Structural Changes: NBSE Class 12 Economics questions, answers
Here, you will find summaries, questions, answers, textbook solutions, pdf, extras etc., of (Nagaland Board) NBSE Class 12 (Arts/Commerce) Economics Part II Chapter 3: Structural Changes. These solutions, however, should be only treated as references and can be modified/changed.
Introduction
India’s journey towards becoming a global economic powerhouse has been marked by significant strides in its industrial sector. The evolution of this sector has been instrumental in shaping the country’s economic landscape, driving growth, and enhancing the nation’s global competitiveness.
The industrial sector’s importance is underscored by its role in fostering innovation and technological advancement. The deregulation of industries since the 1990s has opened up the sector to private enterprises, fostering a competitive environment that has spurred innovation. This deregulation has also led to the influx of foreign capital, bringing with it advanced technologies and management techniques that have further propelled the sector’s growth.
Moreover, the industrial sector has been a key driver of employment in India. The establishment of production and trading units by foreign companies has created numerous job opportunities, contributing to the country’s socio-economic development. This has been complemented by the growth of the service sector, which has seen significant improvements in areas such as telecommunications, insurance, and banking, thanks to the entry of foreign companies.
The industrial sector has also played a pivotal role in the development of India’s capital market. The influx of foreign direct investment and portfolio investment has not only boosted the sector’s growth but also enhanced the country’s financial stability.
Furthermore, the industrial sector’s growth has had a ripple effect on other sectors of the economy. The increase in industrial production has led to an expansion of the market, enabling Indian businesses to extend their reach globally.
However, the journey is far from over. The sector continues to face challenges such as the need for further technological advancement, the requirement for skilled labor, and the need for sustainable and inclusive growth. Addressing these challenges will be crucial for the sector to continue playing its pivotal role in India’s economic development.
Textual questions and answers
Multiple Choice Questions
1. Which of the following statements is untrue?
(a) Deregulation of the industries is not good for the economy
(b) Structural reforms are long-term measurers
(c) Globalisation is achieved by increasing tourism
(d) liberalization is an economic reform
Answer: (a) Deregulation of the industries is not good for the economy
2. Public sector failed as it could not
(a) Keep costs low
(b) produce new goods
(c) compete with imported goods
(d) all of these
Answer: (d) all of these
3. Which of the following statements is not true?
(a) Globalisation is opening up of the economy to the rest of the world
(b) Liberalisation is removal of controls from the private sector
(c) Privatisation is reducing the economic activity of private sector
(d) None of these
Answer: (c) Privatisation is reducing the economic activity of private sector
4. Match the items of Column-I with Column-II and choose the correct alternative:
Column-I
A Goods produced by small scale industries were dereserved
B Foreign Investment limit raised to around 50%
C The rate of corporation tax, has been reduced
D Market determined exchange rates system was adopted
Column-II
(i) Tax Reforms
(ii) Foreign Exchange Reforms
(iii) Financial Sector Reforms
(iv) Deregulation of Industrial Sector
(a) A-(iv) B-(iii) C-(i) D-(ii)
(b) A-(iii) B-(iv) C-(i) D-(ii)
(c) A-(iv) B-(iii) C-(ii) D-(i)
(d) A-(iii) B-(iv) C-(ii) D-(i)
Answer: (a) A-(iv) B-(iii) C-(i) D-(ii)
5. Outsourcing was first recognized as a business strategy in 1989 and became an integral part of business economics throughout the 1990s. The practice of outsourcing is subject to considerable controversy in many countries. India has become one of the favourable destinations for outsourcing because of:
(a) high wage rates
(b) availability of skilled manpower
(c) low taxes
(d) all of the above
Answer: (b) availability of skilled manpower
6. In 1991, an immediate measure taken to resolve the Balance of Payments crisis was:
(a) to free the determination of rupee value in the foreign exchange market from government control.
(b) devaluation of rupee against foreign currencies.
(c) removing the trade barriers, quotas and tariffs.
(d) simplification of export and import procedures.
Answer: (b) devaluation of rupee against foreign currencies.
7. Statement (1): Demonetisation was the step taken by the Government of India in order to tackle the problems of corruption, black money, terrorism and circulation of fake currency in the Indian Economy.
Statement (2): Demonetisation has ensured improved tax compliance in India over the period of time.
