Chapter – 3

Economic Reforms Since 1991

In this post, we have given the Important Questions of Class 12 Economics Chapter 3 (Economic Reforms Since 1991) in English. These Important Questions are useful for the students who are going to appear in class 12 board exams.

Board	CBSE Board, UP Board, JAC Board, Bihar Board, HBSE Board, UBSE Board, PSEB Board, RBSE Board
Textbook	NCERT
Class	Class 12
Subject	Economics
Chapter no.	Chapter 3
Chapter Name	(Economic Reforms Since 1991)
Category	Class 12 Economics Important Questions in English
Medium	English

Chapter-3 Economic Reforms Since 1991

Q1. What are stabilization measures and the structural reform measures?

ANSWER- Stabilization measures are short term measures, intended to correct some of the weaknesses that have developed in the balance of payment and to bring inflation under control. Structural reform policies are long term measures, aimed at improving the efficiency of the economy and increasing its international competitiveness by removing the inflexibility in different segments of the Indian economy.

Q2. Define Liberalization .Explain the measures taken in industrial sector for liberalization of the economy.

ANSWER- Liberalization is the removal or reduction of various types of controls and restrictions, which are in force in the economy, in order to allow trade and industry to function more freely. Following measures had been taken for liberalization of Indian economy under Industrial Sector Reforms :

Industrial Sector Reforms: Industrial Sector Reforms were aimed at reducing government control and opening up the Industrial Sector to private participation. The reforms were

• Delicensing of Industries- Since 1991, the government has relicensed several industries in phased manner. At present, only 5 industries such as liquor, cigarette, and defence equipments, indusrial explosive and dangerous chemicals require permission from the state.
• Contraction of Public Sector: As per the Industrial Policy Resolution1956, 17 Industries were reserved for the public sector and small scale enterprises. In 1991, this number was reduced 8 and presently only 3 industries reserved for the public sector. These are atomic energy, defiance equipments and railway.
• Dereservation of Production Areas: Many goods produced by Small scale industries have now been dereserved. In many industries, the market has been allowed to determine the prices.
• Monopolies and Restrictive Trade Practices (MRTP): With the introduction of Liberalization and expansion schemes, the requirement for large companies, to seek prior approval for expansion, establishment of new undertakings, merger etc was eliminated.
• Freedom to Import goods: liberalization also implied freedom for the industrialists to import capital goods with a view to upgrading their technology.

Q 3. What are the important reforms introduced in the Financial Sector Reforms?

ANSWER- Financial sector includes financial institutions, such as commercial banks, investment banks, share market operations and foreign exchange market. The financial sector in India is controlled by the Central Bank- Reserve Bank of India (RBI).These reforms were:

• Change in Role of RBI : The role of RBI was reduced from regulator to facilitator of financial sector, now financial sector was free to take decisions on many matters without consulting the RBI.
• Private Banks granted permission: Before 1991, all banks were owned either by the RBI or by the government . Private Banks were not permitted. The NEP encouraged private banks and so many private banks such as the ICICI, HDFC etc.
• Increase in limit of Foreign Investment- The limit of foreign investment in banks was raised to around 51% .Foreign Institutional Investors such as merchant bankers, mutual funds and pension funds were now allowed to invest in Indian financial market.

Q.4 Discuss the external sector reforms taken by the Government under Liberalization?

ANSWER- External sector reforms included: foreign exchange reforms and foreign trade policy reforms

• Foreign Exchange Reforms: The important reforms made in the foreign exchange market are
  • Devaluation of Rupees: Devaluation refers to reduction in the value of domestic currency by the government. To overcome Balance of Payment crisis, the rupee was devalued against foreign currencies. This led to an increase in the inflow of foreign exchange.
  • Market Determination of Exchange Rate: The Government allowed rupee value to be free from its control. As a result, market forces of demand and supply determine the exchange of the Indian rupee in terms of foreign currency.
• Foreign Trade reforms :The important trade and investment policy reforms included:
• Removal of quantitative restrictions on Imports and Exports
• Removal of Export Duties
• Reduction in Import Duties
• Relaxation in important licensing system

