Long Questions with Answers - Liberalisation, Privatisation & Globalisation

Q.1. What was the need for economic reforms in India? Explain.
Ans: At the time of independence, building a large public sector was considered necessary because the private sector's capacity to undertake very large investments in areas such as infrastructure was limited. By the late 1980s this situation had changed: India had developed a stronger private sector and many of the arguments for an exclusively large public sector were no longer valid. The need for economic reforms (the New Economic Policy) in 1991 arose mainly for the following reasons:
(i) Increase in Fiscal Deficit: By 1991 government expenditure exceeded revenue by unsustainable margins. Fiscal deficit rose from 5.4 per cent of GDP in 1981-82 to 8.4 per cent of GDP in 1990-91. Interest payments on public debt absorbed a growing share of government expenditure - rising from about 10 per cent in 1980-81 to over 36 per cent in 1991 - putting India in danger of a debt trap. International lenders' confidence had declined, making fiscal correction necessary.
(ii) Adverse Balance of Payments: Imports grew faster than exports, creating pressure on foreign exchange. The current account deficit rose from ₹2,214 crore in 1980-81 to ₹17,367 crore in 1990-91. Correcting this imbalance required policy change to boost exports and conserve foreign exchange.
(iii) Gulf Crisis: The Iraq-Kuwait war of 1990-91 pushed up international oil prices and worsened India's balance of payments position, increasing the urgency of reform.
(iv) Rising Prices (Inflation): Inflation reached double digits in 1990-91, eroding investor confidence and increasing production costs. Capital outflows further strained the economy.
(v) Poor Performance of PSUs: From the 1980s many public sector undertakings began to incur heavy losses and became fiscal liabilities. This highlighted the need to improve efficiency and consider alternatives to exclusive public ownership.
(vi) Fall in Foreign Exchange Reserves: Reserves in 1990-91 fell to levels sufficient for barely two weeks of imports. Exports were weak and industrial output strained. India sought assistance from the World Bank and IMF; conditionality attached to support accelerated the adoption of the New Economic Policy.

Q.2. Explain the measures taken in various sectors for liberalisation of the economy.
Ans: The New Economic Policy introduced a range of liberalisation measures across sectors. Key measures are summarised below:
I. Industrial Sector Reforms
(i) The list of industries reserved for the public sector was cut down from 17 to 4. Even in the remaining reserved areas, private participation was allowed where appropriate.
(ii) The Monopolies and Restrictive Trade Practices (MRTP) Act was liberalised. Previously, firms with assets above ₹100 crore faced many restrictions; the concept of MRTP was effectively dismantled to allow larger firms freedom to expand.
(iii) Industrial licensing was largely abolished. Firms gained freedom to expand capacity and produce according to market demand, subject to environmental and other mandatory clearances.
(iv) The investment limit for small-scale units was raised (to around ₹1 crore), facilitating modernisation and capacity expansion.
(v) Automatic approval for Foreign Direct Investment (FDI) up to 51 per cent was allowed in many industries, simplifying inflows of foreign capital.
(vi) Industries were permitted to import machinery, raw materials and technology more freely to support modernisation.
II. Financial Sector Reforms
(i) The Reserve Bank of India's role shifted from pure controller to a more facilitative regulator, allowing banks and financial institutions greater operational freedom.
(ii) The cap on foreign investment in banks was raised (subject to conditions) to encourage capital inflows and modern banking practices.
(iii) Foreign Institutional Investors (FIIs), such as mutual funds and pension funds, were allowed to invest in Indian financial markets, increasing liquidity and depth.
III. Foreign Exchange Reforms
(i) The rupee was devalued in 1991 to improve competitiveness and attract foreign exchange.
(ii) A market-determined exchange rate regime was introduced so that the value of the rupee would be largely set by demand and supply in foreign exchange markets.
IV. Trade Policy Reforms
(i) Import duties were reduced to increase competitiveness in the domestic market.
(ii) Import quotas and many quantitative restrictions were abolished.
(iii) Import licensing was largely scrapped, simplifying trade procedures.
(iv) Export duties were removed on most goods to improve the competitiveness of Indian exports in world markets.

Q.3. What were the measures taken under economic reforms to promote privatisation? Explain.
Ans: The New Economic Policy promoted privatisation through several measures aimed at reducing the role of the state where it was inefficient and encouraging private participation:
(i) Contraction of the Public Sector: The number of industries reserved exclusively for the public sector was reduced (from 17 to 8 and then to 4). Sectors such as defence equipment, mining of atomic minerals, atomic energy and railway transport remained under exclusive public control; other sectors were opened to private participation.
(ii) Disinvestment: The government began selling part of its equity in inefficient or non-core public sector undertakings to private investors. The objectives were to improve financial health, encourage modernisation, raise resources and attract FDI/technology. It is important to note that not all PSUs were unviable; a set of high-performing PSUs (the 'Navaratnas') continued to play leading roles and, in some cases, retained public ownership while being given greater autonomy.

