CHAPTER 3.

NEW ECONOMIC REFORMS 1991

LIBERALISATION, PRIVATISATION AND GLOBALISATION: AN APPRAISAL
1 MARK QNS:
➢ When expenditure is more than income, the government borrows to finance the deficit from banks and
from people within the country and from international financial institutions.
➢ International Bank for Reconstruction and Development (IBRD), popularly known as World Bank.
➢ India approached the International Bank for Reconstruction and Development (IBRD), popularly known as
World Bank and the International Monetary Fund (IMF), and received $7 billion as loan to manage the
crisis.
➢ Financial sector includes financial institutions, such as commercial banks, investment banks, stock
exchange operations and foreign exchange market.
➢ The financial sector in India is regulated by the Reserve Bank of India (RBI).
➢ Foreign Institutional Investors (FII) - such as merchant bankers, mutual funds and pension funds.
➢ Tax reforms are concerned with the reforms in the government’s taxation and public expenditure policies,
which are collectively known as its fiscal policy. There are two types of taxes: direct and indirect.
➢ Direct taxes consist of taxes on incomes of individuals, as well as, profits of business enterprises.
➢ Indirect taxes - taxes levied on commodities (GOODS & SERVICES)
➢ Fiscal policy: Policy related with revenue and expenditure policy of government
➢ Corporate tax: tax levied on profits of firms/ corporates
➢ Devaluation: Fall in value of one currency in terms of another currency
➢ Quantitative restrictions: (Quota) Specific limit on the physical quantity of goods and services that can be
exported or imported.
➢ Tariff: Tax on imports
➢ Privatisation: It implies shedding of the ownership or management of a government owned enterprise.
➢ Disinvestment: Privatisation of the public sector enterprises by selling off part of the equity of PSEs to the
public is known as disinvestment.

3.2 BACKGROUND
(Qn. WHY WERE REFORMS INTRODUCED IN INDIA?)
1) The origin of the financial crisis was due to the inefficient management of the Indian economy in the
1980s.
2) The revenues were very low, the government had to overshoot its revenue to meet challenges like
unemployment, poverty and population explosion. Spending on development programmes of the
government did not generate additional revenue.
3) The government was not able to generate sufficiently from taxation.
4) The government was spending a large share of its income on areas which do not provide immediate
returns such as the social sector and defence.
5) The income from public sector undertakings was also not very high to meet the growing expenditure.
6) At times, our foreign exchange, borrowed from other countries and international financial institutions, was
spent on meeting consumption needs.
7) Attempt neither made to reduce spending nor to boost exports to pay for the growing imports.
8) Prices of many essential goods rose sharply.
9) Imports grew at a very high rate without matching growth of exports.
10) Foreign exchange reserves declined to a level that was not adequate to finance imports for more than two
weeks.
11) There was also not sufficient foreign exchange to pay the interest that needs to be paid to international
lenders. Also, no country or international funder was willing to lend to India.
12) India approached the International Bank for Reconstruction and Development (IBRD), popularly known as
World Bank and the International Monetary Fund (IMF), and received $7 billion as loan to manage the
crisis.
13) For availing the loan, these international agencies expected India to liberalise and open up the economy by
removing restrictions on the private sector, reduce the role of the government in many areas and remove
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 trade restrictions between India and other countries. India agreed to the conditions of World Bank and IMF
and announced the New Economic Policy (NEP).

(QN. DISTINGUISH / CLASSIFY THE MEASURES OF NEP ECONOMIC REFORMS INTO BROADER
MEASURES.)
OBJECTIVE: To create a more competitive environment in the economy and remove the barriers to entry and
growth of firms.
This set of policies can broadly be classified into two groups:

STABILISATION MEASURES STRUCTURAL REFORM MEASURES

1. Short term measures to correct the 1. Long-term measures to improve the efficiency
weaknesses in the balance of payments and to of the economy and increase its international
bring inflation under control. competitiveness by removing the rigidities in
(Means need to maintain sufficient foreign the Indian economy.
exchange reserves and keep the rising prices
under control)

3.3 LIBERALISATION
INDUSTRIAL SECTOR:
(Qn. What were regulatory mechanisms enforced in India BEFORE 1991? EXPLAIN THE LIBERALIZATION
MEASURES ADOPTED IN INDUSTRIAL SECTOR AFTER 1991.)

