NCERT Solutions for Class 11 Economics Indian Economic Development Chapter 3: Liberalisation, Privatisation and Globalisation: An Appraisal

Chapter at a glance

Exercise Questions

Answer

In 1991 India faced a severe economic crisis:

1. Foreign exchange reserves fell so low that they could pay for imports for only about two weeks; India could not repay its foreign loans.
2. Imports grew much faster than exports, causing a balance of payments crisis.
3. Government spending exceeded revenue; there was a large fiscal deficit and rising public debt, much of it spent on non-development items.
4. Prices of essential goods rose sharply (high inflation).
5. PSUs were inefficient, and the licence system had made industry uncompetitive.

India approached the World Bank and IMF for a loan of about $7 billion; they required India to liberalise its economy. This led to the New Economic Policy of 1991.

Reforms were introduced to overcome the 1991 balance of payments and fiscal crisis and to make the economy more efficient and competitive.

Answer

1. The WTO sets up a rule-based trading system; members get non-discriminatory access to the markets of all other member countries.
2. Members gain from lower tariff and non-tariff barriers worldwide, which expands exports.
3. It provides a forum to settle trade disputes.
4. Developing countries can bargain collectively for fair terms, e.g. on agricultural subsidies of developed countries.
5. It covers trade in goods and services as well as intellectual property; staying outside would isolate a country from world trade.

WTO membership gives fair access to world markets, lower trade barriers, a dispute-settlement forum and a voice in setting trade rules.

Answer

• Before 1991, the RBI decided almost everything: interest rates, the nature of lending, and the opening of branches. This made banks inefficient and uncompetitive.
• The reforms aimed to give banks freedom so that the financial sector could be market-driven, efficient and competitive, and could mobilise savings for growth.
• Private and foreign banks were allowed; banks could fix most interest rates and open branches without permission.

So the RBI changed from a regulator that controls everything to a facilitator that guides the system, while still keeping some controls to protect account holders and the country.

To let banks decide freely on interest rates, lending and branches, making the financial sector competitive and efficient, while RBI only guides and supervises.

Answer

The RBI controls commercial banks through:

1. Cash Reserve Ratio (CRR): the share of deposits banks must keep with the RBI.
2. Statutory Liquidity Ratio (SLR): the share of deposits banks must keep as liquid assets.
3. Bank Rate, repo and reverse repo rates: affect the cost of borrowing for banks and hence interest rates.
4. Open market operations: buying and selling government securities to change the money supply.
5. Selective credit controls and directions on priority-sector lending.
6. Licensing and supervision: permission for new banks, inspection of accounts and norms for capital adequacy.

Through CRR, SLR, policy rates, open market operations, selective credit controls, and licensing and supervision of banks.

Answer

Devaluation is a deliberate reduction by the government in the value of the domestic currency in terms of foreign currencies. In 1991 the rupee was devalued, so more rupees were needed to buy one dollar.

Effects: Indian goods become cheaper for foreigners, so exports rise; imports become costlier, so imports fall. This helps to correct the balance of payments.

Devaluation is an official reduction in the rupee’s value against foreign currencies, making exports cheaper and imports dearer.

Answer

(i) Strategic sale vs Minority sale

(ii) Bilateral vs Multilateral trade

(iii) Tariff vs Non-tariff barriers

1. Strategic sale transfers control, minority sale does not. (ii) Bilateral: two countries; multilateral: many. (iii) Tariffs are import taxes; non-tariff barriers are quotas and other restrictions.

Answer

1. To protect domestic industries from cheaper foreign goods, especially infant industries.
2. To reduce imports and improve the balance of payments, saving foreign exchange.
3. To raise revenue for the government.
4. To discourage the import of luxury or harmful goods.
5. To counter dumping by foreign producers.

Tariffs protect domestic industry, cut imports, save foreign exchange and raise government revenue.

Answer

Quantitative restrictions are limits on the quantity of goods that may be imported (or exported), usually by quotas or licences, rather than by taxes. For example, a rule that only 10,000 cars can be imported in a year. Under the 1991 reforms, quantitative restrictions on imports were removed (fully by 2001).

Quantitative restrictions are direct limits, such as quotas, on the quantity of goods that can be imported or exported.

Answer

No, I do not agree in general.

