Liberalisation,Privatisation and Globalisation Class12,Ch-3 LPG NOTES

Liberalisation,Privatisation and Globalisation Class12,Ch-3 LPG NOTES

 

LIBERALISATION, PRIVATISATION AND GLOBALISATION

SUMMARY OF THE CHAPTER

  • Reasons for Economic reforms.
  • The New Economic Policy.
  • Liberalisation
  • Privatisation
  • Globalisation
  • WTO
  • Appraisal of LPG reforms.
  • Demonetisation
  • GST

REASONS FOR ECONOMIC REFORMS

  1. Poor performance of Public sector :
    • Between 1950 – 90, except few PSUs, overall performance of Public sector was disappointing.
    • PSUs incurred huge losses.
  1. Deficit in BPO :
    • Even after imposing Tariffs and quotas, imports exceeded exports.
    • Why low exports ? – Low quality and high prices of Indian products.
  1. Inflationary pressure :
    • Due to increase in money supply and shortage of supply of goods, economy was facing inflation.
  1. Fall in forex reserve :
    • In 1991, forex reserve was at lowest.
    • So, economy was facing forex crisis.
    • Some 14 days import cover was left.
    • Unable to pay interest on previous borrowings to international lenders.
  1. Huge burden of debts:
    • Government faced huge fiscal and revenue deficits and hence had to borrow.
  1. Inefficient management :
    • Primary reason for 1991 crisis was inefficient management of economy.
    • Government not able to generate sufficient revenue.
    • In few cases, borrowed forex used to meet consumption needs.

What happened in 1991:

    • When India faced the crisis, it went to IBRD (International bank for reconstruction and development – also known as World bank) for long term borrowings.
    • India also went to IMF for short term borrowings – to solve BOP crisis.
    • India received $ 7 billion from these agencies.

Ques: Why these institutions agreed to provide loan?

Ans. These institutions provided loans to India because they expected India will open its economy by –

  1. Removing restrictions on private sector.
  2. Reducing the role of government in many areas.
  3. Removing trade restrictions.

THE NEW ECONOMIC POLICY

  • The NEP was announced in July 1991.
  • Aim was to make economy more competitive and remove trade barriers.
  • The NEP broadly took 2 measures-

1. Stabilisation measures :

    1. Also called short-term measures.
    2. Measures to correct BOP crisis.
    3. Measures to increase forex.
    4. Measures to control inflation.

2. Structural reforms :

    1. Also called long term reforms.
    2. Measures to improve efficiency of economy.
    3. Improving international competitiveness by removing rigidities of economy.
  • Main policies of NEP are- Liberalisation, Privatisation, Globalisation
  • NEP = LPG reforms = Rao-Manmohan model.
Liberalisation,Privatisation and Globalisation Class12,Ch-3 LPG NOTES

ALSO READ:    CLASS 12 CH-2 INDIAN ECONOMY 1950 to 1990 NOTES

LIBERALISATION :

  • Liberalisation means removal of entry and growth restrictions on private sector.
  • Under Liberalisation, government dealt with following aspects-
    1. Industrial sector reforms.
    2. Financial sector reforms.
    3. Tax reforms.
    4. Forex reforms.
    5. Trade and investment policy reforms.

INDUSTRIAL SECTOR REFORMS

  • New industrial policy was announced in july 1991.
  • Industrial reforms included –
    1. Reduction in industrial licensing:
      1. Licence raj was abolished for all industries, except 18 industries. Later, it was reduced to 5.
      2. The 5 industries were – Alcohol. Cigar and cigarettes, Aerospace and defence equipments, Industrial explosives, Specified hazardous chemicals.
      3. No licence required for – new setup, expansion or diversification of existing industry.
    1. Decrease in role of Public sector:
      1. Reserved industries list for Public sector reduced from 17 to 8 industries.
      2. 7 industries were = Arms and ammunition, Defence , Atomic energy, Coal, Mineral oils, Mining of few important ores, Railways.
    1. De-reservation under small scale industries:
      1. Many goods de-reserved.
      2. Investment ceiling on P&M for SSIs increased to 1crore.
      3. Market was allowed to determine price.
    1. MRTP act :
      1. Under this act, prior approval was required for expansion, establishment of new undertakings, merger, demerger etc.
      2. This act was replaced by competition act 2002 and this act has been amended two times i.e in 2007 and in 2009.

