Class 12 Notes on Economic Reforms Since 1991

LPG, which is also known as Liberalisation, Privatisation and Globalisation, were the three major measures that the Indian government adopted under its New Economic Policy. For this, they approached International Banks for development and the betterment of the country and economy. When they approached these international banks and organisations, these agencies asked them to open up our Indian economy to the world, remove trade restrictions and trade barriers and foster the private sector. In this blog, we will be digging more into the chapter on Class 12 Economic Reform Since 1991.

Brief Overview Of The Era Before LPG

Before 1991, the Indian economy and Indian companies were living under a shelter of protection that was created by the Indian government to protect domestic companies from outside or international competition. The economy was not ready to step out into the international market and compete with big established companies and organisations. But, in 1991, the government agreed to the reforms that were advised by the foreign banks and hence announced the New Economic Policy (NEP) to develop the Indian economy and also for its future growth. In the Class 12 Economic Reform Since 1991 chapter, we can broadly categorise or classify the measures into two groups: 

• Structural reforms 
• Stabilization measures 

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Stabilization Measures 

Stabilisation measures were taken and accepted by the Indian government to revamp the Indian economy. These measures were undertaken to correct the inherent and carried forward weaknesses that had been developed in BOPs (Balance of Payments) and also to control inflation. These were mainly short-term measures, unlike the structural reforms.

Structural Reforms

Class 11 Liberalisation, Privatisation and Globalisation talks about the structural reforms that were taken to improve the economy. From a long-term perspective and to strengthen international competitiveness, reforms have been put in place to eliminate rigidity in various segments of the Indian economy. Hence these are long-term measures and policies. The structural reforms that were adopted by the Indian government were as follows:

1. Liberalization 
2. Privatization 
3. Globalization 

Factors Responsible for Economic Reforms Since 1991

As per the class 12 syllabus of Indian Development Economics, the major factors that were responsible and let the government come up with the economic reforms since 1991 were:

1. A decrease in foreign exchange reserves: imports grew faster than exports
2. The unfavourable balance of payments gave rise to a repayment crisis
3. The budget deficit worsened as public expenditure increased faster than receipts
4. Prices increased, with a negative impact on investment
5. Failure of state-owned enterprises: – very small, high return on investment
6. The Gulf crisis has led to a rise in crude oil prices, which has had a negative impact on the balance of payments.
7. High ratio of deficit funding
8. The collapse of the soviet bloc

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Liberalization 

In Class 12 Economic Reform Since 1991, we will first talk about Liberalisation. Liberalisation was one of the three structural reforms that were adopted by the Indian government. It was adopted to put an end to various restrictions and reforms, which later on became a hindrance to the development and growth of the Indian economy. The government decided to loosen its influence and let private sector organisations and companies enter the Indian economy and start working without or with fewer government restrictions. This allowed the economy to become liberal and grow eventually.

Objectives Of Liberalisation Policy

There were many reasons why the structural reform of liberalisation was undertaken by the government. They are mentioned below.

1. Increase competitiveness between domestic industries
2. Encourage foreign trade with other countries whose imports or exports are regulated
3. Foreign capital and technological improvements
4. Expand the borders of the country’s global marketplace
5. A reduction in the country’s debt burden

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Major Economic Reforms Since 1991 Under Liberalisation

Starting from 1991, Indian liberalised its economy and implemented economic reforms for the same. The purpose was to boost economic growth. The reforms included deregulation, reduced trade barriers, encouraging foreign investment, and bringing about financial sector reforms. The main economic reforms are provided below:

Industrial Sector Reforms

There were mainly two types of industrial sector reforms. The first was the abolition of industrial licensing. Apart from a few industries that were concerned with security and strategic concerns, the requirement to have a license was removed. The second reform was the contraction of the private sector. Under this reform, the number of industries under the private sector was reduced. The last reform was providing freedom to import capital goods. Now, companies were permitted to import technology and machines without prior approval from the government. This promoted modernisation and international competition.

Financial Sector Reforms

The financial sector reforms were also three. Financial sector reforms aimed to strengthen the Indian banking sector. The first reform was to deregulate the interest rates. This means that now banks can set up their interest rates based on the market analysis. Second was the reduction of the Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) to the availability of funds for lending and investment. The third was the change in the RBI’s role. RBI transformed from a controller to a facilitator. RBI was now involved in supervision, regulation and monetary stability.

