Chapter 3 – Liberalization Privatization and Globalization An Appraisal Solutions
Question - 1 : - Why were reforms introduced in India?
Answer - 1 : -
Reforms were introduced in the year 1991 due to the following reasons:
1. To manage the economic crisis that the country was going through
2. Fiscal deficit was going through the worst phase during that period and that resulted in increased public debt.
3. India was going through a weak Balance of Payments (BOP) scenario. With the fall of erstwhile Soviet Union and the Gulf War, it led to borrowing from International market. Finally, this led to the formation of new economic policy to attain a balanced economy.
4. PSU’s were established with the aim of providing employment and remove poverty. But the PSU’s turned out to be loss making units, which burdened the already weak economy of the country.
5. High level of fiscal deficit lead to RBI increasing the inflation rate, which made goods more costly and led to the starting of a movement from within.
Question - 2 : - Why is it necessary to become a member of WTO?
Answer - 2 : -
Becoming a member of WTO (World Trade Organisation) is important in many ways as mentioned below:
1. Being a member of WTO, a member country gets equal rights like other member countries to trade in the international market.
2. It provides scope to produce more at a large scale so that it can cater to the needy people across boundaries.
3. WTO will work towards abolishing tariff barrier in order to encourage healthy competition among producers of different countries
4. Member countries of WTO which have a similar economic status can raise voice to safeguard common interests.
Question - 3 : - Why did RBI have to change its role from controller to facilitator of financial sector in India?
Answer - 3 : -
RBI’s role prior to liberalisation was to control and regulate the financial sector which comprises of financial institutions such as commercial banks, stock exchange, investment banking, foreign exchange or forex as it is called now. With the liberalisation and reforms undertaken for finance sector RBI assumed the role of a facilitator in order to allow financial institutions to make their own decision. This led to the entry of foreign players. The main objective of financial reforms was to obtain foreign investment and participation from private sector, to increase competitiveness in finance sector.
Question - 4 : - How is RBI controlling the commercial banks?
Answer - 4 : -
RBI is the authority who determines the various ratios like SLR (Statutory Liquid Ratio), Repo Rate, Cash Reserve Ratio (CRR), Reverse Repo Rate and Prime Lending Rate (PLR). It determines the rate of interest for home loans and other loans for banking sectors and all commercial banks have to follow the same. RBI acts as the Central Bank of India and controls money supply for the economy.
Question - 5 : - What do you understand by devaluation of rupee?
Answer - 5 : -
Devaluation is reduction in the value of the currency in comparison to a foreign currency under Fixed Rate System. Devaluation is done by the government in order to encourage more exports and reduce imports. After the devaluation, the value of rupee is reduced with respect to the foreign currency and more amount of goods can be purchased using one unit of that foreign currency.
Question - 6 : - Distinguish between the following
(i) Strategic and Minority sale
(ii) Bilateral and Multi-lateral trade
(iii) Tariff and Non-tariff barriers.
Answer - 6 : - (i)
| | Strategic Sale | Minority Sale |
| (a) | It refers to the sale of a stake of a PSU amounting to 51% to a private sector bidder with the highest bid. | It refers to the sale of stake of a PSU which can be less than or equal to 49% to a private sector bidder. |
| (b) | Change in ownership handed over to the major stakeholder | Ownership stays with the government due to virtue of holding 51% or more of the stake. |
(ii)
| | Bilateral Trade | Multilateral Trade |
| (a) | Exchange of goods between two nations promoting trade | It is a trade agreement between three or more nations |
| (b) | It provides equal opportunities to both the participating nation | Provides equal opportunity to all the members of the trade agreement |
(iii)
| | Tariff Barriers | Non-tariff Barriers |
| (a) | It refers to the tax that is imposed by the country in order to offer protection to the existing industries. | Refers to barriers which are government policies and practices that restrict foreign trade. |
| (b) | Tariff barriers raise the price of the product but have a limited effect on demand | It is more effective in raising demand |
Question - 7 : - Why are tariffs imposed?
Answer - 7 : -
Tariffs are imposed with the purpose of raising the price of goods from imports which discourages further imports. This provides scope to domestic products for earning market share and help them survive. Any such item that is thought to be unnecessary coupled with a high cost of import will be a burden on forex reserves.
Question - 8 : - What is the meaning of quantitative restrictions?
Answer - 8 : -
It refers to clearly defined limits and quotas on the physical commodities that can be exported or imported during a specific time period. Limits can be made on a selective basis based on varying limits of goods as per country or destination. Quantitative restrictions have a greater protective effect as compared to tariff measures and results in distorting free trade. When quantitative restrictions are used by a trading partner export cannot be done beyond the quota that is set.
Question - 9 : - Those public sector undertakings which are making profits should be privatised. Do you agree with this view? Why?
Answer - 9 : -
A profit-earning PSU is that which is generating revenue for the government while a PSU is regarded as loss-making if the same PSU is inefficient and puts an undue burden on the government. Such loss-making entities should be privatized and can lead to more efficient business. Core areas of business such as Railways, Water should not be privatized as it is created for the welfare of the people as it will impact the welfare of the people. Instead of privatising profit-making PSUs, they can be granted a greater degree of autonomy in their operating activities which will increase efficiency and productivity and make them more competitive with private counterparts.
Question - 10 : - Do you think outsourcing is good for India? Why are developed countries opposing it?
Answer - 10 : -
Yes, it is good for India. These points below further help in justifying that:
1. For a country like India which is developing, employment generation is a concern and outsourcing provides a solution for generating employment opportunities.
2. It enables the transfer of knowledge about the processes and technology from developed countries to the developing countries.
3. By providing outsourcing services India makes itself credible in the international market, it will help in bringing international investment to India.
4. Outsourcing opens up avenues across service sectors and helps the educated youth in getting skills which will result in human capital formation
5. Jobs will help in the building of society by reducing poverty and also pave the way for education, which will build the nation as a whole.
Developed countries oppose outsourcing as it leads to outflow of jobs from the developed countries to the developing countries, it leads to outflow of investment and revenue and helps develop the weaker country, but results in job scarcity for the developed countries.