CBSE Class 11 Economics Economic Reforms Since 1991 Assignment Set 03

Question. How many countries are members of the WTO?
Answer: 164 (July 2016).

Question. Why did RBI have to change its role from controller to facilitator of financial sector in India?
Answer: It was in the wake of economic reforms (LPG policy 1991) that the RBI was expected to shift its role from being a regulator to a facilitator of the financial sector. It was a step towards free play of the market forces so as to revitalise the financial sector: making it more vibrant and efficient. Significantly, the commercial banks were now allowed to decide their own interest-rate structure. This led to a substantial rise in institutional funding of the production units in the economy.

Question. How is RBI controlling the commercial banks?
Answer: CRR, SLR, Repo rate, Open market operations, etc.

Question. What do you understand by devaluation of rupee?
Answer: Devaluation of rupee refers to the fall in the value of domestic currency (i.e., rupee) in relation to foreign currency as planned by the government in a situation when exchange rate is not determined by the forces of supply and demand but is fixed by the government.

Question. Distinguish between the following
(i) Strategic and Minority sale.
(ii) Bilateral and Multilateral trade.
(iii) Tariff and Non-tariff barriers.
Answer: (i) Strategic and Minority Sale: A strategic sale is generally the privatisation process, wherein the majority stake, i.e., at least 51 per cent or more share in a government organisation is sold off to the highest bidder, thereby handing over the management of the organisation to the private or autonomous body. Whereas, in minority sale, the government sells a minority stake (retaining at least 51 per cent of the shares along with full management control). Minority sale does not disturb the public sector character of the companies.
(ii) Bilateral and Multilateral Trade: Bilateral trade agreements refer to trade agreements between the two trading countries. Multilateral trade agreements, on the other hand, refer to agreements among many countries of the world.
(iii) Tariff and Non-tariff Barriers: Tariff barriers refer to barriers on imports through high import duty. Whereas, non-tariff barriers generally refer to quota-barriers, implying quantitative restrictions on imports (or restrictions on the quantum of imports).

Question. Why are tariffs imposed?
Answer: Tariffs are imposed to protect domestic industry and to restrict imports. It is also imposed to generate revenue for the government.

Question. What is the meaning of quantitative restrictions?
Answer: Quantitative restrictions are specific limits imposed by countries on the quantity or value of goods that can be imported or exported.

Question. Do you think outsourcing is good for India? Why are developed countries opposing it?
Answer: Outsourcing is good for India because:
(i) It generates employment opportunities in the domestic economy.
(ii) It contributes to GDP growth.
(iii) It contributes to forex reserves.
Developed countries oppose it as it leads to loss of jobs in their domestic economies.

Question. India has certain advantages which makes it a favourite outsourcing destination. What are these advantages?
Answer: India has the following advantages which makes it a favourite outsourcing destination:
(i) India offers an abundant supply of labour at a low wage rate, and
(ii) India has achieved a revolutionary breakthrough in the IT industry, which is the basic ingredient of outsourcing.

Question. Agriculture sector appears to be adversely affected by the reform process. Why?
Answer: Investment in agriculture sector, particularly in infrastructure (including irrigation, power, roads, etc.), has fallen in the reform period. The withdrawal of fertiliser subsidy has led to increase in the cost of production, which has severely affected the small and marginal farmers. The agriculture sector has been experiencing a number of policy changes such as reduction in import duties on agricultural products, removal of minimum support price, lifting of quantitative restrictions on agricultural products, etc. These have adversely affected Indian farmers as they now have to face increased international competition.

Reason-based Questions 

Read the following statements carefully. Write True or False with a reason.

Question. Fiscal deficit leads to price spiral.
Answer: True. Fiscal deficit leads to price spiral. Reason: Often, the fiscal deficit is financed by the government by way of borrowing from the RBI. It leads to increase in the supply of money in the economy. Other things remaining constant, higher the supply of money, higher is the price spiral.

Question. The current account BoP deficit often leads to borrowing from rest of the world.
Answer: True. Current account BoP deficit often leads to borrowing. Reason: There are two principal sources of finding the current account BoP deficit: (i) Borrowing from rest of the world, and (ii) Foreign investment in the domestic economy, including (a) FDI (foreign direct investment), and (b) FII (foreign institutional investment). Of these two sources, foreign investment is volatile (uncertain) owing to volatility (uncertainty) of the domestic market. Accordingly, the government often relies on borrowing from rest of the world.

