves. This situation left India unable to pay for its imports or service its external debt, forcing the government to seek financial assistance from international institutions like the IMF and the World Bank.

Key Concept: Financial Sector Reforms

b) Reduce RBI’s role as a regulator

[Solution Description] One of the major aims of financial sector reforms in India was to reduce the role of the Reserve Bank of India (RBI) as a regulator, allowing for more autonomy and market-driven operations within the banking sector.

Key Concept: Basic Concepts

c) To reduce barriers to trade and investment

[Solution Description] The primary goal of liberalisation in India was to remove restrictions and regulations in various sectors to allow more freedom for businesses, which would lead to increased efficiency and growth.

Key Concept: Policy Recall

d) Stabilisation measures

[Solution Description] Stabilisation measures were aimed at controlling rising prices and maintaining sufficient foreign exchange reserves during the New Economic Policy in India.

Key Concept: Crisis Management

c) Excessive government spending and large fiscal deficits

[Solution Description] The economic crisis of 1991 was primarily due to a balance of payments crisis, resulting from high fiscal deficits and low foreign exchange reserves. The country was unable to finance its imports or service its external debt obligations, leading to an urgent need for reforms.

Key Concept: Founding Year

c) 1995

[Solution Description]

The World Trade Organisation (WTO) was established as a successor to the General Agreement on Tariffs and Trade (GATT). According to the syllabus, the WTO was founded in 1995.

Key Concept: Cause and Effect

d) Increased competition for Indian farmers

[Solution Description] Reduced import duties on agricultural products have led to increased competition for Indian farmers from foreign markets.

Key Concept: Foreign Exchange Reforms

b) Exchange rates are determined by market forces such as demand and supply.

[Solution Description] One of the key outcomes of foreign exchange reforms was allowing the rupee to be determined by market forces. This means that exchange rates are influenced by supply and demand dynamics in the foreign exchange markets rather than being fixed or pegged by the government.

Key Concept: Policy Changes

c) Slowdown in industrial growth

[Solution Description] The reduction in import duties meant that foreign goods could enter the country at lower costs, leading to increased competition for domestic industries and contributing to industrial slowdown.

Key Concept: Sectoral Impact

c) Service Sector

[Solution Description] The 1991 economic reforms led to significant liberalization and openness in various sectors, including services, manufacturing, and technology. Among these, the service sector experienced substantial growth in FDI inflows. This includes industries such as IT, telecommunications, finance, and insurance, which benefitted greatly from deregulation and opening up to foreign investments.

Key Concept: Policy Comparison

b) They address short-term economic weaknesses

[Solution Description] Stabilisation measures are primarily aimed at addressing short-term economic weaknesses such as balance of payments crises and inflation, whereas structural reforms focus on long-term improvements in economic efficiency and competitiveness. Therefore, the key difference lies in their time horizons and objectives.

Key Concept: Disinvestment Criticism

c) It leads to undervaluation of public assets

[Solution Description] A common criticism of disinvestment is that it may lead to undervaluation of public assets. This occurs when strategic assets are sold below their potential market value, resulting in losses for the government.

Key Concept: Basic Definition

c) A mixed economy combining private and public sector roles

[Solution Description] India adopted a mixed economy model post-independence, which incorporates both capitalist and socialist elements. It allows for private sector participation while the government regulates key sectors.

Key Concept: Policy Implications

c) Better financial discipline and efficiency

[Solution Description] One potential outcome of disinvestment is increasing financial discipline within PSEs, as partial or full privatization often leads to more efficient management and resource allocation.

Key Concept: Definition Recall

b) To establish a rule-based trade regime for optimal resource utilisation

[Solution Description] The objective of the World Trade Organization (WTO) is to establish a rule-based trade regime that ensures the optimum utilisation of world resources.

Key Concept: Foreign Exchange Reforms

c) From 6 billion to 413 billion

[Solution Description] As per the provided information in the syllabus, the foreign exchange reserves increased from 6 billion in 1990-91 to 413 billion in 2018-19.

Key Concept: Globalisation Definition

b) Integration into the global economy

[Solution Description] Globalisation refers to the process where economies around the world integrate through trade, investment, technology, etc., leading to interconnected global markets.

Key Concept: Tax Reforms

c) Goods and Services Tax (GST)

[Solution Description] The Goods and Services Tax (GST) was introduced in India as a comprehensive tax reform to unify multiple indirect taxes into one system, thus simplifying tax procedures and making them more transparent and efficient.

Key Concept: Immediate Effects

b) Industrial

[Solution Description] One of the immediate effects of the New Economic Policy of 1991 was the deregulation of the industrial sector. This included reducing government restrictions on businesses, allowing greater freedom for private enterprises in production and investments.

