Class 11 Economics: Indian Economic Development Question with Answer Liberalisation, Privatisation and Globalisation

Categories: NCERT Class 11 Accountancy

Class 11 Economics: Indian Economic Development Question with Answer

Liberalisation, Privatisation and Globalisation

Q1: Why were reforms introduced in India?

Answer: Economic reforms were introduced in the year 1991 in India to combat economic crisis. Economic Crisis of 1991 was a culminated outcome of the policy failure in the preceding years. It was in that year the Indian government was experiencing huge fiscal deficits, large balance of payment deficits, high inflation level and an acute fall in the foreign exchange reserves. Moreover, the gulf crisis of 1990-91 led to an acute rise in the prices of fuel which further pushed up the inflation level. Because of the combined effect of all these factors, economic reforms became inevitable and were the only way to move Indian economy out of this crisis.

The following are the factors that necessitated the need for the economic reforms.

1. Huge Fiscal Deficit: Throughout 1980s, fiscal deficit was getting worse due to huge non-development expenditures. As a result, gross fiscal deficit rose from 5.7% of GDP to 6.6% of GDP during 1980-81 to 1990-91. Subsequently, a major portion of this deficit was financed by borrowings (both from external and domestic source). The increased borrowings resulted in increased public debt and mounting interest payment obligations. The domestic borrowings by government increased from 35% to 49.8% of GDP during 1980-81 to 1990-91. Moreover, the interest payments obligations accounted for 39.1% of total fiscal deficit. Consequently, India lost its financial worthiness in the international market and, fell in a debt trap. Thus, economic reforms were needed urgently.
2. Weak BOP Situation: BOP represents the excess of total amount of exports over total amount of imports. Due to lack of competitiveness of Indian products, India was not able to earn enough foreign exchange through exports to finance our imports. The current account deficit rose from 1.35% to 3.69% of GDP during 1980-81 to 1990-91. In order to finance this huge current account deficit, Indian government borrowed a huge amount from the international market. Consequently, the external debt increased from 12% to 23% of GDP during the same period. On the other hand, Indian exports were not potent enough to earn sufficient foreign exchange to repay these external debt obligations. This BOP crisis compelled the need for the economic reforms.
3. High level of Inflation: The high fiscal deficits forced the central government to monetise the fiscal deficits by borrowings from RBI. RBI printed new money that pushed up the inflation level, thereby, making the domestic goods more expensive. The rate of inflation rose from 6.7% p.a. to 10.3% p.a. during 1980s to 1990-91. In order to lower the inflation rate, government in 1991 had to opt for the economic reforms.
4. Sick PSUs: Public Sector Undertakings were assigned the prime role of industrialisation and removal of inequality of income and poverty. But the subsequent years witnessed the failure of PSUs to perform these roles efficiently and effectively. Instead of being a revenue generator for the central government, these became liability. The sick PSUs added an extra financial burden on the government's budget.

Q2: Why is it necessary to become a member of WTO?

Answer: 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.

Q3: Why did RBI have to change its role from controller to facilitator of financial sector in India?

Answer: Prior to liberalisation, RBI used to regulate and control the financial sector that includes financial institutions like commercial banks, investment banks, stock exchange operations and foreign exchange market. With the economic liberalisation and financial sector reforms, RBI needed to shift its role from a controller to facilitator of the financial sector. This implies that the financial organisations were free to make their own decisions on many matters without consulting the RBI. This opened up the gates of financial sectors for the private players. The main objective behind the financial reforms was to encourage private sector participation, increase competition and allowing market forces to operate in the financial sector. Thus, it can be said that before liberalisation, RBI was controlling the financial sector operations whereas in the post-liberalisation period, the financial sector operations were mostly based on the market forces.

Q4: How is RBI controlling the commercial banks?

Answer: RBI controls the commercial banks viavarious instruments like Statutory Liquidity Ratio (SLR), Cash Reserve Ratio (CRR), Bank Rate, Prime Lending (PLR), Repo Rate, Reverse Repo Rate and fixing the interest rates and deciding the nature of lending to various sectors. 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. All these measures control the commercials banks' operations and also control money supply in Indian economy.

Q5: What do you understand by devaluation of rupee?

Answer: Devaluation of Rupee refers to the fall in the value of rupee in terms of foreign currency. Specifically, it implies deliberate official lowering of the value of the country's currency with respect to the foreign currency. Devalutaion prevails under the fixed exchange rate regime. This implies that value of rupee has fallen and the value of foreign currency has risen. It means that now (after devaluation) one US$ can be exchanged for more rupees. This encourages exports and discourages imports as the former is cheaper now for foreign countries and the latter is expensive for Indians.

Q6: Why are tariffs imposed?

Answer: Tariffs are imposed to make imports from foreign countries relatively expensive than domestic goods, thereby, t discouraging imports indirectly. These are imposed to provide a safe and protective environment to the infant domestic firms from their technologically advanced foreign counterparts. Tariffs facilitate the domestic firms to survive and grow. Tariffs are also imposed on those goods that the government thinks to be socially unwanted and imports of which will exert unnecessary burden on the scarce foreign exchange reserves.

Q7: What is the meaning of quantitative restrictions?

Answer: Quantitative Restrictions (QRs) refer to the restrictions in the form of limits or quotas on the amount of commodities that can either be imported or exported. QRs usually on imports (refers to non-tariff measures) are imposed to discourage imports of foreign goods and to reduce Balance of Payment (BOP) deficits. The imposition of QRs provides impetus to the domestic firms to survive, grow and expand in a protective and lesser competitive environment.

Q8: Those public sector undertakings which are making profits should be privatised. Do you agree with this view? Why?

Answer: An efficient and profit earning PSU is a revenue generator for the government. 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 whereas it would not be fair to privatise a profit making PSU. Privatising a PSU may lead to concentration of monopoly power in the private hands. 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. 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. 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.