CBSE Class 11 Economics Notes — Liberalisation, Privatisation and Globalisation

CBSE Class 11 Economics notes on liberalisation, privatisation and globalisation: the 1991 crisis, NEP, WTO, outsourcing, and effects on farming and industry.

Chapter Summary

This chapter explains why India launched economic reforms in 1991 after a balance of payments crisis, and what the New Economic Policy changed. It covers liberalisation, privatisation and globalisation, outsourcing and the WTO, then assesses the results: faster GDP growth led by services, rising foreign investment and reserves, but weak employment, agriculture and industry. Useful for CBSE Class 11 Economics revision.

Key Concepts

The 1991 Crisis and Its Background

India followed a mixed economy framework after independence, combining features of capitalism and socialism. Some scholars argue that the many rules and controls this created ended up slowing growth. Others point out that India, starting from near stagnation, built a diversified industrial base, raised savings and achieved food security. In 1991 the country faced an economic crisis in its external accounts. The government could not repay its foreign borrowings, and foreign exchange reserves had fallen so low that they could not pay for even two weeks of imports. Prices of essential goods were also rising.

The roots of the crisis lie in the way the economy was managed in the 1980s. Government expenditure kept exceeding its revenue, since taxes and the income from public sector enterprises were not enough. The gap was filled by borrowing from banks, people and international institutions. Heavy spending went to areas that do not give immediate returns, such as social sectors and defence. Foreign exchange was sometimes spent on consumption, and exports were not raised enough to pay for growing imports. By the late 1980s borrowing became unsustainable, and no country or international lender was ready to lend to India.

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The New Economic Policy: Stabilisation and Structural Reforms

To manage the crisis India approached the International Bank for Reconstruction and Development (World Bank) and the International Monetary Fund (IMF) and received a loan of 7 billion dollars. These agencies expected India to liberalise and open the economy by removing restrictions on the private sector, reducing the role of government in many areas and removing barriers to trade with other countries. India accepted these conditions and announced the New Economic Policy (NEP).

The NEP aimed at a more competitive environment and at removing the barriers to entry and growth of firms. Its measures fall into two groups. Stabilisation measures are short-term steps that correct weaknesses in the balance of payments and bring inflation under control, which in simple terms means keeping enough foreign exchange reserves and holding prices steady. Structural reform measures are long-term steps that improve the efficiency of the economy and its international competitiveness by removing rigidities in different sectors.

The policies introduced under these two heads are commonly described by three words, liberalisation, privatisation and globalisation, often shortened to LPG. A question often asked in examinations is to distinguish stabilisation and structural measures, so remember the contrast of short term versus long term and balance of payments and inflation versus efficiency and competitiveness.

Key Points

Liberalisation of the Industrial and Financial Sectors

Liberalisation means ending the controls that had restricted economic activity. A few measures were taken in the 1980s, but the reforms from 1991 were far more comprehensive.

In industry, the earlier system required entrepreneurs to get government permission to start or close a firm or decide how much to produce. The private sector was shut out of many industries, some goods could be made only by small-scale industries, and prices of certain products were controlled. After 1991, industrial licensing was abolished for most products, except for categories such as alcohol, cigarettes, hazardous chemicals, industrial explosives, electronics, aerospace, and drugs and pharmaceuticals. Only a part of atomic energy generation and some core railway activities remain reserved for the public sector. Many goods have been dereserved from small-scale industry, and in most industries the market decides prices.

In finance, the Reserve Bank of India (RBI) earlier decided how much money banks could keep, interest rates and the nature of lending. A major aim of reform was to change the RBI's role from regulator to facilitator, letting financial institutions take many decisions without consulting it. Private banks, Indian and foreign, were allowed, and foreign investment in banks was raised to about 74 per cent. Foreign Institutional Investors such as merchant bankers, mutual funds and pension funds can now invest in Indian financial markets, although some managerial control remains with the RBI to protect depositors and the nation.

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Tax, Foreign Exchange and Trade Reforms

Tax reforms deal with the government's taxation and public expenditure policies, together called fiscal policy. Direct taxes are levied on incomes of individuals and profits of firms, while indirect taxes are levied on commodities. Since 1991 income tax rates have been reduced continuously, because very high rates were seen as a cause of tax evasion and moderate rates are believed to encourage savings and voluntary disclosure. Corporation tax was also lowered. Indirect tax reform aimed at a common national market for goods, and a constitutional amendment in 2016 led to the Goods and Services Tax (GST), expected to add revenue, reduce evasion and create one nation, one tax and one market. Simplification of procedures was another aim.

In foreign exchange, the rupee was devalued in 1991 as an immediate step to meet the balance of payments crisis. Devaluation raised foreign exchange inflow and began the shift to market-determined exchange rates based on demand and supply of foreign exchange.

Trade and investment reforms tried to raise competitiveness, bring in foreign investment and technology, and promote efficiency. Earlier, India protected industry through quantitative restrictions and high tariffs. Reforms dismantled quantitative restrictions, reduced tariffs and removed import licensing, except for hazardous and environmentally sensitive industries. Restrictions on manufactured consumer goods and agricultural products were fully removed from April 2001, and export duties were removed.

