Economics 6 Marks Question

Prior to 1991, banking institutions were subject to too much control by the RBI through high bank rate, high cash reserve ratio and statutory liquidity ratio.Financial sector includes:

1. banking and non-banking financial’institutions.
2. stock exchange market.
3. foreign exchange market.

In India, financial sector is regulated and controlled by the RBI (Reserve Bank of India). There was a substantial shift in role of the RBI from ‘a regulator’ to ‘a facilitator’ of the financial sector. Earlier as a regulator, the RBI would itself fix interest rate structure for the commercial banks. After liberalisation in 1991, RBI as a facilitator would only facilitate free play of the market forces and leave it to the commercial banks to decide their interest rate structure.

Some studies have stated that there existed deep-rooted inequalities in Indian society and the economic reform policies initiated by the government since 1991 further aggravated the inequalities. Reforms have led to an increase in the income of those who were already rich. Quality of consumption of only high income groups increased, economic growth has not trickled down to the poorer sections of the society. Growth has been concentrated only in some selected areas in the service sector such as telecommunication, information technology, finance entertainment, travel, hospitality services, real estate and trade. Vital sectors such as agriculture and industry which provide livelihoods to millions of people in the country have not been benefited much from reforms thereby increasing income disparities. Besides, large scale production has been promoted under reforms at the cost of small scale industries again leading to concentration of economic power with large Industrial houses and MNCS.

Yes, Navratna policy helps in improving the performance of public sector undertakings. Navratana status is conferred to those PSU’s which perform exceptionally well i.e. either they are earning high profits or are producing goods which are contributing towards increasing the social welfare. This policy boosts the performance of all these PSU’s and encourages them to further improve their productivity. These PSU’s produce goods and services for masses and make them available to the masses at very nominal price which wouldn’t be possible if it was owned by the private sector. Navaratna status also sets benchmark for other PSU’s, which are not performing well or are making losses.

Though the GDP growth rate has increased in the reform period, the reform-led growth has not generated sufficient employment showing that more goods and services are being produced with lesser people, a clear indication of "jobless growth".
This shows that the enterprises are focusing more on capital as a means of production which pays less attention to job creation.
The capital intensive nature of enterprises will not provide employment thus growth in unemployment is largely in line with the rising population which widens the gap between the two.

New economic policy refers to adoption of Liberalisation, Privatisation and Globalisation (LPG) which aims at rendering the economy more efficient, competitive and developed.ELEMENTS OF NEW ECONOMIC POLICY:

1. Liberalisation: It means to free the economy from the direct and physical control imposed by the government.
2. Measures adopted for Liberalisation:

• Abolition of industrial licensing.
• De reservation of production areas.
• Expansion of production capacity.
• Freedom to import capital goods.

3. Privatisation: It refers to general process of involving the private sector in the ownership of management of state owned enterprises. It implies partial or full ownership and management of public sector enterprises by the private sector.
4. Measures adopted for Privatisation:

• Contraction of public sector.
• Disinvestment of public sector undertakings.
• Selling of shares of public enterprises.

5. Globalisation: It means integrating the economy of a country with the economies of other countries under condition of free flow trade and capital and movement of persons across borders.
6. Measures adopted for Globalisation:

• Increase in equity limit of foreign investment.
• Partial convertibility of Indian rupees.
• Long-term trade policy.
• Reduction in tariffs.

The economic reforms introduced against the background of the economic crisis of 1991, changed the direction of India's developmental strategies. The main reasons for the economic reforms being introduced were:

1. The government faced acute external debt and was not in a position to make repayments on its borrowings from abroad.
2. Foreign Exchange Reserves (FER) dropped to a very low level, not being sufficient enough for even a fortnight.
3. Rising prices of the essential goods.
4. Increasing fiscal deficit.

Advantages of demonetisation: Below are some of the key advantages that are often associated with demonetisation.

