Indian economy on the eve of independence. Pre new economic

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Student’s Manual

(1991 ONWARDS)


  1. Indian economy on the eve of independence.

  2. Pre new economic policy[19950-1990]

  3. Need for economic reforms

  4. Economic policies followed since 1991

  5. Appraisal of economic reforms

  6. Second generation reforms

India became independent on August 15, 1947. Under its visionary leader, Nehru, it adopted a system
of parliamentary democracy that remains intact today. An understanding of the economy before
independence is necessary to know and appreciate the level of development achieved in post
independence period.
 In 1951 India formally initiated its development program via launch of the first five year plan. In
1950s to 1970s India turned progressively inward, embarked on a major expansion of public sector
and subjected the private sector to strict controls and licenses. The result was an annual average
growth in per capita GDP of just a little above 1% per annum. The absolute number of poor in the
country rose.
 The Economic and BOP crisis compelled the government to announce the dynamic program of New
Economic Policy of privatization, liberalization and globalization.

 The lesson is an appraisal of the reforms process and its implications in India. The unit ends with an
analysis of the necessary future reforms in form of second generation economic reforms.
Comparing with the plight of framers in India today can you relate to the conditions of the Indian
farmer at the eve of independence from the following points?
The decision to grow type of crops was with the farmers / British.
The role of the Zamindar friendly /non friendly

The farmer took loans from the bank/village money lender.

The money exploited/helped the farmer in times of crisis

The rate of interest was reasonable/unreasonable for the farmer
It was easy /difficult to get loans.

The irrigation and water facilities.

Education and medical facilities for the farmers

Insurance of crops and cattle

Can you expand the list of films given below in which the situation of farmers those day have been
Mother India
Do Bigha Zameen Zameen

Different occupations in villages.

The effect of partition of India and Pakistan on the cotton and jute producing, manufacturing areas.


The British rule was a long story of the
systematic exploitation by an imperialistic
government of a people whom they had               “Indeed some kind of chart might be drawn up to
enslaved by their policy of divide and rule.       indicate the close connection between length of
The benefits of British rule were only             British rule and progressive growth of poverty.
incidental, if any. Their main motive was to
                                                   That rule began with outright plunder, and a land
promote their selfish interests at the cost of
India. Thus in 1947 we inherited a crippled        revenue system which extracted the uttermost
economy with extreme poverty and stagnant          farthing not only from the living but also from the
agriculture, lopsided industrial sector. The       dead cultivators. It was pure loot”.

                                                                            Jawaharlal Nehru
policies of British rule brought about a fundamental change in the structure of Indian economy-
transforming the country into a supplier of raw material and consumer of finished industrial products
from Britain.


   1) Weak Productive Accumulation- At the time of independence, the means of production were
      defective, there was insufficient use of fertilizers, seeds, irrigation, etc., machines were less &
      defective, etc. All these led to weak productive accumulation.
   2) Commercialization of Agriculture- Commercialization of agriculture means production of
      crops for sale in the market rather than for self consumption. During the British rule, farmers
      were given higher price for producing cash crops (like cotton and jute), so that such crops
      could be used as raw material for British industries.
   3) Adverse effects of Partition- India’s agricultural production received a further set back due to
      the country’s partition at the time of independence. Almost, the whole of jute producing area
      became part of East Pakistan (now Bangladesh). India’s jute goods industry, which had
      enjoyed a world monopoly so far, suffered heavily for lack of raw material.
   4) Defective Land Tenure System- the British Government of India set up a land revenue
      system also known as Zamindari system establishing a triangular relationship among
      government, the owner of the soil and the tiller of the soil. According to this system,
      Zamindars were permanent owners of the soil; they have to pay a fixed sum to government as
      land revenue and were free to charge any amount as revenue from the tillers of the soil.

