Students will discover how well the Indian economy was liberalized and accessible to international investment in this topic. This article is a detailed account of what happened before and throughout the procedure. Therefore, this chapter should provide enough answers for students seeking to comprehend the pre-1980 condition and how it influenced the Indian economy today.
Table of Contents
Liberalization, privatization and globalization class 11 notes
Backstory
Government spending started to outstrip revenue by such vast proportions in the late 1980s that paying the expenditures through borrowed funds became unsustainable. As a result, many vital commodities saw significant price increases. As a result, imports increased rapidly without keeping pace with export growth. As previously stated, foreign exchange reserves were insufficient to pay implications for more than two weeks. There was also inadequate foreign cash to pay the interest due to overseas lenders.
India addressed the International Bank for Reconstruction and Development (IBRD), often known as the World Bank, and got a loan of $7 billion to manage the crisis. To secure the loan, these foreign organisations expected India to liberalise and open up the markets by easing restrictions on the private market, lowering the government’s role in several areas, and eliminating trade barriers among India and other nations.
What is LPG in economics class 11?
LPG stands for Liberalization Privatization Globalization. Explained below :
Liberalization
Liberalization was implemented to remove economic limitations and open up various areas of the economy. Different liberalization policies included the following:
Industrial Sector Deregulation:
Previously, measures such as
- Industrial licensing
- Reserving specific industries for the public sector
- Laws only allow small-scale businesses in particular locations price-fixing restrictions.
Later, the reforms brought the following changes:
Almost all industrial licenses were removed, except for alcohol, cigarettes, hazardous chemicals, industrial explosives, electronics, aircraft, medications, and pharmaceuticals.
Only defense equipment, nuclear energy generation, and railway transportation were left to the public sector.
Many commodities manufactured by small-scale companies are no longer reserved.
Reforms in the Industrial Sector
Apart from five industries, the license of all the industries is canceled with these amendments.
alcohol,
cigarette,
military equipment,
industrial explosive, as well as
hazardous chemicals
The list of industries designated for government funding has been reduced from 17 to 8. The count of these was decreased to two in 2010-11.
Many formerly allocated production zones for small-scale companies were now de-reserved.
The lack of licensing indicates a lack of capacity constraints.
The producer may now choose what or how much to create.
Financial sector reforms
The RBI regulates the Indian financial sector, which comprises financial institutions such as commercial banks, investment banks, and foreign currency markets.
One significant goal of financial sector reform is to shift the RBI’s function from regulator to facilitator of the financial system.
It resulted in the formation of private sector banks, both domestic and international.
Foreign institutional investors, including merchant bankers, mutual funds, and pension funds, were also permitted to invest in Indian financial markets.
Tax Reforms: Tax reforms are concerned with changes to the government’s taxes and public expenditure policies, referred to as fiscal policy.
Individual income taxes have been gradually cut since it is perceived that high-income tax rates were a significant source of tax evasion. Moderate-income tax rates indeed stimulate savings and voluntary disclosure of income.
The company tax rate has steadily decreased from its previous high level.
Attempts have also been attempted to alter indirect taxes, such as commodity taxes, to assist the formation of a common national market for products and commodities.
Furthermore, many procedures have been simplified, and rates have been significantly reduced to promote improved compliance on the side of taxpayers.
Reforms in Foreign Exchange
Reforms in Taxation (Fiscal Reforms)
Since 1991, taxation on individual income has been reduced, and the tax system has been simplified. People frequently avoided taxes because they feared taxation’s high burden and complexity.
Reforms to commodity taxes have also been implemented. For example, the Goods and Services Tax, enacted in 2016 and 2017, was supposed to increase government income while preventing tax avoidance.
Reforms to Trade and Investment Policy
Import quotas, common in Foreign Trade Policy, were eliminated following deregulation.
Tariff charges have been reduced.
Privatization
Privatization can refer to various things, including transferring something from the public to the private sector. It is also a metonym for deregulation, which occurs when a heavily regulated private corporation or industry becomes less organized. In many cases, private organizations are charged with implementing government objectives or carrying out government assistance that was previously the vision of state-run companies. Some examples are law enforcement, revenue collecting, and jail administration.
