CBSE Class 11 Economics Economic Reforms Since 1991 Notes Set 02

ECONOMIC REFORMS SINCE 1991 OR NEW ECONOMIC POLICY

• Meaning of Economic Reforms
• Elements of NEP (New Economic Policy)
• An Appraisal of LPG Policies

I. MEANING OF ECONOMIC REFORMS AND NEW ECONOMIC POLICY

Economic reforms refer to a set of economic policies directed to accelerate the pace of ‘growth and development’.

In 1991, the Government of India initiated a series of economic reforms to pull the economy out of the crises of 90’s. These reforms came to be known as New Economic Policy (NEP). Three broad components of NEP are:

(i) The policy of liberalisation (L) in place of licensing (L) for the industries and trade.

(ii) The policy of privatisation (P) in place of quotas (Q) for the industrialists, and

(iii) The policy of globalisation (G) in place of permits (P) for exports and imports.

Thus, LPG was set to replace LQP in 1991.

Obvious Gains and Imperative Losses of Privatisation

Obvious Gains

(i) Privatisation implies supremacy of ‘self-interest’ over ‘social interest’. When ‘self-interest’ prevails, the entrepreneurs work with 100 per cent commitment, and ‘efficiency’ becomes the condition of survival for the workers. High productivity is the obvious result.

(ii) Privatisation expects private enterprises to work in a competitive environment—both domestic as well as international. Competition induces upgradation and modernisation. These are the essential conditions of growth and development.

(iii) Privatisation promotes diversification of production. Unlike PSUs, private enterprises invariably generate high profits. These are used for expansion and diversification of production. MNCs (Multinational Corporations) are a testimony to the fact that private sector enterprises are capable of redefining the benchmark of growth.

(iv) Privatisation promotes consumers’ sovereignty. Higher degree of consumers’ sovereignty implies wider choice and better quality of life.

Imperative Losses

(i) Socialistic pattern of the society (in which ‘social interest’ is accorded top priority) is left to survive only as theoretical possibility. It loses its practical relevance once PSUs are sold off to the private entrepreneurs.

(ii) Privatisation encourages the free play of market forces. But in the process, goods are produced only for those who have the means to buy them. When prices rise (which is an obvious tendency in a system driven by the free play of market forces), weaker sections of the society suffer deprivation. Sircilla Tragedy is a notable evidence to this point.

SIRCILLA TRAGEDY
Sircilla, in Andhra Pradesh, is a small town, known for its powerloom industry. This industry is the main source of livelihood for most people in the town. Privatisation of power supply to this industry led to a substantial hike in power-tariff. Implying an unsustainable burden on the industry. Cut in wages has been a serious consequence, as wages are linked to the production of cloth which has suffered a huge decline. When wages are cut beyond the point of subsistence, what do the workers do? Committing suicide is considered as a desperate option. This is what the workers did in Sircilla. About 50 workers committed suicide which is known as Sircilla Tragedy.

Globalisation

Globalisation means integrating the economy of a country with the economies of other countries under conditions of free flow of trade and capital across borders.

Globalisation may be defined as a process associated with increasing openness, growing economic interdependence and deepening economic integration in the world economy.

Economic reforms aim at integrating the Indian economy with the global economy. As a result, there will be unrestricted flow of goods and services, technology and expertise between India and rest of the world. Particularly, it is expected that capital and technology will flow from the developed countries of the world towards India.

Globalisation, in fact, is the outcome of the policies of Liberalisation and Privatisation
At the international level, it is a process of bringing the world economies, economically and socially, closer to each other in a manner such that each country becomes an element of Global Growth.

Outsourcing
• This is an important outcome of the process of globalisation.
• It refers to a system of hiring business services from the outside world. These services include: call centres, transcription, clinical advice, teaching/coaching and the like.
• India is emerging as an important destination of outsourcing particularly, BPO (business process outsourcing, also called call centres). This is because of two important reasons:
(i) Availability of cheap labour in India, or relatively low wage rate for the skilled workers, and
(ii) A revolutionary growth of IT industry in India.

Policy Strategies Promoting Globalisation of the Indian Economy

Following are some important policy strategies that have influenced the process of globalisation of the Indian economy:

(1) Increase in Equity Limit of Foreign Investment: Equity limit of foreign capital investment has been raised from the initial 40 per cent. It now ranges between 51 to 100 per cent. In 47 high priority industries, foreign direct investment to the extent of 100 per cent has been allowed without any restriction and red-tapism. Export trading houses have also been allowed foreign capital investment up to 100 per cent. However, Foreign Exchange Management Act (FEMA) has been enforced. Compliance to FEMA has been accorded high priority.

(2) Partial Convertibility: To achieve the objective of globalisation, partial convertibility of Indian rupee has been allowed for the following transactions:
(i) Import and export of goods and services,
(ii) Payment of interest or dividend on investment,
(iii) Remittances to meet family expenses. It is called partial convertibility because it does not cover capital transactions. Partial convertibility refers to the sale and purchase of foreign currency (for foreign transactions) at the market price.

(3) Long-term Trade Policy: In conformity with economic reforms, foreign trade policy is enforced for a longer duration (nearly five years). Implying that it is a liberal policy. Under this policy, all restrictions and controls on foreign trade have been removed. Open competition is encouraged. Barring some specific goods, most goods are traded free of restrictions.

(4) Reduction in Tariffs: In order to encourage competitiveness, tariff barriers have been withdrawn on most goods traded between India and rest of the world.

(5) Withdrawal of Quantitative Restrictions: Since 2001, the quantitative restrictions on all import items have been totally withdrawn. This is in conformity with India’s commitment to the WTO.