Regulatory mechanisms enforced in Industrial sector BEFORE 1991 (BEFORE NEP):

i. industrial licensing under which every entrepreneur had to get permission from government officials to
start a firm, close a firm or decide the amount of goods that could be produced
ii. Private sector was not allowed in many industries
iii. Some goods reserved for small-scale industries
iv. Controls on price fixation and distribution of selected industrial products.

*LIBERALISATION MEASURES TAKEN IN INDUSTRIAL SECTOR:

i. The reform policies introduced in and after 1991 removed many of these restrictions.
ii. Industrial licensing was abolished for almost all products EXCEPT alcohol, cigarettes, hazardous chemicals,
industrial explosives, electronics, aerospace and drugs and pharmaceuticals.
iii. (The only industries reserved for the public sector are a part of defence equipment, atomic energy
generation and railway transport.
iv. Many goods produced by small-scale industries have now been de-reserved.
v. In many industries, the market has been allowed to determine the prices.

FINANCIAL SECTOR:
(QN. EXPLAIN THE LIBERALIZATION MEASURES ADOPTED IN FINANCIAL SECTOR AFTER 1991. WHAT
WAS THE MAIN OBJECTIVE? (OR)
WHY DID RBI HAVE TO CHANGE ITS ROLE FROM CONTROLLER TO FACILITATOR OF FINANCIAL SECTOR
IN INDIA?)

Financial Sector Reforms objectives:

i. One of the major aims of financial sector reforms is to reduce the role of RBI from regulator to facilitator of
financial sector.
ii. This means that the financial sector may be allowed to take decisions on many matters without consulting
the RBI.
LIBERALISATION MEASURES IN FINANCIAL SECTOR:
i. The reform policies led to the establishment of private sector banks, Indian as well as foreign.
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 ii. Foreign investment limit in banks was raised to around 50 per cent.
iii. Those banks which fulfil certain conditions have been given freedom to set up new branches without the
approval of the RBI and rationalise their existing branch networks.
iv. Though banks have been given permission to generate resources from India and abroad, certain
managerial aspects have been retained with the RBI to safeguard the interests of the account-holders and
the nation.
v. Foreign Institutional Investors (FII), such as merchant bankers, mutual funds and pension funds, are now
allowed to invest in Indian financial markets.

(QN. HOW IS RBI CONTROLLING THE COMMERCIAL BANKS?)

The financial sector in India is regulated by the Reserve Bank of India (RBI).
All banks and other financial institutions in India are regulated through various norms and regulations of
the RBI.
The RBI decides
i. the amount of money that the banks can keep with themselves and with the RBI (i.e. Statutory
Liquidity Ratio & Cash Reserve Ratio)
ii. fixes interest rates, (i.e. Bank rate, Repo rate, Reverse Repo Rate)
iii. nature of lending to various sectors, etc.

(QN. EXPLAIN THE LIBERALIZATION MEASURES ADOPTED IN TAX / FISCAL POLICY AFTER 1991. (TAX
REFORMS)

i. Since 1991, there has been a continuous reduction in the taxes on individual incomes as it was felt that
high rates of income tax were an important reason for tax evasion.
ii. It is now widely accepted that moderate rates of income tax encourage savings and voluntary disclosure of
income.
iii. The rate of corporation tax, which was very high earlier, has been gradually reduced.
iv. Efforts have also been made to reform the indirect taxes, taxes levied on commodities, in order to facilitate
the establishment of a common national market for goods and commodities.
v. Another component of reforms in this area is simplification. In order to encourage better compliance on
the part of taxpayers many procedures have been simplified and the rates also substantially lowered.
vi. Recently, the Parliament passed a law, Goods and Services Tax Act 2016, to simplify and introduce a unified
indirect tax system in India. This law came into effect from July 2017. This is expected to generate
additional revenue for the government, reduce tax evasion and create ‘One nation, One tax and one
market’.

