NCERT Solutions for Class 11 Economics Chapter 3 - Liberalisation, Privatisation And Globalisation

1. Why were reforms introduced in India?

Ans: India implemented economic reforms in 1991 to counteract the economic crisis. The 1991 economic crisis was the culmination of previous years' policy failures. The Indian government was dealing with massive fiscal deficits, enormous balance of payment deficits, high inflation, and a sharp drop in foreign exchange reserves throughout that year. Economic changes became unavoidable as a result of the cumulative effect of all of these issues, and they were the only way to get the Indian economy out of this crisis.

The issues that triggered the necessity for economic reforms are as follows:

1. Huge Fiscal Deficit: Throughout the 1980s, the fiscal deficit grew as a result of large nondevelopment spending. As a result, borrowings were used to cover a large portion of the deficit both from external and domestic sources. 

As a result of the increasing borrowings, the national debt has grown, as have the interest payments. Between 1980-81 and 1990-91, the government's domestic borrowings climbed from 35% to 49.8% of GDP. In addition, interest payments amounted to 39.1% of the entire budget deficit. As a result, India's financial soundness in the world market deteriorated, and the country became engulfed in debt. As a result, urgent economic reforms were required.

2. Weak Balance of Payment (BOP) Situation: The difference between total exports and total imports is referred to as the Balance of Payment. India was unable to earn enough foreign cash through exports to cover its purchases due to the lack of competitiveness of Indian products. Between 1980-81 and 1990-91, the current account deficit grew from 1.35 %of GDP to 3.69%. The Indian government borrowed a large sum of money from the international market to cover its massive current account deficit. 

As a result, the external debt climbed from 12% to 23% of GDP over the same time period. Indian exports, on the other hand, were insufficient to generate enough foreign cash to meet these external debt obligations. The need for economic reforms was driven by the BOP problem.

3.  Sick Public Sector Undertakings: Public Sector Undertakings were assigned the primary responsibility of industrialization and the elimination of income disparity and poverty. However, in the years thereafter, PSUs have failed to accomplish these functions efficiently and effectively. The government's budget was burdened even more by the ill PSUs.

4. High Inflation Level: The central government was forced to monetize the fiscal deficits by borrowing from the RBI due to the huge fiscal deficits. The Reserve Bank of India (RBI) issued fresh money, raising inflation and making domestic commodities more expensive. Inflation climbed from 6.7 % per year in the 1980s to 10.3 % per year in 1990-91. In order to reduce inflation, the government in 1991 had no choice but to implement economic changes.

2. Why is it necessary to become a member of WTO?

Ans: The World Trade Organisation (WTO) was established in 1995 to replace the General Agreement on Tariffs and Trade (GATT). It is critical for every country to join the World Trade Organization (WTO) for the following reasons:

1. The World Trade Organization (WTO) ensures that all of its members have equitable access to the global market.

2. It argues for the elimination of tariff and non-tariff barriers, resulting in healthier and more equitable competition among diverse producers from various countries.

3. It gives its member countries more freedom to produce in huge quantities in order to meet the demands of people across international borders.

4. This opens up a lot of possibilities for making the best use of global resources while also increasing market access.

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

Ans: Prior to liberalisation, the Reserve Bank of India (RBI) regulated and controlled the financial industry, which included commercial banks, investment banks, stock exchange activities, and the foreign currency market. RBI has to change its function from controller to facilitator of the financial industry as a result of economic liberalisation and financial sector reforms. This means that financial institutions were free to make choices on a variety of issues without consulting the RBI. Private players were able to enter the banking sector as a result of this. The financial reforms were designed to foster private sector participation, enhance competition, and allow market forces to function in the banking sector. As a result, it can be claimed that prior to liberalisation, the RBI controlled financial sector operations, whereas after liberalisation, financial sector activities were mostly determined by market forces.

4. How is RBI controlling the commercial banks?

Ans: RBI regulates commercial banks through a variety of instruments, including the Statutory Liquidity Ratio (SLR), Cash Reserve Ratio (CRR), Bank Rate, Prime Lending Rate (PLR), Repo Rate, and Reverse Repo Rate, as well as setting interest rates and determining the nature of lending to different sectors.

These are the ratios and rates that the RBI has set, and which all commercial banks are required to follow or maintain. All of these policies regulate the operations of commercial banks as well as the money supply in the Indian economy.

5. What do you understand by devaluation of rupee?

Ans: A deliberate downward adjustment in the official exchange rate of the rupee relative to other currencies is known as devaluation. Devaluation is not the same as depreciation, which is a drop in the value of a currency in a floating exchange rate caused by supply and demand forces rather than government action. The Reserve Bank of India (RBI) controls the exchange rate of the rupee by buying and selling foreign currency, generally the US dollar, under the floating exchange rate system now in use in India. 