INDUSTRIAL            SECTOR           ON        THE          EVE         OF        INDEPENDENCE

1) Deindustrialization of Indian Industries- The primary motive of deindustrialization by British
   Government was to exploit world famous Indian handicrafts industry by opting for discriminatory
   tariff policy with a two-fold motive of :
        a) To get raw material from India at cheap rate for the British industries
        b) To create market for British machine made cheap goods.
2) Lack of Capital Goods Industries- The growth of capital goods industries in India was
   unbalanced and lopsided, as Britishers did not want to develop those industries which could
   compete with British Industry and they wanted Indians to be dependent on Britain for the supply
   of capital goods and heavy equipments.
3) Limited Role of Public Sector-The limited area of operation of the public sector was also a
   significant reason for drawback of the industrial sector. The Public sector remained confined only
   to the railways, power generation, communications, ports and some other departmental
4) Low contribution to Gross Domestic Product (GDP) - The growth rate of the new industrial
   sector and its contribution to the GDP remained very small.


   1) Net Exporter of Raw Material and Importer of Finished Goods- India became an exporter
      of primary products such as raw silk, cotton, wool, sugar, indigo, jute, etc. and an importer of
      finished consumer goods like cotton, silk and woolen clothes and capital goods like light
      machinery produced in the factories of Britain.
   2) Monopoly Control of the British Rule- Opening of Suez Canal in 1869 served as direct route
      for the ships operating between India and Britain. More than half of India’s foreign trade was
      with Britain.


   1) High Birth Rate and Death Rate- Birth rate refers to number of children born per thousand
      in a year. Death rate refers to number of people dying per thousand persons in a year. At the
      time of independence both BR and DR were very high at 48/1000 and 40/1000 respectively.
      Such high rates indicate backwardness of a country and led to massive poverty prevailing all
      over the country.
   2) Poor Health Facilities and Low Literacy Rate- Only 17% of population was literate in the
      year 1941.There was only one doctor per 6000 of population. There was only one medical
      institution per 24000 of urban population and one for 50000 of rural population. Both are the
      indicators of low standard of living and backwardness.
   3) Massive Poverty- Lack of purchasing power, widespread famines, (the great Bengal famine),
      stagnation in food grains production and growing population led to a state of abject poverty.
      Life expectancy was 32 years in 1950-51. The per capita NI was Rs. 255 per person per
      annum, in 1950.
   4) Occupational Structure- In India at the time of independence majority of labor force was
      engaged in primary sector a clear indicator of underdevelopment. This is shown below:
                                 Sector       1901 1951
                                 Primary          72      72
                                 Secondary        12      11
                                 Tertiary         16      17

   1. . Define occupational structure.


   2. State any two main causes of Indias’s agricultural stagnation during the colonial period.

     3. Write two-fold motive behind the de-industrialisation effected by the British in pre-
        independence India.


     4. Define Birth rate. What was the Birth rate of India on the eve of Independence.


     5. Define commercialization of agriculture.


     PRE NEW ECONOMIC POLICY (1950-1990 )
     Main Features
1)   Adopted the Path of Mixed Economy to accelerate Economic Growth.
2)   Adopted the 5 year planning process to bring rapid and self-reliant Growth.
3)   Predominant role of Public Sector Units to bring development.
4)   To promote growth with self reliance, import substitution was adopted.
5)   The indigenous industries were protected from foreign competition by the umbrella of protection
     in the form high tariffs, Quotas and Licenses.
6)   Simultaneous development of Large Scale Industry for infrastructure and growth and Small Scale
     Industry for employment and equity.
  7) To bring equity, modernization and self sufficiency in agriculture-land reforms and technical
     reforms were undertaken.

India adopted the path of planning after independence.

Planning is a process of assessing the physical, human and capital resources of an economy, setting
goals and then set out to achieve these goals in a specific period of time by exploiting these
resources. It is thus a planned and coordinated utilization of resources for attainment of social and
economic objectives.

The Planning Commission was set up in 1950 with the prime minister, (Pundit Nehru) as its
chairperson, to promote rapid rise in standard of living, increasing production, and generating more
employment opportunities.