QN. EXPLAIN THE LIBERALIZATION MEASURES ADOPTED IN FOREIGN EXCHANGE MARKET (FOREIGN
EXCHANGE REFORMS)
i. In 1991, to resolve the balance of payments crisis, the rupee was devalued against foreign currencies.
ii. This led to an increase in the inflow of foreign exchange.
iii. It also set the tone to free the determination of rupee value in the foreign exchange market from
government control.
iv. Now, more often than not, markets determine exchange rates based on the demand and supply of foreign
exchange.

QN. EXPLAIN THE LIBERALIZATION MEASURES ADOPTED IN TRADE AND INVESTMENT AFTER 1991.
(TRADE AND INVESTMENT POLICY REFORMS)
BEFORE LIBERALISATION:
i. In order to protect domestic industries, India was following a regime of quantitative restrictions on
imports. This was encouraged through tight control over imports and by keeping the tariffs very
high.
ii. These policies reduced efficiency and competitiveness which led to slow growth of the
manufacturing sector.

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 LIBERALISATION MEASURES IN TRADE AND INVESTMENT:
Liberalisation of trade and investment regime was initiated to increase international competitiveness of
industrial production and also foreign investments and technology into the economy.

i. The aim was also to promote the efficiency of local industries and adoption of modern
technologies.
ii. The trade policy reforms aimed at
(a) dismantling of quantitative restrictions on imports and exports
(b) reduction of tariff rates and
(c) removal of licensing procedures for imports.
iii. Import licensing was abolished except in case of hazardous and environmentally sensitive
industries.
iv. Quantitative restrictions on imports of manufactured consumer goods and agricultural products
were also fully removed from April 2001.
v. Export duties have been removed to increase the competitive position of Indian goods in the
international markets.

(QN. WHY ARE TARIFFS IMPOSED?)

i. Tariffs are imposed to make imports from foreign countries relatively expensive than domestic goods,
thereby, discouraging imports indirectly.
ii. These are imposed to provide a safe and protective environment to the infant domestic firms from their
technologically advanced foreign counterparts.

(QN. WHAT ARE QUANTITATIVE RESTRICTIONS?)

i. Quantitative Restrictions (QRs) are the limits imposed on the quantity of goods that are imported
or exported.
ii. These are imposed to discourage imports and thus protect domestic industries from competition
from cheaper and technologically advanced goods manufactured by other nations.

(QN. DISTINGUISH BETWEEN THE FOLLOWING: )

(I) STRATEGIC AND MINORITY SALE:
STRATEGIC SALE MINORITY SALE
1. Strategic Sale refers to the sale of 51% or more 1. Minority Sale refers to the sale of less than 49%
stake of a PSU to the private sector who bids the stake of a PSU to the private sector.
highest.
2. The ownership of PSU is handed over to the private 2. The ownership of PSU remains with the government
sector. as it holds 51% of stakes.

(II) BILATERAL AND NULTILATERAL TRADE:

BILATERAL TRADE MULTILATERAL TRADE
1. It is a trade agreement between two countries. 1. It is a trade agreement between more than two
countries.
2. This is an agreement that provides equal 2. This is an agreement that provides equal
opportunities to both the countries. opportunities to all the member countries in the
international market.
3. Separate negotiations required to be done with 3. Negotiation done with many countries at the same
different countries on one to one basis. time.

(III) TARIFF AND NON-TARIFF BARRIERS:

TARIFF BARRIERS NON-TARIFF BARRIERS
1. It refers to the tax imposed on the imports by the 1. It refers to the restrictions other than taxes,
country to protect its domestic industries. imposed on imports by the country.
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 2. EXAMPLES: custom duties, export-import duties. 2. EXAMPLES – Quota, License
3. It is imposed on the value of the goods imported. 3. It is the specific limit imposed on the quantity of
goods imported.