Tariff and Non-Tariff Barriers
• Tariff barriers mainly refer to barriers on imports through high import duty.
• Non-tariff barriers generally refer to quota-barriers, implying quantitative restrictions on imports (or restrictions on the quantum of imports).

Bilateral and Multilateral Trade Agreements
• Bilateral trade agreements refer to trade agreements of one country with the other. Or, these are trade agreements between any two countries of the world.
• Multilateral trade agreements refer to trade agreements of one country with many countries of the world. Or, these are trade agreements among many countries of the world.

WORLD TRADE ORGANISATION (WTO)

World Trade Organisation is expected to play an important role in the context of globalisation of the world economies. What is it supposed to do? It is supposed to promote free trade in the international market by reducing tariff barriers and by removing non-tariff barriers. It is focusing on the competition in the international market and free access to markets across different countries of the world. It is facilitating bilateral as well as multilateral trade agreements.

IMPACT OF WTO ON THE INDIAN ECONOMY
Following are the expected benefits of WTO:

(i) It is expected that WTO will offer greater export opportunities to the Indian economy. Accordingly, our share in international trade is expected to increase in future.

(ii) Under Multi-fibre Arrangements (MFA), our textile and readymade garment trade was subject to quota restrictions. As per provisions of the WTO, all these restrictions have been removed. It has helped India to increase its exports of garments and textile. Particularly, our textile exports to America and European countries have shown a substantial rise. It has promoted textile industry and generated employment opportunities.

(iii) Due to ‘agreed’ reduction in trade barriers and reduction in subsidies to the domestic producers of agricultural goods in the developed countries, prices of these goods are expected to rise in the international market. Accordingly, India’s exports of agricultural products are expected to rise.

With greater stability of the international trading system through WTO, India is expecting a marked decline in dumping as a strategy adopted by the developed nations to exploit markets of the less developed countries.

Dumping refers to ‘bulk-sale’ of goods by the developed countries in the domestic market of less developed countries at competitive rates. It discourages domestic investment and consequently, the growth of domestic industry of these countries.

But it must be noted with emphasis that WTO agreement is offering only an asymmetric treatment (something which is not uniformly distributed for all nations of the world) to capital market and labour market. WTO advocates free movement of capital across different nations, not the free movement of labour, while both labour and capital are commodities of the factor market. Certainly, free flow of capital fosters the commercial interests of MNCs of the developed nations. They can exploit markets in less developed countries. But the free flow of labour which would have fostered the commercial interest of LDCs like India is not encouraged by WTO. Accordingly, Indian labour does not find free access to the lucrative factor market in developed countries. (Lucrative factor market refers to the market offering high wage rate.)

Two Parameters of Economic Reforms: Macroeconomic Stabilisation and Microeconomic Structural Adjustments

• Macroeconomic Stabilisation: Macroeconomic stabilisation measures refer to those set of measures which affect the entire economy and are therefore, pervasive in nature (spreading across all sectors of the economy). These measures included review of (a) monetary policy, (b) fiscal policy and (c) exchange rate policy. The focus of these measures was to cope with the crises of confidence relating to ability of the government to manage the country’s dwindling BoP status, particularly its ability to repay the loans taken from the rest of the world.
• Microeconomic Structural Adjustments: Microeconomic Structural Adjustments refer to those measures by the government which focused on structural changes in the economy and which had specific bearing on different sectors of the economy. These measures included reforms in (a) industrial policy, (b) trade policy, (c) public sector policy, (d) price policy, (e) tariff policy, etc.

It may be noted that while Macroeconomic Stabilisers are short-term measures to correct overall imbalances in the system, Microeconomic Structural Adjustments are long-term measures aiming at improving the level of efficiency and productivity in different sectors of the economy.

First Generation Reforms and Second Generation Reforms
Distinction is sometimes drawn between First Generation Reforms and Second Generation Reforms.

• First Generation Reforms are those which do not require any legislative action. These reforms can be carried out simply through the executive and administrative machinery of the government.
• Second Generation Reforms, on the other hand, are those which require legislative action. These reforms cannot be carried out through the existing administrative and executive set-up of the government. Accordingly, Second Generation Reforms are often delayed.

3. AN APPRAISAL OF LPG POLICIES

Briefly referred to as LPG policies, the term implies policies related to liberalisation (L), privatisation (P) and globalisation (G). An appraisal of LPG policies implies an appraisal of NEP (New Economic Policy) or an appraisal of Economic Reforms initiated since 1991. Appraisal of LPG or NEP requires that the reader appreciates or understands the merits and demerits of this policy with reference to the Indian economy.

Merits of the LPG Policies

Following observations highlight the merits of LPG policies:

(1) Vibrant Economy: Indian economy has definitely become a more vibrant economy. Overall level of economic activity has trended up as indicated by GDP growth. Post LPG policies, the growth of GDP shot up to as high as 8 per cent per annum.

(2) Stimulant to Industrial Production: LPG policies have worked as a great stimulant to industrial production in the Indian economy. It is owing to these policies that IT industry in India has achieved global recognition.

(3) A Check on Fiscal Deficit: Mounting fiscal deficit has been a serious threat to the process of investment in the Indian economy. From as high as 8.5 per cent of GDP has been brought down to around 3.5 per cent of GDP.

(4) A Check on Inflation: Owing to a greater flow of goods and services in the economy, rate of inflation has been lowered. In the years 2011-12 to 2013-14, inflation was in the range of 6-9 per cent per annum. For year 2018-19, it is estimated to be 3.4 per cent. It may be noted that high inflation leads to a rise in interest rate, implying a rise in the cost of investment. Accordingly, growth rate is adversely impacted.