Q.5 Distinguish between the following:

i) Strategic and Minority sale

ii) Bilateral and Multilateral trade

iii) Tariff and Non- tariff barriers

ANSWER-

• Strategy and Minority sale: Strategic sale refers to the selling off a major part of equity (51%or more) of the public sector undertaking to the private sector. Under strategic sale ownership transfers to a private company. Minority sale means a sale of 49% or less of the equity of public sector undertaking. The ownership of the PSU remains with the government.
• Bilateral and multilateral trade: Trade between two countries is known as bilateral trade. Trade between more than two countries is known as tariff barriers.
• Tariff and Non tariff Barriers: The barriers which are imposed on imports, to make them relatively expensive, to protect the domestic industry are known as tariff barriers. The barriers which are imposed on the quantity of imports and exports are known as non tariff barriers.

Q.6 Define privatization. Discuss the need for privatization.

ANSWER- Privatization means transfer of ownership, management and control of public sector enterprise to the entrepreneurs in the private sector. With a view to improve the performance of the public sector enterprises, the wave of privatization has spread all over the world. Need for privatization was felt mainly because of the inefficiency of the public sector enterprises. Thus, the private sector was given larger space to operate in the areas reserved exclusively for the public sector.Privatisation can be done by two ways:

• By withdrawal of government control from the management and ownership of public sector companies;; and
• By outright sale of public sector companies.

Q.7 What do you mean by Globalization? Explain its merits and demerits.

ANSWER- Globalization means integrating the national economy with the world economy through removal of barriers on international trade and capital movement.

Merits of Globalization-

• This improves quantity as well as quality of production due to rise in competition.
• Globalization will attract foreign capital which will lead to technological up gradation.
• India’s share in the world trade has increased from 0.5% in 1990-91 to 1.1% in 2005.
• Banking and foreign sector of the home country will raise their competitive skill and efficiency in order to have a competitive edge over foreign banks.

Demits of Globalization-

• Globalization has destroyed local producers since they are unable to compete with cheap imports.
• Large scale establishment of MNCs in the developing countries like India mighty result in monopolies.
• Globalization may lead to income inequalities within the country as it will benefit only those who possess latest skills and technology.

Q.8 What is Outsourcing? What makes India a favourite destination for Outsourcing?

ANSWER- It refers to a system of hiring business services( like call centres ,transcription ,clinical advise etc) from the outside world. The following points suggest that outsourcing is good for India. The following points qualify India to be the favorite destination for outsourcing by various MNCs

• Availability of Cheap Labor – Wage rates in India are comparatively lower than that of in the developed countries
• Reasonable Degree of Skills- India has vast manpower with fairly reasonable degree of skills and techniques.
• Favorable Government Policies- MNCs get various type o lucrative offers from the Indian Government like tax holidays ,low tax rates etc.
• International worthiness: India has a fair international worthiness and credibility;
• Better technology and growth of IT – The advancement and innovations in the IT sector contributed to the growth of the service sector in India.

Q.9 Mention positive impact of LPG policies on the Indian economy.

ANSWER

• Rise in GDP growth- Since the introduction of economic reforms in 1991, country has shown rise in GDP growth rate.
• Rise in Foreign Exchange Reserves- Foreign exchange reserves which were only US $ 6 Billion in 1990-91 to about US $ 413 Billion in 2018-19.
• Rise in inflow of Foreign Capital- One of the benefits derived from global integration is the increased inflow foreign direct investment (FDI) .FDI was at US $ 30 Billion in 2017-18.
• Control of Inflation- The positive point of economic reforms is that it has controlled inflation.
• Rise in Competitiveness of Industrial Sector- Sectors such as auto components, textiles and pharmaceuticals are pillars which show the strength of the industrial sector.
• Controlling Fiscal Deficit- Continuously increasing fiscal deficit was a serious problem in front of government .Due to LPG policies, government receipts have increased. Fiscal deficit has reduced.
• A shift from Monopoly Market to Competitive Market- New economic policies i.e., LPG policies have caused a significant shift from monopoly character of Indian market to monopolistic character.
• Increase in role of Private Sector – Removal of licensing system and removal of restrictions on entry of the private sector, in areas earlier reserved for the public sector; have increased the area of operation of the private sector.

