Economics 4 Marks Question

The profitable PSUs, later referred to as 'navaratnas' were originally formed during 1950 to 1960 when selfreliance was an important element of public policy. They were set up to provide infrastructure and direct employment to the public. They were set up so that quality end-products reached the masses at a nominal cost.

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• Bilateral trade is the trade of goods and services between two countries whereas multilateral trade is the trade of goods and services with more than two countries.
• Due to bilateral nature of trade the cooperation between the two countries is encouraged, whereas in multilateral trade globalisation is encouraged.

2. Tariff barriers refer to the restrictions imposed on imports by a government in the form of taxes, whereas non-tariff barriers refer to those barriers/ restrictions imposed by a government in forms other than taxes. These barriers mainly include restrictions on quantity and quality of goods imported.

The new economic reforms have been criticised on various grounds:

1. The biggest consequence of the new free market policies is acute "inequality". The new reforms have increased the incomes of only high income groups and the poor have been left out of the benefits of the reforms.
2. There is a great deal of variation in economic growth among the Indian states and between states and between the rural and urban areas. The growth has been concentrated only in some selective areas in the service sector such as telecommunication, entertainment, finance, travel and hospitality services, real estate and trade.
3. The information technology sector which has benefited most from the reforms employs fewer than one million people. Job creation in the urban technology sector does little to create economic gains for India's rural poor.
4. For India's rich farmers, trade liberalisation has been a blessing. But the agriculture sector itself is in crisis. The production of some of the staple items had declined as agricultural land is used for production of export crops.
5. Liberalisation has forced the small farmers to compete in a global market where prices of agricultural goods have fallen. Reduction of government subsidies has made farming more expensive.
6. Without public investment in roads and irrigation, rural areas are unable to invite massive private participation in its development.

Many of the public sector undertakings were sold off to the private sector after 1991 due to the following reasons:

1. The purpose was mainly to improve financial discipline and facilitate modernisation.
2. It was also envisaged that private capital and managerial capabilities could be effectively utilized to improve the performance of the PSUs.
3. The government envisaged that privatisation could provide strong impetus to the inflow of FDI.

GST is the single comprehensive indirect tax" on supply of goods and services right from manufacturer or service provider to the consumer.
The system of GST as compared to the old tax system.

• Has simplified the multiplicity of taxes on goods and services.
• The laws, procedures and rates of taxes across the country are also now standardised.
• It has also facilitated the freedom of movement of goods and services.
• It has created a common market in the country.
• The two categories of GST are CGST and SGST.

The benefits of a cashless economy are:

1. Cashless economy will enhance our current banking system. There will be increased access to credit for people who do not fall in any banking network.
2. It will help in widening the bracket of tax payers. All the transactions are monitored and traced back to a given individual. It will be difficult to evade tax then.
3. The risk of counterfeit currency is minimised as the circulation of notes is reduced.
4. It will facilitate faster transfer of money to places across India. Making and receiving payments will be safe, convenient and hasslefree.

The challenges before India for becoming a cashless economy are:

1. Lesser literacy rate among the population makes digital India a distant dream. People have to be made aware of how to use the digital medium to transact.
2. In India, a lot of villages do not have uninterrupted electricity supply. In the absence of this, digital transactions are impossible.

Quantitative restrictions are the limits imposed by countries on the quantity of goods and services which can be imported or exported. It is also a practice of regulating production of a particular good and service. It includes import quota and voluntary export restraints signed by the exporters of foreign countries. It discouraged imports of goods and enabled to protect domestic producers from highly competitive cheaper and technologically advanced goods produced by other countries. It led to the slow growth of industries, and therefore, the trade policy reforms abolished these restrictions from April 2001, except for the hazardous and socially undesirable goods.

The New Economic Policy was introduced with the objective to deregulate the economy and ensure economic development. So, privatisation was crucial for the success of this policy as it insures high productivity, a competitive environment which promotes innovation and efficiency, diversification of activities and consumer sovereignty.
In order to encourage private sector, following measures have been adopted:

1. The government through its economic policy reduced the number of industries reserved for public sector from 17 to 3 at present.
2. It has now been planned to reduce the share of public sector investment to 45%. It increases the share of private sector to 55%.
3. Financial corporations cannot force the industries for conversion of their loans into equity shares.
4. It has now been decided to increase the participation of general public and workers by selling them the shares of public enterprises.

Globalisation refers to the growing interdependence of countries worldwide through the increasing volume and variety of cross-border transactions in goods and services, and also through the more rapid and widespread diffusion of technology. Globalisation is the outcome of the policies of liberalisation and privatisation. One of the most important outcomes of the globalisation process is the "outsourcing of services."
Globalisation is an opportunity in terms of a greater access to global markets, high technology and increased possibility for the large industries of developing countries to become international players.

