If you're a Class 12 Economics student preparing for your board exams, it's important to understand the concepts of liberalization, privatization, and globalization (LPG) given in the Indian Economic Development book Chapter 3. Here are some important questions and answers to help you prepare for your exams and gain a deeper understanding of these economic concepts.
| Board | CBSE and State Boards |
| Class | 12 |
| Subject | Economics |
| Book Name | Indian Economic Development |
| Chapter No. | 3 |
| Chapter Name | Liberalization, Privatization, and Globalization: An Appraisal |
| Type | Important Questions and Answers |
| Session | 2023-24 |
"The only thing that stands between you and your dream is the will to try and the belief that it is actually possible."
- Joel Brown
Indian Economic Development Chapter 3 Liberalization, Privatization, and Globalization Important Questions & Answers
Q. No. 1) Multiple Choice Questions (MCQ)
i. Which of the following can help reduce the fiscal deficit?
a. increasing subsidies
b. increasing the PSU profits
c. investing in improving public goods
d. decreasing the burden and incidence of tax
Ans. Option (b)
ii. …………….was the Indian Finance Minister in 1991, acknowledged for his capabilities to steer away the economic crisis looming large on the erstwhile Indian Economy.
(Choose the correct alternative)
a. Dr. Subramanian Swamy
b. Pranab Mukherjee
c. Dr. Manmohan Singh
d. Dr. Urjit Patel
Ans. Option (c)
iii. Which of the following statements correctly represents actions taken by the government towards liberalization?
- P: levying high tariffs to discourage import and promote the consumption of domestic goods and services
- Q: devaluation of the rupees to encourage the inflow of foreign exchange
- R: allowing for private banks to make decisions independent of the RBI restrictions
- S: fixing prices of certain industrial goods in order to support increased consumption of these goods to boost the manufacturing industry
a. P and Q only
b. P and R only
c. Q and R only
d. Q and S only
Ans. Option (c)
iv. Which of the following policies was adopted to increase the competitive position of Indian goods in the international markets?
a. export duties were removed
b. import licensing was abolished
c. the rate of corporation tax was reduced
d. Foreign Institutional Investors (FII) were allowed to invest in India
Ans. Option (a)
v. Read the following statements: Assertion (A) and Reason (R). Choose the correct alternative from those given below.
- Assertion (A): In 1991, as an immediate measure to resolve the Balance of Payments crisis, the rupee was devalued against foreign currencies.
- Reason (R): Devaluation of currency was eminent, exchange reserves.
Alternatives:
a. Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
b. Both Assertion (A) and Reason (R) are true, but Reason (R) is the explanation of Assertion (A).
c. Assertion (A) is true, but Reason (R) is false.
d. Assertion (A) is false, but Reason (R) is true.
Ans. Option (a)
vi. There are two statements given below, marked as Assertion (A) and Reason (R). Read the statements and choose the correct option.
- Assertion (A): The Devaluation of the Indian rupee in 1991 resulted in the inflow of foreign exchange.
- Reason (R): The Devaluation of the Indian rupee was a step to get taken to get more foreign investments.
a. A is true but R is false.
b. A is false but R is true.
c. Both A and R are true and R explains A.
d. Both A and R are true but R does not explain A.
Ans. Option (a)
vii. Which of the following falls under the role of the World Trade Organisation?
a. setting the limit for domestic and foreign investments in a country
b. mandating the level of tax levied on foreign firms in developing countries
c. aiding the development of poor countries by providing infrastructural investment
d. providing a platform for member countries to decide future tariff-related strategies
Ans. Option (d)
viii. There are two statements given below, marked as Statement (1) and Statement (2). Read the statements and choose the correct option.
- Statement (1): Air India, a fully owned Public Sector Undertaking (PSU) was disinvested and sold to a private entity.
- Statement (2): Public Sector Undertakings (PSU) are sold to create more direct and/or indirect employment opportunities in the country.
a. Statement 1 is true and Statement 2 is false.
b. Statement 1 is false and Statement 2 is true.
c. Both statements 1 and 2 are true
d. Both statements 1 and 2 are false
Ans. Option (c)
ix. Read the following statements - Assertion (A) and Reason (R). Choose one of the correct alternatives given below:
- Assertion (A): Every year government fixes a target for disinvestment of Public Sector Enterprises (PSEs).