Q.4. Discuss the various strategies which laid the foundation stone for the process of globalisation in India.
Ans: Several strategic reforms since 1991 set the foundation for India's globalisation. The main strategies were:
(i) Foreign Exchange Reforms: Devaluation of the rupee in 1991 and the move to a market-determined exchange rate made Indian exports more competitive and integrated exchange rates with global markets.
(ii) Trade and Investment Policy Reforms: The economy was opened to foreign investment and technology transfer. The restrictive Foreign Exchange Regulation Act (FERA) was replaced by the more liberal Foreign Exchange Management Act (FEMA). Quantitative restrictions on imports of many goods were removed, tariff rates were reduced, and import licensing was abolished over time.
(iii) Reduction in Tariffs: Tariff barriers were substantially lowered, encouraging competition, improving resource allocation and integrating Indian producers with global markets.

Q.5. What are the merits and demerits globalisation?
Ans. Merits of Globalisation
(i) Globalisation provides access to advanced technology and inputs from abroad, improving both the quantity and quality of production.
(ii) It improves allocative efficiency by exposing domestic firms to competition.
(iii) Healthy international competition tends to raise product quality and offer consumers better choices at competitive prices.
(iv) India's share in world trade rose from about 0.5 per cent in 1990-91 to approximately 1.1 per cent by 2005, reflecting greater integration with world markets.
Demerits of Globalisation
(i) Small or less efficient domestic firms may not be able to compete with large multinational corporations and may be forced to merge or close down.
(ii) Large-scale entry of multinationals can lead to market concentration and potential monopolistic practices.
(iii) Globalisation can increase income inequality within a country because benefits accrue disproportionately to those with modern skills and capital.

Q.6. Discuss the benefits of WTO to India.
Ans: The World Trade Organization (WTO) has delivered several potential benefits to India:
(i) Reductions in tariff and non-tariff barriers help create a more dynamic international trading environment.
(ii) Improved market access under WTO rules supports India's liberal economic policies and export opportunities.
(iii) Estimates suggested that world income from trade liberalisation could rise substantially, creating larger global markets for Indian goods.
(iv) The WTO strengthens trade relations among member countries and promotes a rules-based trading order.
(v) Lower duties on raw materials, components and capital goods help Indian industry become more competitive.
(vi) TRIPs (Trade-Related Aspects of Intellectual Property Rights) include safeguards and transition arrangements intended to protect developing countries' interests.
(vii) As a founding member, India has increasingly asserted its interests within WTO bodies.
(viii) WTO agreements emphasise linkages between trade policy, environmental policy and sustainable development, encouraging balanced policies.

Q.7. Discuss the positive impacts of New Economic Policy.
Ans: The New Economic Policy produced several positive outcomes for India's economy:
(i) Higher Growth Rate: GDP growth picked up after reforms - from around 1 per cent in 1991-92 to higher sustained rates in subsequent years; by 2004-05 GDP growth reached about 7.6 per cent. Per capita income growth also improved (from about 1.5 per cent in 1991-92 to around 6.1 per cent by 2004-05).
(ii) Improved Industrial Competitiveness: Industrial policies encouraged modernisation and efficiency, helping some industries become more competitive internationally.
(iii) Control on Inflation: Annual inflation fell from very high levels (around 17 per cent in 1991) to much lower single-digit levels by the mid-2000s.
(iv) Reduction in Fiscal Deficit: Fiscal deficit as a percentage of GDP fell from about 8.5 per cent in 1990-91 to around 4.3 per cent in 2005-06.
(v) Poverty Reduction: Reforms created greater employment and self-employment opportunities; headcount poverty declined from around 36 per cent in 1993-94 to about 26.1 per cent in 1999-2000, with further reduction targeted in later plans.
(vi) Higher Efficiency: Reforms encouraged better management, adoption of technology, exit of inefficient units and more competitive behaviour.
(vii) Improved Balance of Payments: The current account deficit narrowed from about 3.2 per cent of GDP in 1990-91 to roughly 1.8 per cent in 2005-06, restoring some external confidence.
(viii) Increase in Investment: Liberalisation and restored investor confidence attracted both domestic and foreign investment into many sectors.

Q.8. What are the negative impacts of New Economic Policy? Explain.
Ans: The New Economic Policy also produced several adverse consequences and challenges:
(i) Relative Neglect of Agriculture: Reforms focused more on industry and services; agricultural growth did not accelerate sufficiently and many rural households continued to face vulnerability.
(ii) Mixed Industrial Performance: Some domestic industries faced stiff competition from cheaper imports; inadequate infrastructure and weak demand in certain sectors limited industrial revival.
(iii) Conditionality and External Pressure: Critics argue that accepting conditional assistance from institutions like the IMF and World Bank reduced policy autonomy in some areas.
(iv) Dependence on Foreign Finance: Increased reliance on foreign capital and technology exposed the economy to external shocks.
(v) Jobless Growth: Technological upgradation and capital-intensive investment patterns meant that growth did not always translate into proportionate employment gains in organised industry.
(vi) Equity Concerns: Benefits of reform were not uniformly distributed; growth with equity remained an unfulfilled objective in many regions and sectors.
(vii) Dependence on Foreign Technology: Greater dependence on imported technology and know-how raised concerns about domestic capability building.
(viii) Overemphasis on Private Sector: Greater encouragement to private enterprise sometimes reduced focus on welfare and public service objectives, causing concern for those who rely on publicly provided services.