FINANCIAL SECTOR REFORMS

  • This deals with reforms w.r.t commercial banks, investment banks, stock exchange etc.
  • Following reforms took place :
    1. Change in role of RBI:
      1. The role of RBI was reduced from regulator to facilitator of financial sector.
      2. Due to this, private banks emerged and interest rates declined.
    1. FDI limit was increased :
      1. Limit of foreign investment in banks was increased upto 51%.
      2. Foreign institutional investors(FIIs) such as merchant bankers, mutual funds were allowed.
    1. Ease in expansion process:
      1. Banks were given freedom to start new branches, take managerial level decisions without RBIs approval.

TAX REFORMS

Ques: What is Tax reforms?

Ans.  Tax reforms refers to reforms in government’s taxation and public expenditure policy, which are collectively known as Fiscal Policy.

  • Following tax reforms were done :
    1. Reduction in Taxes:
      • Earlier, India had high PIT and CT rates, and this was the reason behind lower tax base and tax evasion.
      • Under reforms, tax rates were moderated.
    1. Reforms in Indirect taxes:
      • Considerable reforms were made to establish common goods market for goods and commodities.
    1. Simplification of Process:
      • Tax filing procedures were simplified for taxpayers.

FOREIGN EXCHANGE REFORMS

    1. Devaluation of Rupee:
      • Devaluation = It means deliberate reduction in the value of domestic currency vis-a-vis foreign currency by government of the country.
      • Why devaluation was done ? = To overcome BOP crisis and this led to increase in forex inflow.
    1. Market determination of exchange rate:
      • India adopted Flexible exchange rate system, which is determined by market and not by government.

TRADE AND INVESTMENT POLICY REFORMS

  • Before 1991, there was Tariff and Quota barriers w.r.t import of goods in India.
  • This protection reduced efficiency and competitiveness of domestic industries.
  • So, following reforms were done under Trade and Investment:
    1. Removal of Quantitative restriction: Under NEP, Quota restrictions were reduced and were fully removed in April 2001.
    2. Removal of export duties: Export duties were removed to make Indian goods more competitive in International market.
    3. Reduction in import duties: Tariff rates were reduced.
Liberalisation,Privatisation and Globalisation Class12,Ch-3 LPG NOTES

PRIVATISATION

  • It means transfer of ownership, management and control of public sector enterprises to the entrepreneurs in the private sector.
  • Privatisation can be done in 2 ways-
    1. Transfer of ownership and management of PSUs from government to private sector.
    2. Privatisation of PSUs by selling off part of the equity shares to public.
  • Under reforms, PSUs were given autonomy in order to improve their managerial decisions.
  • PSUs were given status of Miniratnas, Navratnas and Maharatnas.
  • As on 1st Jan 2020, there are –
    1. 10 Maharatnas ( Indian oil corporation limited, Steel authority etc.)
    2. 14 Navratnas ( Bharat electronics limited, Container corporation of India limited etc.)
    3. 74 Miniratnas ( Airports authority of India, Antrix corporation etc.)

GLOBALISATION

  • It means integrating the national economy with the world economy through removal of barriers on international trade and capital movements.
  • Globalisation aims to create a borderless world.
  • Ques- What changes were made by Globalisation in the Indian economy?
  • Ans- Following changes were made –
  1. r.t high technology and high priority industries, automatic permission was allowed for upto 51% Foreign equity.
  2. To fasten trade, Rupee was devalued in 1991 by 20% – Exports were boosted and foreign capital influx was boosted.
  3. In 1992-93 budget rupee was made partially convertible and in next budget it was made fully convertible.
  4. Customs duty were reduced from 250% to 10% in 2007-08.

Arguments in favour of Globalisation –

  1. Greater access to global market.
  2. Advanced technology.
  3. Better future prospects of large industries.
  4. Better future prospects of skilled people across the globe to increase their earnings.

Arguments against Globalisation –

  1. Benefits mostly accrue to developed countries.
  2. Market driven globalisation increases economic disparities.
  3. MNCs gain stronger position in developing countries.

OUTSOURCING

  • It refers to contracting out some of its activities to a third party which were earlier performed by the organisation.
  • India became a favourable decision for outsourcing because –
  1. Skilled manpower available.
  2. Favourable government policies.
  3. Low wage rate and cheap labour available.
  4. Considerable growth of IT industries.