(a) Both 1 and 2 are true.
(b) 1 is true and 2 is false.
(c) 1 is false and 2 is true.
(d) Both 1 and 2 are false.
Answer: (b) 1 is true and 2 is false.
8. Statement (1): Economic Reforms of 1991 paved the way for the liberalisation of Indian Economy.
Statement (2): Economic Reforms of 1991 relaxed the restrictions imposed by the government on private sector.
(a) Both 1 and 2 are true.
(b) 1 is true and 2 is false.
(c) 1 is false and 2 is true.
(d) Both 1 and 2 are false.
Answer: (a) Both 1 and 2 are true.
9. Statement (1): India is often called as the ‘Outsourcing Hub’ of the world.
Statement (2): Availability of skilled manpower is one of the prime factors responsible for the status gained by India at the international platform in the context of outsourcing.
(a) Both 1 and 2 are true.
(b) 1 is true and 2 is false.
(c) 1 is false and 2 is true.
(d) Both 1 and 2 are false.
Answer: (a) Both 1 and 2 are true.
10. Read the following statements-Assertion (A) and Reason (R).
Assertion (A): Launch of LPG policies has caused a significant shift in the structure of the Indian markets, they are now increasingly shedding their monopoly nature and becoming more competitive in nature.
Reason (R): Equity limit of foreign capital investment has been raised from the initial 40%, it now ranges between 51-100%.
Choose one of the correct alternatives given below-
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true but Reason (R) is not the correct explanation of Assertion (A).
(c) Assertion (A) is true but Reason (R) is false.
(d) Assertion (A) is false but Reason (R) is true.
Answer: (b) Both Assertion (A) and Reason (R) are true but Reason (R) is not the correct explanation of Assertion (A).
Very Short-Answer Type Questions
1. What are tariffs?
Answer: Tariffs, also known as duties, are taxes imposed on imports, so as to discourage imports.
2. Give one important function of NITI Aayog.
Answer: One important function of NITI Aayog is to act as the premier policy ‘think tank’ of the Government of India, providing both directional and policy inputs.
3. How does devaluation affect foreign trade?
Answer: Devaluation is the fall in the value of domestic currency with respect to foreign currency. It was used to make up for the balance of payment crisis.
4. Give one word for selling of government shares in the public sector.
Answer: Disinvestment.
5. When was the New Economic Policy introduced?
Answer: The New Economic Policy was introduced in July 1991.
6. Mention any two causes for the economic crisis of 1991 in India.
Answer: Two causes for the economic crisis of 1991 in India are:
(i) The rise in price of crude oil due to the Gulf crisis.
(ii) Remittances from Non-resident Indians (NRI’s) working in the Gulf countries dried up.
7. What are ‘remittances’?
Answer: Remittances are foreign currency transferred by those working outside the country, to their families and friends in their own country.
8. Define ‘privatisation’.
Answer: Privatisation is the encouragement to private sector by reducing government control in certain activities.
9. What is ‘globalisation’?
Answer: Globalisation is the integration of the economy with the world economy through free trade and free movement of capital.
10. Give two ways in which the Indian industries were deregulated.
Answer: The following are two ways in which the Indian industries were deregulated:
(i) Delicensing of Industries: The government has delicensed several industries in a phased manner.
(ii) Removal of Restriction on Size of Industry: The threshold limit of assets for MRTP companies was abolished, allowing them to expand and modernize.
Indian industries were deregulated in ways:
(i) Delicensing several industries in a phased manner.
(ii) Threshold limit of assets for MRTP companies was abolished, allowing them to expand and modernize.
Short-Answer Type Questions-I
1. How is delicensing of industries an advantage for the private sector?
Answer: Delicensing was a step towards liberalising industries from government controls and regulations. All other industries have been thrown open to the private sector. Industries were free to expand and produce, and the fixation of limits to the production level was eliminated.
2. On 8th November 2016, Government of India demonetized existing currency notes of ₹1000 and ₹500. State two positive outcomes brought about by demonetization.
Answer: Two positive outcomes brought about by demonetization are:
(i) To tackle the problems of corruption and black money.
(ii) To tackle the problems of terrorism and circulation of fake currency.