  To understand the pre new economic policy era we take the main sectors of the economy and analyze

  Agricultural Sector: In 1950 agriculture contributed 50% to NI of India and provided employment to
  almost 65% of workforce. It was the basis of both industrial development and foreign trade of the
  country. Agriculture provided a large variety of agricultural products for consumption. The problems
  and measures taken in this sector during 1950 to 1990 can be stated as follows:
  Problems                          Measures
  Defective land tenure system The government undertook abolition of intermediaries,
  like       zamindari     which conferred security and ownership rights on tenants and laws
  continued in practice.            about regulation of rent were passed.
  Lack of credit and marketing Nationalization of banks, setting up of Cooperative Agricultural
  facilities                        and rural Development Banks, RRB’s, NABARD, and provision
                                 of KCC.

                             Government set up regulated markets (7000 markets) and
                             improved storage through warehousing corporations and
                             provided better transport facilities and connectivity to rural
                             India – Prdhan Mantri Gram Sadak Yojna.
Pressure of population lead Consolidation of holdings, cooperative farming and land ceiling
to       subdivision     and acts were passed.
fragmentation      of   land
Lack of irrigation and Introduction of the New agricultural Strategy (green revolution)
shortage of food             in 1966.
Illiterate and superstitious Chaupal programs on radio and TV to inform and change the
farmers, subsistence farming attitudes of farmers, provide pesticides, educate farmers about
and crop losses              proper crop rotation

Know more!!!!!!            A note on Green Revolution (NAS)

The strategy of green revolution was launched in October 1965. It was restricted to the production of
5 major crops – wheat, rice, bajra, maize and jowar. There were 3 basic elements in the method of
the green revolution -1. Continue expansion of farming area. 2. Multiple cropping of existing farm
land. 3. Using seeds (HYV seeds). The green Revolution resulted in a record grain output of 131
million tons in 1978-79. This established India as one of the world’s biggest agricultural producers.
The success of green revolution transformed India, from a starving nation to an exporter of food.

Industrial Sector:
Development of a country originates from industrial development. Industrially developed countries
are also economically prosperous. The 2nd five year plan also called the Mahalnobis Model lead to the
promotion of heavy and key industries in India.
 The period 1950 onwards witnessed development of infrastructure, research and development,
establishment of large scale along with many small scale industries, coexistence of public and private
sector enterprises, growth of both consumer and capital goods industries. The industrial sector made a
significant contribution to agriculture and trade.
The industrial policy plays a key role in influencing the foreign trade policy, fiscal policy the
monetary policy, the economic policy of the country. Government of India declared its 1st Industrial
Policy Resolution (IPR) in 1948. It divided the industries into 4 categories.

    1. Industries that were to be state monopolies. These were limited to atomic energy, arms and
       ammunition and railways (3 in all)
    2. Basic industries in which the state would have the exclusive right to new investment – 6
       industries were included in this – iron and steel, ship building, mineral oils, coal, aircraft
       production and telecommunication equipments.
    3. Industries of national importance that the state might regulate and license in consultation with
       state government. 18 industries were placed in this category.
    4. All other industries that would be opened to the private sector without constraints.
IPR 1948 remained in force till 1956. Two developments had taken place. One the first plan which
was initiated in 1951 was completed. Second parliament accepted socialistic pattern of society. This
lead to IPR 1956

The features of IPR 1956 are:
   1. Specific and all important role assigned to the public sector – all industries were classified into
       3 groups. These groups were called schedule A,B,C.
            Schedule A – exclusive responsibility of state. There were 17 industries in this.
            Schedule B – Progressively state owned – 12 industries.
            Schedule C – Generally left to private sector. The state reserved the right to enter this
               if need be.
    2. Protection to cottage and small scale industries
    3. Cautious approach towards foreign capital
IPR 1956 remained the basis of industrial policy till 1991.
The problems faced by industrial sector in this era can be put as follows:
   1. Growth of inefficient public monopolies like telecommunication.
   2. Lack of competition lead to lack of modernization of industries.
   3. There was indiscriminate and imbalanced spread of PSU which discouraged the private
   4. Loss making PSU’s continued to operate causing a drag on resources.