- Reason (R): Disinvestment is an excellent tool for discarding the loss incurring Public Sector Enterprises (PSEs).
Alternatives:
a. Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A)
b. Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A)
c. Assertion (A) is true but Reason (R) is false.
d. Assertion (A) is false but Reason (R) is true.
Ans. Option (b)
x. There are two statements given below, marked as Assertion (A) and Reason (R). Read the statements and choose the correct option.
- Assertion (A): According to the Government of India, the disinvestment of Public Sector Enterprises has brought accountability and professionalism to them.
- Reason (R): The Government of India used disinvestment mainly to improve financial discipline and facilitate modernization.
a. A is true but R is false.
b. A is false but R is true.
c. Both A and R are true and R explains A.
d. Both A and R are true but R does not explain A.
Ans. Option (c)
Q. No. 2) India’s post-1990 economic strategy entailed three important breaks with the past:
- To dismantle the vast network of controls and permits that dominated the economic system.
- To redefine the role of the state as a facilitator of economic transactions and as a neutral regulator rather than the primary provider of goods and services.
- To move away from a regime of import substitution and to integrate fully with the global trading system.
The 1991 reforms unleashed the energies of Indian entrepreneurs and gave untold choices to the consumers and changed the face of the Indian economy. The reform agenda constituted a paradigm shift and has defined the broad contours of economic policymaking for three decades.
Liberalization was adopted as the guiding principle of governance and all governments since 1991, have broadly stuck to that path.
Today we don’t need a paradigm shift. We need to look at individual sectors and see which one of these needs, reforms to create a competitive environment and improve efficiency. The power sector, the financial system, governance structures, and even agricultural marketing need reforms.
Today’s reforms also require much more discussion and consensus-building. The central government needs to work in tandem with state governments and consult different stakeholders impacted by reform decisions. Timing and sequencing are critically important in the new reforms’ agenda.
Source: Excerpts from ‘Like 1991, the 2021 crisis presents an opportunity, by C.Rangarajan, 22nd January 2021 (livemint.com)
i. According to the given text, ________ was adopted as the guiding principle of governance and all governments since 1991.
a. Modernization
b. Liberalisation
c. Privatization
d. Globalization
Ans. Option (b)
ii. Read the following statements carefully and choose the correct alternatives given below:
- Statement 1 – 1991 was a landmark moment in India’s post-independence history as that changed the nature of the economy in fundamental ways.
- Statement 2 –India’s economic establishment launched a multipronged reforms agenda to repair India’s macroeconomic balance sheet and ignite growth.
Alternatives:
a. Both statements are true.
b. Both statements are false.
c. Statement 1 is true and Statement 2 is false
d. Statement 2 is true and Statement 1 is false
Ans. Option (a)
iii. Read the following statements - Assertion (A) and Reason (R):
- Assertion (A) – India’s pre-1990 economic strategy dismantles the vast network of controls and permits that dominated the economic system.
- Reason(R) – The 1991 reforms unleashed the energies of Indian entrepreneurs, gave untold choices to consumers, and changed the face of the Indian economy.
From the given alternatives choose the correct one:
Alternatives:
a. Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
b. Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A).
c. Assertion (A) is true but Reason (R) is false.
d. Assertion (A) is false but Reason (R) is true.
Ans. Option (d)
iv. In the light of the given text and common knowledge, identify the incorrect statement: -
a. A severe balance of payments problem triggered an acute economic crisis in 1991.
b. In 1991, the economic and political leadership launched a multipronged reform agenda to repair the macroeconomic situation of the nation.
c. In the post-1991 situation, the state was
d. given the role of primary regulator of the economy.
e. Post-pandemic, individual sectors should be looked at closely. Sectors that need reforms should be identified and corrective action should be taken.
Ans. Option (c)
v. Read the following statements carefully and choose the correct alternatives given below:
- Statement 1 – Timing and sequencing are critically important in the post-economic reform agenda.
- Statement 2 –Post pandemic reforms in India require a paradigm shift.
Alternatives:
a. Both statements are true.
b. Both statements are false.
c. Statement 1 is true and Statement 2 is false
d. Statement 2 is true and Statement 1 is false
Ans. Option (c)
vi. Read the following statements - Assertion (A) and Reason (R):
- Assertion (A) – The 1991 reforms released the vitalities of Indian businesspersons.