3. Explore the Industrial Policy Reforms under NEP-1991.
Answer: Under the New Industrial Policy announced in July 1991, the specific changes introduced were:
(i) Delicensing of Industries: Since 1991 the government has delicensed several industries in a phased manner. At present, only six industries such as alcohol, cigarettes, hazardous chemicals, electronic aerospace and defence equipment, industrial explosives and drugs and pharmaceuticals alone require permission from the State.
(ii) Removal of Restriction on Size of Industry: Under the Monopolies and Restrictive Trade Practices Act (MRTP Act), the government had placed a ceiling on the size of large scale enterprise. The threshold limit of assets for MRTP companies was abolished under the New Industrial Policy 1991
(iii) Reduction in Number of Industries Reserved: As per the Industrial Policy Resolution, 1956, 17 industries were reserved for the public sector. In 1991, this number was reduced to 8 and presently only 3 industries are reserved for the public sector.
(iv) Encouragement to Foreign Capital: Before 1991, the government regulated foreign investment. Since 1991, the government has become more liberal in its policy towards foreign investment in India.
Under the New Industrial Policy announced in July 1991, specific changes introduced were:
(i) Delicensing of Industries: The government delicensed several industries.
(ii) Removal of Restriction on Size of Industry: Threshold limit for MRTP companies was abolished.
(iii) Reduction in Number of Industries Reserved: Industries were reduced to 3.
(iv) Encouragement to Foreign Capital: government has become more liberal.
4. What are Fiscal Policy Reforms? Explain.
Answer: Fiscal policy is the revenue and expenditure policy of the government. The NEP took the following steps to control the poor fiscal situation in the country:
(i) Tax Reforms: Taxes are the main source of revenue for the government and they also serve as tools to control production, consumption and distribution of commodities.
(ii) Reduction in Government Expenditure: The government also made an attempt to reduce its expenditure. Unnecessary expenditure was cut down.
(iii) Sale of Government Enterprises: The government also tried to sell its capital in certain PSUs where private sector was willing to participate. This is known as disinvestment.
5. Why are tariffs imposed on imports?
Answer: Tariffs, also known as duties, are imposed on imports so as to discourage imports.
6. Explain the need for delicensing of Indian industries in 1991.
Answer: The need for delicensing of Indian industries was to remove all the obstacles that had come in the way of industrial development and had in fact led to a near stagnation of Indian industries since the 1970s. These measures would also increase competition for the public and private sector industries.
7. How were the fiscal reforms able to increase the net tax?
Answer: The fiscal reforms were aimed at reducing the tax rates and increasing the tax net. To overcome the problem of tax evasion and a large proportion of income being unreported, both direct and indirect taxes were reduced. The complicated procedure was also simplified for greater tax compliance.
8. What is disinvestment? What is the controversy associated with this measure?
Answer: Disinvestment is the sale of ownership of government (as equity) to the private sector.
The controversy associated with this measure is that the sale of Bharat Aluminium Company (BALCO), a profit making PSU, was under much controversy as it was said to have been sold to a private entrepreneur at a very low value.
9. What benefits does India derive from outsourcing?
Answer: The benefits India derives from outsourcing are that Indian Business Process Outsourcing (BPO) companies are already gaining prominence and earning precious foreign exchange.
10. Give three arguments in favour of globalisation.
Answer: Three arguments in favour of globalisation are:
(i) Increase in Foreign Collaboration: Foreign collaboration agreements can be technical collaboration, financial collaboration or both.
(ii) Increase in Foreign Exchange Reserves: As a result of globalisation of Indian economy, foreign exchange reserves have also increased substantially.
(iii) Technological Development: Globalisation has enabled the inflow of foreign technology, which is very superior and advanced.
Short-Answer Type Questions-II
1. “We’re totally delighted that this process is complete and happy to have Air India back in the Tata Group”, said Tata Sons chairman N Chandrasekaran. The debt laden Air India has been purchased by Tata Sons from the government of India on 27th January 2022. The Government said running the airline was incurring losses of nearly $2.6 Million every day. The airline’s management cited rising aviation fuel prices and airport usage charges as well as competition from low-cost carrier, a weakening rupee and the interest burden for its poor financial performances. Explain any two positive and two negative impacts of privatizing Air India.
Answer: The positive impacts (merits) of privatisation are:
(i) Increase in Efficiency: Privatisation of public sector industries increases their productivity, profitability and effectiveness.