1. Getting fake currency out of circulation: Demonetisation can also be used to get fake currency out of circulation in a country's economy since such currencies cannot be deposited in banks and other financial institutions.
2. Controlling inflation: Demonetisation can control inflation by taking certain notes out of circulation can help the government to control public spending.
3. Tax Collection: Money deposited in the bank during demonetisation can be taxed especially if the affected parties were trying to evade taxation by keeping hard cash.
4. The move to digital currency: Some commentators argue that in the future, we will all be using digital currency, such as bitcoins. If this is true, then one advantage of demonetisation is that it will help to propel us into the future.
5. Improved deposits and savings in financial institutions: Parallel economies make it difficult for banks and other financial institutions to raise deposits. Demonetisation reduces the size of the parallel economy and boosts savings and deposits.
6. Stopping fraudsters: When a new currency is introduced, this can also be a great opportunity to halt the activities of fraudsters who had been making money illegally by counterfeiting coins and notes.

Yes, outsourcing is good for India because:

1. Employment: For a developing country like India, employment generation is an important objective and outsourcing proves to be a boon for creating more employment opportunities. It leads to generation of newer and higher paying jobs.
2. Exchange of technical know-how: Outsourcing enables the exchange of ideas and technical know-how of sophisticated and advanced technology from developed to developing countries.
3. International worthiness: Outsourcing to India also enhances India's international worthiness credibility. This increases the inflow of investment to India.
4. Encourages other sectors: Outsourcing not only benefits the service sector but also affects other related sectors like industrial and agricultural sector through various backward and forward linkages.
5. Contributes to human capital formation: Outsourcing helps in the development and formation of human capital by training, imparting them with advanced skills, thereby, increasing their future scope and their suitability for high ranked jobs.
6. Better standard of living and eradication of poverty: By creating more and higher paying jobs, outsourcing improves the standard and quality of living of the people in the developing countries. It also helps in reducing poverty.
7. Greater infrastructural investment: Outsourcing to India requires better quality infrastructure. This leads to the modernisation of the economy and larger investment by the government to develop quality infrastructure and develop quality human capital.

Developed countries opposing this because outsourcing leads to the outflow of investments and funds from the developed countries to the developing nations. Also the MNCs contribute more to the development of the host country than the home country. It also resulting in unemployment in the countries where it is located.

Prior to liberalisation, RBI used to regulate and control the financial sector that includes financial institutions like commercial banks, investment banks, stock exchange operations and foreign exchange market. With the economic liberalisation and financial sector reforms, RBI needed to shift its role from a controller to facilitator of the financial sector. This implies that the financial organisations were free to make their own decisions on many matters without consulting the RBI. This opened up the gates of financial sectors for the private players. The main objective behind the financial reforms was to encourage private sector participation, increase competition and allowing market forces to operate in the financial sector. Thus, it can be said that before liberalisation, RBI was controlling the financial sector operations whereas in the post-liberalisation period, the financial sector operations were mostly based on the market forces.

Devaluation of rupee means a deliberate downward adjustment in the official exchange rate of rupee relative to other currencies, Devaluation is different from depreciation which is a fall in the value of a currency in a floating exchange rate due to supply and demand side factors and not due to government decision. Under floating exchange rate system as followed in India at present, the RBI maintains the exchange rate of rupee by buying or selling foreign currency, usually US Dollar. There were two important implications of devaluation of rupee. First revaluation made India's exports relatively less expensive for foreigners and increased their competitiveness and second, it made foreign products relatively more expensive for domestic consumers, discouraging imports. As is evident, this was done to reduce India's Balance of Payments (BoP) deficit.

An efficient and profit earning PSU is a revenue generator for the government. But if, a PSU is an inefficient and loss making one, then the same PSU exerts unnecessary burden on the government’s scarce revenues and further may lead to budget deficit. The loss making PSUs should be privatised whereas it would not be fair to privatise a profit making PSU. Privatising a PSU may lead to concentration of monopoly power in the private hands. Further some of the PSUs like, water, railways, etc. enhance the welfare of nation and is meant to serve general public at a very nominal cost. Privatisation of such important PSUs will lead to loss of welfare of poor people. Hence, only less important PSUs should be privatised while leaving the core and important PSUs to be owned by the public sector. Instead of privatisation of profit-making PSUs, government can allow more degree of autonomy and accountability in their operations, which will not only increase their productivity and efficiency but also enhance their competitiveness with their private counterparts.