Question. Disinvestment is a compulsion for the government to tackle budgetary deficit.
Answer: False. Disinvestment is not a compulsion for the government to tackle budgetary deficit. The fact of the matter is that the government resorts to disinvestment (selling shares of public enterprises to private entrepreneurs) only when the public sector enterprises are found to be breeding centres of inefficiency and corruption. Of course, once disinvestment is done it helps the government to manage budgetary deficit.

Question. FDI leads to economic colonialism.
Answer: True. FDI leads to economic colonialism. Because FDI implies ownership and management of the domestic enterprises by the foreign companies. Higher FDI leads to higher economic control of the foreign companies in the domestic market. This is what economic colonialism implies.

HOTS & Applications

Question. How does liberalisation of the economy lead to economic growth?
Answer: Liberalisation included a set of economic reforms offering freedom to the private enterprises from government controls. It focused on (i) delicensing of the industrial establishment, (ii) simplification of trade and tariff policies, (iii) simplification of tax structure, (iv) fiscal consolidation/discipline, and (v) freedom to the banking sector to decide their interest rate structure. These reforms led to a rise in investment. Rise in investment led to a rise in GDP growth.

Question. How does privatisation lead to fiscal consolidation?
Answer: Privatisation implies transfer of ownership and management of public sector enterprises to the private entrepreneurs. It is a process involving disinvestment in public sector enterprises. By and large divestment (disinvestment) is planned for such public sector enterprises which are inefficient and run into huge losses. Disinvestment leads to fiscal consolidation in two ways: (i) Losses of the public sector enterprises are plugged, and (ii) Revenue of the government rises on account of the sale of shares of public enterprises.

Question. Write a critical review of NEP.
Answer: A critical review of NEP includes description of positive as well as negative impact of the economic reforms initiated in 1991. The positive impact is evident in terms of a substantial rise in the level of economic activity in the economy, as indicated by a sustained rise in GDP. The negative impact is evident in terms of sectoral imbalances and concentration of economic power. Sectoral imbalances have occurred on account of the fact that: (i) agricultural sector has suffered a neglect while the industrial and tertiary sectors have gained a momentum, and (ii) growth process has largely been confined to urban sector of the economy. Concentration of economic power has occurred owing to rapid control of the domestic market by the multinational corporations.

Question. What makes India a favourite destination for outsourcing?
Answer: Two factors are significantly important in the context of India emerging as a favourite destination for outsourcing. These are:
(i) India offers an abundant supply of labour at a low wage rate, and
(ii) India has achieved a revolutionary breakthrough in the IT industry, which is the basic ingredient of outsourcing.

Analysis & Evaluation

Question. Should devaluation always lead to a rise in our export earnings, because rupee value of the dollar increases?
Answer: When rupee value of the dollar increases (owing to devaluation) purchasing power of the dollar in the Indian market rises. This prompts the foreign buyers to increase their purchases from the Indian markets. However, this need not necessarily lead to a rise in our export earnings. Because while the quantity of goods sold rises (after devaluation), price of the goods (in terms of dollars) falls in the domestic market. Accordingly, market value of the goods \( = (\text{Quantity of the goods exported} \times \text{Price of the goods}) \) may increase, remain constant or even fall after devaluation. It will increase only if the percentage increase in the quantity of goods exported happens to be greater than the percentage fall in the price of these goods.

Question. Write your views on the need for inclusive growth for the Indian economy. Is inclusive growth achievable for a developing economy like India when exposed to the process of Privatisation and Globalisation?
Answer: Inclusive growth refers to that process of growth, the fruits of which are equitably shared by all sections of the society. It happens only when the rate of participation improves and the rate of growth is accelerated. While Privatisation and Globalisation focus on efficiency and competitiveness, there is a fear that these might lead to neglect of certain sectors like agriculture and rural areas, further deepening the rural-urban divide. Therefore, for inclusive growth to be achievable, the government needs to ensure a level playing field, invest heavily in social infrastructure like education and healthcare, and ensure that the benefits of growth reach the underprivileged sections through targeted policies.