The depreciation of the rupee had two major consequences. The first revaluation reduced the cost of Indian exports to foreigners and boosted their competitiveness. Second, it increased the cost of imported goods for domestic customers, discouraging imports. As is clear, this was done in order to minimise India's current account deficit.

6 : Distinguish between the following 

(i) Strategic and Minority sale

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(ii) Bilateral and Multilateral trade 

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iii) Tariff and Non-tariff barriers.

Ans:

7. Why are tariffs imposed?

Ans: Tariffs are used to make imported goods from other countries more expensive than indigenous items, hence discouraging imports. These are in place to provide a safe and protective environment for domestic enterprises who are just getting started in comparison to their more technologically adept overseas rivals. Tariffs make it easier for domestic businesses to thrive and survive. Tariffs are also placed on commodities that the government considers to be socially undesirable and whose importation would place an undue strain on the country's limited foreign exchange reserves.

8. What is the meaning of quantitative restrictions?

Ans: Quantitative Restrictions (QRs) are limitations on the amount of commodities that can be imported or exported in the form of limits or quotas. Quantitative restrictions on imports are usually applied to discourage the import of foreign goods and reduce BOP deficits. QRs give domestic businesses a boost to survive, thrive, and expand in a more protective and less competitive market. It could take the shape of a monopoly, quota, or other quantitative means.

9. Those public sector undertakings which are making profits should be privatised. Do you agree with this view? Why?

Ans: A government revenue generator is a PSU that is efficient and profitable. However, if a PSU is inefficient and loses money, it places an undue load on the government's limited resources and may result in a budget deficit. Privatization of loss-making PSUs is appropriate, while privatisation of profit-making PSUs is not. Privatizing a public utility could result in the consolidation of monopoly power in private hands. Furthermore, some PSUs, such as water and railways, contribute to the nation's welfare and are designed to serve the public at a low cost.

10. Do you think outsourcing is good for India? Why are developed countries opposing it?

Ans: Outsourcing is beneficial to India. Outsourcing appears to be beneficial to India, as evidenced by the following points.

1. Employment: For a growing country like India, job creation is a critical goal, and outsourcing has shown to be a godsend in this regard. It results in the creation of new, higher-paying jobs.

2. Technical know-how transfer: Outsourcing allows for the transfer of complex and advanced technology ideas and technical know-how from developed to developing countries.

3. International credibility: Outsourcing to India improves India's international credibility. This raises the amount of money coming into India.

4. Encourages other sectors: Outsourcing benefits not just the service industry, but also other associated sectors such as the industrial and agricultural sectors, due to different backward and forward connections.

5. Assists in the growth and formation of human capital: Outsourcing aids in the development and formation of human capital by training and imparting advanced skills to employees, hence enhancing their future scope and appropriateness for high-ranking positions.

6. Eradication of poverty: Outsourcing enhances the level of living and the eradication of poverty in developing countries by producing more and better-paying jobs. It also aids in the reduction of poverty.

7. Increased infrastructure investment: Outsourcing to India necessitates the development of higher-quality infrastructure. This leads to the economy's modernisation and the government's increased investment in developing high-quality infrastructure and human resources.

However, while outsourcing to India is beneficial, developed countries oppose it since outsourcing causes a movement of income and investments from rich countries to developing countries. MNCs also contribute more to the host country's development than they do to their own. Outsourcing also reduces the number of jobs created in wealthy countries because the same jobs can be done for less money in developing countries. Furthermore, this results in job insecurity in rich countries, as jobs might be outsourced to poor countries at any time.

11. India has certain advantages which make it a favourite outsourcing destination. What are these advantages?

Ans: The following factors identify India as a preferred outsourcing destination for multinational corporations.

1. Easy Access to Low-Cost Labor: Because labour rates in India are lower than in industrialised countries, MNCs find it economically feasible to outsource their operations to India.

2. Reasonable Degree of Skills: Indians have a reasonable level of skills and procedures that require little training time and, as a result, are inexpensive to learn.

3. International worthiness and credibility: India has a reasonable level of international worthiness and credibility. This boosts international investors' confidence in India.

4. Untapped Market: India offers an untapped market for manufactured goods and services. This not only allows MNCs to tap into India's vast local market, but also to conquer the worldwide market, as the cost of production in India is lower.

5. Stable Political Climate: India's democratic political environment allows multinational corporations to flourish and grow in a stable and secure environment.

