Q.1. What was the need for economic reforms in India? Explain.
Ans. At the time of independence, building a large public sector was almost unavoidable. The capabilities of India’s private sector could not be visualised at that time to make very large investments in the areas like infrastructure. However, by late 1980s the situation had completely changed. By that time, India had developed a strong private sector. Therefore, the argument of a large public sector was no longer valid. Need for economic reforms or New Economic Policy was observed mainly due to following reasons:
(i) Increase in Fiscal Deficit: By 1991, government expenditures began to exceed its revenue by such large margins, which became unsustainable. Fiscal deficit was increasing year after year due to increase in its non-developmental expenditure. Fiscal deficit was 5.4 per cent of GDP in 1981–82, which increased to 8.4 per cent of GDP in 1990–91. Interest payments on public debt were amounted to 10 per cent of total government expenditure in 1980–81 which increased to 36.4 per cent in 1991. Thus, government was fast heading for debt trap. India had lost the faith of international institutions like World Bank and IMF. Hence, it was necessary to begin new economic reforms in the country.
(ii) Adverse Balance of Payments: Balance of payments is an account of all the payments and receipts of one country with other countries. Imports grew at a very high rate unable to match growth in exports. Thus, India faced adverse balance of payment. The country needed foreign exchange to pay for the import of goods and services. The deficit in the balance of payment on current was ₹ 2,214 crore in 1980–81 which rose to ₹ 17,367 crore in 1990–91. Therefore, it was necessary to adopt New Economic Policy to correct the deficit in the Balance of Payment.
(iii) Gulf Crisis: Prices of petroleum increased in 1990–91 due to Iraq War. This Gulf crisis further worsened the balance of payment position of India.
(iv) Rise in Prices: During 1990–91, the level of inflation in the country reached to double digit. As a result, foreign investors had lost their confidence in Indian economy and national capital resources were flying out of the country. Cost of production had taken an upward jump due to high rate of inflation.
(v) Poor Performance of the Public Sector Undertaking: After 1980, most of the public sector undertakings had suffered huge losses. As a result, PSUs have become a liability to the nation. It became inevitable for the government to adopt New Economic Policy.
(vi) Fall in Foreign Exchange Reserves: During 1990–91, foreign exchange reserves declined to a level that was not adequate for imports worth more than two weeks; exports declined and industrial output of the country was crippled. India had to approach the World Bank and IMF to provide huge loans of $7 billion to bail India out of the crisis. The IMF and World Bank announced New Economic Policy as a condition to support Indian economy to overcome crisis.
Q.2. Explain the measures taken in various sectors for liberalisation of the economy.
Ans. The following measures had been taken for liberalisation of Indian economy under New Economic Policy:
I. Industrial Sector Reforms
(i) The number of industries reserved for the public sector was reduced from 17 to 4 and in the areas reserved for public sector; private sector’s participation was to be allowed.
(ii) Monopolies and Restrictive Trade Practices (MRTP) Act was liberalised. According to the provision of MRTP Act, all those firms having assets worth more than 100 crore were used to be declared as MRTP firms and were subjected to many restrictions. Now, the concept of MRTP has been abolished. These firms are now free to expand themselves.
(iii) Under the policy of liberalisation, industries are now free for expansion and production. Producers are now free to produce anything on the basis of demand in the market. Licensing was abolished and as a result, firms are free to expand their production capacity.
(iv) Investment limit of the small scale industries has been raised to ₹ one crore to enable them for modernisation.
(v) Automatic approval was granted for Foreign Direct Investment up to 51 per cent in a wide range of industries.
(vi) Under liberalisation, Indian industries were allowed to buy machinery and raw material from abroad. Government has also allowed the industries to import technology for their modernisation from abroad.
II. Financial Sector Reforms
(i) RBI’s role had been changed from controller to facilitator in India to allow the financial sector to take decisions on various matters without consulting the RBI.
(ii) The limit for foreign investment in banks was raised to around 50 per cent.
(iii) Foreign Institutional Investors (FII) such as merchant bankers, mutual funds and pension funds are now allowed to invest in Indian financial markets.
III. Foreign Exchange Reforms
(i) The rupee was devalued against foreign currencies to attract huge inflow of foreign exchange.
