NEW DIGAMBER PUBLIC SCHOOL

CLASS: XII
SUB: ECONOMICS
CH 3 – IED
REVISION NOTES

Economic Reforms

Economic reforms or structural adjustment is a long term multi-dimensional package of

various policies (Liberalisation, privatisation and globalisation) and programme for the

speedy growth, efficiency in production and make a competitive environment. Economic

reforms were adopted by Indian Govt. in 1991.

Factor’s responsible for Economic reforms.

1. Fall in foreign exchange reserve : as imports grew faster than exports

2. Adverse balance of payments resulted repayment crisis

3. Mounting fiscal deficit as govt. expenditure grew faster than revenue

4. Rise in prices, which has the negative impact on Investment.

5. Failure of public enterprises:- very low return on high Investment

6. Gulf crisis increases crude oil prices which negatively affected BOP.

7. High rate of deficit financing

8. Collapse of soviet block.

 New Economic Policy

It refers to economic reforms introduced since 1991 to improve the productivity and

profitability of economy and to make it globally competitive.

Measures of New Economic policy

1. Stabilisation measures: These are short run measures introduced by Govt to control

rise in price, adverse balance of payment and fall in foreign ex-change reserve.

2. Structural reform measures: These are long run policies, aimed at improving the

efficiency of the economy and increasing its international competiveness by removing

the rigidity in various segment of the Indian economy.

In the new economic policy 1991, Structural reforms can be seen with respect to:
 1. Liberalisation.

2. Privatisation

3. Globalisation.

Liberalisation

Liberalisation means removing all unnecessary control and restrictions like permits licences,

protectionist duties quotas etc. In other words, It may defined as loosening of govt.

regulation in a country to allow for private sector companies to operate business transactions

with fewer restrictions.

Objectives of liberalisation

1. To decrease debt burden of the country

2. To expand size of the market

3. To increase competition among domestic industries

4. To encourage export and import of goods and services.

Economic reforms under liberalisation.

1. Industrial sector reforms

a. Abolition of Industrial Licensing: Licensing was reduced to only 5 industries

i.e. liquor, cigarette, defense equipment, industrial explosives and dangerous

chemicals.

b. Contraction off Public Sector: Under the new industrial policy, the number of

industries reserved for PSU was reduced from 17 to 8. In 2010-11, the number

of industries was reduced merely to two i.e. Atomic Energy and Railways.

c. De-reservation under SSI: Production areas which earlier were reserved for SSI

were de-reserved.

d. Increase in production
 e. Freedom to Import capital goods

2. Financial sector reforms.

a. Change in role of RBI from regulator to facilitator

i. Reducing various Ratios(SLR, CRR)

ii. De-regulation of interest rates

b. Establishment of Private banks

c. FDI and FII in Private Banks

d. Freedom to setup new branches

3. Fiscal reforms/Tax reforms

a. Direct Tax: burden cannot be shifted

b. Indirect Tax: burden can be shifted

c. Following Tax Reforms were introduced:

i. Reduction in Taxes as high tax rates were an important reason for tax

evasion.

ii. Introduction of GST in March, 2017 was another reform in indirect

taxes to facilitate establishment of common national market for goods

and commodities.

iii. Procedure for tax payment have been simplified.

4. Foreign exchange reforms

a. Devaluation of rupee: fall in the value of domestic currency with reference to

international currencies. It leads to rise in exports and fall in imports. Here

rupee was devalued by 20%

5. Trade and investment policy reforms.

 a. Removal of Quantitative restrictions on imports and exports

b. Removal of Export Duty

c. Reduction in Import Duty

d. Relaxation in Import Licensing System

Privatisation

Privatisation is the general process of involving the private sector in the ownership or

operation of a state owned enterprises.

Policies adopted for privatisation

1. Contraction of public sector.

2. Abolish the ownership of Govt. in the management of public enterprises.

3. Sale of shares of public enterprises - Disinvestment

Objectives of Privatisation

1. Raising funds from Disinvestment

2. Improving the financial condition of the govt.

3. Bringing healthy competition within an economy

4. Making Way for Foreign Direct Investment

The purpose of privatization was mainly to improve financial discipline and facilitate

Modernization.

As on 13 Sept 2017, there were 8 Maharatnas, 16 Navratnas and 74 Miniratnas

Sircilla Tragedy of Andhra Pradesh is an example of the negative impacts of Privatisation.

 Globalisation

Globalisation may be defined as a process associated with increasing openness, growing

economic interdependence and deepening economic integration in the world economy.

Policy promoting globalisation.

1. Increase in equity limit of foreign investment: In 47 high priority industries, FDI to the

extent of 51% has been allowed without any restrictions.

2. Partial convertibility: Union Budget 1992-93 made Indian rupee partially convertible

for

a. Import and export of G & S

b. Payment of interest or dividend of investment

c. To meet family expenses

3. Long term trade policy: Export-Import policy (1992-97) was announced to remove all

restrictions and controls on the external trade

 4. Reduction in tariff: Custom duty has been modified i.e. it has been reduced from 250%

to 10% in 2007-08 budget.

** Partial convertibility refers to the freedom to convert domestic currency into foreign

currency and vice versa for restricted purposes. In India, there is partial convertibility as

there are restrictions on capital account transactions, though the rupee is fully convertible in

the current account

Outsourcing

• It is an important outcome of the process of Globalisation.

• It refers to contracting out some of the activities to a third party which were earlier

performed by the organisation.

• In simple words, it refers to a system of hiring business services from the outside

world.

• Eg: call centres, security services, educational services etc

• India is emerging as an important destination of outsourcing particularly, BPO,

because of two reasons:

• Availability of cheap labour

• A revolutionary growth of IT industry in India

WTO

• In 1948 GATT was established with 23 countries to administer all

multilateral trade agreements by providing equal opportunities to all

countries in the international market for trading purpose.

• On 1st January 1995 WTO came into existence as the successor of GATT.

• WTO is a powerful body that aims at making the whole world a big village where

goods and services can flow without any barriers.

 • At present, there are 164 member countries of WTO in which Afganistan joined last in

2016

• Dr. Ngozi Okonjo-Iweala of Nigeria is the Director General of WTO

Functions of WTO

• To facilitate international trade by removing tariff and non tariff barriers.

• To ensure optimum utilization of world resources.

• To protect the environment.

• To enlarge production and trade of services.

• To provide a platform where member countries can decide future strategies.

• To establish a regime where nations cannot place arbitrary restrictions on trade.

An Appraisal of LPG Policies

Positive Impact

1. Increase in foreign investment.

2. Increase in foreign exchange reserves.

 3. A check of inflation.

4. Increase in national income.

5. Increase in exports.

6. Consumer sovereignty.

Negative Impact

1. Neglect of agriculture.

2. Jobless growth.

3. Increase income inequalities.

4. Adverse effect of disinvestment policy.

5. Spread of consumerism.

6. Cultural erosion.

7. Encourages economic colonialism