WORLD TRADE ORGANISATION (WTO)

  • With a membership of 23 countries, GATT (General agreement on trade and tariff) was established as global trade organisation, in 1948 with 23 countries.
  • It was setup to provide multilateral trade with equal opportunities to all countries.
  • WTO was founded in 1995 as successor of GATT.
  • WTO covers trade in goods as well as services.
  • Present members are 164.
  • All members follow rules and regulations of WTO.
  • It frames fair global rules, regulations and advocates the interests of developing nations.
  • Major functions of WTO-
    1. To facilitate international trade ( both multilateral and bilateral)
    2. To establish rule based trading-regime.
    3. To ensure optimum utilisation of world resources.
    4. To protect environment.

AN APPRAISAL OF LPG POLICIES

ARGUMENTS IN FAVOUR OF LPG REFORMS

1. Increase in rate of economic growth:

    • GDP growth during 1980-91 = 5.6% and during 2018-19 = 7.2%.
    • Share of agricultural sector in GDP declined, industrial sector fluctuated and service sector has gone up.

2. Inflow of foreign investment:

    • Reforms increased FDI inflow.
    • 1990 – 91 = $100 million and in 2014-15 = $73.5 billion.
    • With launch of MAKE IN INDIA in 2014, FDI policy was further liberalised and FDI increased by 48%.

3. Rise in Forex reserve:

    • 1990-91 = 6 billion USD ; 2014 – 15 = 321 billion USD.
    • India is one of the largest forex holder in world.

4. Rise in exports:

    • Exports of auto parts, engineering goods , IT softwares and textlies increased.
    • In Pharma industry also, India is exporting at competitive scale.

5. Control of inflation:

    • Increase in production, tax reforms etc. Helped in controlling inflation.
    • 1991 = 17% inflation.
    • 2015-16 = 5.48% inflation.

ARGUMENTS AGAINST REFORMS

1.Unemployment:

    • GDP has grown at faster rate but growth in employment rate has not been able to match the growth in GDP. Hence, India’s pattern of growth is often termed as JOBLESS GROWTH.

2. Neglect of Agriculture:

    • Reduction in public investment: Public investment in agriculture sector, such as irrigation, power, roads, market linkages etc has reduced in after reforms period.
    • Removal of subsidy: Removal of fertilizer subsidy increased cost of production.
    • Shift towards cash crops: Due to export oriented policy, cropping pattern has shifted to cash crops from food grains. It led to rise in price of food grains.

3. Ineffective disinvestment policy:

    • Government very often goes for targeted disinvestment of PSUs. Eg- in 2014-15, the target was Rs. 56000 crore, but the achievement was Rs. 34,500 crore.
    • The disinvestment policy of government according to some economists , was not successful because-
      1. Assets of PSUs are undervalued.
      2. Such proceeds are used to compensate revenue shortages and not for development of existing PSEs and developing social infrastructure.

4. Ineffective tax policy:

      1. Tax rates were reduced to generate larger revenue and reduce tax evasion. But tax revenue did not increased to desired level.

5. Unbalanced growth:

      1. Growth has been concentrated in some selected areas such as service sector, but agriculture sector and industrial sector has not observed similar level of growth.

ALSO READ:              CLASS 12 CH-2 INDIAN ECONOMY 1950 to 1990 NOTES

EMPLOYMENT CLASS 12 ASSERTION/REASON PRACTICE QUESTIONS

DEMONETISATION

  • On 8th November 2016, Demonetisation was announced.
  • Under it, 500 and 1000 rupee currency notes were demonetized with immediate effect. These notes accounted for 86% of total cash supply in the country.
  • Demonetisation is the act of removing a currency unit of its status as Legal Tender.
  • Aim of Demonetisation –
    1. To curb corruption.
    2. To control illegal activities.
    3. To control accumulation of “Black Money”.
  • Features of Demonetisation :
    1. It is a “Tax administration measure”. ( Cash holdings out declared income was deposited in banks and were exchanged against new notes. But, people holding unaccounted wealth had to declare and pay taxes along with penalty).
    2. It is a signal to the fact that Tax evasion will no longer be tolerated or accepted.
    3. It led to channelizing savings into the formal financial system.
    4. It aims to create a less-cash or cash-lite economy.
  • Impact of Demonetisation:
1.     Money / Interest rates i.  Decline in cash transactions.

ii. Bank deposits increased.

iii. Increase in financial savings.
2.     Private wealth Declined, since some demonetized notes were not returned and real estate price fell.
3.     Public sector wealth No effect.
4.     Digitalisation Digital transactions amongst new users and use of RuPay cards and Aadhar Enabled Payment System (AEPS) increased.
5.     Real Estate Prices declined.
6.     Tax collection Rise in income tax collection because of increased disclosure.