(5) Consumer’s Sovereignty: Consumers sovereignty has expanded over time. This is evident from the fact that a large variety of goods and services from the diverse global markets are now within the easy reach of the buyers. Producers are widely responding to the consumers choice and preference. Consequently, overall level of expenditure of the households has tended to rise. Implying an overall rise in the welfare status of the people.

(6) A Substantial Increase in Foreign Exchange Reserves: Depletion of forex reserves was one of the compelling reasons for the government to shift to LPG policies. Thanks to these policies, forex reserves of the country have now reached a comfortable level. Good amount of forex reserves enhances economic confidence of the global investors in the Indian markets.

(7) Flow of Private Foreign Investment: Private foreign investment has taken a quantum jump after the adoption of LPG policies. This has been a matter of great relief to the government in view of the facts that: (i) domestic economy was not generating enough of surplus for reinvestment, and (ii) indigenous technology was getting obsolete. It is significant to note that private foreign investment is often accompanied with innovative techniques of production.

FDI and FII
Foreign investment includes FDI (Foreign Direct Investment) and FII (Foreign Institutional Investment).
• FDI refers to investment by the foreigners by way of their business establishments in India. It implies ownership and control of business. Examples: Coke, Pepsi, Domino’s, McDonald.
• FII refers to investment in Indian companies (by way of purchasing their equity or shares) by the foreign banking and non-banking institutions. It does not involve any kind of direct control on the management of the Indian companies where investment is made. FII, unlike FDI, is simply an investment in the stock market in India by the foreign banking and non-banking institutions.

(8) Recognition of India as an Emerging Economic Power: It is owing to LPG policies and the consequent rise in the overall level of economic activity, that India is now being recognised as an emerging economic power in the world. This recognition (particularly by developed nations of the world) not only raises India’s economic ranking in the world, but also boosts confidence of the global investors in the Indian economy as their preferred destination of investment.

(9) A Shift from Monopoly Market to Competitive Market: Launch of LPG policies has caused a significant shift in the structure of the Indian markets. Indian markets are now increasingly shedding its monopolistic character, and becoming more and more competitive in nature. For instance, a couple of decades back, products like cars, refrigerators, ACs and PCs were the monopoly markets of select brands only. Now a variety of these products are available at competitive prices.

Briefly, owing to LPG policies, the Indian economy has definitely gained a ‘growth momentum’. The process of growth has not only accelerated, but has also become more diversified. There is a definite change in welfare level of the people. Recognition of the Indian economy as an emerging economic power in the world is of crucial significance.

Demerits of LPG Policies

All that glitters is not gold. There is a negative side of the story as well. Following observations highlight demerits or negative impact of LPG policies in India:

Neglect of Agriculture: Post New Economic Policy (NEP) of 1991, growth of GDP has largely been driven by the secondary and tertiary sectors of the economy. Agricultural sector has suffered a serious neglect and its growth rate has slided/slipped to a miserably low level (2-3 per cent per annum). This has led to a widening gulf between the rural and urban economies. Implying the spread of poverty. In fact, slow growth of agricultural sector must ultimately hinder the process of growth of the industrial sector as well. This is because:
(i) Agricultural sector is an important source of raw material for the industrial sector.
(ii) Agricultural sector is the principal source of labour supply to the industrial sector, and
(iii) Agricultural sector is a significant source of demand for the industrial products like tractors and thrashers.

Urban Concentration of Growth Process: LPG policies have resulted in the concentration of growth process in urban areas. Think of any MNC, you will hardly find its trace in the rural areas of the country. All MNCs are focusing only on urban areas, where they find conducive infrastructural facilities. This has further widened the ‘rural-urban gulf’. Rural-urban gulf implies economic dualism which deepens social dualism as well. Economic and social dualism are always a big threat to the process of growth and development.

Economic and Social Dualism
• Economic Dualism: It refers to disintegration of the economy into traditional and modern sectors of production. While the traditional sector relies upon traditional technology, the modern sector is driven by modern technology.
• Social Dualism: It refers to disintegration of the society into ‘haves’ (enjoying high social status) and ‘have-nots’ (living with low social status).

(3) Economic Colonialism: India suffered nearly 200 years of political colonialism during the British rule. Now, while MNCs are expanding their economic control, we might suffer a sort of economic colonialism. Implying a situation where MNCs are exploiting the Indian markets to sell their products and in the process, domestic producers are marginalised owing to their poor competitive strength.

(4) Spread of Consumerism: Spread of MNCs in the country as a consequence of LPG policies has resulted in a large-scale spread of consumerism. A variety of global brands in the market has induced the masses to become spendthrift, going beyond their means. The Indian society is adapting itself to the western culture of spending through borrowing. This may expand size of the market for the traders and the manufacturers, but certainly enhances vulnerability of the households as consumers.

(5) Lopsided Growth Process: LPG has accelerated the growth process of the Indian economy, but it is lopsided. It is not an inclusive growth process. It does not include all the sectors of the economy. Instead, it is increasingly relying on ‘service sector’ of the economy. In fact, it is just an ‘IT-focused’ growth process which is gradually over-shadowing the process of industrialisation, besides neglecting the farming sector. It is alarming to note that, owing to liberalisation and globalisation, the Indian farmer is shifting to the production of cash crops for the foreign markets, causing a shortfall of domestic supplies of foodgrains. Alas! We are often forced to import foodgrains despite Green Revolution. Rising prices of food products towards the end of 2009 should serve as a wake up call to the fact that LPG policies are almost neglecting the farming sector of the economy.

