Class XI Economics www.vedantu.

com 1 Revision Notes Class - 11 Economics (Indian Economic

Development ) Chapter 3 – Liberalisation, Privatisation and Globalisation Economic Policy of 1991 ●
In 1991, in an attempt to battle the severe economic crisis, the Government of India initiated a
series of economic reforms called the New Economic Policy. ● India announced the New Economic
Policy (NEP) subject to the conditionalities of the World Bank and IMF. Broad classification of this
policy is: ○ Stabilisation measures: These were the short term measures to correct issues such as
inflation, and deficit in balance of payments. ○ Structural reform measures: These were long term
measures that focused upon enhancing the international competitiveness, and efficiency of the
economy. ● The three major components of this policy were: ○ Liberalisation ○ Privatisation ○
Globalisation. Economic Reforms: In India, economic reforms were implemented for the following
reasons: ● Decreasing Foreign exchange reserves: Foreign exchange reserves, which the government
usually has in hand to import gasoline and other essentials, plummeted to levels that were
insufficient to last even a fortnight. The government was unable to repay its foreign borrowings.
Class XI Economics www.vedantu.com 2 ● Poor performance of the public sector: During the period
1951–1990, the public sector was given a significant role in development policies. However, the
majority of government enterprises performed poorly. They were losing a lot of money because of
ineffective management. ● Inflationary BoP or imports exceeding exports: Imports increased at a
rapid pace, but not at the same rate as exports. Even after establishing high taxes and quotas, the
government was unable to limit imports. Exports, on the other hand, were quite low due to the bad
quality and high pricing of our items in comparison to foreign commodities. ● Government has
massive debts: The government's investment on different developmental projects exceeded its
earnings from taxation. Therefore, the public authority acquired cash from banks, public and global
financial organisations such as the International Monetary Fund (IMF) and other sources.
LIBERALISATION The independence of the economy from direct or physical constraints imposed by
the government is referred to as liberalisation. It is commonly defined as the relaxation of
government regulations in a country to allow private sector enterprises to conduct business
activities with fewer limitations. This refers to the opening of economic boundaries for multinational
and foreign investment in emerging countries. Various liberalisation measures were taken in respect
to foreign trade, technological upgradation, exports-imports and foreign investment. Industrial
Sector Reforms ● Under these reforms, the requirement of licensing was abolished except for five
industries ○ liquor, Class XI Economics www.vedantu.com 3 ○ cigarette, ○ defense equipment, ○
industrial explosives, and ○ dangerous chemicals. ● The number of industries earmarked for the
government has been cut from 17 to 8. In 2010-11, the number of these was reduced to 2. ● Many
production areas which earlier were reserved for small-scale industries were now de-reserved. ● The
absence of licencing implies the absence of capacity limits. ● The producer could now decide what
to produce and how much to produce. Financial Sector Reforms ● RBI’s role was transformed from a
regulator to a facilitator of the financial sector. ● As a regulator, the RBI would fix the interest
structure for commercial banks. But as a facilitator, it would only facilitate the free play of the
market forces and let the banks decide their interest rates. ● Indian financial markets were also
open to Foreign Institutional Investors (FII), like merchant bankers, mutual funds, and pension funds.