(ii) Increase in Competition: By privatising existing public sector units, benefits of competition can be increased. Consumers are benefited as a result of increase in competition bcause now there is no monopoly of public sector units and the business environment is more competitive.
The negative impacts (demerits) of privatisation are:
(i) No Social Welfare: Under privtisation, private entrepreneurs are keen to invest their capital in those industries in which margin of profit is very high. Private sector gives more importance to profit motive than social welfare.
(ii) Increase in Unemployment: Private entrepreneurs employ highly sophisticated technology which is mostly capital intensive. Such technology causes unemployment.
2. Why did RBI change its role from a controller to that of a facilitator of financial sector in India?
Answer: Under the NEP, the government brought in many changes in the financial sector as a competitive financial sector is necessary to promote structural reforms. The RBI was now seen more as a facilitator rather than as a controller of finance. The financial sector was no longer required to seek approval from the RBI in many matters.
3. Agriculture sector appears to be adversely affected by the reform process. Why?
Answer: The poor performance of the agricultural sector has been attributed to a decline in public investment in infrastructure such as irrigation and transport, decline in farmers’ subsidy and greater competition from international arena due to withdrawal of minimum support prices.
Production for exports has reduced the domestic supply and has, therefore, pushed up the prices of foodgrains.
4. Why has the industrial sector performed poorly in the reform period?
Answer: Much of the decline in industrial growth is due to the opening up of the economy to international competition. Domestic goods have been replaced by cheaper and better quality imported ones.
Employment in the organised sector has fallen.
Though developed countries are approaching India as a vast market for their goods, Indian goods are unable to reach other markets due to various non-tariff barriers.
5. How did the MRTP Act contain industrial growth? Give the steps taken to remove these hurdles.
Answer: Under the Monopolies and Restrictive Trade Practices Act (MRTP Act), the government had placed a ceiling on the size of large scale enterprise (assets worth ₹100 crore in 1985). Beyond this limit the industry had to take step-by-step approval from the government. This was restrictive to further expansion, diversification and modernisation of private industries.
The threshold limit of assets for MRTP companies was abolished under the New Industrial Policy 1991. This paved the way for consolidation of large industrial houses in a globally competitive environment.
6. Discuss the reforms introduced in the financial sector in India under the NEP, 1991.
Answer: The financial sector comprises financial institutions such as the commercial banks, investment banks, stock exchange and foreign exchange markets with the Reserve Bank of India (RBI) as the controlling authority. Under the NEP, the government brought in many changes in the financial sector as a competitive financial sector is necessary to promote structural reforms. The RBI was now seen more as a facilitator rather than as a controller of finance. The financial sector was no longer required to seek approval from the RBI in many matters. These reforms were:
(i) Freedom to Determine Own Interest rates: Up to 1991, the RBI was deciding the interest rates for banks on loans given and deposits taken. As per the NEP 1991, banks could charge own interest rates on loans and choose to give a suitable rate on deposits. This step increased competitiveness in the banking sector and consumers benefited immensely. Private banks were encouraged to come up.
(ii) Private Banks Granted Permission: Before 1991, all banks were owned either by the RBI or by the government. Private banks were not permitted. The NEP encouraged private banks and so many private banks such as the ICICI, HDFC, Lord Krishna and ABN-Amro were set up in India. This further increased the competition to the benefit of the consumers in terms of both lower interest rates and better quality services.
(iii) Permission for Foreign Investment: Since 1991, foreign investment limit in banks was raised to 50 per cent. Foreign Institutional Investors (FIIs) such as merchant bankers, mutual funds and pension funds can now invest in Indian markets.
7. Give two merits and two demerits of globalisation.
Answer: Two merits of globalisation are:
- Increase in Foreign Collaboration: Foreign collaboration agreements can be technical collaboration, financial collaboration or both. In financial collaboration, foreign companies provide financial resources, while in technical collaboration modern foreign technology is provided by foreign companies. Foreign companies are setting up many enterprises in India in collaboration with Indian companies.
- Increase in Foreign Exchange Reserves: As a result of globalisation of Indian economy, foreign exchange reserves have also increased substantially. In 1991, foreign exchange reserves of India amounted to ₹ 4,388 crore which on 22nd April, 2016 increased to ₹ 23,93,220 crore (US$ 361.6 billion).