Q.10 What is WTO? Discuss its objectives ?

ANSWER- The WTO was founded in 1995 as the successor organization to the General Agreement on Trade and Tariff (GATT) . GATT was established in 1948 with 23 countries as the global trade organization to administer all multilateral trade agreement by providing equal opportunities to all countries in the international market for trading purposes. At present membership of WTO is 164.

Objective of WTO

• To protect the environment.
• To provide greater market access to all member countries.
• To ensure optimum utilization of world resources.
• To enlarge production and trade of services.
• To ensures the reduction of tariffs and other barriers to trade.

Q11. Discuss the disadvantages of GST.

Ans. Disadvantages of GST are as under:

• Complicated tax system: GST has introduced 4 different tax stabs of 5%, 12%, 18% and 28%which has made consumer confused in these rates .sometimes he remains baffled over these rates while making purchases.
• Difficult system for small and marginal producers: small producers and trades are unable to maintain such a good record relating to sale and purchases of goods and services. They are puzzled over filling quarterly returns and refund claims. However small businessmen with annual income of Rs. 20 lakh have been kept out of GST arena.
• Some major items are out of GST regimes: Petroleum and Liquor are kept out of coverage of GST which is a major source of state income. Therefore GST is a partial tax system.
• Negative impact on real estate market: GST will add up to 8% to the cost of new homes which can reduce the demand for such homes.
• Inflationary: producers feel the tax slab are high which can raise prices of the product which in turn can have negative impact on demand.
• Negative impact of GST is expected to be observed on GDP growth of India. It is to be expected to fall by more than 1% in the year 2017-2018. But economist feel it is a temporary effect which will be improved in coming years.

Q.12. What are the main causes of demonetisation?

Or

What are reason behind demonetisation?

 Ans. Following are the main reason behind demonetisation:

• Black money: A recent study has pegged India black market economy at over rs 30 lakh core or about 20% of total GDP. This is even bigger than the GDP of countries like Thailand and Argentina. So now after this decision black money holders are left with just two option – either route his money through banks, declaring it to be their income or burn the stashed file.
• Fake currency and Terrorism: “Terrorism is a frightening thing. But have u ever thought about how these terrorist get their money? Enemies from across their border have run their operation using fake currency notes. This has been going for years.”
• Stability of the economy: The major impact of this decision is on the economy because it gives it gives highly positive impact on the economic stability in near future. The coming 6 or 7 months are expected to witness a considerable level of deflation. Sectors like real estate, construction materiel, gold, unorganised trade and services will see significant pain in the near time.

 To check unorganised trading:

• Price hike in real estate sectors is mainly because of the involvement of black money , but after taking this decision the prices of property will surely come down to their real value To their real value.
• Unorganised dealing in share market will also be eliminated after this decision and this will gain positive result in the economic condition of the country.
• The problem of inflation will get solved with this step as the govt. will get more money in its pocket in the form of taxes and undisclosed income.
• Banking system will also get strengthen as the banks will also be flooded with the huge amount of money. This will also result in more economic development in the nation as the money will be channelized properly through banks.
• Less cash economy: It is not possible to make India ‘cash – les s economy’ but for the making development and transparency in the economy, we can say use of less cash is possible. So far making people familiar with e – payment and use of plastic currency is made possible only after demonetization.

Q.13. Discuss the merits of demonetization.

Or

Demonetised Favoured economic growth or not. Explain.

