CHAPTER-3

LIBERALISATION, PRIVATISATION AND GLOBALISATION

I Fill in the blanks. (Each question carries one mark)

1) Reforms were introduced during 1991.
2) RBI regulates Financial Sector.
3) WTO was founded in 1995.
4) Taxes on incomes of individuals is called Direct tax.
II Answer the following question in a word/sentence each. (Each question carries
one mark)
1) What is Liberalisation?
Liberalisation refers to removal of restrictions and opening up of various sectors of
the economy by giving freedom to invest.
2) Give the meaning of Privatisation?
Privatisation refers to transferring of the ownership or management of a
government owned enterprise to private entrepreneurs.
3) What is Globalisation?
Globalisation refers to integration of the economy of the country with the world
economy.
4) Expand IBRD.
International Bank for Reconstruction and Development.
5) Expand GATT.
General Agreement on Trade and Tariff.
6) Give the meaning of Direct tax.
Direct Tax is the tax where the tax burden cannot be transferred to other person.
Example: Income tax.
7) What do you mean by Out Sourcing?
Out Sourcing is the process where a company hires regular service from external
sources, mainly from other countries, which was previously provided internally or
from within the country.
III Answer the following questions in four sentences each. (Each question carries two
marks)
1) Give the meaning of Industrial Licensing
Industrial Licensing is a system in which every entrepreneur had to get permission
from government officials to start a firm, closedown a firm or to decide the amount
of goods they could be produced.
2) Mention four objectives of Trade Policy?
The four objectives of trade policy are-
• To dismantle quantitative restrictions on imports and exports.
• To reduce tariff rates.
• Removal of licensing procedures for imports.
• Removal of export duties.
3) What is Fiscal Policy?
Fiscal Policy is the policy of the government in respect of taxation and public
expenditure. Tax reforms are concerned with the reforms in government’s taxation
which we term generally public revenue which also includes non-tax revenue. Fiscal
Policy includes Public Revenue and Public Expenditure.
4) What are the Services of out sourcing?
The major services of out sourcing are: legal advice, computer service,
advertisement , medical service, teacher service etc.
5) What do you mean by Disinvestment?

9
 Disinvestment refers to the sale of part of equity shares of public sector enterprise to
the private people (private entrepreneurs). The main purpose of disinvestment is to
improve financial conditions and facilitate modernisation.
6) Give Example for Direct Tax and Indirect Tax.
Example for Direct Tax: Income tax.
Example for Indirect Tax: Sales tax.
IV Answer the following question in twelve sentences each. (Each question carries four
marks)
1) Briefly explain the back ground of Economic Reforms in India.
There was a financial crisis in India since 1980. The various developmental policies
required huge amount of money. But there were no enough funds with Indian
government to spend for those developmental policies. Government expenditure
exceeded its income.
At this situation India approached the International Bank of Reconstruction and
Development and International Monetary Fund for loans. To avail the loans these
international institutions expected India to liberalise and open up the economy by
removing restrictions on private sector, reduce the role of government in many areas
and remove trade restriction between India and other countries. India had to agree
to these conditions of IBRD and IMF and announced the New Economic Policy which
included Liberalisation, Privatisation and Globalization.
2) Write a note on WTO.
The World trade Organization (WTO) was founded in 1995 as the successor
organization to the General Agreement on Trade and Tariff (GATT) which was
established in 1948.
The main objectives of WTO are as follows:
* To establish a rule based trading system in which nations cannot place arbitrary
restrictions on trade.
* To enlarge production and trade services.
* To ensure optimum utilisation of world resources
* To protect the environment.
India being the founder member of WTO, kept its commitments towards
Liberalization of trade, made in WTO by removing quantitative restrictions on imports
and reducing tariff rates.

Some economists argue that the usefulness of WTO TO India is not much when
compared to developed countries. The major portions of the benefits are enjoyed by
the rich countries.
3) Briefly explain the financial sector reforms.
The financial sector consists of financial institutions like commercial banks,
investment banks, stock exchange operations and foreign exchange market. The
financial sector in India is regulated by the Reserve Bank of India.
The major objective of financial sector reforms is to reduce the role of RBI. That
means, the financial sector may be allowed to take decisions on many matters
independent of RBI.
The financial sector reform policies led to the establishment of private sector banks
both Indian and Foreign. Foreign investment limit in banks was raised to around 50
percent. The banks are given freedom to set up new branches without the approval
of the RBI after fulfilling certain conditions. Foreign institutional investors (FII) like
merchant bankers, mutual funds and pension funds and pension funds are now
allowed to invest in Indian financial markets.

