Class 12 Economics Short Questions with Answers - Liberalisation, Privatisation & Globalisation

Q.1. When were economic reforms introduced in India?
Ans. Economic reforms were introduced in India in 1991. Economic reforms refer to all those measures that aim at rendering the economy more efficient, competitive and developed.

Q.2. List any two reasons which led to economic reforms in India.
Ans. The reasons which led to economic reforms in India include:
(i) Unfavourable Balance of Payment
(ii) Inflation
(iii) Falling foreign exchange reserves

Q.3. What are the three broad components of New Economic Policy, 1991?
Ans. The three broad components of New Economic Policy are:
(i) Liberalisation
(ii) Privatisation
(iii) Globalisation

Q.4. Define liberalisation.
Ans. Liberalisation means liberating the trade and industry of an economy from unnecessary restrictions and making the industries more competitive.

Q.5. State any two reforms introduced under liberalisation.
Ans. The reforms introduced under liberalisation include:
(i) Deregulation of industrial sector
(ii) Trade and investment policy reforms
(iii) Tax reforms

Q.6. What is fiscal policy?
Ans. It refers to the revenue and expenditure policy of the government to achieve balanced development in the economy.

Q.7. Define direct tax. Give two examples.
Ans. Direct taxes are those taxes levied immediately on the property and income of persons, and are paid directly by the consumers to the state. For example, income tax, property tax.

Q.8. Define indirect tax. Give two examples.
Ans. Indirect tax is a tax collected by an intermediary (seller) from the person who bears the ultimate economic burden of the tax (buyer). For example, excise duty, sales tax.

Q.9. What was the consequence of devaluation of rupee?
Ans. Devaluation of rupee led to huge inflow of foreign exchange in India.

Q.10. List the aims of trade policy reforms.
Ans. The aims of trade policy reforms were:
(i) Removal of quantitative restrictions
(ii) Reduction in tariff rates
(iii) Removal of import licensing

Q.11. For what categories of products was industrial licensing not abolished?
Ans. Industrial licensing was not abolished for product categories such as alcohol, cigarettes, hazardous chemicals, industrial explosives, electronics, aerospace and drugs and pharmaceuticals.

Q.12. Define privatisation.
Ans. Privatisation means the induction of private management and control in the public sector enterprises.

Q.13. What is disinvestment?
Ans. Disinvestment involves selling a part of the Public Sector Undertaking’s equity to the public to promote privatisation.

Q.14. State the purpose for undertaking disinvestment.
Ans. Disinvestment was undertaken:
(i) to maintain fiscal discipline; and
(ii) to facilitate modernisation.

Q.15. Explain the occurrence of events which led to introduction of economic reforms in India.
Ans. The inefficient management of the Indian economy led to huge amount of borrowings from national and international financial institutions. As a result, India met with an economic crisis in 1991 due to its failure to repay its borrowings from abroad. Crisis led to rise in prices of essential goods. In order to overcome the crisis, India approached IMF and World Bank for loan. The IMF and World Bank announced New Economic Policy as a condition to support Indian economy. Thus, India needed to introduce economic reforms:
(i) To maintain sufficient foreign exchange reserves
(ii) To keep inflation under control
(iii) To improve economic efficiency
(iv) To remove rigidities in various areas
(v) To increase international competitiveness

Q.16. Discuss the nature of government’s revenue and expenditure prior to economic reforms in India.
Ans. The government was not able to generate sufficient revenue from taxation. Lack of revenue was accompanied by problems such as unemployment, poverty and population explosion. The income from PSUs was also not very high to meet the growing expenditure. On the other hand, the government was spending a large share of its insufficient income on areas which did not provide immediate returns. Moreover, the foreign exchange borrowed from other countries and international financial institutions was spent on meeting consumption needs. The government neither made an attempt to reduce such reckless spending nor did it pay sufficient attention to increase its exports to meet growing imports’ expenditure.

