Class 12-commerce NCERT Solutions Economics Chapter 3: Liberalisation , Privatisation and Globalisation: An Appraisal

After independence, the economic policies adopted by the government were unable to achieve the desired level of economic growth. Also, the Indian economy faced several problems such as economic recession, fiscal deficit and unfavourable balance of payments. Hence, the New Economic Policy (NEP) was initiated in 1991 to tackle economic crisis and to speed up economic growth. Main reasons for introducing economic reforms in India:

1. Increase in fiscal deficit: Borrowings by the government to meet excess expenditure over revenue during a particular period of time is called fiscal deficit. In 1981-82, the fiscal deficit was 5.4% of GDP which increased to 8.4% of GDP in 1991. The government of India took a huge loan from the International Monetary Fund (IMF) and World Bank to meet this deficit. This increased the burden of the government to repay the loan with interest. Thus, India was caught in a debt trap. So, India opted to draft new economic reforms to cut non-developmental programmes and policies to get out of the debt trap.
2. Unfavourable balance of payments: Unfavourable balance of payments is the amount which is to be paid to the rest of the world in excess of the amount to be received from them. In 1981-82, the balance of payment deficit on current account was Rs 2,214 crore which had increased to Rs 17,367 crore in 1990-91. This was because India's imports were more than its exports. Hence, it depended on external debts to make payments for imports. Consequently, it increased the burden of the foreign debt service and initiated NEP to reduce the pressure of unfavourable balance of payments.
3. Reduction in foreign exchange reserves: Foreign exchange reserves declined from Rs 8151 crore in 1986-87 to Rs 6252 crore in 1989-90 because of unfavourable balance of payments. This situation further worsened to an extent that the Indian government mortgaged gold reserves to the World Bank to repay borrowed loans. This resulted in liberalisation and privatisation of the economy through economic reforms.
4. High inflation rate: Before the introduction of NEP, the average inflation rate was 16.7% as there was excess deficit financing, i.e. government borrowing from the Reserve Bank of India to meet its deficits. So, planners introduced economic reforms to combat the inflation rate.
5. Restricted licensing policy: The regulatory licensing policy had restricted new firms from entering the market and thus reduced the industrial growth of the country. In July 1991, a new industrial policy was introduced to abolish the policy of industrial licensing except for liquor, dangerous chemicals, defence equipment, cigars and industrial explosives.

Therefore, economic reforms were introduced to increase the growth rate of the economy and to tackle the economic recession situation in India.

The World Trade Organization (WTO) is an international organisation which came into existence on 1 January 1995. General Agreement on Trade and Tariffs (GATTS), General Agreement on Trade in Services (GATS) and agreements on Trade-Related Investment Measures (TRIMS) and Trade-Related Aspects of Intellectual Property Rights (TRIPS) are managed by WTO. It is very important for a country to become a member of the World Trade Organization (WTO) for the following reasons:

1. It gives an opportunity to trade with other member countries with fewer restrictions from them.
2. It facilitates international trade through removal of tariff and non-tariff barriers and provides access to all member countries. This substantially increases export opportunities and generates employment in the Indian economy.
3. Member countries of World Trade Organization (WTO) can raise their voice against false economic activities. It helps in bringing fair rules and regulations at a global level and protects the interests of developing nations.

Reserve Bank of India (RBI) controls all the financial institutions in India such as commercial banks, investment banks, stock exchange operations and the foreign exchange market. It fixes the limit for the bank to maintain reserves, interest rates and the pattern of lending to the public. Financial sector reforms focused on changing the role of RBI from controller to facilitator of the financial sector. So, the RBI facilitated free play of the market forces in the following ways:

1. Financial institutions were allowed to take decisions of the interest structure without permission from RBI.
2. The limit of foreign investment in the banking sector was raised up to 50%.
3. Some major banks were given authority to open new branches with the approval of RBI with respect to necessary conditions.
4. Liberalisation of commercial banks helped the financial sector to grow at a faster rate.
5. Commercial banks were permitted to generate resources within India and abroad through the capital market without affecting the interest of depositors.

Thus, the RBI performs the role of facilitator of the financial sector in India.

Commercial banks in India are controlled through the rules and regulations formulated by the Reserve Bank of India (RBI). RBI uses quantitative and qualitative instruments to control and regulate banking operations. 

Quantitative instruments of credit control are designed to regulate the total volume of credit in an economy. It affects all the sectors making use of bank credit. It includes cash reserve ratios, open market operation, repo rates, reverse repo rates and bank rates.