(6) Cultural Erosion: Globalisation has also led to cultural erosion in the Indian society. Following are some significant observations in this context:
• Economic prosperity has taken a lead over all other parameters of life.
• Everybody wants to be economically independent and well-off, regardless of his responsibility towards the family or the society.
• Loyalty towards the family and loyalty towards the society which used to be the strongholds of the Indian social culture are being discarded as useless virtues in the wake of materialism.

Which Way to Go?

Should we or should we not subscribe to the LPG policies? It is a debatable issue. But avoiding the pros & cons of LPG, the +2 graders can definitely make one concrete observation: That LPG policies are the only way out to accelerate the pace of growth and development. Indeed perusal of LPG policies was to a great extent a matter of economic compulsion rather than a matter of choice for the politicians of the country. However, a compulsion should never mean an abject surrender. It is strongly recommended that LPG policies are pursued with guarded precautions. Notably:

(i) We must see to it that we do not surrender to big players in the international markets.

(ii) We must see to it that we do not compromise with economic interest of our domestic producers, while allowing a free access to the foreign investors in the Indian markets.

(iii) We must see to it that we do not become economically subservient to multinational corporations.

(iv) We must be in a position to channelise FDI (foreign direct investment) more into areas of infrastructure rather than retail trading or fast-food junctions like KFC and Dominos.

Power Points & Revision Window

• Economic Reforms: Economic reforms refer to all those measures which aim at rendering the economy more efficient, competitive and developed. Liberalisation, privatisation and globalisation are the principal elements of economic reforms in India.
• Liberalisation: Liberalisation implies freedom of private enterprises from controls imposed by the government.
• Measures of Liberalisation: (i) Abolition of industrial licensing, (ii) Contraction of public sector, (iii) De-reservation of production areas, (iv) Expansion of production capacity, (v) Freedom to import capital goods.
• Fiscal Reforms: These refer to increasing the revenue of the government and lowering the expenditure in a way that it causes no adverse effect on production and economic welfare.
• Financial Reforms: These refer to the reforms in country’s monetary and banking policies.
• Privatisation: It implies partial or full ownership and management of public sector enterprises by the private sector.
• Measures of Privatisation: (i) Outright sale of the government enterprises to the private entrepreneurs, (ii) Withdrawal of the government ownership and management.
• Globalisation: It is a process associated with increasing openness, growing economic interdependence and deepening economic integration in the global economy.
• Measures of Globalisation: (i) Increase in equity limit of foreign investment, (ii) Partial convertibility, (iii) Long-term trade policy, (iv) Reduction in tariffs, (v) Withdrawal of quantitative restrictions.
• Positive Impact of the LPG Policies: (i) Vibrant economy, (ii) Stimulant to industrial production, (iii) A check on fiscal deficit, (iv) A check on inflation, (v) Spread of consumer’s sovereignty, (vi) A substantial increase in foreign exchange reserves, (vii) Flow of private foreign investment, (viii) Recognition of India as an emerging economic power, (ix) A shift from monopoly market to competitive market.
• Negative Impact of the LPG Policies: (i) Neglect of agriculture, (ii) Urban concentration of growth process, (iii) Economic colonialism, (iv) Spread of consumerism, (v) Lopsided growth process, (vi) Cultural erosion.

Liberalisation

Liberalisation of the economy means freedom of the producing units from direct or physical controls imposed by the government. Following are some notable observations in this regard:

(i) Prior to 1991, government had imposed several types of controls on private enterprises in the domestic economy. These included industrial licensing system, price control or financial control on goods, import licence, foreign exchange control, restrictions on investment by big business houses, etc.

(ii) It was experienced by the government that several shortcomings had emerged in the economy on account of these controls.

(iii) These controls had given rise to corruption, undue delays and inefficiency.

(iv) Growth rate of GDP had fallen sharply and high-cost economic system (rather than a low-cost competitive economic system) came into being.

In view of these facts, liberalisation of the economy was considered as a key component of NEP. Greater reliance was to be placed on market forces (of supply and demand) rather than checks and controls.

Examples of developing countries (Korea, Thailand, Singapore) that had achieved rapid growth due to liberalisation were considered as worthy of emulation.

Why Controls are imposed after all?
In the context of the Indian experience, controls were imposed by the government with a view to:
(i) checking the growth of private monopolies, and
(ii) minimising the hold of large industrial houses on the financial resources of the country.
Illustration: Some banks were nationalised in sixties because these were owned by the big industrial houses who would use banking funds primarily to meet their own financial needs.

Economic Reforms (with liberalisation as its key component) were based on the assumption that market forces would drive the economy towards the path of competitive growth and development.

Economic Reforms under Liberalisation

Liberalisation included the following reforms:

(1) Industrial Sector Reforms

Liberalisation virtually implied de-regulation of industrial sector of the economy. Following observations highlight how it happened:

(i) Abolition of Industrial Licensing: In July 1991, a new industrial policy was announced. It abolished the requirement of licensing except for the following five industries: (a) liquor, (b) cigarette, (c) defence equipments, (d) industrial explosives, and (e) dangerous chemicals.

(ii) Contraction of Public Sector: Under the new industrial policy, number of industries reserved for public sector was reduced from 17 to 8. In 2010-11, the number of these industries was reduced merely to two: (i) Atomic energy, and (ii) Railways.

(iii) De-reservation of Production Areas: Many production areas which earlier were reserved for SSI (small-scale industries) were de-reserved. Forces of the market were allowed to determine allocation of resources (rather than the directive policy of the government).

(iv) Expansion of Production Capacity: Earlier production capacity was linked with licensing. Now, freedom from licensing implied freedom from capacity constraints. ‘What to produce and how much to produce’ was now a matter of producer’s choice depending on market conditions.

(v) Freedom to Import Capital Goods: Liberalisation also implied freedom for the industrialists to import capital goods with a view to upgrading their technology. Permission was no longer required from the government to enter into international agreements for the import of technology.