Two demerits of globalisation are:
- Unemployment: Foreign companies operating in India use capital-intensive technology. Even some Indian companies use imorted capital-intensive technology. With the incresing use of computers and automatic machines, employment avenues are reduced.
- Exploitation of Labour: Globalisation is exploiting unskilled workers by giving lower wages, less job security, long working hours. Labourers have to work even in these conditions because bad jobs and less wages are better than no jobs.
8. Briefly discuss the features of LPG.
Answer: The NEP laid stress on replacing the licence, quota and permit (LQP) raj by liberalisation, privatisation and globalisation (LPG) regime. The first two are policy strategies adopted while globalisation is the outcome of these two strategies. The meaning of these three terms which are three main elements of NEP are:
Liberalisation: No economy is completely free of restrictions. Whenever these restrictions or controls are slackened or removed, the regime is said to be following a policy of liberalisation. Liberalisation is the removal or reduction of various types of controls and restrictions, which are in force in the economy, in order to allow trade and industry to function more freely.
Privatisation: Privatisation is the opening of the economy to the private sector by reducing the control of the government on certain activities. The world was also witnessing a wave of de-nationalisation around this time.
Globalisation: Globalisation is the integration of the economy with the world economy through free trade and free movement of capital. It means opening up of the domestic market to the international markets by reducing the trade barriers and allowing free flow of capital, labour and technology. Actually, it results from liberalisation and privatisation.
Long-Answer Type Questions-I
1. Explain any three merits and three demerits of liberalisation.
Answer: The merits of liberalisation are:
(i) Increase in Foreign Investment: With liberalisation, increase in foreign investment was observed. In the last few years, there has been a huge inflow of foreign investment in the form of foreign direct investment and portfolio investment.
(ii) A Growing Economy: With liberalisation, overall level of economic activity has increased at a much faster pace that the growth of GDP shot up as 8 percent per annum.
(iii) Control over Price: Before liberalisation, inflation rate was very high in our economy. With liberalisation, both competition and production have increased which has helped check the rising prices. In the year 2009–10, inflation rate was only 3.8 per cent, while this rate was 12.1 per cent in the year 1990–91.
The demerits of liberalisation are:
(i) Increase in Unemployment: Liberalisation has accelerated the use of capital intensive technology. It has promoted computerisation and mechanisation of industrial activities in the economy, which in turn has led to an increase in unemployment rate of even the skilled labour.
(ii) Loss of Small Business Units: With an increase in competition in the economy, small business units which were not strong enough to compete with the multinational corporations have closed down.
(iii) Created Regional Imbalances: Though foreign investment in the economy was accelerated, no foreign investor or firm shows interest in setting up business units in backward regions. This created further regional imbalances in the economy.
2. Explain the reforms introduced in the financial sector in India under the NEP, 1991.
Answer: The financial sector comprises financial institutions such as the commercial banks, investment banks, stock exchange and foreign exchange markets with the Reserve Bank of India (RBI) as the controlling authority. Under the NEP, the government brought in many changes in the financial sector as a competitive financial sector is necessary to promote structural reforms. The RBI was now seen more as a facilitator rather than as a controller of finance. The financial sector was no longer required to seek approval from the RBI in many matters. These reforms were:
(i) Freedom to Determine Own Interest rates: Up to 1991, the RBI was deciding the interest rates for banks on loans given and deposits taken. As per the NEP 1991, banks could charge own interest rates on loans and choose to give a suitable rate on deposits. This step increased competitiveness in the banking sector and consumers benefited immensely. Private banks were encouraged to come up.
(ii) Private Banks Granted Permission: Before 1991, all banks were owned either by the RBI or by the government. Private banks were not permitted. The NEP encouraged private banks and so many private banks such as the ICICI, HDFC, Lord Krishna and ABN-Amro were set up in India. This further increased the competition to the benefit of the consumers in terms of both lower interest rates and better quality services.
(iii) Permission for Foreign Investment: Since 1991, foreign investment limit in banks was raised to 50 per cent. Foreign Institutional Investors (FIIs) such as merchant bankers, mutual funds and pension funds can now invest in Indian markets. Barkleys, Merryl Lynch, Morgan Stanley are some such examples. Foreign investment was allowed in the insurance sector.
