Class 12 Economics Chapter 3 ECONOMIC REFORMS SINCE 1991
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NCERT Notes for Class 12 Economics Chapter 3 ECONOMIC REFORMS SINCE 1991
Class 12 Economics Chapter 3 ECONOMIC REFORMS SINCE 1991
LIBERALISATION, PRIVATISATION AND GLOBALISATION: AN APPRAISAL
BACKGROUND -1991 policy
- The origin of the financial crisis can be traced from the inefficient management of the Indian economy in the 1980s.
- Expenditure is more than income; the government borrows to finance the deficit from banks and also from people within the country and from international financial institutions.
- The government was spending a large share of its income on areas which do not provide immediate returns such as the social sector and defence.
- The income from public sector undertakings was also not very high to meet the growing expenditure.
- Foreign exchange, borrowed from other countries and international financial institutions, was spent on meeting consumption needs.
- In the late 1980s, government expenditure began to exceed its revenue by large margins.
- No country or international funder was willing to lend to India.
- India approached the International Bank for Reconstruction and Development (IBRD), popularly known as World Bank and the International Monetary Fund (IMF),and received $7 billion as loan to manage the crisis.( The International Bank for Reconstruction and Development (IBRD) and International Monetary Fund (IMF) were established by delegates at the Bretton Woods Conference in 1944 and became operational in 1946.)
- New Economic Policy (NEP) consisted of two groups: the stabilisation measures and the structural reform measures.
- Stabilisation measures are short-term measures, intended to correct some of the weaknesses in the balance of payments and to bring inflation under control.
- Structural reform policies are long-term measures, aimed at improving the efficiency of the economy and increasing its international competitiveness by removing the rigidities in various segments of the Indian economy.
Liberalisation, Privatisations and Globalisation.(LPG)
- Liberalisation was introduced to put an end to the restrictions and open various sectors of the economy.
- Sectors which received greater attention in and after 1991 are in industrial sector, financial sector, tax reforms, foreign exchange markets and trade and investment .
(I) Deregulation of Industrial Sector
In India, regulatory mechanisms were enforced in various ways:
- Industrial licensing.
- Private sector was not allowed in many industries
- some goods could be produced only in small-scale industries, and
- controls on price fixation and distribution of selected industrial products.
- The reform policies introduced in and after 1991 removed so many restrictions.
- Industrial licensing was abolished for almost all products. (except alcohol, cigarettes, hazardous chemicals etc.), The only industries which are now reserved for the public sector are a part of defence equipment, atomic energy generation and railway transport. Many goods produced by small-scale industries have now been dereserved. In many industries, the market has been allowed to determine the prices.
(II) Financial Sector Reforms
- Financial sector includes financial institutions, such as commercial banks, investment banks, stock exchange operations and foreign exchange market.
- The financial sector in India is regulated by the Reserve Bank of India (RBI).
- One of the major aims of financial sector reforms is to reduce the role of RBI from regulator to facilitator of financial sector.
- The reform policies led to the establishment of private sector banks, Indian as well as foreign.
- Foreign Institutional Investors (FII), such as merchant bankers, mutual funds and pension funds, are now allowed to invest in Indian financial markets.
- Foreign investment limit in banks was raised to around 50 per cent. Those banks which fulfill certain conditions have been given freedom to set up new branches without the approval of the RBI.
(III) Tax Reforms
- Tax reforms are concerned with the reforms in the government’s taxation and public expenditure policies, which are collectively known as fiscal policy.
- There are two types of taxes: direct and indirect. Direct taxes consist of taxes on incomes of individuals, as well as, profits of business enterprises. Indirect taxes are taxes levied on commodities.
- The rate of corporation tax, which was very high earlier, has been gradually reduced.
- Recently, the Parliament passed a law, Goods and Services Tax Act 2016, to simplify and introduce a unified indirect tax system in India. This law came into effect from July 2017.
- GST expected to generate additional revenue for the government, reduce tax evasion and create ‘one nation, one tax and one market’.
(IV) Foreign Exchange Reforms
- The first important reform in the external sector was made in the foreign exchange market. In 1991, as an immediate measure to resolve the balance of payments crisis, the rupee was devalued (decrease in the value of home currency in the international market due to the deliberate action taken by the government) against foreign currencies.
- It also set the tone to free the determination of rupee value in the foreign exchange market from government control.
- It led to an increase in the inflow of foreign exchange.
- Now, more often markets determine exchange rates based on the demand and supply of foreign exchange.
(V) Trade and Investment Policy Reforms:
- Liberalisation of trade and investment policy was initiated to increase international competitiveness of industrial production and also foreign investments and technology into the economy.
- The aim was also to promote the efficiency of local industries and adoption of modern technologies.