Q.17. Write a short note on New Economic Policy, India.
Ans. The IMF and World Bank announced New Economic Policy as a condition to support Indian economy to overcome crisis. The NEP consisted of wide range of economic reforms. The core policies were intended to create a more competitive environment in the economy and remove the barriers to entry and growth of firms. This set of policies can broadly be classified into two groups:
(i) Stabilisation Measures: These are short-term measures aimed to correct the weaknesses developed in the balance of payments and to bring inflation under control.
(ii) Structural Reform Measures: These are long-term measures initiated to improve economic efficiency and increase its international competitiveness by eliminating the rigidities in various segments of the Indian economy.

Q.18. Explain the significance of liberalisation as an element of new economic reforms.
Ans. Liberalisation means liberating the trade and industry of an economy from unnecessary restrictions and making the industries more competitive. It implies making the economy free from direct or physical controls imposed by the government. Partial liberalisation was started in India’s economy in the decade of eighties. However, the New Economic Policy initiated in 1991 is more comprehensive and focused on reducing the controls by introducing liberal changes in both the external as well as domestic economy. Liberalisation process is based on the assumption that market forces could guide the economy in a more effective way than the government control.

Q.19. State the salient features of trade policy reforms.
Ans. The features of trade policy reforms are:
(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.20. How were the Indian industries regulated prior to reforms?
Ans. The Indian industries were regulated in the following ways prior to reforms:
(i) Obtaining industrial license from government officials was mandatory for every entrepreneur to start a firm, close a firm or to decide the quantity of goods that could be produced.
(ii) Private sector was not allowed in many industrial categories.
(iii) Production of some goods was reserved for only in small scale industries.
(iv) Government controlled prices determination and distribution of selected industrial products.

Q.21. Discuss the need for privatisation. What are the ways in which PSUs can be privatised?
Ans. Privatisation means the induction of private management and control in the public sector enterprises. With a view to improve the performance of the public sector enterprises, the wave of privatisation has spread all over the world. Need for privatisation was felt mainly because of the inefficiency of the public sector enterprises. Thus, the private sector was given a larger space to operate in the areas reserved exclusively for the public sector. Privatisation can be done by two ways:
(i) By withdrawal governmental control from the management and ownership of public sector companies; and
(ii) By outright sale of public sector companies.

Q.22. Explain the significance of globalisation in the light of today’s modern world.
Ans. Integration and unification of domestic economy with the world economy is known as globalisation. Globalisation is the outcome of liberalisation and privatisation. Due to the globalisation process, the unrestricted flow of goods and services, technology, capital and expertise was enabled among different countries of the world. It helps in fostering healthy foreign competition among nations. As a result of globalisation process, the government of India has decided to increase the share of foreign investment up to 51% in Indian companies and provided automatic sanction to collaborations and foreign investors for this much of investment.

Q.23. State the objective of WTO.
Ans. The WTO has the following objectives:
(i) To develop the multilateral trading system encompassing the GATT, the results of the Uruguay Round and all the agreements concluded under the GATT
(ii) To raise standard of living, real income, employment through expansion of trade
(iii) To promote optimum utilisation of the world’s resources
(iv) To secure the share of developing countries in the growth of international trade
(v) To eliminate discriminatory treatment in international trade
(vi) To ensure linkage among different trade policies, environmental policies and sustainable development

Q.24. Why do global countries prefer to outsource resources and services?
Ans. At present, many global countries prefer to outsource resources and services because:
(i) Outsourcing increases efficiency.
(ii) It releases capital expenditure, which can be used for other productive activities.
(iii) It enables countries to focus on their primary activities.

Q.25. Discuss the role of India as WTO member.
Ans. Being a founder member of WTO, India has been in the forefront of framing fair global rules, regulations and safeguards and advocating the interests of the developing world. India has kept its commitments towards liberalisation of trade by removing quantitative restrictions on imports and reducing tariff rates.