(2) Financial Sector Reforms

Financial sector includes: (i) banking and non-banking financial institutions, (ii) stock exchange market, and (iii) foreign exchange market.

In India, financial sector is regulated and controlled by the RBI (Reserve Bank of India).

Liberalisation implied a substantial shift in the role of the RBI from ‘a regulator’ to ‘a facilitator’ of the financial sector.

As a regulator, the RBI (prior to liberalisation) would itself fix interest rate structure for the commercial banks. But as a facilitator (after liberalisation) the RBI would only facilitate the free play of the market forces and leave it to the commercial banks to decide their interest rate structure. Now, competition (rather than control) rules the decision-making process.

• Consequent upon the policy of liberalisation, there has been a substantial shift in the role of the RBI from ‘a regulator’ to ‘a facilitator’ of the financial sector.
• Now market forces (rather than controls) decide the interest rate structure, volume and the pattern of investment.

Free play of the market forces has led to the emergence of private bankers—both domestic as well as international—in the Indian banking industry.

Liberalisation has also allowed FII (Foreign Institutional Investors) to invest in Indian financial markets. (Examples of FII: Merchant bankers, mutual funds and pension funds.)

Consequent upon these changes, financial sector in India has shown a multi-dimensional growth and is playing a significant role in the growth and development of the economy.

DEMONETISATION

Demonetisation, introduced in 2016, is closely related to financial sector reforms. Let us understand its concept and consequences in the context of the Indian economy.

Concept

Demonetisation is a policy action of the government that withdraws the status of ‘legal tender’ from the existing currency. Once the status of ‘legal tender’ is withdrawn, the existing currency (or the currency notes) are reduced merely to pieces of paper. These notes lose their acceptance as a medium of exchange, or they lose their power to buy goods and services in the market.

It was on November 8, 2016 that the Government of India announced demonetisation of the currency notes of Rs. 500 and Rs. 1,000. The people were required to deposit the demonetised currency notes with the banks within a period of 2 months. The demonetised notes were replaced by new currency notes of Rs. 500 and Rs. 2,000.

Basic Purpose

Basically, demonetisation aims at curbing illegal transactions and anti-social activities (funded through illegal transactions).

Principal Merits

• (i) It helps unearth (find out) black money.
• (ii) Reduction of black money leads to shrinkage of shadow economy (an economy with unrecorded production activity and tax evasion).
• (iii) When shadow economy shrinks, and tax evasion is reduced, government revenue tends to rise.
• (iv) Demonetisation compels people to deposit their demonetised notes with the banks. Accordingly, financial-base of the banking sector tends to expand.
• (v) A check on funding to terrorists helps combat anti-social activities in the economy.
• (vi) With cash almost disappearing from the market, people were driven to digital mode of transactions. This was a big move towards cashless (or low cash) economy. It also promoted banking habits of the people, a big leap towards financial inclusion.

Principal Demerits

• (i) In an underdeveloped economy like India, people are used to cash-transactions. With demonetisation, people are stripped of (deprived of) cash in hand. It impairs (disturbs) their routine transactions and therefore, their normal living. Thus, demonetisation in 2016 led to a serious social chaos (unrest) in India.
• (ii) Cash-crunch (owing to demonetisation) jolts production activity in the shadow economy. Accordingly, jobs are lost and poor people are further marginalised.
• (iii) A jolt to production activity in the shadow economy invariably hurts the overall level of economic activity (including production, consumption and investment) in the economy. The economy starts facing ‘slowdown’. At the macro level, the process of slowdown is often a long-drawn process, as it tends to cumulate over time. India is yet to recover from the slowdown triggered by demonetisation in 2016.
• (iv) Nearly 90 per cent of the workforce in India is engaged in informal economy (or unorganised sector of the economy) for their livelihood. And this segment of the economy is highly cash dependent and cash-sensitive. A huge cut in liquidity (following note ban) implied that cash purchase of inputs and cash payment of wages became impossible. These led to an instantaneous cut in production activity. Consequently, there was a large-scale lay-off. Daily wagers lost their employment from day-1 of demonetisation.
• (v) Exchange of demonetised currency with the valid currency leads to long queues at the banks. People feel hurt when they find it difficult to use their own money. Accordingly, consumption is lowered and inducement to invest is lost.

In short, demonetisation causes loss and gain of opportunities. It is very difficult to precisely assess the net impact of demonetisation over a short period of time. Nevertheless, social unrest is an immediate short period loss, which people in India have successfully managed.

Note: For further details on Demonetisation, students are advised to refer to Project Work at the end of the text.

(3) Fiscal Reforms

Fiscal reforms relate to revenue and expenditure of the government. Tax reforms are the principal component of fiscal reforms.

Broadly, taxes are classified as: (a) direct taxes, and (b) indirect taxes.

Direct taxes are those taxes, the burden of which cannot be shifted onto others. (Examples: Income tax, wealth tax.) One who pays such a tax himself bears the burden of it.

Indirect taxes (levied on goods and services) are those taxes, the burden of which can be shifted onto others. [Examples: GST (Goods and Services Tax), custom duty.]) One who pays such a tax [Example: A shopkeeper paying GST (Goods and Services Tax) to the government] can shift the burden of this tax onto the final buyers of the goods by adding the tax amount to the basic price of the goods sold.

Fiscal Policy
• It refers to revenue and expenditure policy of the government.
• It is a policy that seeks to achieve stability in the economy by managing the revenue and expenditure of the government.

