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.

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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 

Stabilization 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 Liberalization, Privatization 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:

• Liberalization 
• Privatization 
• 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 block

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Liberalization 

In Class 12 Economic Reform Since 1991, we will first talk about Liberalization. Liberalization 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 in the development and the growth of the Indian economy. The government decided to loosen up 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 Liberalization Policy

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

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

Major Economic Reforms Since 1991 Under Liberalisation

1. Industrial sector reforms- these included factors and reforms like:
   • Contraction of Public Sector
   • Abolition of Industrial Licensing
   • Freedom to Import capital goods
2. Financial sector reforms- these included factors and reforms like:
   • De-regulation of interest rates
   • Reducing various Ratios like SLR and CRR
   • Change in the role of the central bank or the RBI from the regulator to facilitator of the economy and banks.
3. Foreign exchange reforms- these included factors and reforms like:
   • Devaluation of rupee
4. Trade and investment reforms
5. Fiscal reforms
6. Tax reforms

Privatization 

Moving further, Class 12 Economic Reform Since 1991 talks about Privatization. This was the second policy among the three policies of LPG that were adopted by the government. Privatization 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:

• By disinvestment
• By withdrawal of governmental ownership or stakes from these public sector companies

Also Read: Class 12 Notes on Indian Economy Chapter 3

Forms Of Privatization 

There are various forms of Privatization. They are mentioned below. 

• Denationalization or Strategic Sale: When full ownership of productive assets is transferred to private sector companies, the law is called denationalization.
• Partial Privatization 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 privatization. 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.
• Deficit Privatization or Token Privatization: When the government disinvest its share capital to a degree of 5-10% to compensate for the deficit in the budget is called the privatization deficit.

Objectives Of Privatization 

Class 12 Economic Reform Since 1991 also talks about the various objectives of privatization as a policy. They are mentioned below. 

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

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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 the nation with the global economy. During globalization, 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, globalization 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, outsourcing of contract work from one country to another 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.

Benefits Of Globalization 

Towards the end, Class 11 Liberalization, Privatization and Globalisation talks about the many benefits of Globalization. You can have a look here: 

• 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. 
• 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. 
• The professionals in India are the best at what they do. 
• The low wage rate and highly skilled personnel have made India the most favourable global outsourcing destination in the subsequent phase of the reform.
• 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. 

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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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