Qualitative instruments of credit control are designed to regulate the direction of credit. It affects the flow of credit for a particular use. It includes margin requirements, moral suasion and selective credit controls.

Thus, the RBI controls commercial banks by using its quantitative and qualitative instruments of credit controls. 

Devaluation of rupee is a decrease in the price of domestic currency in terms of all foreign currencies under a fixed exchange rate system. This situation prevails when the government increases the exchange rate under the fixed exchange rate system. For example, if the exchange rate rises from $1 = Rs 45 to $1 = Rs 60. It results in an increase in the demand for exports because domestic goods become cheaper in terms of foreign currency.  

During the time of foreign exchange reforms, Indian currency was devalued against foreign currencies. This led to an increase in the supply of foreign currency in India by exporting more goods and services.

(i) Strategic and Minority sale

(ii) Bilateral and Multi-lateral trade

(iii) Tariff and Non-tariff barriers

A tariff is a tax imposed on goods imported by a country to protect domestically produced goods from import competition. The imposition of tariffs increases the price of imported goods. This is because the custom duty levied by the government on such goods is an indirect tax, so its burden shifts to consumers in the form of higher prices. It makes foreign goods costlier than domestically produced goods. This practice protects domestic producers from foreign competition. Also, the government earns revenue in the form of foreign exchange by imposing tariffs on foreign goods. Tariffs can also be imposed on imported goods which are socially undesirable.

Quantitative restrictions are the limits imposed by countries on the quantity of goods and services which can be imported or exported. It is also a practice of regulating production of a particular good and service. It includes import quota and voluntary export restraints signed by the exporters of foreign countries. It discouraged imports of goods and enabled to protect domestic producers from highly competitive cheaper and technologically advanced goods produced by other countries. It led to the slow growth of industries, and therefore, the trade policy reforms abolished these restrictions from April 2001, except for the hazardous and socially undesirable goods.

Profit-making public sector undertakings are the main source of revenue of the government to be used in special welfare programmes. This enables to promote equality of income and wealth distribution among the public. The PSUs which operate with social motive such as railways, water supply and postal services should be retained in the public sector. However, many PSUs incur losses. These loss-making units should be privatised to protect the financial condition of the government. However, profit-making industries should remain in the public sector only because the resources of these units can be used for developmental activities. The government should retain strategic industries to prevent emergence of any monopoly in the privative sector.

Outsourcing is good for India because of the following reasons:

1. Outsourcing helped India to receive new ideas and technological knowledge from developed countries.
2. Employment generation is one of the most important aims of any developing nation. It helped to create new avenues for generating employment in India.
3. It improved human capital in India to a great extent with its positive effects. Employees received necessary training which enabled to develop skills and increased their scope for job advancement.
4. Infrastructure facilities in urban cities were developed to suit the requirements of BPO activities. This enabled India to benefit with high-end technology and best breed of infrastructure to remain a successful destination for outsourcing.

Developed nations opposed outsourcing because there is investment outflow to developing nations and unemployment level increases in developed countries.

India is a favourite outsourcing destination because of the following reasons:

1. Cheap labour: In highly populated India, the supply of labour is in surplus with a low wage rate. This enabled foreign companies to hire regular service from India and reduced the cost of operation.
2. Availability of skilled labour: Indians are highly educated and they are able to acquire necessary skills from a wide range of training programmes to perform the task in an efficient manner. They have better understanding of the language which is required for providing services such as voice-based business process, accounting, teaching and clinical advice.
3. Lower cost of raw material: The cost of raw material is less in India, so it attracted multinational companies to outsource their businesses to India.
4. Take advantage of government grants: Many foreign companies were attracted to India because the government provided grants to open up operations easily in India.
5. Stable government regulation: India's stable political environment attracted foreign investors to invest.
6. Focus on core business competencies: When the company grows, there is a need for research and marketing along with the existing production activity. India is a flexible outsourcing place to find the service provider to perform non-core activities so that the company can focus on core activities.   

The government gave navratna status to nine industries for substantial autonomy in its functioning. These are

1. Bharat Heavy Electricals Limited
2. Videsh Sanchar Nigam Limited
3. Indian Oil Corporation
4. Bharat Petroleum Corporation Limited
5. Steel Authority of India Limited
6. Indian Petrochemicals Corporation Limited
7. National Thermal Power Corporation Limited
8. Hindustan Petroleum Corporation Limited
9. Oil and Natural Gas Corporation

Later, this status was further extended to two more industries such as Mahanagar Telephone Nigam Limited and Indian Oil Limited. In 2009, the government declared maharatna and miniratna status to some industries to enhance efficiency and profitability.