Increasing interaction of the domestic economy with the other countries of the world is termed as "Globalisation", The main features of Globalisation are:

1. With the introduction of globalisation, foreign investors can now directly invest in India. To promote this, a Foreign Investment Promotion Board (FIPB) has been set up.
2. New technology and management expertise is also brought along with Foreign Direct Investment (FDI). Indian industries can now make technology agreements with the foreign suppliers of technology. Government has started granting automatic approval in certain selected industries.
3. On account of globalisation, there is unrestricted flow of goods and services, technology and expertise between India and the rest of the world.

The benefits of being a member of the WTO is limited for developing countries like India because:

1. Major volume of international trade occurs between the developed countries. Thus, the benefit to developing nations is limited.
2. The developing economies are forced to open up their markets for the developed countries but not allowed access to the markets of the developed countries.
3. Many developing countries exports continue to face significant barriers in rich country markets. Often the products in which developing countries are competitive are the ones that confront protection.
4. While liberalisation in trade of manufactured goods has seen rapid progress, industrialised countries have resisted demand to open markets for agricultural goods which developing nations export.

Liberalisation of trade and investment regime was brought about to stimulate international competitiveness of industrial production.
Foreign investment and technology was to be also introduced in the economy. The primary aim was to promote the efficiency of the industries by using modern technologies.
For protecting domestic industires, India's thrust was on "quantitative restrictions on imports". This was attained by keeping tariffs very high.
But it reduced the efficiency and competitiveness of the domestic industries. Ultimately these policies led to slow growth of the manufacturing sector. On the other hand the trade-policy reforms aimed at:

1. Removal of quantitative restrictions on imports and exports.
2. Removal of licensing procedures for imports.
3. Reduction of tariff rates.
4. Abolition of import licensing was an important reform.
5. Export duties were removed to increase the competitiveness of Indian goods in the global markets.

Most multinational corporations, and even small companies, are outsourcing their services to India as India has the following advantages:

1. Availability of Cheap Labour: India is a country with a large population and thus abundant supply of labour. Due to this reason, labour in India is available at low wage rates. This helps foreign companies in reducing cost of operation by outsourcing their business processes to India.
2. Skill and Accuracy: India has a wide pool of talent in the form of educated and trained youth who have the required skill and can work with accuracy in the business processes such as accounting, record keeping, IT consultancy, etc. Here outsourcing plays a vital role it gives a platform to the people so that they can use and enhance their skills and secondly that need low training period and thus, low cost of training.
3. Continuity and Risk: Management Periods of high employee turnover will add uncertainty to the operations. Outsourcing will provide a level of continuity lo the company while reducing the risk that a substandard level of operation would bring to the company.
4. Reduced Overhead: Overhead costs of performing a back office functions are extremely high but due to the out sourcing those functions are become cheaper and convenient to use.

There has been deceleration in agricultural growth. This deceleration is the root cause of the problem of rural distress that reached crisis in some parts of the country. Farmers find themselves into crippling debt due to low farm incomes combined with low prices of output and lack of credit at reasonable prices. This has led to widespread distress migration.
Economic reforms have not been able to benefit the agricultural sector because:

1. Liberalisation has forced the small farmers to compete in a global market where prices of goods have fallen while removal of subsidies has led to increase in the cost of production. It has made farming more expensive.
2. Various policy changes like reduction in import duties on agricultural products, removal of minimum support price and lifting of quantitative restrictions have increased the threat of international competition to the Indian farmers.
3. The export-oriented growth has favoured increased production of cash crops rather than food grains. This has increased the prices of food grains.
4. Public investment in agriculture sector especially in infrastructure which includes irrigation, power, roads, market linkages and research has been reduced in the reform period.

Liberalisation refers to the freedom of the economy from the direct controls imposed by the government.Main steps taken towards liberalisation in 1991 are:

1. Delicensing of Industries: New economic policy abolished the system of industrial licensing except for those industries which were of strategic concern.
2. Amendment of Monopolies and Restrictive Trade Practices Act (MRTP): Government had imposed investment controls on industries. These restrictions were removed.
3. Liberalisation in trade and investment: Tariff and non-tariff barriers such as quantitative restrictions to trade were removed.
4. Liberalisation in the financial sector: led to reduced tax rates, and more freedom to financial institutions in their lending and deposit policies.

