Chapter 3

Liberalisation, Privatisation and Globalisation-An Appraisal

1. Why were reforms introduced in India?

The economic reforms were introduced in the year 1991 in India :

1. to combat economic crisis, relating to its external debt
2. Various rules and plans introduced by the government for
controlling and regulating the economy resulted in hampering the
process of growth and development National income was
growing at the rate of 0.8%.
3. India was highly indebted country and government was not able
to make repayments of loan from abroad.
4. Foreign exchange reserves collapsed as import is more than the
export.
5. The inflation level reached 16.8% which ultimately increases the
prices of essential goods.
6. India took loan from IMF and World bank to the extent of 7 billion
dollars. In pressure, government have to liberalise its market.
2. Why is it necessary to become a member of WTO?

It is important for any country to become a member of WTO (World

Trade Organisation) for the following reasons:

1. WTO provides equal opportunities to all its member countries to

trade in the international market.

2. It provides its member countries with larger scope to produce at

large scale to cater to the needs of people across the international
boundaries. This provides ample scope to utilise world resources
optimally and provides greater market accessibility.

3. It advocates for the removal of tariff and non-tariff barriers, thereby,

promoting healthier and fairer competition among different producers
of different countries.

4. The countries of similar economic conditions being members of

WTO can raise their voice to safeguards their common interests.

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

After economic liberalisation and financial sector reforms,

 1. RBI needed to shift its role from a controller to facilitator of the
financial sector.
2. This means that the financial sector may be allowed to take
decisions on many matters without consulting the RBI.
3. The reform policies led to the establishment of private sector
banks, Indian as well as foreign.

4. How is RBI controlling the commercial banks?

1. All the banks in India are controlled through various norms and
regulations of the RBI.
2. It controls the commercial banks via various instruments like
Statutory Liquidity Ratio (SLR), Cash Reserve Ratio (CRR), Bank
Rate, Repo Rate, Reverse Repo Rate and fixing the interest rates
and deciding the nature of lending to various sectors.
3. These are those ratios and rates that are fixed by RBI and it is
mandatory for all the commercial banks to follow or maintain
these rates.

5. What do you understand by devaluation of rupee?

Devaluation of Rupee refers to the fall in the value of rupee in

terms of foreign currency. This means that value of rupee has
fallen and the value of foreign currency has risen.

6. Distinguish between the following

(i) Strategic and Minority sale

Strategic Sale Minority Sale

Strategic Sale refers to the sale of 51% or Minority Sale refers to the sale of less
(i) more stake of a PSU to the private sector than 49% stake of a PSU to the
who bids the highest. private sector.
The ownership of PSU is handed over to The ownership of PSU still remains
(ii) the private sector. with the government as it holds 51%
of stakes.

(ii) Bilateral and Multi-lateral trade

Bilateral Trade Multilateral Trade

It is a trade agreement between two It is a trade agreement among more than
(i)
countries two countries.
(ii) This is an agreement that provides equal This is an agreement that provides equal
opportunities to both the countries. opportunities to all the member
 countries in the international market

(iii) Tariff and Non-tariff barriers.

Tariff Barriers Non-tariff Barriers

It refers to the tax imposed on the It refers to the restrictions other than
(i) imports by the country to protect its taxes, imposed on imports by the
domestic industries. country.
It includes custom duties, export-import It includes quotes and licenses.
(ii)
duties
It is imposed on the physical units (like It is imposed on the quantity and quality
(iii) per tonne) or on value of the goods of the goods imported.
imported.

7. Why are tariffs imposed?

Tariffs are imposed to make imports from foreign countries relatively

expensive than domestic goods. This discourage imports and protect
domestically produced goods.

8. What is the meaning of quantitative restrictions?

Quantitative restrictions are specific limits imposed by countries on

the quantity or value of goods that can be imported or exported. It can
be in the form of a quota, a monopoly or any other quantitative means.

9. Those public sector undertakings which are making profits should be

privatized. Do you agree with this view? Why?

1. The PSUs which are making profits should not be privatized because
they are revenue generator for the government.
2. But if a PSU is an inefficient and loss making one, then the same
PSU exerts unnecessary burden on the government's scarce revenues
and further may lead to budget deficit. The loss making PSUs should be
privatised.
3. Further some of the PSUs like, water, railways, etc. enhance the
welfare of nation and is meant to serve general public at a very
nominal cost.
4. Privatisation of such important PSUs will lead to loss of welfare of
poor people. Hence, only less important PSUs should be privatised
while leaving the core and important PSUs to be owned by the public
sector.
5. Instead of privatisation of profit-making PSUs, government can allow
more degree of autonomy and accountability in their operations, which
will not only increase their productivity and efficiency but also
enhance their competitiveness with their private counterparts.
10. Do you think outsourcing is good for India? Why are developed
countries opposing it?