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Privatisation and Disinvestment

Privatisation means shedding the ownership or management of a government-owned enterprise. It happens in two ways. The government may withdraw from ownership and management of public sector companies, or it may sell public sector companies outright. When the government sells part of the equity of public sector enterprises to the public, it is called disinvestment.

The government's stated purposes were to improve financial discipline and speed up modernisation. It was also expected that private capital and managerial skills could improve performance, and that privatisation would encourage inflow of foreign direct investment (FDI).

Alongside this the government also tried to improve efficiency by giving public enterprises more autonomy. Profitable enterprises were given the special status of maharatnas, navratnas and miniratnas, with greater managerial, financial and operational freedom. Examples are Indian Oil Corporation and Steel Authority of India as maharatnas, Hindustan Aeronautics and Mahanagar Telephone Nigam as navratnas, and Bharat Sanchar Nigam, Airport Authority of India and IRCTC as miniratnas. The granting of such status improved performance, though critics say the government partly privatised these firms through disinvestment instead of helping them expand globally. More recently the government has decided to keep them in the public sector and let them grow in global markets.

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Globalisation and Outsourcing

Globalisation is generally understood as the integration of a country's economy with the world economy, but it is a complex process. It is the outcome of policies that aim at greater interdependence and integration, creating networks and activities that go beyond economic, social and geographical boundaries. Events far away can then influence what happens in India. It is turning the world into one whole, a borderless world.

Outsourcing is one of its important outcomes. In outsourcing a company hires regular services from external sources, mostly from other countries, which were earlier provided internally, such as legal advice, computer services, advertising and security. It has grown because of fast communication and the growth of Information Technology. Services such as voice-based business processes (BPO or call centres), record keeping, accountancy, banking services, music recording, film editing, book transcription, clinical advice and even teaching are outsourced by companies in developed countries to India. Data in text, voice and visual form is digitised and sent in real time across continents.

India has become a favoured destination because of low wage rates and a large pool of skilled manpower, which allow services at lower cost with reasonable skill and accuracy. Indian firms have also expanded abroad. Tata Steel operates in 26 countries, HCL Technologies has offices in 31 countries, and ONGC Videsh has projects in 16 countries.

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The World Trade Organisation

The World Trade Organisation (WTO) was founded in 1995 as the successor to the General Agreement on Tariffs and Trade (GATT). GATT had been established in 1948 with 23 countries as a global trade organisation to administer multilateral trade agreements and give all countries equal opportunities in international trade. The WTO is expected to establish a rule-based trading system in which nations cannot place arbitrary restrictions on trade. It also aims to enlarge production and trade of services, ensure optimum use of world resources and protect the environment.

WTO agreements cover trade in goods as well as services, and they try to promote bilateral and multilateral trade by removing tariff and non-tariff barriers and by giving all member countries greater market access.

As an important member, India has been at the forefront of framing fair global rules and safeguards and of advocating the interests of developing countries. India has kept its liberalisation commitments by removing quantitative restrictions on imports and reducing tariffs.

The chapter also notes criticism. Some scholars question the usefulness of membership because most world trade takes place among developed nations. Developing countries feel that they are forced to open their markets to developed countries while not getting equal access to the markets of developed countries, and developed countries complain about agricultural subsidies given elsewhere.

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Assessment: Growth, Investment and Trade

After three decades of reforms, the chapter looks at the results through GDP growth, which is how the growth of an economy is measured. India grew rapidly for about two decades after 1991. The GDP growth rate rose from 5.6 per cent in 1980-91 to 8.2 per cent in 2007-2012. Table 3.1 shows the sector-wise pattern. Agriculture grew at 3.6 per cent in 1980-91 and 3.3 per cent in 1992-2001, and its growth declined during the reform period. Industry fluctuated, from 7.1 per cent in 1980-91 to 9.4 per cent in 2002-07 and 3.6 per cent in 2012-13. Services rose from 6.7 per cent to 10 per cent in 2007-12, which shows that GDP growth was driven mainly by services. Growth slowed during 2012-13 and then recovered.

Opening up also brought in foreign money. Foreign investment, which includes FDI and FII, rose from about 100 million dollars in 1990-91 to about 30 billion dollars in 2017-18. Foreign exchange reserves rose from about 96 billion dollars in 1990-91 to about 413 billion dollars in 2018-19, making India one of the world's largest reserve holders. India has become a successful exporter of auto parts, pharmaceutical goods, engineering goods, IT software and textiles, and inflation has been kept under control.

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Criticisms: Employment, Agriculture, Industry and Fiscal Policy

The reforms have also been criticised for failing to solve basic problems. Although GDP growth rose, it did not create enough jobs, so critics call it growth without sufficient employment.

In agriculture, growth has slowed. Public investment in irrigation, power, roads, market linkages and research and extension, which had been important in the Green Revolution, has fallen. Partial removal of the fertiliser subsidy raised production costs and hurt small and marginal farmers. Lower import duties, low minimum support prices and removal of quantitative restrictions exposed farmers to international competition. Export-oriented strategies also shifted land from food grains to cash crops, which puts pressure on food grain prices. The chapter's example of Mahadeva, a groundnut farmer in Anantpur, shows costs of 10,000 rupees against income of 14,000 rupees, which then came under pressure from reduced subsidies, crop disease and cheap imported edible oils.