3. Explain any three merits and three demerits of globalisation.
Answer: The merits of globalisation are:
(i) Increase in Foreign Collaboration: Foreign collaboration agreements can be technical collaboration, financial collaboration or both. In financial collaboration, foreign companies provide financial resources, while in technical collaboration modern foreign technology is provided by foreign companies. Foreign companies are setting up many enterprises in India in collaboration with Indian companies.
(ii) Increase in Foreign Exchange Reserves: As a result of globalisation of Indian economy, foreign exchange reserves have also increased substantially. In 1991, foreign exchange reserves of India amounted to ₹ 4,388 crore which on 22nd April, 2016 increased to ₹ 23,93,220 crore (US$ 361.6 billion). Thus, there has been an increase of 545 times in foreign exchange reserves of India.
(iii) Technological Development: Globalisation has enabled the inflow of foreign technology, which is very superior and advanced. Now Indian business units use this modern technology.
The demerits of globalisation are:
(i) Unemployment: Foreign companies operating in India use capital-intensive technology. Even some Indian companies use imported capital-intensive technology. With the increasing use of computers and automatic machines, employment avenues are reduced.
(ii) Exploitation of Labour: Globalisation is exploiting unskilled workers by giving lower wages, less job security, long working hours. Labourers have to work even in these conditions because bad jobs and less wages are better than no jobs.
(iii) Increase in Inequalities: Globalisation has increased inequalities in our economy. Globalisation has benefitted MNCs and big industrial units but small and cottage industries are adversely hit by it. It has increased income inequalities in India.
4. What are the major factors responsible for the high growth of the service sector?
Answer: Services have recorded a more consistent growth. There has been an upsurge in industry related services such as insurance, financing, real estate and business services, especially outsourcing services. There is a rising external demand for the call centre and software related services.
5. Agricultural sector appears to be adversely affected by the reform process. Why?
Answer: The poor performance of the agricultural sector has been attributed to a decline in public investment in infrastructure such as irrigation and transport, decline in farmers’ subsidy and greater competition from international arena due to withdrawal of minimum support prices. Production for exports has reduced the domestic supply and has, therefore, pushed up the prices of foodgrains.
6. Why did the industrial sector perform poorly in the reform period?
Answer: Much of the decline in industrial growth is due to the opening up of the economy to international competition. Domestic goods have been replaced by cheaper and better quality imported ones. Employment in the organised sector has fallen. Though developed countries are approaching India as a vast market for their goods, Indian goods are unable to reach other markets due to various non-tariff barriers.
7. Discuss the economic reforms in India in the light of social justice and welfare.
Answer: Growth has neither generated employment nor it has reduced the rising inequality. As a result, a large proportion of the population is deprived and excluded from the fruits of development even though economic growth has increased.
Jobs in the organised sector have not increased despite faster growth. The percentage of our population below the poverty line is declining but only at a modest pace. Malnutrition levels also appear to be declining, but the magnitude of the problem continues to be very high. Far too many people still lack access to basic services such as health, education, clean drinking water and sanitation facilities without which they cannot claim their share in the benefits of growth. Women have increased their participation in the labour force as individuals, but continue to face discrimination and are subject to increasing violence.
8. Discuss privatisation stating its features, merits and demerits.
Answer: Privatisation is the opening of the economy to the private sector by reducing the control of the government on certain activities. The world was also witnessing a wave of de-nationalisation around this time. The measures adopted under privatisation include reducing the number of industries reserved for public sector from 17 to only 2, and selling sick PSUs to the private sector. Up to 74 per cent of shares have been sold to foreign investors, institutional investors, mutual funds, public and workers. In some PSUs, even 100 per cent shares are disinvested.
The merits of privatisation are:
(i) Increase in Efficiency: Privatisation of public sector industries increases their productivity, profitability and effectiveness.
(ii) International Trends: Most of the developed economies have already adopted privatisation. Therefore by adopting privatisation, our economy will come in line with international trends and internationally competitive.
(iii) Increase in Competition: By privatising existing public sector units, benefits of competition can be increased. Consumers are benefited as a result of increase in competition because now there is no monopoly of public sector units and the business environment is more competitive.
(iv) Reducing in Economic Burden of Government: Through privatisation, the private sector will share the burden of economic development and will provide funds for capital investment. The burden of the government with regard to investment in new projects, modernisation of loss-making projects, sick units is reduced.