The role of state has been changing from a controller, regulator and participator to that of a facilitator, observer and guide.Following changes have changed the role of state since 1991:

1. Before economic reforms, government had its share in all sectors of the economy. It was producing bread, butter, biscuits, milk, running hotels and many of these were actually not required to be in public sector. Government withdrew herself from these sectors through delicensing, deregulation and disinvestment.
2. As a regulator, during 1947-1990, Government regulated all activities with the laws and acts. But after 1991, except some basic and strategic goods and services, decisions were made to be market driven. For this purpose, regulatory authorities were set up for different sectors.
3. Since 1991, Government has focused its attention on development of social sector like education, health, defence, law and order. It is concerned with eradication of poverty, generating employment opportunities, reducing inequalities etc.

Overall, the role of state has changed from producer to production facilitator.

Globalisation has the following adverse effects on the Indian economy:

1. The local producers stand to lose due to their inability to compete with cheap imports.
2. To provide goods and services at competitive prices, producers try to save on costs by lowering the wages, ensuring long working hours and denying the workers various social benefits. This results in mounting unrest among workers.
3. Globalisation has also affected the workers of PSUs adversely. They have been affected by budget cuts, privatisation and retrenchment.
4. Globalisation has also adversely affected the small businessmen.
5. Studies have revealed that globalisation has adversely affected nearly half a billion people of South Asia; majority among these are poor people.
6. Globalisation has raised the depth of income inequalities.

The economic reforms were introduced in the year 1991 in India to combat economic crisis, relating to its external debt:

• Various rules and plans introduced by the government for controlling and regulating the economy resulted in hampering the process of growth and development National income was growing at the rate of 0.8%.
• India was highly indebted country and government was not able to make repayments of loan from abroad.
• Foreign exchange reserves collapsed as import is more than the export.
• The inflation level reached 16.8% which ultimately increases the prices of essential goods.
• India took loan from IMF and World bank to the extent of 7 billion dollars. In pressure, government have to liberalise its market.

Fiscal reforms are concerned with the reforms initiated in government's taxation and public expenditure policies.
The following reforms were introduced in this category:

1. The fiscal reforms simplified the tax structure and lowered the rates of taxation. The maximum rate of income tax was brought down to 30% from 51%.
2. The rates of various indirect taxes, such as custom duty, excise duty, etc were reduced considerably.
3. The government decided to reduce subsidies so that it can control expenditure.
4. Conscious efforts were made by the government to control its expenditure so that a mounting deficit could be controlled.

These measures helped to reduce tax evasion and increased government's revenues. By controlling its expenditure and by increasing revenues, the government succeeded to a certain extent in controlling the budget deficit.

It is popularly known as World Bank which was also set-up in 1944 under Bretton Woods Conference, alongwith IMF, hence these two are known as sister institutions or Bretton Woods' twins. World Bank is also headquartered at Washington DC and has 189 members. The World Bank focuses on making loans to government in order to rebuild railroads, highways, and other infrastructure i.e., the areas where private sector enterprises do not take interest.The main objectives of IBRD are as follows:

1. To help reconstruction of member countries after the Second World War.
2. To facilitate the investment of foreign capital for productive purpose.
3. To maintain balance growth of international trade and to attain equilibrium in BoP account.
4. Motivating governments to act on preventing climate change, controlling communicable diseases, managing international financial crises and promoting free trade.

No, I do not agree with this view. Even though disinvestment would increase the revenue of the government, the profit-making industries should be retained in the public sector since they raise resources from the capital market which government can use for the development of PSUs and the infrastructure.

• The assets of the profit-making industries if undervalued might lead to a substantial loss to the government if sold to the private sector.
• The government should retain the strategic industries to avoid emergence of any monopoly in the private sector.

It is important for any country to become a member of WTO (World Trade Organisation) for the following reasons:

• WTO provides equal opportunities to all its member countries to trade in the international market.
• It provides its member countries with larger scope to produce at large scale to cater to the needs of people across the international boundaries. This provides ample scope to utilise world resources optimally and provides greater market accessibility.
• It advocates for the removal of tariff and non-tariff barriers, thereby, promoting healthier and fairer competition among different producers of different countries.
• The countries of similar economic conditions being members of WTO can raise their voice to safeguards their common interests.