                                            Proble ms of Industrial
                                          de ve lopment (1950 -1990)

                     Micro Le vel                                   Macro Le ve l
                      Proble ms                                      proble ms

                        Growing       Industrial     Lack of
    Ine ffe icient                                   balance d                        Le ss production
                        Industrial    Dispute s
    Public              Sickness.                    re gional         Inade quate     of mass
    se ctor unit s                                   growth.           Employme nt    consumption
                                                                       ge ne ration   goods

Prepare a list of the various types of industries prevailing in India at the time of independence.
   1. ________________
   2. _________________
   3. _________________
   4. _________________
   5. ________________
Prepare a list of items of export and import at the time of independence.

    2. _______________________________

Foreign Trade Sector:
As far as foreign trade sector is concerned, there was a fast increase in imports and slow increase in
exports, leading to deficit in balance of trade. This deficit was continuously increasing. Imports were
growing fast due to demand for capital goods, heavy import of petroleum products. Exports had
grown slowly due to less competitive power in international market. Prior to 1991 India’s trade policy
was designed to be highly regulatory and restrictive in nature. It followed import substitution
industrialization, a highly inward looking strategy. Domestic industry was protected by high tariff
walls, quotas and other restrictions.
 Every coin has its 2 sides the Economic Policy adopted from 1950-1990 had its good effects and
    Good Effects:-
1) Economic growth got a big push after a stagnant growth under colonial rule - Industrial Sector
    showed a growth of 6% per annum. Agricultural Sector under the effect of Green Revolution
    showed a spectacular increase in production and productivity.
2) There was diversification of industries in India-consumer and capital goods leading to export
3) The economy witnessed establishment of large scale industries mainly in second 5-year plan.
4) There was simultaneous growth of small scale industries through incentives provided by govt.
5) The long term objectives of planning like growth, modernization, equity, self reliance were seem
    to be achieved.
    Bad Effects:-
1) Huge losses witnessed in Public Sector Units  Corruption, inefficiency and sickness in these
    industries became common. Their huge losses were a drain of nation’s resources.
2) Protection policies made indigenous industries relaxed. They failed to achieve international
    standard of product quality and failed to be competitive and diversified.
3) Export promotion was limited. Import substitution did not build on Foreign Exchange reserved of
4) There was deficit in BOP which lead to erosion of foreign exchange reserves of the country.
   Q1. Define planning.

   Q2.What is a mixed economy?


   Q3.Why is P.C. Mahalanobis known as the architect of Indian planning?

   Q4. Give classification of Industries according to IPR 1956.



   Q5. List any two problems of Indian agriculture.

   Q6, Give any three main features of Indian industry.


New Economic Policy here refers to the Government of India’s new plan of action to influence
production and capital formation activities in the country. It is a long term multi-dimensional
package of various policies for further economic development and structural adjustments. It
includes reforms in agriculture sector, industrial sector, financial sector, fiscal sector, international
trade etc.
 In India the economic reforms were undertaken by the Narasimha Rao government in July 1991.
The then finance minister Manmohan Singh initiated the process of economic liberalization – to
remove the inefficiencies in the economic system. The NEP did away with the license Raj- and
ended many public monopolies. Since 1990 India has emerged as one of the wealthiest economies
in the developing world.

Need for New Economic Policy:-
      Performance of public sector units was continuously declining.
      The scope of private sector was limited, that too subjected to too many of controls in form of
       license, permits and quotas.
      There were too many restrictions on imports and too many concessions given to exports. Still
       there was a balance of payments problem.
      Tax rates were high leading to tax evasion and providing disincentives to producers.
      Government expenditure was increasing at a fast rate. Government was forced to resort to deficit
      There were too many of controls on commercial banks and too little of non-banking financial
       institutions and stock market. The confidence of investors was shaking.
      The country did not have enough foreign exchange reserves even to pay for its next 10 days
       imports, threatening its international standing.
      With growing fiscal deficit and debt trap, the World Bank and IMF refused to extend any more
       loans, till India brought about dynamic reforms.