Privatization Strategies Adopted:
Improving the environment for FDI inflows: Privatization aims to build a robust framework for FDI inflows. Increased FDI inflows improve the financial situation of the economy.
Increasing the efficiency of public-sector undertakings (PSUs): Delegating decision-making authority to PSUs improves their efficiency. Some companies were given the Navratna and Miniratna titles.
Globalization
After urbanization and globalization, Indian society is changing dramatically. As a result, economic policies have significantly impacted the formation of the economy’s core foundation.
The government’s economic policies also had an essential part in planning the level of assets, employment, earnings, and societal investments
.
Cross-border culture is one of the most important repercussions of globalisation on Indian society. It has had a significant influence on the cultural, social, political, or economic features of the country.
However, economic unification is essential in transforming a country’s economy into an international one.
The Benefits of Globalization in India
Increased employment: The creation of special economic zones (SEZ) has increased the number of new jobs accessible. Including an export processing zone (EPZ) center in India is beneficial in employing thousands of people.
Another critical element in India is the availability of inexpensive labor. This attribute encourages large Western corporations to hire workers from other areas, resulting in more employment.
Increase in compensation: As a result of the competence and knowledge that a foreign firm provides, the remuneration level has grown compared to local enterprises. This opportunity arose as a result of a change in the management structure.
Outsourcing
This globalization result refers to a system of sourcing commercial services from the outside globe.
Call centers, transcribing, clinical advice, teaching/coaching, BPOs, KPOs, accountancy, and banking services are examples of these services.
World Trade Organization (WTO)
The World Trade Organization (WTO) was established in 1995 as the successor organization to the General Agreement on Tariffs and Trade (GATT), an earlier global trade organization established in 1948.
GAAT was created in 1948 as the global trade organization with 23 countries to manage all multilateral trade agreements by offering equitable trading opportunities to all countries in the worldwide market.
It is anticipated to build a rule-based trading framework devoid of arbitrary trade barriers.
And expand service production and commerce to ensure optimal use of global resources and environmental protection.
The World Commerce Organization’s overarching goal is to enable trade to flow quickly, freely, somewhat, and predictably; to achieve this goal, The World Trade Organization (WTO) fulfills the following functions:
Managing World Trade Organization Trade Agreements.
- Serving as a forum for trade talks.
- resolving and handling commercial conflicts
- National trade policies are being monitored and reviewed.
- Technical help and training programs are provided to members to assist them with their trade policy.
- Training and technical support for underdeveloped nations
- Collaboration with International Organizations
Positive effects of the reform ( Liberalization, privatization and globalization )
Agriculture’s development has slowed over the reform era, while the industrial sector has seen oscillations and the service sector’s growth has increased.
The economy’s liberalization has resulted in rapid growth in foreign direct investment and foreign exchange reserves.
India is today regarded as a successful exporter of auto components, technical items, information technology software, and textiles.
Rising prices have also been kept in check.
Reforms’ Beneficial Effects
Agriculture’s development has slowed over the reform era, while the industrial sector has seen oscillations and the service sector’s growth has increased.
India has had steady robust GDP growth over the last two decades. This growth has been mostly driven by a rise in the service sector.
The economy’s liberalization has resulted in rapid growth in foreign direct investment and foreign exchange reserves.
India is today regarded as a successful exporter of auto components, technical items, information technology software, and textiles.
Rising prices have also been kept in check.
Demerits of the reform
Growth and Employment: While the GDP growth rate has grown over the reform era, adequate employment has not been produced.
Agriculture Reforms: Unlike the Green Revolution, state investment in agricultural infrastructure has declined.
The partial elimination of fertilizer subsidies has resulted in higher expenses for small and marginal farmers.
Indian farmers are facing increased competition from cheaper imported products due to import liberalization.
Food prices are under pressure due to a shift in attention to cash crops due to export orientation.