Under the navratna policy, the government of India provided special treatment and positively affected the performance of these units. These units were given operational and managerial autonomy to run their businesses effectively and efficiently. Some of the navratna industries were major players in the global market. They produced goods at cheaper cost. These enterprises not only served as an important source of employment but also formed an infrastructural base which induced private investment in a wide range of areas of industrial growth. Thus, the navratna policy of the government has definitely contributed to the development of public sector undertakings in India.

Major factors responsible for the high growth of the service sector in India:

1. Economic reforms in 1991: Economic reforms introduced in 1991 allowed MNCs to enter the Indian market. It abolished restrictions on foreign investment and opened the doors for inflow of foreign capital. Government-liberalised policy enabled the increase of foreign direct investment drastically. It brought several changes in the Indian market.
2. Low labour cost: The cost of labour in India was comparatively lower than developed nations. This attracted multinational companies to outsource their business service activities in India. Hence, the service industry was rapidly grown with the companies who identified the importance of business outsourcing process such as training, teaching and marketing to improve their business performance.
3. Growth of Information Technology (IT): Growth of the service sector was highly stimulated by the growth of information technology (IT) in India. IT helped perform vital service businesses of the country. Highly skilled software resources are found in India. Many state governments such as Andhra Pradesh, Madhya Pradesh, Karnataka, Maharashtra and Delhi emphasised on the importance of the IT sector. 
4. Structural changes: Structural changes were taking place in the Indian economy, i.e. transformation from the primary sector to the tertiary sector. This transformation caused an increase in the demand for the service sector.
5. Market orientation: The manufacturing sector faced many changes in the competitive condition and demand-supply forces in the market. This diverted their attention from production to market orientation. Further, it forced manufacturing organisations to conduct marketing research, accounting, auditing, human resource management, and research and development institutions to analyse market conditions. These were entirely service-based functions. 

Reasons for the adverse effect on the growth of the agricultural sector:

1. Reduction in investment in agriculture: During the reform period, the government decreased the investment in irrigation, power, roads and market linkages. The government of India removed the subsidy on fertilisers which made farming comparatively costlier. Poor farmers were not able to buy fertilisers without subsidy. This further affected the growth of agriculture.
2. Significant changes in policies: After India became a member of the World Trade Organization, there was a significant change in policies. The government reduced the import duty on agricultural products and abolished the minimum support price for agricultural products. Indian farmers faced severe international competition as quantitative restrictions were withdrawn on agricultural products. Thus, the condition of Indian farmers became worse.
3. Export-oriented policy:  As the government adopted an export-oriented policy in agriculture, there was a drastic shift in the production for the domestic market to the international market. This led to commercialisation of agriculture, i.e. production of cash crops instead of food crops which further worsened the situation in the sense that India faced a shortage of food grains.

The industrial sector performed poorly in the reform period because of the following reasons:

1. Abolishment of tariff and non-tariff barriers on imported goods: The removal of tariff and non-tariff barriers made imported goods comparatively cheaper than domestically produced goods. It became difficult for domestic producers to compete with foreign producers. So, cheaper imports decreased the demand for domestic industrial goods.
2. Comparatively high cost of production: During economic reforms, there was inadequate investment in infrastructural facilities such as power supply. This made production costlier. On the other hand, foreign producers could sell their goods and services at cheaper prices with lower cost of production.
3. No access to global market: Non-tariff barriers restricted entry of Indian producers in the global market. This drastically affected the growth of the industrial sector during economic reforms.
4. Globalisation: This created the condition of free movement of goods and services from foreign countries but affected the growth of domestic industries and employment generation in India.

Thus, the industrial sector performed poorly in the reform period with the adverse effects of removing tariff and non-tariff barriers on imported goods.

Economic reforms opened up new avenues for domestic producers and provided access to the international market and technology. However, these reforms adversely affected social justice and welfare in the following ways:

1. Farmers and domestic producers were severely affected with international competition at the time of economic reforms.
2. The gaps between the rich and the poor increased widely because economic reforms focused on the development of metropolitan cities rather than backward areas.
3. The quality of consumption increased only for the rich, and thus, economic growth was unable to reach the poor sections of society.
4. Remote and rural areas remained underdeveloped as economic reforms benefited areas connected to urban cities.
5. Growth of the service sector increased significantly, but there was no growth in the agricultural sector.
6. The government of India focused more on the revival of the service sector than the agricultural sector even though about 65% of the total population depended on it.

Thus, economic reforms did not pay attention to social justice and welfare of the people in India.