(ii) The government adopted free market mechanism for the determination of rupee value in the foreign exchange market.
IV. Trade Policy Reforms
(i) There was moderation/reduction in import duty to enhance competitiveness in the domestic market.
(ii) Import quotas had been completely abolished.
(iii) Policy of import licensing had almost been scrapped.
(iv) Export duty had been withdrawn to enhance competitiveness of Indian goods in the international market.
Q.3. What were the measures taken under economic reforms to promote privatisation? Explain.
Ans. The following measures were taken to promote privatisation under New Economic Policy:
(i) Contraction of Public Sector : Earlier for the economic development of India, great importance was given to public sector. However, most of the objectives of economic development have remained unfulfilled. As a result, policy of contraction of public sector was adopted under economic reforms. Number of industries reserved exclusively for public sector was reduced from 17 to 8 and further to 4, viz. defence equipment, mining of atomic minerals, atomic energy and railways transports. All other industries form the part of private sector.
(ii) Disinvestments: In the liberalisation process, the part of the equity of inefficient public sector undertakings was sold to the private sector (public). This is also known as disinvestments. The purpose of disinvestments was mainly to improve financial position and facilitate modernisation. It was thought that disinvestments could provide strong impetus to the inflow of Foreign Direct Investment. It should be remembered that all of our PSUs are not inefficient. Our Nine PSUs, which are known as ‘Navaratnas’ of Indian Economy are still playing a leading role in the world market.
Q.4. Discuss the various strategies which laid the foundation stone for the process of globalisation in India.
Ans. The various strategies which laid the foundation stone for the process of globalisation in India are discussed below:
(i) Foreign Exchange Reforms: In 1991, rupee had to be devalued against foreign currencies in order to correct the widening deficit in the balance of trade. That was the first and most important reform in the external sector which was made in the foreign exchange market. At present, the value of rupee is determined by market on the basis of demand and supply of exports and imports and by FDI or FIIs.
(ii) Trade and Investment Policy Reforms: Since 1991, the door for foreign investment and technology transfer are opened. Foreign Exchange Regulation Act (FERA), which intended to control the inflow and outflow of foreign exchange, was replaced by a more liberal Foreign Exchange Management Act (FEMA). Quantitative restrictions on imports of agricultural products and manufactured consumer goods were also fully removed from April, 2001. Since 1991, tariff rules are reduced and the licensing procedures for imports are removed.
(iii) Reduction in tariff: In order to encourage competitiveness, tariff barriers have been withdrawn on most goods traded between India and rest of the world.
Q.5. What are the merits and demerits globalisation?
Ans. Merits of Globalisation
(i) Globalisation provides exposure to international economies and helps availing advanced technology and inputs from across the globe. This improves quantity as well as quality of production.
(ii) It helps in improving efficiency of allocation of resources due to more competitive environment.
(iii) It encourages healthy competition among nations, which helps in improving the quality of goods and services at a competitive price.
(iv) India’s share in the world trade has increased from 0.5 per cent in 1990–91 to 1.1 per cent in 2005.
Demerits of Globalisation
(i) Many industries (especially small units) may not be able to compete at par with big MNCs. As a result, they might be forced to merge with global enterprises or face a closure. (ii) Large scale establishment of MNC’s in the developing countries like India might result in monopolies.
(iii) Globalisation may lead to income inequalities within the country as it will benefit only those who possess latest skills and technology.
Q.6. Discuss the benefits of WTO to India.
Ans. The following are the important benefits emerging from the WTO agreement:
(i) Due to reductions in tariff and non-tariff barriers, there will be development of trading environment leading to dynamism.
(ii) Countries like India will be helped in their liberal economic policies due to increase in market access opportunities under the WTO.
(iii) It is estimated that world income from trade liberalisation could increase from $110 billion to $510 billion annually.
(iv) The WTO will strengthen the trade relations among member countries. It will lead to a new trade order.
(v) India will gain in the long run due to low duties on raw-material, components and capital goods.
(vi) The TRIPs are not going to harm India and other developing countries because of providing safeguards.
(vii) India, being a founder member country, has already started to assert itself in the meeting of the WTO council.
(viii) The WTO agreement will emphasise linkages between trade policies, environmental policies and sustainable development.