GST

GST (Goods and Services Tax) has been introduced in India with a view to providing a uniform tax structure across all parts of the country. It is a one tax in place of all taxes on goods and services, and it is a uniform tax across all states of the country. Thus, GST carries the slogan of ‘one tax, one nation, one market’. GST is expected to generate additional tax revenue for the government, increase tax compliance and reduce tax evasion.

The Basic Structure of GST

Goods and services have been classified into different categories. Each category of goods carries a specific rate of taxation. And, there is a category of goods which is ‘tax-exempt’, considering the needs and means of poorer section of the society.

Following flow chart shows the structure of GST:

Structure of GST

Typical Characteristics

Three typical characteristics of GST must be noted:

• GST is levied at each stage of value addition.
• GST focuses on the supply of goods rather than their production. Tax is levied as and when goods are supplied (or when goods leave their destination for their buyers).
• GST paid by the producers on the purchase of inputs is allowed to be adjusted by the producers in their payment of GST proceeds to the government.

Principal Merits

Four principal merits of GST are under:

• It is simplified tax structure, as it is a one tax for all the indirect taxes, and it is a uniform tax across all parts of the country.
• Since refund of GST on inputs is available to the producers only when they buy inputs from the registered suppliers, it ensures higher degree of transparency in business: Black money transactions are reduced.
• Being a uniform tax across all parts of the country, GST has enhanced size of the market for the domestic producers.
• GST has raised government revenue as there is a higher degree of transparency in business.

Some Teething Problems and Demerits

Any new concept always suffers from some teething problems when it comes to its implementation. So is GST. The teething problems of GST are often highlighted as its demerits. Two observations are notable in this context:

• GST is yet to cover all goods produced in the country. Electricity generation, alcohol, petrol and diesel are some notable products out of the ambit of GST.
• GST rates across different goods and services are still not finally settled, and to that extent uncertainty looms in the economy. This uncertainty hampers decision-making and therefore, investment in production activity.

Note: For further details on GST, students are advised to refer to Project Work at the end of the text.

Prior to liberalisation, tax structure in the country has been highly complex and evasive. Fearing a heavy burden of taxation, people would often evade taxes. Now tax structure has been simplified and moderated. This has raised tax compliance and therefore tax revenue of the government.

(4) External Sector Reforms

External sector reforms include: (i) foreign exchange reforms, and (ii) foreign trade policy reforms.

Foreign exchange reforms were initiated in 1991 with the devaluation of the Indian rupee against foreign currencies.

Devaluation implies a fall in the value of rupee vis-a-vis (say) US dollar or British pound. Implying that a US dollar or British pound can be exchanged for more rupees than before. Or, implying that a US dollar or British pound can buy more goods in the Indian market.

This increased the supply of foreign currency into the Indian economy by way of higher exports of the domestic goods and services.

Devaluation

• Devaluation implies lowering the value of our currency in relation to other currencies of the world.
• Consequently, a US dollar or a British pound can be exchanged for more rupees than before.
• Implying that a US dollar or a British pound can buy more goods in the Indian market.
• This is expected to increase the supply of foreign exchange into the Indian economy.

Followed by devaluation in 1991, the exchange value of the Indian rupee in the international money market (or foreign exchange market) was left to the free play of the market forces. Presently, exchange rate is determined by the forces of supply and demand in the international exchange market.

Foreign Trade Policy underwent a substantial change in the wake of liberalisation. Tariff restrictions have been considerably moderated, rather withdrawn from many items of export and import. Instead of policy of protection to the domestic industry, now there is the policy of ‘survival of the fittest’. Market competition has replaced the policy of quotas and tariffs. Efficiency is the benchmark of growth, not simply expansion.

Salient Features of Trade Policy after Liberalisation

(i) Import quotas have been abolished.

(ii) Import licensing (except in case of goods which are not environment-friendly and are hazardous) has been abolished.

(iii) There is a moderation/reduction of import duty to enhance competitiveness in the domestic market.

(iv) Export duty has been withdrawn to enhance competitiveness of Indian goods in the international market.

(v) Briefly, trade policy after liberalisation is to facilitate integration of the Indian market with the global market with a view to achieving growth through competition rather than protection.

DON’T CONFUSE LIBERALISATION WITH A LAISSEZ-FAIRE SYSTEM

Let us first understand the concept of laissez-faire. It refers to a system in which there is no intervention by the state in the functioning of an economy. All decisions relating to allocation of resources and the goods & services to be produced are taken by producers on the basis of market forces of supply and demand. Role of the government is restricted just to the maintenance of law & order and defence of the country from external aggressions: it is nothing beyond being a night watchman of the country.

Liberalisation should not be confused with a laissez-faire system. Liberalisation only implies a situation wherein the government allows greater degree of freedom and flexibility to the private entrepreneurs in matters relating to allocation of resources. To illustrate, pursuing the policy of liberalisation, the government may abolish licensing/registration of the enterprises as an essential requirement. Likewise, the government may liberalise or abolish limits on the production capacity of the firms. But all this is in consonance with direct participation of the government in production activity. Thus, liberalisation does not exclude government’s intervention in the economy; it does not rule out the existence of checks and controls by the government. It only implies greater degree of freedom to the private entrepreneurs in deciding their areas of economic activity and expanding their scale of production.

Privatisation

Privatisation is the process of involving the private sector in the ownership or operation of a state owned enterprise.

It implies gradual withdrawal of government ownership/management from the public sector enterprises. It may happen in two ways:

(i) Outright sale of the government enterprises to the private entrepreneurs or

(ii) Withdrawal of the government ownership and management from the mixed enterprises (the enterprises jointly owned and managed by the government and the private entrepreneurs).