- In order to protect domestic industries, India was following a regime of quantitative restrictions on import.
- The trade policy reforms aimed at
- dismantling of quantitative restrictions on imports and exports
- reduction of tariff rates and
- removal of licensing procedures for imports.
- Import licensing was abolished except in case of hazardous and environmentally sensitive industries.
- Quantitative restrictions on imports of manufactured consumer goods and agricultural products were also fully removed from April 2001.
- Export duties have been removed to increase the competitive position of Indian goods in the international markets.
- It implies shedding of the ownership or management of a government owned enterprise.
- Government companies are converted into private companies in two ways
(i) by withdrawal of the government from ownership and management of public sector companies and or (ii) by outright sale of public sector companies.
Privatisation of the public sector enterprises by selling off part of the equity of PSEs to the public is known as disinvestment.
Some examples of public enterprises with Maharatnas , Navratnas and Miniratnas status are :
Maharatnas – (a) Indian Oil Corporation Limited, and (b) Steel Authority of India Limited
Navratnas – (a) Hindustan Aeronautics Limited, (b) Mahanagar Telephone Nigam Limited
Miniratnas – (a) Bharat Sanchar Nigam Limited; (b) Airport Authority of India and (c) Indian Railway Catering and Tourism Corporation Limited.
- Globalization is generally refers to the integration of the economy of the country with the world economy.
- It involves creation of networks and activities which eliminates economic, social and geographical boundaries.
- Outsourcing is one of the important outcomes of the globalisation process. In outsourcing, a company hires regular service from external sources.
- As a form of economic activity, outsourcing has widely enlarged.
- Many of the services such as voice-based business processes (popularly known as BPO or call centres), record keeping, accountancy, banking services, music recording, film editing, book transcription, clinical advice etc outsourced by companies in developed countries to India.
- The low wage rates and availability of skilled manpower in India have made it a destination for global outsourcing in the post-reform period.
World Trade Organisation (WTO)
- The WTO was founded in 1995 as the successor organization to the General Agreement on Trade and Tariff (GATT).
- GATT was established in 1948.
- WTO is expected to establish a rule-based trading regime in which nations cannot place arbitrary restrictions on trade.
- The purpose of WTO is to enlarge production and trade of services, to ensure optimum utilization of world resources and to protect the environment.
- The WTO agreements cover trade in goods as well as services to facilitate international trade (bilateral and multilateral) through removal of tariff as well as non-tariff barriers between member countries.
- As an important member of WTO, India has been in the forefront of framing fair global rules, regulations and advocating the interests of the developing world.
INDIAN ECONOMY DURING REFORMS: AN ASSESSMENT
- In economics, the growth of an economy is measured by the Gross Domestic Product(GDP).
- The post–1991 India witnessed a rapid growth in GDP on a continual basis for two decades.
- During the reform period, the growth of agriculture has declined. While the industrial sector was in fluctuation, the growth of the service sector has improved.
- The opening of the economy has led to a rapid increase in foreign direct investment and foreign exchange reserves.
- The foreign investment includes foreign direct investment (FDI) and foreign institutional investment (FII).
- India becomes successful in exporting of auto parts, engineering goods, IT software and textiles in the reform period. Rising prices have also been kept under control.
Reform process has been widely criticized because it does not fully address the areas of employment, agriculture, industry, infrastructure development and fiscal management.
Growth and Employment: Though the GDP growth rate has increased in the reform period, scholars point out that the reform-led growth has not generated sufficient employment opportunities in the country.
Reforms in Agriculture: Reforms have not been able to benefit agriculture. Public investment in agriculture sector especially in infrastructure has fallen in the reform period. Removal of fertilizer subsidy has led to increase in the cost of production, which has severely affected the small and marginal farmers. Export oriented policy strategies in agriculture leads to focusing on cash crops. This leads to increasing in the prices of food grains.
Reforms in Industry: Industrial growth has also recorded a slowdown. This is because of decreasing demand of industrial products due to cheaper imports, inadequate investment in infrastructure etc. The infrastructure facilities, including power supply, have remained inadequate due to lack of investment. Developing country like India still does not have the access to developed countries’ markets because of high non-tariff barriers.
Disinvestment: Every year, the government fixes a target for disinvestment of public sector enterprises. Critics point out that the assets of public sector enterprises have been undervalued and sold to the private sector. Disinvestment is used to offset the shortage of government revenues rather than development of social infrastructure.
Reforms and Fiscal Policies: The tax reductions in the reform period, aimed at yielding larger revenue and curb tax evasion, but it does not achieve the fruitful result. Reform policies, involving tariff reduction, have curtailed the scope for raising revenue through custom duties.