Yes, outsourcing is good for India because:

1. Employment: For a developing country like India, employment

generation is an important objective and outsourcing proves to
be a boon for creating more employment opportunities. It leads to
generation of newer and higher paying jobs
2. Exchange of technical know-how: Outsourcing enables the
exchange of ideas and technical know-how of sophisticated and
advanced technology from developed to developing countries.
3. International worthiness: Outsourcing to India also enhances
India's international worthiness credibility. This increases the
inflow of investment to India
4. Encourages other sectors: Outsourcing not only benefits the
service sector but also affects other related sectors like
industrial and agricultural sector through various backward and
forward linkages.
5. Contributes to human capital formation: Outsourcing helps in the
development and formation of human capital by training,
imparting them with advanced skills, thereby, increasing their
future scope and their suitability for high ranked jobs
6. Better standard of living and eradication of poverty: By creating
more and higher paying jobs, outsourcing improves the standard
and quality of living of the people in the developing countries. It
also helps in reducing poverty.
7. Greater infrastructural investment: Outsourcing to India requires
better quality infrastructure. This leads to the modernisation of
the economy and larger investment by the government to develop
quality infrastructure and develop quality human capital.

Developed countries are opposing this because outsourcing leads to

the outflow of investments and funds from the developed countries to
the developing nations. Also the MNCs contribute more to the
development of the host country than the home country. It also
resulting in unemployment in the countries where it is located.

11. India has certain advantages which make it a favourite outsourcing

destination. What are these advantages?
The advantages which make it a favourite outsourcing destination are:

1. Easy Availability of Cheap Labour: As the wage rates in India are

comparatively lower than that of in the developed countries, MNCs find
it economically feasible to outsource their business in India.

2. Skills: Indians have reasonable degree of skills and techniques also

knowledge of international language, English.

3. Stable Political Environment: The democratic political environment

in India provides a stable and secured environment to the MNCs to
expand and grow.
4. Availability of raw material at cheaper rate: India is well enriched in
natural resources. This ensures the MNCs cheap availability of raw
material and undisturbed and perennial supply of raw materials. This
enables proper and smooth operation of MNCs.

12. Do you think the navaratna policy of the government helps in

improving the performance of public sector undertakings in
India? How?

The government has decided to give special treatment to some of the

important profit making PSUs. The granting of navaratna status
resulted in better performance of these companies.

1. They were given greater managerial and operational autonomy, in

taking various decisions to run the company efficiently and thus
increase their profits.
2. They also became highly competitive and some of them are
becoming the giant global players.
Therefore, the navaratna policy has certainly improved the
performance of these PSUs.

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

There are various factors which are responsible for the high growth of
the service sector:
1. Reforms introduced in 1991, ramoves various restrictions on the
movement of international finance which led to huge inflow of foreign
capital, foreign direct investments and outsourcing to India. This
encouraged the service sector growth.

2. Availability of cheap labour and and skilled labour at lower wage

rate.

3. The revolution in Information Technology (IT) field in India has also

played a major role in the high growth of the service sector.

4. Indian economy is experiencing structural transformation that

implies shift of economic dependence from primary to tertiary sector.
Due to this transformation, there was increased demand of services by
other sectors which y boosted the service sector.

14. Agriculture sector appears to be adversely affected by the reform

process. Why?

The economic reforms of 1991 have not been able to benefit

agriculture, where the growth rate has been decelerating. The reasons
are:
1. Public investment in agriculture sector especially in infrastructure,
which includes irrigation, power, roads market linkages and research
and extension, has been reduced in the reform period.

2. Removal of subsidies on fertilizers pushed up the cost of production

of agriculture. This made farming more expensive, thereby, adversely
affecting the poor and marginal farmers.

3. Since the commencement of WTO, this sector has been experiencing

a number of policy changes such as reduction in import duties on
agricultural products, removal of minimum support price and lifting of
quantitative restrictions on agricultural products.

4. The export-oriented growth has favored increased production of cash crops

rather than food grains. This has increased the prices of food grains.

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

The industrial sector has performed poorly in the reform period due to:

1. The cheaper imports of foreign goods have replaced the demand of

domestic goods.

2. Due to lack of infrastructure, the domestic firms could not compete

with their developed foreign counterparts in terms of cost of
production and quality of goods.

3. Developing countries like India still does not have the access to
global markets of developed countries due to high non-tariff barriers.

4. The domestic industries were given protection during the pre-

liberalised period but at the time of liberalisation, the domestic
industries were still not developed up to the extent it was thought and
consequently, they could not compete with the multi-national
companies.

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

If the economic reforms have given us an opportunity in terms of

greater access to global markets and high technology, it has also
compromised the welfare of people belonging to poor section.

1. It devastated the local producers as well as the farmers.

2. It results in the greater inequalities of income and wealth.

3. Further, the economic reforms developed the areas that were well
connected with the metropolitan cities leaving the remote and rural
area undeveloped.

4. It results in growth of service sector of India especially in the form

of quality education, superior health care facilities, IT, tourism,
multiplex cinemas etc. were out of the reach of the poor section of the
population.