6. Lack of Competitive Competitors: The lack of fierce competition from Indian domestic businesses is the most critical factor for MNCs in India. This allows them to nearly have a monopoly in the Indian market.

7. Favorable Government Policies: The most essential factor that contributes to India's popularity as an outsourcing destination is the country's favourable government and tax policies. The Indian government provides MNCs with a variety of attractive incentives, including tax vacations, reduced tax rates, and simplified tax laws, among others. All of these laws allow multinational corporations to keep a significant amount of their earnings in the form of savings, which they may use to grow and expand their businesses.

12. Do you think the navaratna policy of the government helps in improving the performance of public sector undertakings in India? How?

Ans: The government granted the designation of 'navaratnas' to the following nine PSUs to increase efficiency, instil professionalism, and enable them to compete effectively in the market:

1. Indian Oil Corporation (Indian Oil Corporation) (IOCL)

2. Bharat Petroleum Corporation Limited (BPCL)

3. Hindustan Petroleum Corporation Limited (HPCL) 

4. Oil and Natural Gas Corporation (ONGC)

5. Steel Authority of India Limited (SAIL)

6. India Petrochemical Corporations Ltd (IPCL)

7. Bharat Heavy Electricals Ltd (BHEL)

8. National Thermal Power Corporation (NTPC)

9. Videsh Sanchar Nigam Ltd (VSNL)

These businesses were given more financial, managerial, and operational independence. This increased their productivity and efficiency. They've also become fiercely competitive, with some of them on their way to becoming global powerhouses. These businesses are financially self-sufficient and self-sufficient. As a result, the navaratna strategy has boosted the performance of these PSUs significantly.

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

Ans: The following are the important elements that contributed to India's rise in the service sector:

1. High demand for services as a final product: India was a relatively untapped market for the service industry. As a result, when the service industry began to expand as a result of business outsourcing from industrialised countries to India, there was a huge need for these services, particularly banking, computer services, advertising, and communication. As a result of the increasing demand, the service industry grew at a rapid pace.

2. Structural transformation: The Indian economy is undergoing structural transformation, which entails a shift in economic dependency from the primary to the tertiary sectors. Other sectors expanded their need for services as a result of this shift, boosting the service sector.

3. Liberalisation and economic reforms: The liberalisation and various economic changes that began in 1991 are also responsible for the expansion of the Indian service sector. Various constraints on the movement of international finance were reduced as a result of these reforms. As a result, India has seen a massive influx of foreign cash, foreign direct investments, and outsourcing. This aided the expansion of the service industry.

4. Increased trade volume: India's low tariff and non-tariff barriers to imports are partially to blame for the service sector's rapid expansion. Domestic products were able to engage and compete in international markets thanks to foreign trade reforms.

5. Low-cost labour and a reasonable level of skill in India: Developed countries considered outsourcing to India possible and profitable due to the availability of low-cost labour and a reasonable level of skilled manpower in India. Business outsourcing, in and of itself, is a significant boost to the service sector's growth.

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

Ans: The agricultural sector did not gain greatly from the 1991 economic reforms. The causes for the negative consequences of economic reforms on India's agriculture industry are as follows:

1. Public Investment Reduction: The Indian government has made significant cuts in providing enough irrigation, electricity, information systems, market linkages, and highways. Furthermore, agricultural research and development was not as well funded as it had been during the green revolution.

2. Liberalization and Import Duty Reduction on Agricultural Items: The Indian government cut import taxes on agricultural products in accordance with WTO agreements, forcing poor and marginal farmers to compete in international markets with their foreign counterparts. Poor farmers were harmed by stiff competition in the foreign market, as well as traditional farming techniques.

3. Shift to Cash Crops and Lack of Food Grains: Export-oriented production techniques shifted agricultural production away from food grains and toward currency crops such as cotton, jute, and other cash crops. This resulted in a decrease in the availability of food grains and, as a result, inferior nutritional values, lowering their productivity even further.

4. Subsidy Removal: Subsidies were removed from fertilisers, which increased the cost of farm production. This increased the cost of farming, putting poor and marginal farmers at a disadvantage.

5. Inflationary Pressures on Food Grains: The change to cash crop production, combined with the elimination of subsidies, put inflationary pressures on food grain prices. As a result, the agricultural sector's performance was harmed as the cost of producing food grains increased.

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

Ans: The industrial sector, like the agricultural sector, had a terrible result. The following factors may contribute to the industrial sector's poor performance:

1. Lack of Investment: Domestic enterprises could not compete with their developed overseas counterparts in terms of cost of production and quality of goods due to a lack of investment in infrastructure facilities particularly electricity supply.