Industry Reforms: Industrial growth has also slowed, for a variety of causes, including:
Imports at a lower cost are replacing domestic demand.
Import competition has increased. It has a negative influence on domestic industry and employment creation.
Inadequate investment in infrastructure, such as power plants.
Liberalization, Privatization, And Globalization Summary
Late in the 1980s, government expenditure started to vastly outpace its receipts, making it impossible to cover the difference with borrowings. As a result, many necessary commodities saw a substantial price increase. Without keeping pace with the expansion of exports, imports increased dramatically. Foreign exchange reserves decreased to a degree where they could not cover implications for more than two weeks, as previously mentioned. In addition, there was not enough foreign currency to protect the interest owed to foreign lenders. No nation or foreign donor was also willing to lend money to India.
India requested a loan of $7 billion from the International Bank for Reconstruction and Development (IBRD), often known as the World Bank and the International Monetary Fund (IMF), to help handle the crisis. These foreign organizations anticipated that India would liberalize and open up the economy by lifting limitations on the private sector, reducing the role of the government in many areas, and erasing trade barriers with other nations to qualify for the loan.
Consequently, the government started several programs under globalization, privatization, and liberalization.
Liberalization: The liberation of the economy from direct or overt governmental restraints is referred to as liberalization.
The process of engaging the private sector in the ownership or management of a state-owned firm is known as privatization.
Globalization is a process that is characterized by greater economic interdependence, more openness, and deeper economic integration in the global economy.
Economics chapter 3 class 11 NCERT solutions
Here are all the NCERT answers for Chapter 3 of Economics for Class 11. This solution includes all of the problems, explanations, and answers for Class 11’s first chapter, “Of Liberalization, Privatization, and Globalization.” You must have come across chapter 3 of the NCERT textbook for Economics if you are a Class 11 student studying liberalization, privatization, and globalization. After reviewing the lesson, you must seek answers to the lesson’s questions’. You can get all of the NCERT solutions for Economics Chapter 3: Liberalization, Privatization, and Globalization here in one convenient location.
When were Liberalization, Privatization, and Globalization
In 1991, the new Industrial Policy was declared. The three essential facets of the policy are globalization, privatization, and liberalization.
Liberalization, privatization and globalization Question and Answers
Q1. Why were reforms introduced in India?
Ans. Following are the reforms implemented in 1991 :
1. To manage the country’s current economic crisis
2. The fiscal deficit was at its worst during that period, resulting in rising national debt.
3. India was experiencing a poor Balance of Payments (BOP). Moreover, with the demise of the former Soviet Union and the Gulf War, borrowing from the international market became necessary.
4. Public sector undertakings were founded to create jobs and alleviate poverty. However, the PSUs turned out to be loss-making institutions, burdening the country’s already fragile economy.
5. Because of the high level of budget imbalance, the RBI increased the inflation rate, making things more expensive and sparking a movement from within.
Q2. Why is membership in the WTO required?
Ans: In 1995, the World Trade Organization (WTO) was formed to replace the General Agreement on Tariffs and Trade (GATT). Every country must join the World Trade Organization (WTO) for the following reasons:
1. The World Trade Organization (WTO) assures all members equal access to the global market.
2. It advocates for removing tariff and non-tariff barriers, resulting in more healthy and equal competition among producers from various nations.
3. It allows its member nations to produce in large numbers to fulfill the needs of people across international borders.
4. This offers many opportunities for making the most use of global resources while expanding market access.
Q3. Why did RBI have to change its role from the controller to facilitator of the financial sector in India?
(RBI) is in charge of all financial institutions in India, including commercial banks, investment banks, stock exchange activities, and the foreign exchange market. It establishes the bank’s reserve requirement, interest rates, and lending pattern to the public. Financial sector reforms focused on shifting the RBI’s role from that of a controller to that of a facilitator of the financial industry. As a result, the RBI promoted the free play of market forces in the following ways:
Financial firms were permitted to make interest-rate choices without seeking clearance from the RBI.