10
4) Write a short note on outsourcing.
Outsourcing is a process in which a company hires regular service from external
sources, usually from other countries. It includes legal service, computer service,
advertisement, security etc.
Many services like voice-based business processes, record keeping, accountancy,
banking services, music recording, film editing, clinical advice or even teaching are
being outsourced by companies in developed countries to India. Most of the Multi-
National corporations and small companies are outsourcing their services to India
where they can be availed at cheaper cost. The low wage rates and availability of
skilled labour in India have made it a destination for global outsourcing.
V Answer the following question in twenty sentences each. (Each question carries six
marks
1) Briefly explain the important areas of Liberalisation.
Liberalisation is one of the reforms of New Economic Policy of 1991. It was introduced
to put an end to the restrictions and open up various sectors of the economy. The
following are the important areas of liberalisation.
• Deregulation of Industrial sector.
• Financial sector reforms.
• Tax reforms
• Foreign Exchange Reforms
• Trade and Investment Policy reforms
Deregulation of Industrial Sector: The liberalisation policy removed many restrictions
enforced on industrial sector. Industrial licensing was abolished for almost all
products except products like alcohol, cigarettes, hazardous chemicals, industrial
explosives, pharmaceuticals etc. The only industries which are reserved for
government are defence equipments, atomic energy generation and railway
transport.
Financial sector Reforms: The financial sector consists of financial institutions like
commercial banks, investment banks, stock exchange operations and foreign
exchange market.
The financial sector in India is regulated by Reserve Bank of India. The major objective
of financial sector reforms is to reduce the role of RBI. That means the financial sector
may be allowed to take decisions on many matters independent of RBI. The financial
reforms policies led to the establishment of private sector banks both Indian and
Foreign.
Tax Reforms:These are the reforms which are concerned with Government’s taxation
and public expenditure policies. They are called as fiscal policy of the government.
There are 2 types of taxes- direct taxes and indirect taxes. Since 1991, there has been
a continuous reduction in the taxes on individual incomes. It is now widely accepted
that moderate rates of income tax encourage savings and voluntary disclosure of
income. The rate of corporation tax has been gradually reduced. A new tax called GST
(Goods and Service Tax) has been introduced from 01-07-2017.
Foreign Exchange Reforms: During 1991, the government took a immediate measure
to resolve the balance of payments crisis, the rupee was developed against foreign
currencies. This led to an increase in the inflow of foreign exchange. This led to the
free determination of rupee value in the foreign exchange market. At present, the
market forces i.e demand and supply determine exchange rates.
Trade and Investment Policy reforms: A new trade and investment policy under
liberalization strategy was made to increase international competitiveness of
industrial production and a foreign investments and technology into the economy. To

11
 protect Indian industries, the government was following quantitative restrictions on
imports which encouraged tight control over imports.
The main objectives of Trade and Investment policy were-
• To remove quantitative restrictions on imports.
• To reduce quantitative restrictions in exports.
• Reducing tariff rates.
• Removal of licensing system.
A process of disinvestment was also initiated by selling of part of equity shares of
Public Sector Enterprises to the public.

2) Briefly explain the effects of reforms on Agricultural Sector.

The economic reforms of 1991 have not been able to benefit agriculture, where the
growth rate is not up to the expected level.
The public sector investment in agriculture sector, like irrigation, power, roads,
market linkages and research has fall in the reform period.
The removal of fertilizer subsidy has led to increase in the cost of production, which
has severely affected the small and marginal farmers.
This sector has been experiencing a number of policy changes, such as reduction in
import duties on agricultural products, removal of minimum support price and lifting
of quantitative restrictions on agricultural products.
These have adversely affected Indian farmers as they now have to face increased
international competition.
Further, due to 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 the place of production of food grains. This has resulted in
increase in prices of food grains.
VI Project-Oriented Question (Five marks)
1 Identify the following banks as agriculture, industry, nationalised, private and foreign
bank.
ICCI, Canara Bank, HSBC, NABARD, IDBI
ICICI- Private Bank
Canara Bank – Nationalised Bank
HSBC- Foreign bank
NABARD- Agriculture Bank
IDBI- Industrial Bank
************************

12