3.4 PRIVATISATION
(QN. DEFINE PRIVATISATION. HOW IT IS DONE? HOW IT IS DIFFERENT FROM DISINVESTMENT?)
i. Privatisation implies shedding of the ownership or management of a government owned
enterprise.
ii. Government companies are converted into private companies in two ways:
▪ by withdrawal of the government from ownership and management of public sector
companies
▪ by outright sale of public sector companies.
iii. Privatisation of the public sector enterprises by selling off part of the equity of PSEs to the public is
known as disinvestment.

(QN. WHAT WERE THE OBJECTIVES OF PRIVATISATION ENVISAGED BY THE GOVERNMENT IN 1991?)
According to the government, the main objective of privatisation was -
i. to improve financial discipline and facilitate modernisation.
ii. private capital and managerial capabilities could be effectively utilised to improve the
performance of the PSUs.
iii. to provide strong impetus to the inflow of FDI. (encourage the inflow of FDI)

(QN. DISCUSS THE ARGUMENTS IN FAVOUR OF AND AGAINST PRIVATIZATION.)

Arguments in favour of privatization:
i) Improvement in financial discipline and modernisation
ii) private capital and managerial capabilities could be effectively utilised to improve the
performance of the PSUs.
iii) To attract more inflow of FDI
iv) Poor Performance of PSEs: - The performance of some PSEs is poor and inefficient as they are over
controlled and over regulated. Its inefficiency can be removed if these enterprises are privatised.
v) Privatisation will lead to improvement in efficiency and performance as private sectors are ‘profit-
oriented’
vi) Development of Social and Economic Infrastructures by the Government:- Government resources for
keeping up PSEs may be utilised for the purposes of social sector.
vii) Competitive Behaviour: Privatisation will promote private sector culture by introducing competition so
that Indian industrialists can compete with their foreign industries efficiently.
viii) Absence of Governmental Interference: Indian PSEs are subject to too much governmental and political
interference thereby making them operationally inefficient. Private sector is free from such
unavoidable interference.
ix) Public sector enterprises were putting large financial burden due to huge losses. Private sector reduces
the financial burden.

Arguments against privatization:

i) Social welfare neglected: -Private sector operates mainly with the objective of profit maximization.
Thus, this sector does not guarantee social welfare.

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 ii) Private sector does not take interest in projects which are risky and have long gestation period with
lowerprofitability.it may adversely affect the growth of necessities and infrastructure of the economy.
iii) Concentration of economic power: - Privatization can also result in private monopoly and may lead to
exploitation and concentration of economic power in few hands.
iv) Rise in level of unemployment: Under privatization, in the name of more and more profit, private
industrialists have adopted ‘hire and fire’ policy of employment as well as labour-saving technologies.

(QN. THOSE PUBLIC SECTOR UNDERTAKINGS, WHICH ARE MAKING PROFITS, SHOULD BE PRIVATISED.
DO YOU AGREE WITH THIS VIEW? WHY?)

No. Profit making PSUs should not be privatized.

i. Profit-making public sector undertakings are the main source of revenue of the government to be used in
special welfare programmes.
ii. This enables to promote equality of income and wealth distribution among the public.
iii. The PSUs, which operate with social motive, such as railways, water supply and postal services should be
iv. retained in the public sector.
v. These PSUs were given greater managerial and operational autonomy, to improve efficiency, infuse
professionalism and enable them to compete more effectively in the liberalised global environment.
vi. Profit-making industries should remain in the public sector only because the resources of these units can
be used for developmental activities.
vii. However, many PSUs incur losses. These loss-making units should be privatised to protect the financial
condition of the government.

(QN. DO YOU THINK THE NAVARATNA POLICY OF THE GOVERNMENT HELPS IN IMPROVING THE
PERFORMANCE OF PUBLIC SECTOR UNDERTAKINGS IN INDIA? HOW?)