Tax Reforms (Fiscal Reforms) ● There has been a reduction in the taxes and simplification of the
structure of taxes on individual incomes since 1991. Fearing a heavy burden and complex nature of
taxes, people would often evade taxes. Class XI Economics www.vedantu.com 4 ● Reforms have also
been made in taxes levied on commodities. The Goods and Services Tax which was passed in 2016
and came to effect in 2017, was expected to generate additional government revenue and prevent
tax evasion. Foreign Exchange Reforms ● In 1991, the Indian rupee was devalued against foreign
currencies to fix the balance of payment imbalance. ● Followed by the devaluation, the exchange
value of the Indian rupee in the international money market was left to the free play of market
forces. Trade and Investment Policy reforms ● After liberalization, import quotas prevalent in the
Foreign Trade Policy were removed. ● Reduction in tariff rates were made. ● The policy of import
licensing was almost scrapped except in the case of a few goods. ● There was a reduction of import
duty to enhance competitiveness in the domestic market. ● Export duty was withdrawn to enhance
the competitiveness of Indian goods in the international market. ● From April 2001, quantitative
restrictions on imports have been removed. PRIVATISATION ● It refers to the process of involving
the private sector in the ownership of the state owned enterprise. Class XI Economics
www.vedantu.com 5 ● The transfer of government ownership to the public sector can take place in
two ways: a. Outright sale of the government enterprises to private entrepreneurs b. Withdrawal of
government ownership and management from the mixed enterprises. ● Disinvestment is also a type
of privatisation where the government sells off a part of its share of the capital of PSUs to private
investors. Strategies adopted for Privatisation: ● Providing a strong impetus for FDI inflows:
Privatisation strives to provide a solid foundation for FDI inflows. Increased FDI inflows strengthen
the economy's financial position. ● Increasing the efficiency of public-sector endeavours (PSUs):
Giving PSUs decision-making authority increases their efficiency. Some businesses were accorded
the Navratna and Miniratna designations. GLOBALISATION It refers to the integration of a country’s
economy with the global economy. Features Some of the features of globalisation are a follows: ●
Liberalisation: It represents the freedom of entrepreneurs to develop any industry, trade, or
business enterprise, whether within or outside of their own country. ● Economic Activity
Globalization: Domestic markets, as well as the global market, govern economic activity. It refers to
the process of merging the domestic and global economies. Class XI Economics www.vedantu.com 6
● Trade liberalisation: It advocates for the unrestricted flow of trade between all nations. It
advocates for industry and commerce to be free of overbearing regulatory and protective laws and
restrictions. ● Privatisation: Globalisation implies removing the state from control of means of
production and distribution and allowing free movement of industrial, commercial, and economic
activities among individuals and companies. ● Increased Collaborations: One characteristic of
globalisation is the encouragement of entrepreneurial collaborations in order to ensure fast
modernisation, development, and technical improvement. Outsourcing ● This outcome of
globalization refers to a system of hiring business services from the outside world. ● These services
can include call centers, transcription, clinical advice, teaching/coaching, BPOs, KPOs, accounting,
banking services etc. ● India is becoming an important destination to outsource because of the
availability of cheap labour and revolutionary growth in the IT industry in India thus making India a
destination for global outsourcing. WORLD TRADE ORGANISATION ● On January 1, 1995, the
organisation GATT was replaced by the World Trade Organization. Its headquarters are in Geneva,
Switzerland. ● It is also a member-driven rule-based organisation, in that all decisions are made by
member states based on a general consensus. ● The World Trade Organisation (WTO), is expected to
play an important role in the globalisation of world economies. It is intended to encourage
international trade by lowering tariffs and eliminating non-tariff barriers. Class XI Economics
www.vedantu.com 7 ASSESSMENT OF LPG POLICIES Merits ● Growth: The Indian economy has
become a more vibrant economy. The overall level of economic activity has trended up as indicated
by an impressive increase in the growth rate of GDP. Following the implementation of LPG policy,
GDP growth reached as high as 8% per year. ● Rise in FDI: There has been a substantial rise in
foreign direct investment (FDI) and foreign institutional investment (FII). The foreign exchange
reserves have also shown considerable growth. As a result, India is now one of the largest foreign
exchange reserve holders in the world. ● Increased Exports: India has emerged as a leading exporter
of a variety of goods like auto parts, pharmaceutical goods, engineering goods, IT software and
textiles. ● A check on Inflation: Owing to a greater flow of goods and services in the economy, LPG
policies brought a check on inflation. Demerits ● Unemployment The growth-led reforms failed to
generate sufficient employment opportunities in the country. ● Reforms in Agriculture Class XI
Economics www.vedantu.com 8 The growth of GDP has primarily been triggered by the growth of
secondary and tertiary sectors. The agricultural sector has suffered serious neglect and its growth
rate has depleted to a miserably low level. As a result, India is experiencing a growing disparity
between its rural and urban economies. ● Reforms in Industry Due to decreasing demand for
industrial products, industrial growth has recorded a slowdown. The decreasing demand can be due
to cheaper imports, inadequate investment in infrastructure, etc. The opening up of the economy
has imposed increasing competition from imports on domestic manufacturers and the infrastructure
remains inadequate. ● Disinvestment There has been a substantial loss to the government and the
outright sale of public assets because the assets of PSUs have been undervalued and sold to the
private sector. Instead of being used to develop the social infrastructure of the country, the
proceeds from the sale of such assets are used to offset the shortage of government revenues. ●
Reforms and Fiscal Policies The growth of public sector expenditures has been limited by economic
reforms, especially in the social sectors. The tax reductions were expected to curb tax evasion and
increase government revenue, but no increase in tax revenue was witnessed. To entice foreign
investment, tax breaks were offered to international investors. This further reduced the scope for
increasing tax revenue.