Q.7. Discuss the positive impacts of New Economic Policy.
Ans. The positive impacts of New Economic Policy are discussed below:
(i) Increase in the Rate of Economic Growth: The annual growth rate of GDP in 1991–92 was slightly more than 1 per cent, which rose to 7.6 per cent in 2004–05. With the adoption of New Economic Policy, there has been increase in the rate of economic growth. The rate of growth of per capita income in 1991–92 was 1.5 per cent, which rose to 6.1 per cent in 2004–05. However, in comparison to the growth rate of many other Asian or world countries, India’s performance has been rather dismal.
(ii) Increase in the Competitiveness of Industrial Sector : Indian industrial sector stood nowhere in the international world. After adoption of New Economic Policy, efforts were taken to stimulate the industrial activity so that it becomes competitive and profitable.
(iii) Control on Prices: With the adoption of New Economic Policy, annual rate of inflation has been reduced from 17 per cent in 1991 to below 5 per cent in 2005–06.
(iv) Fall in the Fiscal Deficit: Fiscal deficit as a percentage of GDP has fallen from 8.5 per cent in 1990–91 to 4.3 per cent in 2005–06.
(v) Reduction in Poverty and Inequality: Poverty and inequalities in the distribution of wealth have not been reduced in India during the planning era. However, after the New Economic Policy regime, people are getting more opportunities of self-employment, which are expected to reduce these problems. Population below poverty line was 36 per cent in 1993–94, which reduced to 26.1 per cent in 1999–2000. Twelfth plan projection is to reduce poverty below 10 per cent.
(vi) Increase in the Efficiency: New Economic Policy is adding to the efficiency of the Indian economy in many ways viz., scientific management, improvement in technology, closure of inefficient units, freedom from controls and restrictions, competition and co-operation, etc.
(vii) Decline in Deficit of Balance of Payment: Current account deficit of balance of payment has been declined from 3.2 per cent of GDP in 1990–91 to 1.8 per cent in 2005–06. Thus, New Economic Policy has raised the global confidence in the Indian economy.
(viii) Increase in Investment: After adoption of New Economic Policy, the international confidence on the economy has been restored. Foreign investors are now showing active interest in investment in many sectors.
Q.8. What are the negative impacts of New Economic Policy? Explain.
Ans. The following are the negative impacts of New Economic Policy:
(i) Less Importance to Agriculture: The New Economic Policy has not been able to benefit agriculture, where the growth rate has been decelerating. The New Economic Policy concerns itself largely with industrial development and modernisation. Most of the Indian population is engaged in agriculture. Thus, it would be wrong to think that the Indian economy can be developed entirely on the basis of industrialisation.
(ii) Less Development of Industrial Sector : Indian industrial sector has not been developed significantly during New Economic Policy as industrial growth has also recorded a slow-down. This is due to the decreasing demand of industrial products because of cheaper imports, inadequate investment in infrastructure, etc. Globalisation is creating conditions for free movement of goods and services, which adversely affected the local industries and employment. India’s share in the world exports is also negligible.
(iii) Pressure of IMF and World Bank: The policy reform is a complete surrender to the World Bank and IMF. The government has surrendered its sovereignty in order to procure huge amount of loan from many international agencies.
(iv) More Dependence on Foreign Debt: During the regime of economic reforms, the dependence on foreign debt has been increased which is not a good sign for the Indian economy.
(v) Jobless Growth: The New Economic Policy by its programmes of technological upgradation has promoted capital intensive technologies and as a consequence, employment opportunities have further declined. This process accompanied with increase in direct foreign investment has resulted in capital intensive pattern of growth and as a result, it has promoted jobless growth in organised industry.
(vi) Failure of Economic Reforms on Growth as well as Equity: There is no balanced development in the Indian economy. As a result, economic reforms have failed in achieving the goal of ‘growth with equity’.
(vii) Dependence on Foreign Technology and Investment: New Economic Reforms have accorded more dependence on foreign technology and investment, which is harmful for the domestic economy.
(viii) Undue Importance to Private Sector: Undue importance has been given to private sector and has discouraged public sector. As a result, the condition of poor in India is not going to be better. Public welfare motive is lagging behind due to the adoption of New Economic Policy.