The restriction on foreign investment in the banking industry has been raised to 50%.
With the consent of the RBI, several big banks were given the power to create additional branches subject to specific criteria.
Commercial bank liberalization aided the financial sector’s rapid growth.
Commercial banks were allowed to earn resources in India and abroad through the capital market without jeopardizing depositors’ interests.
As a result, the RBI is a facilitator of the Indian financial industry.
Q4. How is RBI controlling the commercial banks?
The RBI is in charge of determining several ratios such as the SLR (Statutory Liquid Ratio), Repo Rate, Cash Reserve Ratio (CRR), Reverse Repo Rate, and Prime Lending Rate (PLR). It sets the interest rate for house loans and other loans in the banking industry, and all commercial banks must follow it. (RBI) is the country’s central bank, in charge of managing the nation’s money supply.
Q5. What do you understand about the devaluation of the rupee?
Devaluation is a planned downward adjustment in the official exchange rate of the rupee relative to other currencies. Depreciation, on the other hand, is a reduction in the value of a coin under a floating exchange rate driven by supply and demand dynamics rather than government intervention. Under India’s floating exchange rate system, the Reserve Bank of India (RBI) manages the rupee’s exchange rate by buying and selling foreign currency, most notably the US dollar.
The rupee’s devaluation has two critical repercussions. First, the initial revaluation brought down the cost of Indian exports to foreigners and increased their competitiveness. Second, it raised the price of imported items for domestic buyers, deterring them from importing.
Q6. Distinguish between the following
(i) Strategic and Minority sale
(ii) Bilateral and Multilateral trade
(iii) Tariff and Non-tariff barriers.
(i)
| Strategic sale | Minority sale |
| It refers to selling a 51 percent interest in a PSU to the highest bidder from the private sector. | It refers to selling an interest in a PSU to a private-sector bidder for less than or equal to 49 percent. |
| The principal stakeholder has received a change in ownership. | Because the government owns 51 percent or more of the company, ownership remains with the government. |
(ii)
| Bilateral trade | Multilateral trade |
| Goods exchange between two countries to promote commerce | It is a commercial treaty among three or more countries. |
| It gives both participating nations equal possibilities. | Provides the same opportunities to all trade treaty participants. |
(iii)
| Tariff barrier | Non-tariff barrier |
| It is a tax levied by the government to safeguard established enterprises. | Barriers are government policies and actions that impede international trade. |
| Tariff barriers boost product prices but have little influence on demand. | It has a more significant impact on increasing demand. |
Q7. Why are tariffs imposed?
Ans. A tariff is a tariff levied on a country’s imported products to safeguard domestically produced items from import competition. Imported items become more expensive when tariffs are imposed. The government’s custom duty on such things is an indirect tax. Hence the burden is passed on to consumers in the form of increased costs.
Moreover, it raises the price of imported items relative to domestically produced goods. This method safeguards native manufacturers from international competition. In addition, by taxes on foreign goods, the government generates money in the form of foreign exchange.
Q8. What is the meaning of quantitative restriction?
Ans. Quantitative constraints entailed limitations on the amounts produced or obtained. For example, during the pre-liberalization period in India, the government dictated how much output a firm might create.
Q9. Those public sector undertakings that are making profits should be privatized. Do you agree with this view? Why?
Ans. There are two sides to this story. One point of view is that if a PSU is profitable, there is no reason to privatize it because the institution generates cash for the government. Another point of view is that the government should concentrate on governance since it is what it is meant to do. The government has no business making bread or even automobiles. As a result, in the long term, all PSUs should be privatized. Since we are currently in the post-reform period, most people would support the privatization of all PSUs.
Q10. Do you think outsourcing is good for India? Why are developed countries opposing it?
Ans. Outsourcing is beneficial to India for the following reasons:
First, outsourcing enabled India to access developed countries’ fresh ideas and technological expertise.
One of the essential goals of every developing country is to create jobs. It aided in the development of new possibilities for job creation in India.