Foreign Exchange Reforms

The next reform is the foreign exchange reform. The rupee was devalued, which made exports from India cheaper and competitive in the international market. Moreover, the system of market-determined exchange rate was started. The demand and supply in the foreign exchange market would affect the rupee’s value. There was a relaxation of the forex controls as companies gained easier access to foreign currency for investment and trade.

Trade and Investment Reforms

Another of important economic reform since 1991 was the trade and investment reforms. The reforms were aimed at connecting India with the global economy. There was mainly a reduction of import tariffs. This means the duties on imports were lowered to increase competitiveness and improve the quality of products. Secondly, the import licensing was removed. The import restrictions on several goods were lifted. There was also a promotion of Foreign Direct Investment (FDI). The FDI approval process was simplified and there were higher investment caps.

Fiscal Reforms

The Fiscal reforms were introduced as the government emphasised reducing the fiscal deficits. They wanted to promote disciplined spending. The reforms included the reduction of subsidies. Now, efforts were being made to cut down unnecessary subsidies so that the money could be used for better purposes. Secondly, emphasis was placed on better expenditure management. Therefore, medium-term fiscal policies and expenditure planning was introduced. The FRBM Act came into effect in 2003 to enforce fiscal discipline.

Tax Reforms

Another one of the significant economic reforms since 1991 was the tax reforms. The aim was to create a more equitable and efficient tax system. The changes included a lowering of personal and corporate tax rates to increase the tax base, the simplification of tax structure, and the introduction of GST. GST was introduced in 2017. This service tax also played an important role in influencing the liberalisation era.

To learn more about the economic reforms since 1991 watch this video:

Privatization 

Moving further, Class 12 Economic Reform Since 1991 talks about Privatisation. This was the second policy among the three policies of LPG that were adopted by the government. Privatisation policy has been used to enhance the dominant role of private sector enterprises and the diminished role of public sector enterprises. In other words, it’s reducing the ownership of the management of a government-owned company. Now, these State-owned enterprises can be turned into private enterprises in two ways:

1. By disinvestment
2. By the withdrawal of governmental ownership or stakes from these public sector companies

Also Read: Class 12 Notes on Indian Economy Chapter 3

Forms Of Privatisation 

Privatisation can happen in different ways. Each form of privatisation varies depending on how much control shifts from public to private hands.There are various forms of privatisation. They are mentioned below. 

1. Denationalisation or Strategic Sale: When full ownership of productive assets is transferred to private sector companies, the law is called denationalisation.
2. Partial Privatisation or Partial Sale: Where the private sector holds more than 50% but less than 100% of the shares of a public sector corporation, whose transfer has already been interpreted, this is called partial privatisation. In this case, most of the shares are held by the private sector. Accordingly, the private sector has significant control over the functionality and autonomy of the business.
3. Deficit Privatisation or Token Privatisation: When the government disinvest its share capital to a degree of 5-10% to compensate for the deficit in the budget is called the privatisation deficit.

Objectives Of Privatisation 

Class 12 Economic Reform Since 1991 also talks about the various objectives of privatisation as a policy. The main goal of privatisation is to improve efficiency. It also aims to reduce the financial burden on the government. Privatisation focuses on encouraging private investment, promoting competition and increasing service quality. The main objectives of privatisation are mentioned below. 

1. Improve the government’s fiscal situation.
2. Reduce the workload on public sector firms.
3. Raise capital through divestment.
4. Increase the effectiveness of governmental agencies.
5. Provide the consumer with higher quality and improved goods and services.
6. Develop healthy competition in society.
7. Encouragement of foreign direct investment (FDI) in India.

Also Read: Emerging Modes of Business Class 11 Notes

Policies Adopted for Privatisation 

As per the unit of class 12 on Economic Reforms Since 1991, the policies that were adopted for privatisation by the government of India are as follows:

1. Contraction of the public sector
2. Abolishing the ownership of the Government in the management of public enterprises
3. Sale of shares of public enterprises

Globalization 

This is the third policy of LPG in Class 12 Economic Reform since 1991. Globalisation refers to the integration of the economy of a nation with the global economy. During globalisation, the emphasis is placed on foreign trade and private and institutional foreign investment. It was the final LPG policy to be implemented in India. Having said that, globalisation as a term is a very complicated phenomenon. The main objective is to transform the world into an independent and integrated world by defining various strategic policies. Globalisation tries to create a world without borders, where the needs of a country can come from all over the world and become a great economy. 