Yes. The Navratna policy of the government helps in improving the performance of public sector undertaking
in India.
1) In order to improve efficiency, infuse professionalism and enable them to compete more effectively in the
liberalised global environment, the government identifies PSEs and declare them as Maharatnas, Navratnas
and Miniratnas.
2) They were given greater managerial and operational autonomy in taking various decisions to run the
company efficiently and thus increase their profits.
3) Greater operational, financial and managerial autonomy has also been granted to profit-making enterprises
referred to as miniratnas.
4) The Central Public Sector Enterprises are designated with different status. A few examples of public
enterprises with their status are as follows:
(i) Maharatnas –
(a) Indian Oil Corporation Limited, and (b) Steel Authority of India Limited,
(ii) Navratnas –
(a) Hindustan Aeronautics Limited, (b) Mahanagar Telephone Nigam Limited; and
(iii) Miniratnas –
(a) Bharat Sanchar Nigam Limited; (b) Airport Authority of India and (c) Indian Railway Catering and
Tourism Corporation Limited.
5) Many of these profitable PSEs were originally formed during the 1950s and 1960s when self-reliance was
an important element of public policy.
6) They were set up with the intention of providing infrastructure and direct employment to the public so that
quality end-product reaches the masses at a nominal cost and the companies themselves were made
accountable to all stakeholders.
7) The granting of status resulted in better performance of these companies.
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3.5 GLOBALISATION
(QN. DEFINE GLOBALISATION. DISCUSS THE ADVANTAGES AND DISADVANTAGES OF GLOBALISATION.)

Globalisation refers to the integration of the economy of the country with the world economy. It is an outcome of
the set of various policies that are aimed at transforming the world towards greater interdependence and
integration. It involves creation of networks and activities transcending economic, social, and geographical
boundaries.

Arguments in Favour of Globalisation:

i. Globalisation is expected to promote efficiency, productivity and, hence, higher economic growth rate.
ii. Globalisation has one pillar of liberalisation. It promotes the efficient allocation of resources.
iii. This will increase export earnings, allow the inflow of foreign capital and technology.
iv. It promotes employment opportunities.
v. Industries and farm sector, banking and financial sectors are then exposed to international competition.
Competition enhances efficiency, productivity and ultimately a better economic growth rate is likely to be
achieved.
vi. As far as consumers are concerned, variety of quality goods at the right price will be delivered. This helps to
bring down prices. Quality improvement and price reduction will then be enjoyed.

Arguments against Globalisation:

i. Globalisation will promote fierce and unhealthy competition. One may argue that MNCs will swallow the
domestic producers of poor backward countries overtime.
ii. Ultimately, this will cause concentration of economic and political power into the hands of the developed
foreign business enterprises.
iii. Modern technologies used by the MNCs will make the unemployment situation worse.
iv. This widens inequalities in the distribution of income and wealth.
v. Above all, integration of the domestic economy into the world economy provides larger benefits to the
developed countries than to the LDCs.
vi. Foreign capital is not interested in producing goods that an underdeveloped country requires. Globalisation
then distorts production structure of an economy.

(QN. DEFINE OUTSOURCING. DO YOU THINK OUTSOURCING IS GOOD FOR INDIA? WHY ARE DEVELOPED
COUNTRIES OPPOSING IT?)

Outsourcing is a business practice in which certain functions required by the business are performed by outside
parties on a contract basis rather than the business’s employees.

Yes, outsourcing is good for India. -Reasons:

i. Outsourcing creates more employment opportunities.

ii. Exchange of ideas and advanced technology from developed to developing countries.
iii. Enhances India’s international worthiness credibility - This increases the inflow of investment to India.
iv. Outsourcing not only benefits the service sector but also benefits other sectors like industrial and
agricultural sector through various backward and forward linkages.
v. It helps the development of human capital formation by training, skill development etc. and increases their
suitability for high skilled jobs.
vi. By creating more and higher paying jobs, it leads to better standard of living and eradication of poverty.
vii. Increases factor income and GDP.
viii. Outsourcing to India requires better quality infrastructure. This leads to the modernisation of the economy.