With its favorable benefits, it significantly boosted human capital in India. Employees received the necessary training, which allowed them to build abilities and expand their opportunities for promotion.
Infrastructure facilities in metropolitan areas were created to meet the needs of BPO activity. These Infrastructural facilities enabled India to benefit from cutting-edge technology and the most extraordinary breed of infrastructure, allowing it to remain a thriving outsourcing destination.
Q11. India has several benefits that make it a popular outsourcing location. What are these benefits??
Ans. Outsourcing has created several new job possibilities in India. Jobs that were once unheard of have become commonplace, contributing to increased people’s discretionary income in India. As a result, outsourcing is beneficial to India. However, several individuals have lost employment in many industrialized nations, including the United States, since India is an appealing outsourcing destination. As a result, unemployment rates in wealthy nations have risen. As a result, rich countries are opposed to outsourcing.
Q12. Do you believe the government’s navaratna strategy helps to improve the efficiency of public firms in India? How?
Ans. The government designated the following nine PSUs as ‘navaratnas’ to promote productivity promote professionalism, and allow them to compete successfully in the market:
Indian Oil Corporation (Indian Oil Corporation) is a company that produces oil in India (IOCL)
Bharat Petroleum Corporation Limited (BPCL) (BPCL)
Hindustan Petroleum Corporation Limited (HPCL) (HPCL)
Natural Gas and Oil Corporation (ONGC)
Steel Authority of India Ltd. (SAIL)
India Petrochemical Corporations Ltd. is the sixth company on the list (IPCL)
Bharat Heavy Electricals Limited (BHEL)
National Thermal Power Company (NTPC)
The Videsh Sanchar Nigam Ltd. (VSNL)
These companies were allowed more economical, managerial, and practical autonomy. Their production and efficiency improved as a result. They’ve also grown highly competitive, with several poised to become global powerhouses.
Q13. What are the major factors responsible for the high growth of the service sector?
Ans. The following are the primary causes driving India’s service sector’s rapid growth:
The most recent advancements in telecoms.
Education awareness implies a rising number of competent individuals, which supplies much-needed human resources.
Various multinational corporations outsource business processes to India.
Q14. Agriculture sector appears to be adversely affected by the reform process. Why?
Ans. Reasons for the agriculture sector’s slow growth include:
Reduction in agricultural investment: During the reform period, the government reduced investment in irrigation, power, highways, and market links. The Indian government eliminated the fertilizer subsidy, making farming more expensive. Without support, poor farmers were unable to purchase fertilizer. Agriculture’s expansion was hampered as a result.
Considerable policy changes: Following India’s admission to the World Trade Organization, there was a significant shift in policy. The administration cut agricultural import duties and eliminated the minimum support price for farm products. As quantitative limits on agricultural goods were lifted, Indian farmers faced intense worldwide competition. As a result, the situation of Indian farmers deteriorated.
Q15. Why has the industrial sector performed poorly in the reform period?
Ans. Several variables are to blame for the industrial sector’s poor performance throughout the reform. First, reform could only encourage the free flow of commodities, resulting in lower import prices. Cheaper imports have made it difficult for locally manufactured items to compete. Furthermore, adequate infrastructure development, such as electricity generation, road network, dedicated freight corridor, and so on, could not occur throughout the reform period.
Q16. Discuss economic reforms in India regarding social justice and welfare.
Ans. The income of the already rich has increased as a result of reforms. However, only those with a high income witnessed an improvement in the quality of their consumption; economic advancement did not reach the poorest segments of society.
Economic changes enabled India to join and participate in foreign markets. Thus, simplifying the flow of goods and people across international boundaries. Furthermore, the increased influx of FDI money and investment into India has reduced the country’s demand for foreign currency to finance the purchase of complicated and advanced technologies. Furthermore, due to the development of outsourcing and the service sector, India’s economic growth and GDP expanded several times. On the other hand, agriculture employed a considerable portion of the population remained untouched. The changes also favored the upper-income people at the expense of the lower-income population. As a result, economic and social imbalances between different parts of the population have increased and will continue to grow.