1. Profit-making PSUs earn revenue for the government, which can be used for welfare and development.
2. Many work in strategic sectors (defence, energy, oil) where public control is important.
3. They have social goals: employment, reasonable prices and development of backward regions.
4. Selling a profitable asset to meet a short-term budget deficit is like selling family silver, and it is often sold below its true value.

The better policy is to give such PSUs more autonomy (as under Navratna status) so they can compete better. Privatisation is more justified for loss-making units in non-strategic areas.

No; profitable PSUs earn revenue, serve strategic and social aims and should be given autonomy rather than sold.

Answer

Yes, outsourcing is good for India

1. It creates jobs for educated youth in call centres, IT, accounting, medical transcription and research.
2. It brings foreign exchange and foreign investment.
3. Workers gain skills and exposure to world standards; it has helped India’s service sector grow fast.

Why developed countries oppose it

• Jobs move from their countries to low-wage countries like India, causing unemployment at home.
• Money flows out of their economy, and there is political pressure from workers and trade unions.

Yes; outsourcing gives India jobs, foreign exchange and skills. Developed countries oppose it because their own jobs and income move abroad.

Answer

1. A large pool of skilled, English-speaking workers.
2. Low wages compared with developed countries.
3. Good IT and communication infrastructure.
4. Time-zone difference: work can be done during the night of Western countries, giving round-the-clock service.
5. Liberal government policies after 1991.
6. Political stability and a large number of technical institutions.

Cheap, skilled, English-speaking manpower; good telecom; favourable time zone; supportive policies.

Answer

Yes. In 1996 the government gave Navratna status to nine efficient, profit-making PSUs (later also Maharatna and Miniratna categories). The policy helped by:

1. Giving them greater managerial and operational autonomy in taking decisions, including investment.
2. Letting them raise funds and form joint ventures on their own.
3. Making them more competitive in domestic and world markets.

As a result many of these companies increased their profits and expanded (some became global players). Some critics say they are still not fully free of government control.

Yes; autonomy in decisions and funding made efficient PSUs more competitive, and their profits and size grew.

Answer

1. Liberalisation and globalisation opened the sector to private and foreign investment.
2. Growth of IT and telecom, and the boom in outsourcing.
3. Availability of cheap skilled labour.
4. Rising incomes and urbanisation, which raised demand for banking, insurance, hotels, health and education.
5. Reforms in the financial sector.
6. Exports of software and business services.

Liberalisation, IT and telecom revolution, outsourcing, cheap skilled labour and rising demand for services.

Answer

1. Public investment in agriculture (irrigation, power, roads, research) fell.
2. Fertiliser subsidy was reduced, raising the cost of production for small farmers.
3. Import duties on farm goods were lowered, so farmers faced competition from cheap, subsidised foreign produce.
4. Minimum support prices were reduced in relative terms; export-oriented policies shifted land from food crops to cash crops, raising food prices.
5. Price fluctuations exposed farmers to world market risks.

Reduced public investment and subsidies, lower import duties and a shift to cash crops hurt agriculture during the reforms.

Answer

1. Cheaper imports reduced demand for domestic goods.
2. Poor infrastructure (power supply, roads) due to low investment.
3. Developing countries still faced non-tariff barriers in developed countries’ markets, limiting exports.
4. Industries could not compete with large multinational companies.
5. Low investment in research and technology.

Cheap imports, poor infrastructure, low investment and barriers in foreign markets slowed industrial growth.

Answer

Positive effects

• Higher GDP growth, more foreign investment and foreign exchange reserves.
• Growth of services and better consumer choice.

Concerns about social justice

1. Benefits went mainly to high-income groups and to sectors such as IT, finance and telecom; inequality increased.
2. Agriculture and industry, which employ most people, grew slowly; job growth was weak.
3. Cuts in subsidies and public spending hit the poor and farmers.
4. Disinvestment and privatisation reduced job security; casual and contract employment increased.
5. Growth was concentrated in some regions, widening regional imbalances.

Conclusion. Reforms raised growth, but to achieve social justice the state must protect the vulnerable through spending on agriculture, health, education and employment programmes.

Reforms raised growth but widened inequality and neglected agriculture and jobs; state support for the poor is needed for social justice.

Topic checklist

• Causes of the 1991 crisis
• Liberalisation: industrial, financial, tax, foreign exchange and trade reforms
• Privatisation, disinvestment, Navratna policy
• Globalisation, outsourcing and the WTO
• Appraisal by sector and from the social-justice angle

Total questions answered: 16 of 16