- Reason(R) – The reform agenda established a paradigm shift and defined the broad outlines of economic policymaking for years to come.
From the given alternatives choose the correct one:
Alternatives:
a. Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
b. Both Assertion (A) and Reason (R) are true and Reason (R) is not the correct explanation of Assertion (A).
c. Assertion (A) is true but Reason (R) is false.
d. Assertion (A) is false but Reason (R) is true.
Ans. Option (a)
Q. No. 3) Why were reforms introduced in India?
Ans.
- A steep fall in foreign exchange reserves: Foreign exchange reserves, which we generally maintain to import petroleum and other important items, dropped to levels that were not sufficient for even a fortnight.
- An unfavorable Balance of Payments (BOP): Imports grew at a very high rate without matching the growth of exports.
- A huge burden of external debt: The government was not able to make repayments on its borrowings from abroad. There was also not sufficient foreign exchange to pay the interest that needed to be paid to international lenders.
- High rate of price inflation: Prices of many essential goods rose sharply.
- A huge burden of fiscal deficit in the government budget: When expenditure is more than income, the government borrows to finance the deficit from banks and also from people within the country and from international financial institutions. The revenue from taxation and public sector undertakings was lower than the expenditure incurred on developmental policies.
Q. No. 4) Discuss briefly any two major steps taken by the Government of India on the “Financial Sector” front under the Economic Reforms of 1991.
Ans. Two steps taken by the government of India in the financial sector under the Economic Reforms of 1991 were:
- Change in the role of the Reserve Bank of India (RBI): The role of RBI was reduced from regulator to facilitator of the financial sector. This means that the financial sector was given greater autonomy (to take decisions) on many matters independent of RBI.
- Origin of Private Banks: The reform process led to the establishment of private sector banks of Indian as well as foreign origin.
Q. No. 5) Why did RBI have to change its role from controller to facilitator of the financial sector in India?
Ans.
- Economic liberalization: In 1991, India began a process of economic liberalization that led to a greater role for the private sector in the economy. This meant that the RBI could no longer control the financial sector in the same way that it had in the past.
- Globalization: India's integration into the global economy also meant that the RBI had to change its role. The RBI could no longer insulate the Indian financial sector from the global financial system.
- Financial sector reforms: The RBI undertook a number of financial sector reforms in the 1990s and 2000s. These reforms led to a more competitive and efficient financial sector. This meant that the RBI needed to change its role from controller to facilitator in order to promote competition and efficiency.
Q. No. 6) Name any two taxes which were subsumed in Goods and Services Tax (GST).
Ans. Value-added tax, service tax, excise duty, sales tax.
Q. No. 7) Those public sector undertakings which are making profits should be privatized. Do you agree with this view? Why?
Ans. Arguments in favor of privatization:
- Increased efficiency: Private companies are often more efficient than government-owned companies. This is because they are driven by the profit motive and are not subject to the same bureaucratic constraints as government-owned companies.
- Improved service delivery: Private companies are often able to deliver better services than government-owned companies. This is because they are more responsive to customer needs and are not subject to the same political interference as government-owned companies.
- Increased competition: Privatization can lead to increased competition in the market. This can benefit consumers by driving down prices and improving the quality of goods and services.
- Revenue generation: The government can generate revenue from the sale of PSUs. This revenue can be used to fund other government programs or to reduce the national debt.
Arguments against privatization:
- Loss of jobs: Privatization can lead to job losses, as private companies are often more efficient and may not need as many employees as government-owned companies.
- Reduced social welfare: Public sector undertakings often provide social welfare benefits to their employees, such as subsidized housing, healthcare, and education. Privatization can lead to a reduction in these benefits, as private companies are not legally obligated to provide them.
- Increased inequality: Privatization can lead to increased inequality, as private companies are often owned by a small number of wealthy individuals. This can lead to a concentration of wealth and power in the hands of a few people.
- Loss of control: Privatization can lead to a loss of control over strategic industries, as they are transferred to private ownership. This can make it more difficult for the government to regulate these industries and to ensure that they are operating in the best interests of the public.