Outsourcing to India is good but developed countries oppose this because:

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Outsourcing leads to the outflow of investments and funds from the developed countries to the less developed
countries.
MNCs contribute more to the development of the host country than the home country.
Outsourcing reduces the employment generation in the developed countries as the same jobs can be done in the
less developed countries at relatively cheap wages.
Moreover, this leads to job insecurity in the developed countries as at a point of time jobs are outsourced to the
developing countries.

(QN. INDIA HAS CERTAIN ADVANTAGES, WHICH MAKES IT A FAVOURITE OUTSOURCING DESTINATION.
WHAT ARE THESE ADVANTAGES?)

India is a favourite outsourcing destination because of the following reasons:

i. Cheap labour: In highly populated India, the supply of labour is in surplus with a low wage rate. This
enabled foreign companies to hire regular service from India and reduced the cost of operation.
ii. Availability of skilled labour: Indians are highly educated and skilled; they are able to acquire necessary
skills from a wide range of training programmes to perform the task in an efficient manner.
iii. English Language proficiency: They have better understanding of the language, which is required for
providing services such as voice-based business process, accounting, teaching, and clinical advice.
iv. Lower cost of raw material: The cost of raw material is less in India, so it attracted multinational companies
to outsource their businesses to India.
v. Reasonable Degree of Infrastructural Investment: Indian government has invested heavily in the past two
decades in the infrastructural sector. Good infrastructure facilities such as Transport, roads,
communication, banking etc to attract more investment from MNCs.
vi. Take advantage of government grants: Many foreign companies were attracted to India because the
government provided grants to open up operations in India.
vii. Stable government regulation: India's stable political environment attracted foreign investors to invest.
viii. Favourable Government Policies: The most important point that makes India as the most favourite spot for
outsourcing is the favourable government and tax policies like tax holidays, low rate of tax, easy tax policies,
etc.

Note: Name the Indian companies which have expanded to other countries due to globalisation.

1. ONGC Videsh, a subsidiary of PSE ONGC

2. TATA Steel
3. HCL Technologies
4. Dr Reddy Laboratories
______________________________________________________________________________________________

(QN. WHAT ARE THE MAJOR FACTORS RESPONSIBLE FOR THE HIGH GROWTH OF THE SERVICE SECTOR?)
The major factors that led to the growth of service sectors in India are as follows:

i. Modern day governments have to provide basic services to its citizens. These basic services include
education, healthcare, transport, communication, electricity supply, water, Municipal Corporation etc. As
population grow, the need for these services to grow. This is one of the factors for the growth of service
sector.
ii. With the growth of primary and secondary sectors, there is growth of tertiary sector too.
iii. Liberalisation and economic reforms initiated in 1991 led to huge inflow of foreign capital, foreign direct
investments and outsourcing to India. This encouraged the service sector growth.
iv. Structural transformation: Indian economy is experiencing shift from primary to tertiary sector. Due to this
transformation, there was increased demand of services by other sectors which boosted the service sector.

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 v. Advanced technology and growth of IT enabled the use of internet, telecommunication, mobile phone, and
electronic transactions across different countries. All these contributed to the growth of the service sector
in India.
vi. Increased volume of trade due to low tariff and non-tariff barriers on imports by India are also responsible
for high growth rate of service sector.
vii. Outsourcing leads to the development of human capital that requires training, skill development etc. This
also led to the growth of service sector.
viii. Infrastructural development happening in the country is also one of the reasons for the growth of tertiary
sector.

(QN. WHY IS IT NECESSARY TO BECOME A MEMBER OF WTO?) (better to write all points full)

i. WTO provides equal opportunities to all its member countries to trade in the international market.
ii. It provides its member countries with larger scope to produce at large scale to cater to the needs of people
across the international boundaries.
iii. This provides ample scope to utilise world resources optimally and provides greater market accessibility.
iv. It advocates for the removal of tariff and non-tariff barriers, thereby, promoting healthier and fairer
competition among different producers of different countries.
v. The countries of similar economic conditions being members of WTO can raise their voice to safeguards
their common interests.

(QN. AGRICULTURE SECTOR APPEARS TO BE ADVERSELY AFFECTED BY THE REFORM PROCESS. WHY?)