Liberalisation,Privatisation and Globalisation Class12,Ch-3 LPG NOTES

GOODS AND SERVICES TAX (GST)

  • GST is a comprehensive indirect tax which has replaced many indirect taxes in India.
  • The GST act was passed in parliament on 29th March, 2017.
  • The act came into effect as on 1st July, 2017.
  • It is comprehensive, multi-stage, destination-based tax which is levied on every value addition.
  • The idea of GST is “One Nation One Tax”.
  • GST is expected to improve the ease of doing business, reduce tax burden by eliminating tax-on-tax etc.
  • GST has replaced 17 indirect taxes ( like VAT, Service tax, Excise duty, Sales tax, etc.) and 23 cesses of centre and the states.
  • The last dealer in the supply chain passes on the added GST to the consumer, making GST a destination – based consumption tax.
  • The provision of input tax credit at each stage of value chain helps in avoiding the cascading effect (tax on tax) under GST, which is expected to reduce prices of commodity and benefit the consumers.

TYPES OF TAXES UNDER GST

  1. Central goods and services tax (CGST) : It is levied on ‘ Intra-State” supply of goods or services by the Centre.
  2. State goods and Services tax(SGST) : It is levied on the “Intra-State” supply of goods or services by the state (including UTs with legislature).
  3. Integrated goods and services tax (IGST) : It is levied on inter-state supply of goods or services and is collected by centre.

SOME FACTS ABOUT GST:

  • Single tax structure.
  • Effect on Prices : Luxury items became costlier and consumption goods have become cheaper.
  • Invoice matching : ITC of purchased goods and services will be available only when the inward supply details filed in by buyer matches the outward supplies details filed in by supplier.
  • Anti-Profiteering Measure : As per anti-profiteering rule , the benefits of reduced GST tax rates and increased input tax credit should be passed on to the consumer in the form of reduced prices. A National Anti-Profiteering Authority (NAA) has been constituted for efficient administration of these provisions.
  • Registration under GST : If turnover exceeds Rs. 20 lakhs , compulsory registration under GST. This limit is Rs. 10 lakhs for North Eastern and hilly states , as they are special category states.

INPUT TAX CREDIT

  • ITC means reducing the taxes paid on inputs from taxes to be paid on output. When any supply of services or goods are supplied to a taxable person, the GST charged is known as ITC.

GST COUNCIL

  • GST council is a constitutional body.
  • It makes recommendations to UTs and State Government on issues related to GST.
  • ARTICLE – 279A : As per article 279A, GST council will consist of –
    1. Chairperson = Union Finance Minister.
    2. Vice-Chairperson = Chosen amongst the ministers of State governments.
    3. Members = M/O Finance and all M/O Finance / Taxation of each state.
  • Quorum : 50% of total members.
  • Decision making : Every decision of GST council shall be taken by a majority of NOT less than 75% of weighted votes of the members present and voting.
  • Votes of Central government = 1/3rd weight of total votes casted.
  • Votes of all state governments (TOTAL) = 2/3rd of total votes casted.

ALSO READ:        INTRODUCTION TO GST

SUPPLY UNDER GST

FAQs:

Q1. What is currency Devaluation?

Ans.Devaluation means deliberate reduction in the value of domestic currency vis-a-vis foreign currency by government of the country. 

Q2. What is input tax credit or ITC?

Ans. ITC means reducing the taxes paid on inputs from taxes to be paid on output. When any supply of services or goods are supplied to a taxable person, the GST charged is known as ITC. 

Q3. What is the full form of FDI? 

Ans. The full form of FDI is Foreign Direct Investment?

Q4.  What is the full form of MRTP Act?

Ans. The full form of MRTP is Monopolistic and Restrictive Trade Practices Act.

Q5.What is meant by Globalisation?

Ans. Globalisation means integrating the national economy with the world economy through removal of barriers on international trade and capital movements.Globalisation aims to create a borderless world. 

Q6. What is Liberalisation?

Ans.Liberalisation means removal of entry and growth restrictions on private sector.Under Liberalisation, government dealt with Industrial sector reforms,Financial sector reforms,Tax reforms,Forex reforms and Trade and investment policy reforms. 

Q7. What do you mean by PRIVATISATION? 

Ans. Privatisation means transfer of ownership, management and control of public sector enterprises to the entrepreneurs in the private sector. Privatisation can be done in 2 ways-

  1. Transfer of ownership and management of PSUs from government to private sector.
  2. Privatisation of PSUs by selling off part of the equity shares to public.
GlobalisationMRTP ActPrivatisationwhy LPG Reforms?liberalisation
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