(v) Reduction in Political Interference: Now there is no delay in taking industrial decisions there is no political interference. Industries are run on sound economic principles. Functioning of these industries by the experts becomes possible.
(vi) Encouragement to New Inventions: In private sector, more emphasis is given to research. Privatisation encourages new inventions, research and development activities.
(vii) Increase in Industrial Growth Rate: Privatisation promotes industrialisation. It further creates employment, boosts industrial production, and promotes export.
(viii) Increase in Foreign Direct Investment: Privatisation promote globalisation. It encourages foreign investors to invest in domestic economy. In India, from April 2000 to March 2016, ₹ 14,95,326 crore is invested in the form of Foreign Direct Investment.
The demerits of privatisation are:
(i) No Social Welfare: Under privatisation, private entrepreneurs are keen to invest their capital in those industries in which margin of profit is very high. Private sector gives more importance to profit motive than social welfare.
(ii) Class Struggle: Privatisation implies class struggle. Capitalists (entrepreneurs) and labourers have conflicting interests that adversely affect smooth functioning of the economy.
(iii) Political Pressure: Some political parties mainly communists (left parties) are against privatisation. So, it hinders the process of privatisation.
(iv) Increase in Unemployment: Private entrepreneurs employ highly sophisticated technology which is mostly capital intensive. Such technology causes unemployment.
(v) Problem of Financing: Private sector needs huge resources to buy public sector enterprises. Private sector cannot manage large financial resources all by itself. If it borrows funds from financial institutions to buy share of public enterprises, then it will amount to buying government enterprises with government funds by the private sector. However, because people are less sure of the profitability of public sector enterprises and so they will be reluctant to invest their capital therein.
(vi) Increase in Regional Imbalances: Private entrepreneurs prefer to set up their units in already developed regions. It has led to regional imbalances (regional disparities).
Long-Answer Type Questions-II
1. Explain trade and capital flows reforms undertaken in 1991.
Answer: Protection of Indian industries was no longer contributing to economic growth. India had to encourage international competitiveness by-(i) improving efficiency of Indian industries and (ii) attracting modern and better technology. For this, Indian industries needed to transact freely with the rest of the world. Trade was opened up and capital flows from rest of the world were encouraged with the following measures:
(i) Reduction in Customs Duties/Tariffs: The peak rates of customs tariff had been as high as 300 per cent. These were reduced to 150 per cent and gradually it was reduced to 10 per cent in the 2007-08 Budget. Even export duties have been reduced, so Indian exports are more competitive internationally. In case of reduced import duties, there is greater competition between domestic and foreign goods.
(ii) Import-Export Quota: Quotas or quantitative restrictions on imports and exports were maintained. Under the NEP, these quantitative restrictions have been greatly reduced and done away with in certain goods such as in manufactured consumer goods and agricultural products all quotas have been withdrawn since 2001.
(iii) Liberalisation of Investment: The government has also liberalised capital inflows in the form of foreign direct investment as part of the external sector reforms. Many Multinational Corporations (MNCs) such as Renault, Walmart, etc., have already entered the vast expanding Indian market.
(iv) Relaxation of Import Licenses: Earlier industries required licences or permits for imports. Under the NEP, many goods have been rid of the need for government licence. This has encouraged industries to source raw materials and inputs at better prices which has made them more efficient and competitive.
2. Do you think outsourcing is good for India? Why are developed countries opposing it?
Answer: Outsourcing is good for India. India is often called as the ‘Outsourcing Hub’ of the world. Indian Business Process Outsourcing (BPO) companies are already gaining prominence and earning precious foreign exchange. Services have recorded a more consistent growth. There has been an upsurge in industry related services such as insurance, financing, real estate and business services, especially outsourcing services. There is a rising external demand for the call centre and software related services.
Developed countries are opposing it because outsourcing transfers jobs from their countries to developing nations like India where labour is cheaper. This leads to a reduction in employment opportunities in developed countries, causing unemployment and resentment among their local workers who feel their jobs are being taken away.
3. India has certain advantages which make it a favourite outsourcing destination. What are these advantages?
Answer: Availability of skilled manpower is one of the prime factors responsible for the status gained by India at the international platform in the context of outsourcing.