Q. No. 8) Define the following terms:
- a. Disinvestment
- b. Outsourcing
Ans. a. Disinvestment: Privatisation of the public sector enterprises (PSEs) by selling off a part/whole of the equity to the general public or any private sector player is known as disinvestment.
b. Outsourcing: Hiring of regular service from external sources, mostly from foreign countries, which was previously provided internally or from within the country is known as outsourcing.
Q. No. 9) Name any one Maharatana company.
Ans. Indian Oil Corporation Limited.
Q. No. 10) “In the post-reform period, the Government of India decided to retain profit-making Public Sector Undertakings (PSUs). It provided a special status to PSUs to enable them to expand in the global market.” Do you agree with the given statement? Give valid reasons in support of your answer.
Ans. Yes. In order to improve efficiency, infuse professionalism and enable Public Sector Undertakings (PSUs) to compete more effectively in the liberalized global environment, the government identified profit-making PSUs. The government declared them as Maharatnas, Navratnas, and Miniratnas. PSUs were given greater managerial and operational autonomy, in taking various decisions. As a result, over the years these Maharatnas, Navratnas, and Miniratnas have performed exceedingly well and established themselves as market leaders.
Q. No. 11) Amazon has been outsourcing to various customer support companies in India to accommodate more local and international buyers and sellers. In light of the above statement, how has the process of globalization impacted the Indian economy?
Ans.
- generates more employment and job opportunities
- increases the overall GDP of the country
- leads to the formalization of the employment sector
- limits the availability of social security measures for the workers.
Q. No. 12) India has certain advantages which make it a favorite outsourcing destination. What are these advantages?
Ans. The low wage rates and availability of skilled manpower in India have made it a destination for global outsourcing in the post-reform period.
Q. No. 13) Why is it necessary to become a member of the WTO?
Ans.
- Increased market access: WTO membership gives countries access to the markets of other WTO members. This can lead to increased exports and economic growth. For example, India's exports to other WTO members have increased by more than 500% since it joined the WTO in 1995.
- Reduced trade barriers: WTO members agree to reduce tariffs and other trade barriers. This makes it easier for businesses to trade goods and services across borders. For example, India has reduced its tariffs on imports by an average of 50% since it joined the WTO.
- Increased investment: WTO membership can attract foreign investment. This can help to finance economic growth and create jobs. For example, India has received more than $1 trillion in foreign investment since it joined the WTO.
- Improved access to technology: WTO membership can give countries access to new technologies. This can help to improve productivity and competitiveness. For example, India has benefited from access to new technologies in the areas of agriculture, manufacturing, and information technology.
- Strengthened rules-based trading system: WTO membership helps to strengthen the rules-based trading system. This can help to prevent trade disputes and ensure that trade is fair and open. For example, India has used the WTO to resolve trade disputes with other countries.
Q. No. 14) ‘The opening up of the Indian Economy has led to a rapid increase in Foreign Direct Investments and Foreign Exchange Reserves of the country’. Defend or refute the given statement.
Ans. The given statement is true to its character. Foreign investments, both Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII), have increased from about US $100 million in 1990-91 to US $ 74 billion recently. This has changed the status of India from a ‘begging bowl’ in the 1990s to a ‘self-dependent’ economy in the present age.
Due to the opening up of the Indian Economy, she has become one of the largest foreign exchange reserve holders in the world. India has been able to register an increase in its foreign exchange reserves from about US $ 6 billion in 1990-91 to about US $ 321 billion in 2014-15.
Q. No. 15) “Agriculture sector appears to be adversely affected by the economic reform process.” Explain the given statement.
Ans. The agricultural sector was adversely affected by the reform process in the following manner:
- Public investment in the agriculture sector especially in infrastructure like irrigation, power, etc. has been reduced in the reform period
- The reduction of fertilizer subsidies has increased the cost of production affecting thereby the small and marginal farmers
- Increased international competitiveness due to liberalization and reduction of import duties.
- Shift from food crops to cash crops due to export-oriented policy in agriculture led to a rise in prices of food grains.
| Must See: Liberalization, Privatization, and Globalization Class 12 Notes Indian Economy 1950-1990 Class 12 Notes National Income and Related Aggregates Class 12 Notes |
| Also Read: Class 12 Important Questions Class 12 Notes |
Hope you liked these Important Questions and Answers on Class 12 Economics Indian Economic Development Chapter 3 Liberalization, Privatization, and Globalization. Please share this with your friends and do comment if you have any doubts/suggestions to share.