Economic reforms had a negative impact on developmental and welfare activities in India by way of the following facts:

1. Export-oriented policy strategies adopted in agriculture sector led to shift from production for the domestic market towards production for the export market, with special focus on production of cash crops in place of foodgrains. This in turn led to shortage of foodgrains thereby pushing up the price of foodgrains. Certainly this strategy was against the principle of social justice, as the poor were hit hard and worst affected. It was also anti-welfare in nature.
2. Industrial growth also slowed down because on account of globalisation cheaper imports have substituted the demand for domestic goods. This in turn has adversely affected the local industries and employment opportunities in India.
3. The assets of PSU's have been undervalued and sold to the private sector, through the process of "Disinvestment" of PSU's. This resulted in an enormous loss to the government. Further the proceeds from disinvestment have been used to compensate the shortage of government revenue instead of being used for developing PSU's and building social infrastructure in the country, to boost up social justice and welfare.
4. Reform policies w.r.t tariff reduction have curtailed the scope for raising government's revenue through custom duties. To lure foreign investment, tax incentives provided to foreign investors further lowered the scope for raising tax revenues. Certainly this had a negative impact on the developmental and welfare activities in India.

India met with an economic crisis in 1991, due to a number of causes. Some of them were:

1. Inefficient management of the Indian economy in 1980's. The government was not able to generate sufficient revenue from internal sources such as taxation.
2. In the late 1980's, government's expenditure was greater than its revenue by huge amount.
3. Prices of many essential goods rose sharply.
4. Foreign exchange reserves declined to a level that was not adequate to finance imports for more than two weeks. There was also not sufficient foreign exchange to pay the interest needed to be paid to international lenders.

So, on account of the above causes and pressure from international organisations like the World Bank and IMF, India adopted a New Economic Policy in 1991.

There was a need to introduce reforms because:

1. Mounting fiscal deficit: Fiscal deficit of the government had been mounting year after year on continuous increase in non-development expenditure. Due to persistent rise in fiscal deficit there was corresponding rise in public debt and interest payment liability. There was possibility that the economy might lead to debt-trap situation. Thus it becomes essential for the government to reduce its non-development expenditure and restore fiscal discipline in the economy.
2. Adverse balance of payment: When receipts of foreign exchange fall short of their payments, the problem of adverse balance of payment arises. Despite the restrictive policy adopted by the government till 1990 import substitution and export promotion the desired result could not be met. Our export could not compete in terms of price and quality in the international market. As a result there was slow growth of export and rapid increase in imports. Accordingly, the burden of foreign debt services increased tremendously and led to depletion of foreign exchange reserves.
3. Gulf Crises: On account of Iraq war in 1990-91 prices of petrol shot-up. Besides, India used to receive huge amount of remittances from gulf countries in terms of foreign exchange which stopped due to this war.
4. Poor performances of PSUs: Due to poor performances of public sector undertakings, they degenerated in to a liability. Most of public sector undertakings were incurring loss and their performance was quiet satisfactory. On account of these factors, it becomes imperative for the government to adopt new economic policy or to initiate economic reforms.
5. Rise in price: Due to rise in prices of foodgrains there was pressure of inflation prior to 1991, which deepen the economic crisis from bad to worse.
6. Fall in foreign exchange reserves: In 1990-91 India's foreign exchange reserves fell to such a low level that there was not enough to pay for an import bill of even 10 days. In such situation the government had to helplessly resort to policy of liberalisation as suggested by the World Bank.

Case for Globalisation:

1. It will improve allocative efficiency of resources, capital output ratio, increase labour productivity, develop the exports, increase the inflow of capital, bring world class technology, increase competition, and boost the rate of economic growth.
2. It will help to restructure the production and trade pattern in a capital scarce, labour abundant economy in favour of labour intensive goods and techniques.
3. Foreign capital will be attracted and with its entry, updated technology will also enter the country.
4. With the entry of foreign competition and the removal of import tariff barriers, domestic industry will be subject to price reducing and quality improving effects in the domestic economy which will benefit consumers.
5. It creates employment opportunities in the economy.