The most important outcome of globalisation in the Indian economy is the concept of the outsourcing model. Outsourcing refers to when a company in a country hires professionals from other countries to get their work done at cheap prices. The best part about outsourcing is that the work can be done at a low cost and from the top sources and human resources available throughout the world. Services such as legal advice, marketing, technical assistance, etc., were being outsourced from companies based in the US, UK, and other parts of Europe.

As information technology or IT has also developed in recent years, the outsourcing of contract work from one country to another has increased considerably due to globalisation. As a means of communication has broadened their reach, all economic activities have increased around the world. 

Having said that, various business process outsourcing (BPO) companies or call centres, which have their voice business process model, are being developed in India. Activities such as accounting and bookkeeping services, clinical counselling, banking or even education were being outsourced from developed countries to India.

Economic Reforms Since 1991 Class 12  Chapter PDF

Here is a class 12th chapter PDF. This chapter contains everything about the economic reforms. This is the NCERT PDF available for students online. This is the official version of the textbook chapter. You can download the same here:

Particulars	PDF
Economic Reforms Since 1991 Class 12  Chapter PDF	Download Here

Economic Reforms Since 1991 Class 12 Notes PDF

On the contrary, if you are looking for the notes PDF, you can download the same from below. This is a summary of notes on the economic reforms. You can download this PDF for quick learning of the topic before the exams.

Particulars	PDF
Economic Reforms Since 1991 Class 12 notes PDF	Download Here

Benefits Of Globalisation 

Towards the end, Class 11 Liberalisation, Privatisation and Globalisation talks about the many benefits of globalisation. You can have a look here: 

1. The biggest advantage of globalisation and its outcome, outsourcing, is that large multinational corporations or even small businesses can benefit from good services at a lower rate than their country’s standards. 
2. The skill set and the availability of human resource capital in abundance in India are regarded as the most dynamic and effective throughout the world. 
3. The professionals in India are the best at what they do. 
4. The low wage rate and highly skilled personnel have made India the most favourable global outsourcing destination in the subsequent phase of the reform.
5. It has helped in the growth and development of the tertiary sector of the economy and the creation of more jobs and employment for the people. 

Also Read: Class 11 Introduction To Microeconomics

Policies Promoting Globalisation

As per the unit of Class 12 of Economic Reforms since 1991, the main policies that were adopted by the government of India to promote and implement globalisation were: 

1. Increase in the equity limit for foreign investments
2. Partial convertibility
3. Long-term business and trade policy
4. Reduction of tariffs

Positive and Negative Impacts of LPG Policies 

Positive Impacts	Negative Impacts
Increase in foreign investment and/or foreign direct investments in the Indian economy.	The agriculture sector of the Indian economy was somehow neglected in the economic reforms since 1991.
Increase in foreign exchange reserves	Jobless growth
A decrease in the Inflation rates	A rise in income inequalities in the country
Increase in the national income	Adverse effects of the disinvestment policies could be seen
Increase in the exports of the country	Spread of consumerism
Consumer sovereignty	Encouragement of economic colonialism
	Cultural erosion

World Trade Organisation

The last topic of the class 12 unit on Economic Reforms Since 1991 is the World Trade Organisation. Also known as WTO, this institution or organisation was established in 1995. It successfully replaced the General Agreement on Trade and Tariffs (GATT) which had been in place since 1946. The overarching goal of the World Trade Organization or WTO is to always contribute to smooth, free, fair and predictable trade. To meet this objective, they perform these functions:

1. Monitoring and revising domestic trade policies
2. Support the members in the development of trade policies through technical assistance and training programs.
3. Administration of World Trade Agreements
4.  Serve as the forum for trade negotiations
5. Settlement and Management of Trade Disputes
6. Technical assistance and training for developing nations
7. Cooperation with other International Organizations

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