Disinvestment

• Disinvestment is a policy instrument to promote privatisation.
• It occurs when the government sells off its share capital of PSUs (public sector undertakings) to the private investors.
• Argument in favour of disinvestment is the same as in case of privatisation.
• It is taken as a remedial measure to improve production and managerial efficiency, as well as to facilitate modernisation.
• Of course, disinvestment is also used as a means to manage fiscal deficit by the government.

Need for Privatisation

Need for privatisation was felt mainly because of poor performance of PSUs. Note the following observations in this regard:

(i) The process of industrialisation was initiated during Second Five Year Plan assigning a key role to PSUs.

(ii) The Industrial Policy Resolution (1956) clearly and categorically stated the significance of PSUs in the process of growth and development.

(iii) It is beyond doubt that it was through the spread of PSUs that India could diversify its industrial base between the period 1951-1991.

(iv) It was on account of the spread of PSUs that the Indian economy underwent a structural transformation: people started shifting from agriculture to industry as their source of livelihood, and there was a gradual increase in the percentage contribution of industry to GDP. PSUs gave us Navratnas (nine jewels of the Indian industry, besides a host of mini ratnas).

(v) Gradually, most public sector enterprises turned into as social dead-weight (or a social liability). Mounting losses of PSUs became unsustainable.

(vi) Leakage, pilferage, inefficiency and corruption had become so rampant in PSUs that their privatisation was considered as the only remedy.

(vii) Accordingly in 1991, the government decided to phase out public enterprises by selling its equity to the private entrepreneurs. Privatisation was to replace public ownership of a large number of enterprises.

(viii) However, in view of their efficient performance, Navratnas were to be retained as public sector enterprises. Indeed, the government decided to upgrade their functional freedom with a view to enhancing their competitive strength.

NAVRATNAS

In the context of PSUs in India, Navratnas refer to nine such profit making companies which are compared with nine courtiers in the court of king Vikramaditya who were men of eminence and rare wisdom. These nine industries are: (i) IOC (Indian Oil Corporation); (ii) BPCL (Bharat Petroleum Corporation Ltd.); (iii) ONGC (Oil and Natural Gas Corporation); (iv) SAIL (Steel Authority of India Ltd.); (v) BHEL (Bharat Heavy Electricals Ltd.); (vi) IPCL (Indian Petrochemicals Corporation Ltd.); (vii) VSNL (Videsh Sanchar Nigam Ltd.); (viii) NTPC (National Thermal Power Corporation); and (ix) HPCL (Hindustan Petroleum Corporation Ltd.)

However, with the passage of time, Navratna status was no longer confined to these nine industries only; it was accorded to other industries as well, like MTNL (Mahanagar Telephone Nigam Limited) and Oil India Limited. In all, 16 industries have earned the distinction of acquiring Navratna status.

• Maharatnas: In 2009, the government also started according Maharatna status. The PSUs having earned this status include: (i) Coal India Ltd. (CIL), (ii) Indian Oil Corporation (IOC) Ltd., (iii) National Thermal Power Corporation (NTPC) Ltd., (iv) Oil and Natural Gas Corporation (ONGC) Ltd., (v) Steel Authority of India Ltd. (SAIL), (vi) Bharat Heavy Electricals Limited (BHEL), (vii) Gas Authority of India Limited (GAIL), and (viii) Bharat Petroleum Corporation Limited (BPCL). Thus, quite a few industries (like IOC) have moved from Navratna to Maharatna status.
• Miniratnas: Recently, yet another status called ‘Miniratna’ has been created to encourage PSUs to improve efficiency and profitability. So far 75 PSUs have been awarded Miniratna status.

Navratnas have often been quoted by the government as the epicentre of growth in the Indian economy. And, it is not denying the fact that these enterprises brought about an exemplary shift in the concept of industrialisation in the economy. These enterprises served not only as a significant source of employment, but also as an infrastructural base that induced private investment in diverse areas of industrial growth.

In the wake of privatisation, the government had initially thought of disinvestment of Navratnas as well. But, owing to a stiff political resistance, it is now decided to develop Navratnas as global players in their respective areas of industrialisation.

Liberalisation, Privatisation and Globalisation :

Question: What are the major factors responsible for the high growth of the service sector?
Answer: The major factors responsible for the high growth of the service sector are as follows:
- Rise in income – Rise in income of the people increase the demand of the services which can make their lives more comfortable.
- Outsourcing- India is looked upon as a great destination to outsource various business processes such as call centers, accounting services etc.
- Globalization- It has increased the demand for courier, shipping ,travel and information services.
- Cheap labor and reasonable degree of skill in India- Due to the availability of cheap labor and reasonable degree of skilled manpower in India, developed countries found outsourcing to India feasible and profitable.

Question: “Agriculture sector appears to be adversely affected by the economic reform process” Explain the given statement.
Answer: The agriculture sector was adversely affected by the reform process in the following manner-
- Public investment in agriculture sector especially in infrastructure like irrigation ,power etc. , has been reduced in the reform period.
- Removal of fertilizer subsidy has incre4ased the cost of production affecting thereby the small and marginal farmers.
- Increased international competitiveness due to liberalization and reduction of import duties.
- Shift from food crops to cash crops due to export-oriented policy in agriculture.

Question: India is often called the OUTSOURCING DESTINATION of the World. Discuss the prime reasons for this name given to India.
Answer: Reasons for India as outsourcing destination-
- Availability of skilled manpower- India has vast skilled manpower which enhances the faith of MNCs.
- Favorable Government Policies – MNCs get various types of lucrative offers from the Indian government such as tax holidays , tax concessions etc.
- Low wages- The wage rate in India is low comparative to European and other countries.