 Ans. Demonetisation Favoured India’s Economic growth

 The reasons are as follows:

• Financial Reform: Demonetisation policy of the Govt. has been termed as the greatest financial reform that aimed to curb the black money corruption and counterfeit currency notes.
• Corruption-free: Demonetisation was done to help India to become corruption free as it will be difficult now keep the unaccounted cash.
• To check the black money: Demonetisation will help the Govt. to track the black money and the unaccounted cash will now flow no more and the amount collected by means of tax can be better utilised for the public welfare and development schemes.
• To curb terrorist activities : One of the biggest achievements of Demonetisation has been seen in the drastic curb of terrorist activities as it has stop the funding the terrorism which used to get a boost due to inflow of unaccounted cash and fake currency in large volume.
• To check money laundering: It will eventually come to halt as the activity easily be tracked and the money can be seized by the authorities.
• To Stop Parallel Economy: Demonetisation aimed to stop the running of parallel economy due to circulation of fake currency as the banning of Rs. 500 and Rs. 1000 notes will eliminate their circulation.
• Loans the public sector banks which were reeling under deposit crunch and were running short of funds have suddenly swelled with lot of money which can be used for future and loans after keeping a certain amount of reserve as per RBI guidelines.
• Use of accounts: The people who opened the Jan Dhan accounts will now use their accounts and becomes familiar with banking activities. The money deposited in these accounts can be used for the developmental activity of the country.
• Cashless society: Demonetisation has driven the country towards a cashless society. Lakhs of the people in the remote rural areas have started resorting to use the cashless transactions. The move has promoted banking activities. Now even the small transactions have started going through banking channels and the small savings have turned into huge national asset.
• To check inflation: The high rising price pattern and inflationary trends which the Indian economy was facing are taking a down turn making the living possible within low income group reach.

Q.14. Discuss arguments against (demerits) of economic reforms. (LPG)

Ans. Some people make following arguments against new economic policy. Following observations can be noted in this regard:

• Neglect of Agriculture Sector. Economic reforms concentrate on Industry, trade and finance, ignoring the role of agriculture sector in Indian economy. No particular reform has been suggested on this front.
• More Dependence on Foreign Debts. New policy makes Indian economy much dependent on foreign investment and foreign technology. Average Indian owe Rs.1500 as foreign debt, heavy dependence on foreign debts may prove disastrous for the economy.
• Pressure of World Bank and IMF.AII these reforms are introduced in India on the recommendations of

Q.15. Define Gst. How is it governed?

Ans:

• Meaning-Gst is an indirect tax collected on the value addition of goods and services at each stage of sale or purchase in a supply chain.
• Whenever a producer makes some purchases of inputs(raw material), he will get input credits, which will be adjusted from his total amount of tax. Gst will be charged from him on the basis of his value additions. There will be no cascading (Compounding) of tax load on the consumer.
• Gst tax is governed by GST-Council composed of Central Finance Minister and all the Finance Ministers of various states. However, Union Finance Minister (Mr.Arun Jaitly) is the Chairman of this Council. This Council meets occasionally to make required changes in it. Last meeting on 25^th Feb 2019,made some big changes in Real Estate taxes and made it “Nation Friendly”

Q.16. What are the Merits of GST?

Ans:

• Taxes becomes easier and simple: It has replaced 17 complicated taxes into a single tax
• Unified Market: it will help to introduce ‘one Nation-one Market-one Tax’ in whole India. No Discrimination of rates in states will be there.
• Consumption Based Tax: Gst is imposed on the basis of consumption rather than manufacturing. It will not disturb expansion plans.
• Abolition of CST: Central Sale tax(Cst) has been completely abolished so that there should be no double taxation on certain goods produced in Centre Regime.
• Booster to Global trade: Gst has made exportables as tax free but imports are taxed for the need of the country.
• Promotes ‘Make –in India’ spirits: Gst would reduce the cost of manufacturing both from a tax perspective as well as an on compliance front. It will prove a booster for the industry.

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