Efficiency of banking and financial sectors will improve.
Case against Globalisation:

1. It leads to redistribution of economic power and increases inequalities among nations.
2. One study reveals that in the globalising world, the economies are moving away from each other rather than coming closer.
3. Globalisation is increasing pressure on economies for structural and conceptual readjustments.
4. Public is going through the pains and uncertainties of structural and conceptual readjustments for the sake of benefits yet to come.
5. Globalisation is unfair from the view point of developing countries as none of the MNCs has set up manufacturing plants in India or signed any technology transfer agreement with any Indian company like INTEL, AMD and CISCO.

Negative impacts of New Economic Policy:

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 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.

The salient features of GST are as under:

1. GST would be applicable on sale of goods and services as against the present concept of tax on the manufacture of goods. GST would be destination based tax as against the present concept of origin based tax.
2. It would be a dual GST: The GST levied by the Centre would be called Central GST (CGST) and that to be levied by the states would be called State GST (SGST). An Integrated GST (IGST) would be levied on inter-state supply of goods or services. This would be collected by the centre.
3. GST would replace the following taxes currently levied and collected by the centre:

• Central Excise Duty (including additional Duties of Excise).
• Service Tax CVD (levied on imports in lieu of Excise Duty).
• SACD (levied on imports in lieu of VAT).
• Central Sales Tax (CST).
• Excise Duty levied on Medicinal & Toiletries preparations.
• Surcharges and cess.

4. State taxes that would be subsumed within GST are:

• VAT/ Sales Tax.
• Entertainment Tax.
• Luxury Tax.
• Taxes on Lottery, betting and gambling.
• Surcharges & Cess.

Economic reforms have not been able to benefit the agricultural sector because:

1. Public investment in agriculture sector especially in infrastructure which includes irrigation, power, roads, market linkages and research has been reduced in the reform period.
2. Liberalisation has forced the small farmers to compete in the global market where prices of goods have fallen while removal of subsidies has led to increase in the cost of production, making farming more expensive.
3. The various policy changes like reduction in import duties on agricultural products, removal of minimum support price and lifting of quantitative restrictions have increased the threat of international competition to the Indian farmers.
4. The export-oriented growth has favoured increased production of cash crops rather than food grains. This has increased the prices of food grains.

In general, the post-reform period appears to be one of disequilibrium with most manufacturing industries recording a decline in total factor productivity.
This was due to:

1. Globalisation has created conditions for free movement of goods and services from foreign countries that adversely affect the local industries and employment in developing countries.
2. Decreasing demand of domestic industrial products due to cheaper imports.
3. Inadequate investment in infrastructural facilities such as power supply.
4. A developing country like India still does not have the access to the developed countries markets, due to high non-tariff barriers.

Measures adopted for globalisation are:

1. Rupee was devalued by 20% in July 1990-91. This made our goods cheaper thus encouraging exports and discouraging imports.
2. A system of market determined exchange rate replaced the system of fixed exchange rate determined by the RBI.
3. Exports and imports were now regulated by the market forces free from government intervention.
4. Tariffs on imports were reduced and custom duties abolished.
5. Quantitative restrictions on imports and exports were reduced or abolished in certain areas.
6. The import licensing policy was abolished except in case of hazardous and environment-sensitive industries.

Disadvantages of demonestiation: Demonestiation is not all beneficial and even proponents of demonetisation acknowledge that it does have its disadvantages. A few of them are outlined below.

1. Little cash in circulation: Cash crunch is a major disadvantage of demonetisation due to the unavailability of small currency denominations, an issue which makes it difficult to make small purchases.
2. Inconvenience and annoyance to the public: Sometimes, demonetisation can be very inconvenient. For example, sometimes the government will remove certain denominations of bank notes from circulation but keep others. It can be annoying when smaller coins are removed from circulation and you do not have enough change. Further, queuing up in banks to deposit money or exchange currency can be inconveniencing.
3. Slowdown in Economic Growth: Economic growth will experience a period of lull due to business disruptions, at least in the short term.
4. Panic: Not everyone understands the essence of demonetisation and, therefore, such an exercise is likely to result in panic among a section of the population.)
5. An avenue for fraud and corruption: Some people are likely to take advantage of lapses in the financial system to engage in fraud and corruption when exchanging currencies.
6. Disruption of Trade: The normal trading activities may be disrupted by this process since it takes time for consumers and suppliers to adjust to the new monetary policy.