2. Lower Import Prices: Lower import prices reduced demand for industrial production. Because of the reduction of import duties, imports from industrialised countries were cheaper. The demand for native goods fell as a result of these lower-cost, higher-quality overseas imports.

3. Vulnerable and Infant Domestic Industries: Domestic industries were given a safe haven to grow and expand during the pre-liberalisation period. However, at the time of liberalisation, domestic industries had not yet expanded to the amount that was expected, and as a result, they were unable to compete with multinational corporations. Domestic industries' reliance on traditional technologies that were neither cost-effective nor high-quality was a major factor in their slow growth. As a result, liberalisation had a negative impact on domestic industries.

4. High Non-tariff Barriers by Developed Countries: Due to the high non-tariff barriers erected by developed countries, it was extremely difficult to get entry to their markets. For example, the United States did not lift quota limits on textile imports from India and China.

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

Ans: Reforms have resulted in an increase in the income of the already wealthy. Only high-income groups saw an increase in the quality of their consumption; economic progress did not reach the poorer portions of society. 

India was able to enter and compete in foreign markets thanks to economic changes. This made it easier to move products and services across international borders. Furthermore, greater inflows of foreign money and investment into India have decreased the need for foreign exchange to finance the purchase of complex and advanced technology into the country. Furthermore, India's economic growth and GDP increased by many folds as a result of the outsourcing and service industry boom. On the other hand, agriculture, which employed a large section of the population, was unaffected by the economic reforms. The reforms also favoured the high-income population at the expense of their low-income counterparts. As a result, economic and social disparities between different segments of the population have grown and continue to grow.

Moreover, economic reforms focused on places that were well connected to major cities, leaving isolated and rural areas undeveloped. As a result, there were significant geographical differences. The rise in the service sector, particularly in the form of high-quality education, superior health-care facilities, information technology, tourism, multiplex theatres, and other amenities, was out of reach for the poor. The populace working in agriculture and related industries has yet to reap the benefits of improved technology and modern practises. As a result, economic reforms have failed to promote social justice and improve the wellbeing of India's general populace.

Class 11 Economics Chapter 3 Topics

Why Is it Mandatory for Every Country to Become a Member of the WTO?

WTO stands for World Trade Organisation which is a global trade organisation that was set up to give equal trade opportunities for all countries across the globe. WTO  has its headquarters in Geneva, Switzerland. At present, WTO has about 164 member countries. India officially became a member of the WTO on January 1, 1995. WTO works to abolish tax barriers between countries and encourage healthy competition in trade. It also plays a role in helping needy countries across the boundaries. Members of WTO will have an important role in framing trade policies, regulations, safeguarding boundaries and advocating reforms in developing nations. In this, WTO provides scope to share resources optimally across the globe.

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What is RBI and Explain Its Role in Other Commercial Banks?

RBI stands for Reserve Bank of India and it was established on April 1, 1934.  RBI is the central bank of India which deals with the issue and supply of Indian Rupees. All the other banks and financial organisations in India are controlled by norms and conditions introduced by RBI. Approval from RBI is needed by the banks for starting new branches. RBI holds a fixed amount of money in liquid form which is not in supply. RBI is also given the duty of fixing the interest rates of loans and deposits in the banks. In the case of demonetisation, the new notes are printed and supplied by RBI. Credit Rates for different purposes for each customer is fixed by them.

Why Were Reforms Introduced in India?

Economic reforms were introduced in India in 1991 under the name New Industrial Policy. The policy was a mitigation plan to save India from an economic crisis.  India had rising debts with foreign countries which led to an exponential increase in the price of essential goods. The economic reform abolished license to all projects except for 18 industries. The focus was shifted from cultivating staple crops to cultivating cash crops. The public sector was narrowed down since they were a liability and the private sector which the revenue generator was given opportunities in the core industries. The government took special care to ensure that foreign investment was encouraged in India. New initiatives were taken to ensure increased export of goods and regulations were reduced for Foreign trade.  

Hope you got some basic information about Economic Development in India. For detailed solutions, download NCERT Solutions for Class 11 Economics Chapter 3 free PDF. 

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Solved Example

Q1) Why Were the Economic Reforms Introduced in 1991?

1. To develop agriculture in India 

2. To increase jobs in India 

3. To mitigate the economic crisis in India

4. To increase transportation in India

Ans: 3) To mitigate the economic crisis in India

Fun Fact

India was the leading exporter of Pepper in Ancient times. There are references to pepper trade in Greek and Roman literature. Pepper was a spice native only to Indian Subcontinent. Colonisers first sought to find India only to harvest pepper from here, which later led to them plundering India for 200 years.