4. Describe the economic crisis that engulfed India in 1991. What led to such a situation?
Answer: In 1991, a major economic crisis engulfed India. Towards the end of 1990, Iraq invaded Kuwait and the Gulf crisis that occurred thereafter adversely affected the Indian economy in a major way. The resultant rise in price of crude oil erupted as a major crisis in the Indian economy. A major component of India’s imports is crude oil and by the middle of 1991, India did not have enough foreign exchange reserves to pay for even two weeks of imports. The government was on the brink of becoming a defaulter in repayment of debt for the first time in history. NRI capital in India was withdrawn suddenly by the investors as India was rated very low by the credit rating agencies.
The following factors led to this situation:
(i) The Origin of Economic Crisis: The careless management of the economy led to certain imbalances causing this crisis. This was the result of an attempt made to live beyond its means. Domestically, the government had much more expenditure than income. The deficit in the income was being met by borrowings at home and from abroad.
(ii) Poor performance by the public sector undertakings: Though a few public sector undertakings (PSUs) performed well, overall the performance was dismal. Rather than being a vehicle for faster industrialisation, many of the PSUs proved to be a drag on economic growth.
(iii) Inflationary pressures: The rate of inflation reached double figures (10.3 per cent in 1990-91). A cause for concern was the rising price of food.
(iv) Increasing debt burden: In the decade of 1980–90, the government had outlived its means; expenditure was much higher than revenue. This had led the government to raise revenue from domestic sources and borrow from the rest of the world.
(v) Fragile balance of payments position: Foreign exchange earned from exporting to other countries is used for paying for imports primarily for petroleum. India’s imports soared despite the heavy duties and quotas. Exports, on the other hand, did not rise as expected due to non-competitive quality and high price of Indian goods in the international market.
5. How privatisation proved to be beneficial for India?
Answer: Privatisation proved to be beneficial for India in the following ways:
(i) Increase in Efficiency: Privatisation of public sector industries increases their productivity, profitability and effectiveness.
(ii) International Trends: Most of the developed economies have already adopted privatisation. Therefore by adopting privatisation, our economy will come in line with international trends and internationally competitive.
(iii) Increase in Competition: By privatising existing public sector units, benefits of competition can be increased. Consumers are benefited as a result of increase in competition because now there is no monopoly of public sector units and the business environment is more competitive.
(iv) Reducing in Economic Burden of Government: Through privatisation, the private sector will share the burden of economic development and will provide funds for capital investment. The burden of the government with regard to investment in new projects, modernisation of loss-making projects, sick units is reduced.
(v) Reduction in Political Interference: Now there is no delay in taking industrial decisions there is no political interference. Industries are run on sound economic principles. Functioning of these industries by the experts becomes possible.
(vi) Encouragement to New Inventions: In private sector, more emphasis is given to research. Privatisation encourages new inventions, research and development activities.
(vii) Increase in Industrial Growth Rate: Privatisation promotes industrialisation. It further creates employment, boosts industrial production, and promotes export.
(viii) Increase in Foreign Direct Investment: Privatisation promote globalisation. It encourages foreign investors to invest in domestic economy.
Additional/extra questions and answers
1. Describe the performance of public sector undertakings between 1950 and 1990.
Answer: In the forty-year period after independence, though a few public sector undertakings (PSUs) performed well, the overall performance was dismal. Rather than being a vehicle for faster industrialisation, many of the PSUs proved to be a drag on economic growth. They had been recording losses for a long time and the government had to go on supporting them with funds.
67. What were the short-term and long-term objectives of the New Economic Policy of 1991?
Answer: In response to the crisis situation of 1990-91, the government introduced policy reforms under the New Economic Policy (NEP). The objectives of the NEP were twofold.
- The short-term objective was to introduce stabilisation measures to correct imbalances in the economy.
- The long-term objective was to introduce structural adjustments to improve the productivity of labour and capital, so that efficiency and output might improve.
Additional/extra MCQs
1: What was the approximate rate of inflation in India during the economic crisis of 1990-91?
A. 5.6 per cent
B. 8.2 per cent
C. 10.3 per cent
D. 12.1 per cent
Answer: C. 10.3 per cent
35: (I) The government created the National Investment Fund in 2005.
(II) Proceeds from the disinvestment of Public Sector Undertakings are used to finance social sector schemes.
A. I is the cause of II.
B. II explains the purpose of I.
C. I and II are unrelated events.
D. I is a contradiction of II.
Answer: B. II explains the purpose of I.
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