The private sector was encouraged to participate in operation and ownership of production units by way of:

1. Reduction in number of reserved public sector units.
2. Disinvestment in public sector undertakings by selling the shares of Public Sector Undertakings (PSU) into private hands.
3. Increase in the share of private sector in total investment.
4. Corporatisation of a public department with some operational and managerial autonomy.
5. Licensing policy, which was a disincentive for the private sector to start new units or expand existing units, was abolished for all industries except four.
6. Tax reforms, free flow of capital and technology from foreign countries also made production process profitable for the private sector, thus ensuring greater participation.

Power sector reforms in many states of India brought about a steep rise in the power tariff, because of the removal of the supply of electricity at the subsidised rates. This badly affected the workers employed in small industries. Citing an example of powerloom textile industry in Andhra Pradesh. As the wages in this industry were linked to the production of cloth, power-cut would definitely reduce the wages of the weavers. The outcome was that the workers were hit hard twice (tariff hike and the fall in wages). All this led to an acute crisis in the livelihood of weavers, who now felt so dejected that fifty power loom weavers committed suicide in town of Siricilla in Andhra Pradesh.

Reduction in rates of taxes in India have been quite high (97.7% in 1973-74), but upon recommendation of TRC, the income tax slabs were reduced. The peak rate of customs duties has been reduced to 15% in budget 2006-07.
Rationalisation of Tax Systems: Excise duties were rationalised by introducing CENVAT. VAT was introduced at state level for achieving a non-cascading, self enforcing, and harmonised commodity taxation The Fiscal Responsibility and Budget Management Act (FRBMA), 2003 has been implemented and it emphasises on

• Revenue led fiscal consolidation.
• Better expenditure outcomes.
• Rationalisation of tax regime.

Raju is right, the government intervention in these sectors is essential due to following reasons:

1. Expenditures on education and health, make substantial long-term impact and they cannot be reversed.
2. Individual consumers of education and health services do not have complete information about the quality of services and their costs.
3. The government has to ensure that private institutions in these sectors adhere to the standards stipulated by the government and charge the correct price.
4. In developing economies, a substantial section of society cannot afford to have these services by paying for it. These should be provided to them by the government.

1. Bharat Electronics Ltd.
2. Bharat Petroleum Corporation Ltd.
3. Hindustan Aeronautics Ltd.
4. Hindustan Petroleum Corporation Ltd.
5. Mahanagar Telephone Nigam Ltd.
6. National Alluminium Company Ltd.
7. National Mineral Development Corporation Ltd.
8. Neyveli Lignite Corporation Ltd.
9. Oil India Ltd.
10. Power Finance Corporation Ltd.
11. Power Grid Corporation of India Ltd.
12. Rashtriya Ispat Nigam Ltd.
13. Rural Electrification Corporation Ltd.
14. Shipping Corporation of India Ltd.

Globalisation results in the following benefits for the economy:

1. It helps the economy to adopt new and flexible methods of production.
2. It results in raising the productivity of the industrial sector by reducing capital output ratio, increasing exports, raising the efficiency of the workforce, modernising the technology used and increasing capital flow in the country.
3. It helps in restructuring the production units of the country towards the production of those goods which the country can produce effectively and efficiently with the use of the domestically available factors of production.
4. It helps to increase the flow of foreign capital into the country.
5. It helps to improve the quality of goods produced in the economy.
6. It helps to address the problem of unemployment.

Major factors responsible for the high growth of service sector is 'outsourcing', which is an outcome of the globalisation process.
Outsourcing as a form of economic activity has been intensified. This is because of the growth of fast modes of communication, particularly the growth in the field of Information Technology.
Outsourcing has generated new employment opportunities in our economy. It has in turn contributed to the growth of the country's GDP and has also increased the foreign exchange reserves in the country.

In order to improve efficiency, enhance professionalism and enable them to compete effectively in the liberalised global environment, Government of India announced a policy in 1996, called Navratna Policy. Under this policy, 9 most profitable PSUs were given status of navratna and 97 other profit making PSUs were called Mini ratnas.List of companies included in Navratnas is as follows:

1. Indian Oil Corporation Ltd. (IOC)
2. Bharat Petroleum Corporation Ltd. (BPCL)
3. Hindustan Petroleum Corporation Ltd. (HPCL)
4. Oil and Natural Gas Corporation Ltd. (ONGC)
5. Steel Authority of India Limited. (SAIL)
6. Indian Pharmaceuticals Corporation Ltd. (IPCL)
7. Bharat Heavy Electronics Ltd. (BHEL)
8. National Thermal Power Corporation Ltd. (NTPC)
9. Videsh Sanchar Nigham Ltd. (VSNL)
10. Gas Authority of India Limited. (GAIL)
11. Mahanangar Telephone Nigam Limited. (MTNL)