Reforms have not been able to benefit agriculture, where the growth rate has been decelerating.

1) Reduction in investment in agriculture: Public investment in agriculture sector especially in infrastructure,

which includes irrigation, power, roads, market linkages and research and extension (which played a crucial
role in the Green Revolution), has fallen in the reform period.
2) Removal of Subsidies: The removal of fertilizer subsidy has led to increase in the cost of production, which. has
severely affected the small and marginal farmers.
3) Significant changes in policies: This sector has been experiencing a number of policy changes such as
i) Reduction in import duties on agricultural products,
ii) Removal of minimum support price and
iii) Removing quantitative restrictions on agricultural products.
these have adversely affected Indian farmers as they now have to face increased international competition.
4) Export-oriented policy: because of export-oriented policy strategies in agriculture, there has been a shift from
production for the domestic market towards production for the export market focusing on cash crops in lieu of
production of food grains.
5) Inflationary Pressures on Food Grains: adversely affected the agricultural sector’s performance by making the
cost of producing food grains more expensive.

(QN. WHY HAS THE INDUSTRIAL SECTOR PERFORMED POORLY IN THE REFORM PERIOD?)
The industrial sector performed poorly in the reform period because of the following reasons:

i. Decreasing demand of industrial products due to various reasons such as cheaper imports, inadequate
investment in infrastructure etc.
ii. Industrial growth has also recorded a slowdown.
iii. Due to globalization developing countries are compelled to open up their economies to greater flow of
goods and capital from developed countries and rendering their industries vulnerable to imported goods.

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 iv. Vulnerable conditions of local industries: due to free movement of goods and services from foreign
countries. It adversely affects the local industries and employment opportunities in developing countries.
v. Domestic manufacturers are facing competition from cheaper imports.
vi. Lack of investment in infrastructure power supply etc.
vii. A developing country like India still does not have the access to developed countries’ markets because of
high non-tariff barriers. For example, although all quota restrictions on exports of textiles and clothing have
been removed in India, USA has not removed their quota restriction on import of textiles from India and
China.

(QN. DISCUSS ECONOMIC REFORMS IN INDIA IN THE LIGHT OF SOCIAL JUSTICE AND WELFARE.)
Economic reforms opened up new avenues for domestic producers and provided access to the international market
and technology. However, these reforms adversely affected social justice and welfare in the following ways:

i. Farmers and domestic producers were severely affected with international competition at the time of
economic reforms.
ii. The gaps between the rich and the poor increased widely because economic reforms focused on the
development of metropolitan cities rather than backward areas.
iii. The quality of consumption increased only for the rich, and thus, economic growth was unable to reach the
poor sections of society.
iv. Remote and rural areas remained underdeveloped as economic reforms benefited areas connected to
urban cities.
v. Growth of the service sector increased significantly, but there was no growth in the agricultural sector.
vi. The government of India focused more on the revival of the service sector than the agricultural sector even
though about 65% of the total population depended on it.
Thus, economic reforms did not pay attention to social justice and welfare of the people in India.

(QN. ‘DISINVESTMENT AND REFORMS IN FISCAL POLICY DID NOT SERVE ITS PURPOSE FOR THE
DEVELOPMENT OF THE ECONONY’. EXPLAIN THE STATEMENT.)
DISINVESTMENT:

I. Every year, the government fixes a target for the disinvestment of the PSEs. The assets of the PSEs have
been undervalued and sold to private sector.
II. This means that there has been a substantial loss to the government.
III. The proceeds of disinvestment are used to offset the shortage of government revenues rather than for
the development of PSEs and building of social infrastructure in the country.

FISCAL POLICY:

I. Economic reforms have placed the limits on public expenditure especially in social sectors.
II. Tax reductions in the reform period aimed to curb tax evasion have not resulted increase in tax revenue
for the government.
III. Tariff reductions have curtailed the scope of raising revenue through custom duties.
IV. The tax incentives provided to attract foreign investment further reduced the government revenue.
V. It led to negative impact on developmental and welfare expenditure.

The End.

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