Key Concept: Sectoral Contribution

c) Services

[Solution Description] In order to determine which sector had a higher contribution to GDP growth in 2004-05, we analyze historical data on GDP contributions by different sectors like Agriculture, Industry, and Services. The trend from previous years indicates that the Services sector began showing significant growth post-economic reforms in the early 1990s, with substantial increases by the mid-2000s. Therefore, the Services sector contributed more significantly to GDP growth in 2004-05 compared to the prior decade.

Key Concept: Definition Check

c) To balance growth and equity

[Solution Description] The government adjusts its policies primarily to achieve a balance between economic growth and equity. Economic growth focuses on increasing the wealth and resources of a nation, while equity ensures that this wealth is distributed fairly among its population.

Key Concept: Market Access

c) Provides greater market access to all member countries

[Solution Description]

The WTO enhances market access by ensuring that all member countries benefit from fair trading practices. This involves reducing barriers and providing a level playing field for all members, thereby encouraging open international markets accessible to everyone within the organization.

Key Concept: Tax Types

c) Direct and Indirect

[Solution Description] The syllabus mentions direct and indirect taxes as part of tax reforms. Direct taxes are levied directly on individuals or organizations, such as income tax, while indirect taxes include those applied to goods and services, like GST.

Key Concept: Basic Trends

c) Services

[Solution Description] Reviewing various reports, the services sector has consistently shown the highest GDP growth rate compared to agriculture and industry due to increased urbanization, technology advancement, and service demand.

Key Concept: Historical Context

c) Declining foreign exchange reserves

[Solution Description] In 1991, India faced a severe economic crisis characterized by declining foreign exchange reserves. To address this issue, India decided to adopt economic liberalization policies, which included opening up the economy to global markets.

Key Concept: Policy Measures

d) New Economic Policy

[Solution Description] In response to the 1991 economic crisis, the Indian government introduced the New Economic Policy, which included stabilization and structural reform measures to address the economic challenges.

Key Concept: Financial Sector Reforms

c) Facilitator

[Solution Description] The Reserve Bank of India (RBI) was initially a regulator and supervisor of banks. With reforms, its role shifted more towards facilitating rather than solely regulating financial transactions and policies to encourage growth.

Key Concept: Disinvestment Definition

b) Selling part of the equity of PSEs to the public

[Solution Description]

Disinvestment refers to the process of selling part of the equity of Public Sector Enterprises (PSEs) to the public or private entities. It involves reducing the government’s stake in these enterprises to raise funds or encourage wider public participation.

Key Concept: Technology Role

b) Facilitates real-time data transmission

[Solution Description] Modern telecommunication plays a crucial role in outsourcing by facilitating real-time data transmission, which allows seamless communication between companies across different geographical locations.

Key Concept: Crisis Analysis

b) Depletion of foreign exchange reserves

[Solution Description]

The high fiscal deficit in India during the late 1980s led to various economic issues. One major consequence was the depletion of foreign exchange reserves, which caused challenges in financing imports and weakened the country’s creditworthiness on an international scale. This situation eventually contributed to the balance of payments crisis in 1991.

Key Concept: GST Impact

c) Unified national market

[Solution Description] The implementation of the Goods and Services Tax (GST) aims to unify the fragmented tax structure by merging all indirect taxes into a single tax system. This creates a seamless national market, reducing barriers between states.

Key Concept: Policy Evaluation

b) Moderately effective

[Solution Description] Allowing higher foreign investment limits in banks can improve liquidity and capital adequacy, making financial institutions more resilient to economic shocks. This could be considered moderately effective since it provides immediate capital influx during crises without major structural changes.

Key Concept: Licensing Exceptions

b) Aerospace industry

[Solution Description] Industrial licensing was abolished for most industries, but exceptions include those with potential risks to health and safety, such as alcohol, hazardous chemicals, and explosives. Hence, electronics require licensing due to regulatory concerns.

Key Concept: Foreign Exchange Reforms

c) Devaluation of the rupee

[Solution Description] In 1991, the Government of India devalued the rupee as an immediate measure to address the severe balance of payments crisis. This action made Indian exports cheaper and more competitive in international markets.

Key Concept: Sector Identification

b) Financial sector

[Solution Description] Financial sector reforms aimed at reducing the Reserve Bank of India’s role from regulator to facilitator significantly impacted the financial sector by introducing more private and foreign banks into the market.

Key Concept: Reform Objective

b) To allow market-based exchange rate determination

[Solution Description] The main objective of allowing the market to determine the rupee value was to enable a market-based exchange rate system.