Question: Why has the industrial sector performed poorly in the reform period?
Answer: The causes of the poor performance of the industrial sector are as follows:
- More dependence of foreign loan.
- Competition with foreign developed countries.
- Comparison of the products of Indian industries with foreign industries.
- Exploitation of consumers due to privatization.
- Challenge of prices from industrial sector of China.

Question: Do you think the navaratna policy of the government helps in improving the performance of public sector undertakings in India? How?
Answer: The government identifies PSUs and declare them as maharatnas, navratnas and miniratnas. They are given greater managerial and operational autonomy, in taking various decisions to run the company efficiently and thus increase their profits’
- Maharatnas – a) Indian OIL corporation Ltd(IOC),b) Coal India Ltd(CIL) , c) National Thermal Power Corporation(NTPC) , d) Steel Authority of India Ltd(SAIL).
- Navratna – a) Hindustan Aeronautics Ltd., b) Mahanagar Telephone Nigam Ltd(MTNL)
- Miniratnas- a) Bharat Sanchar Nigam Ltd (BSNL) ,b) Air Authority of India and ,c) Indian Railway Catering and Tourism Corporation Ltd.
The granting of status resulted in better performance of these companies

Question: Is it necessary to become a member of WTO ? Why?
Answer: Yes it is important for any country to become a member of WTO for the following reasons:
- WTO provides equal opportunities to all its member countries to trade in the international market.
- The countries of similar economic conditions being members of WTO can raise their voice to safeguard their common interests.
- It provides its member countries with larger scope to produces at large scale to cater for the needs of people across the international boundaries.
- It advocates for the removal of tariff and non tariff barriers ,thereby promoting healthier and fairer competition among different countries.

Question: Why has the industrial sector performed poorly in the reform period?
Answer: Just like the agriculture sector ,industrial sector’s performance was also poor. The poor performance of industrial sector may be attributable to the following reasons:
- Cheaper Imports – The demand for industrial output reduced due to the cheaper imports. the imports from developed countries were cheaper due to the removal of import tariffs. These cheaper and quality foreign imports led to the fall in the demand of domestic goods.
- Lack of investment- Due to the lack of investment in infrastructure facilities, the domestic firms could not compete with their developed foreign counterparts in terms of cost of production and quality of goods.
- High non tariffs barriers by the developed countries: It was very difficult to gain access to the developed countries market due to high non-tariff barriers maintained by the developed countries..
- Competition from MNCs – During the pre-liberalized period, the domestic industries were provided a protective environment to grow and expand. But at the time of liberalization, the domestic industries were still not developed up to the extent it was thought and consequently they could not compete with the multinational companies.

Question: Which of the organization replaced General Agreement on Trade and Tariff
a) International Monetary Fund
b) United Nations Organization
c) World Trade Organization
d) World Health Organization
Answer: c

Question: When was the New Economic Policy announced?
a) June 1991
b) July 1991
c) May 1991
d) None of the options
Answer: b

Question: —– refers to disposal of equity of public sector units in the market
a) Globalization
b) Privatization
c) Liberalization
d) Disinvestment
Answer: d

Question: Which of the following is not a policy initiated under New Economic Policy?
a) Liberalization
b) Privatization
c) Globalization
d) Licensing
Answer: d

Question: Quantitative restrictions on imports of manufactured consumer goods and agricultural products were also fully removed from
a) 1980
b) 1991
c) 2001
d) 1995
Answer: c

Question: On which date did PM Narendra Modi address the Indian people announcing the demonetization of RS 5OO AND RS 1000
a) 8 Oct 2017
b) 8 Nov 2016
c) 8 Nov 2017
d) 8 Oct 2016
Answer: b

Question: The highest GST rate applicable now is
a) 28%
b) 12%
c) 18%
d) None of the options
Answer: a

Question: GST was introduced in India with effect from
a) 1/7/2017
b) 1/7/2016
c) 1/7/2018
d) 1/7/2019
Answer: a

Question: What is the other name of World Bank?
a) World Health Organization
b) World Trade Organization
c) International Monetary Fund
d) International Bank for Reconstruction and Development
Answer: d

Question: At present how many industries are exclusively reserved for the public sector in India?
a) 2
b) 3
c) 4
d) 5
Answer: b

Question: When was WTO founded?
a) 1948
b) 1951
c) 1991
d) 1995
Answer: d

Question: Which Act has been enacted in place of MRTP Act ?
a) Competition Act
b) Monopoly Act
c) Licensing Act
d) Foreign Exchange Act
Answer: a

Question: At present how many member countries WTO has?
a) 150
b) 164
c) 159
d) 190
Answer: b

Question: —refers to the transfer of assets or services function from public to private ownership?
a) Globalization
b) Privatization
c) Disinvestment
d) Liberalization
Answer: b

Question: Outsourcing is good for India because
a) It provides employment to large number of unemployed
b) It provides excellence in a particular field
c) Both a and b
d) Neither a nor b
Answer: c

Question: It refers to contracting out some of its activities to a third party which were earlier performed by the organization
a) Globalization
b) Outsourcing
c) Privatization
d) Liberalization
Answer: b

Question: Trade between two countries is known as
a) Bilateral Trade
b) Multi lateral Trade
c) Both a and b
d) Neither a nor b
Answer: a

Question: GATT was established in the year:
a) 1958
b) 1948
c) 1968
d) 1995
Answer: b

Question: Financial sector reforms mainly relate to :
a) Banking sector
b) Foreign Exchange Market
c) Both a and b
d) Insurance sector
Answer: c

Question: Reforms have not been able to benefit agriculture because of
a) Public investment in agriculture sector especially in infrastructure has fallen
b) Rise in subsidy
c) Rise in import duties on agriculture products
d) Shift from production of cash crops to food crops
Answer: a