Industrial growth slowed because cheaper imports replaced domestic demand and infrastructure, including power, stayed inadequate. Developing countries also face high non-tariff barriers in developed markets.

On disinvestment, critics say PSE assets were undervalued and that proceeds were used to cover revenue shortfalls rather than to develop PSEs or social infrastructure. In fiscal policy, tax cuts and lower customs duties did not increase revenue, and tax incentives for foreign investors further limited revenue, so spending on development and welfare suffered.

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Conclusion: Opportunity or Threat?

The chapter ends by noting that liberalisation, privatisation and globalisation have produced both positive and negative results for India and for other countries. Supporters see globalisation as an opportunity, giving access to global markets and high technology and allowing large firms of developing countries to become important international players.

Critics see it as a strategy of developed countries to expand their markets. They say it compromises the welfare and identity of people in poor countries and, being market driven, has widened inequality among nations and people. Some studies say the early 1990s crisis itself came from deep inequalities in Indian society, and that the externally advised reforms increased them. Growth, they point out, benefited high-income groups and was concentrated in services such as telecommunication, IT, finance, entertainment, travel and hospitality, real estate and trade, rather than in agriculture and industry which support millions of livelihoods.

The Siricilla case shows the human cost of reforms in one sector. When power sector reforms in Andhra Pradesh ended cheap electricity and tariffs rose steeply, powerloom weavers whose wages depend on production lost income, and the livelihood crisis led to the deaths of 50 workers in Siricilla.

For board answers, present both sides and support each point with evidence from the chapter.

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Frequently Asked Questions

Why were economic reforms introduced in India in 1991?

India faced a balance of payments crisis. Government spending exceeded revenue, imports grew faster than exports, prices rose, and foreign exchange reserves fell to a level sufficient for less than two weeks of imports. India could not pay interest to lenders, and no one would lend to it. It approached the World Bank and IMF and accepted reforms as conditions for a loan.

Distinguish between stabilisation measures and structural reform measures.

Stabilisation measures are short-term measures meant to correct balance of payments weaknesses and bring inflation under control. Structural reform measures are long-term measures that improve the efficiency of the economy and increase international competitiveness by removing rigidities in different sectors. The first deal with an immediate crisis, while the second change the way the economy works.

What is liberalisation? Mention some reforms under it.

Liberalisation means removing rules and restrictions that hindered economic activity so that sectors are opened up. Under it, industrial licensing was abolished for most industries, financial sector rules were relaxed with private banks allowed, income and corporation taxes were reduced, the rupee was devalued, and import licensing and quantitative restrictions on imports were removed.

Why did the RBI have to change its role from controller to facilitator?

Under the earlier system the RBI decided banks' cash holdings, interest rates and lending patterns, which slowed financial institutions. Reforms aimed at letting the financial sector take many decisions without consulting the RBI, so that banks work more efficiently and competitively. The RBI keeps certain managerial controls to protect account holders and the nation.

What do you understand by devaluation of the rupee?

Devaluation is a reduction in the value of the rupee in terms of foreign currencies by the government. In 1991 the rupee was devalued as an immediate measure to resolve the balance of payments crisis. It made Indian exports cheaper, raised the inflow of foreign exchange and began the shift to exchange rates determined by market demand and supply.

What is privatisation? How is it different from disinvestment?

Privatisation means shedding the ownership or management of a government enterprise, either by withdrawing from it or selling it outright. Disinvestment is one form of it, in which the government sells part of the equity of public sector enterprises to the public. Hence, disinvestment is a method, and privatisation is the broader idea.

What is outsourcing and why is India a favoured destination?

Outsourcing is when a company hires regular services, such as accounting, legal advice or call centres, from outside sources, often in other countries. India is favoured because of low wage rates and skilled manpower, which allow services at lower cost with reasonable accuracy. Fast communication and IT growth help data move in real time across the world.

Why is membership of the WTO considered important for India?

The WTO sets a rule-based global trading system in which members cannot place arbitrary trade restrictions, and it gives members greater market access. India uses it to frame fair rules and speak for developing countries. Critics, however, say most trade is among developed nations and that developing countries do not get equal access to their markets.

Why has the agriculture sector been adversely affected by reforms?

Public investment in irrigation, power, roads and research fell. Partial removal of the fertiliser subsidy raised costs for small farmers. Lower import duties, low support prices and removal of import restrictions exposed farmers to global competition. Export-led policies also shifted land to cash crops, which put pressure on food grain prices.

Why has the industrial sector performed poorly in the reform period?

Industrial growth slowed because cheaper imports replaced demand for domestic goods and investment in infrastructure, including power, remained inadequate. Developing countries were also pushed to open markets while facing high non-tariff barriers in developed countries, as in the case of the USA retaining textile import quotas on India and China.

CBSE Class 11 Economics Notes — Liberalisation, Privatisation and Globalisation