Economic Crisis in 1991 – Statistics bear testimony to the fact that the genesis of the economic crisis in India in
1991 lies in the large and persistent macro economic imbalances that developed over the 1980’s. The main causes
of this crisis were growing fiscal imbalances, large fiscal deficit due to wasteful expenditures, high level of
borrowings from RBI, rising money supply resulting in high rate of inflation, deficit in BOP and external
indebtedness. This crisis needed economic reforms.
Rationale of Economic Reforms- Crisis of 1991
     NI was growing at the rate of 0.8%.
     Inflation reached the height of 16.8%.
     BOP crisis was to the extent of 10,000 crores.
     India was highly indebted country- it was paying 30000 crore interest charges per year.
     Foreign exchange reserves were only $1.8 billion, which was insufficient.
     India sold large amount of gold to bank of England.
     India applied for the loan from World Bank and IMF to the extent of 7 billion dollar.
     Fiscal deficit was more than 7.5% . Deficit financing was around 3%.
     Trade relation with Soviet Block had broken down.
     Remittances from NRI’s stopped due to war in Arab countries.
     Prices of petroleum products were very high.
    Source – Indian Economic Development by Dr. Deepashree
Thus, in 1991, the LPQ Raj (license, permits and quota raj) was replaced by the LPG Policy
of Liberalization, Privatization and Globalization) heralding a new era of economic reforms:
1. Liberalization
2. Privatization
3. Globalization

Meaning of liberalization
What does liberalization mean to you?
     Relating to with your decision of subjects time table uniform, school policies

     Prepare a list of the problems faced by your country which hampers its economic growth.

     Frame policies to over come them.

     Liberalizations means removing all unnecessary controls and restrictions like permits, licenses,
     protectionist duties, quotas, etc. imposed by the government.

     Liberalization measures
     Liberalization was introduced in many areas in July 1991. These were
1.   Industrial Sector Reforms
     In order to make necessary reforms in the industrial sector, the Government introduced its new
     IPR on July 24, 1991. The various measures under industrial policy reforms include:
a)   Reduction in Industrial Licensing: The new policy had abolished industrial licensing for all
     projects, except for a short list of industries(like liquor, defense equipments, industrial explosives,
     etc.). No licenses were needed to set up new units, expand or diversify the existing the line of
     manufacture, except in certain industries, related to security and strategic considerations.
b)    Decrease in the role of Public Sector: One of the striking features was the substantive reduction
     the role of public sector. The number of industries exclusively reserved for the public sector
     reduced from 17 to 3. The only industries which are now reserved for public sector are defense
     equipments, atomic energy generation and railway transport.
c)   De-reservation of small scale industries: According to the new policy, investment limits for
     small scale industries has been increased to 1 crore with a view to modernize them. In many
     industries, the market has been allowed to determine the prices through forces of the market.
d)   Monopolies and Restrictive Trade Practices (MRTP) Act: With the introduction of
     liberalization and expansion schemes, the requirements for large companies, to seek prior
     approval for expansion, establishment of new undertakings, merger, amalgamations, etc. were
2.   Financial Sector Reforms
     Financial Sector includes financial institutions like commercial banks, investment banks, stock
     exchange operations and foreign exchange market. The financial sector in India is controlled by
     the Central Bank-Reserve Bank of India (RBI). The reforms introduced under financial sector are:
a)   The role of RBI was reduced from regulator to facilitator of financial sector which helped
     this sector to take many decisions on various matters without consulting RBI.
b)   Establishment of private sector banks in India like ICICI Bank and ABN AMRO Bank increase
     the competition in the market which benefitted the consumers through lower interest rate and
     better services.
c)   Foreign investment limits in banks was raised to around 51 %. Foreign Institutional Investors
     (FII) such as merchant bankers, mutual funds and pension funds are now allowed to invest in
     Indian financial markets.
d)   Banks were given freedom to set up new branches (after fulfillment of certain conditions)
     without the approval of the RBI.
3. Fiscal Reforms
   Fiscal reforms refer to the reforms in the government’s taxation and public expenditure
   policies.The government initiated various fiscal measures in order to reduce the fiscal deficit from
   8.4% of GDP in 1990-91 to 5.0% in 1996-97 and to 3.7% in 2006-07. Fiscal reforms mainly
   consist of Tax reforms which include:
a) Reduction in Taxes: High rates of taxes on individual income (income tax) and profits of
   companies (co-operate tax) were responsible for the tax evasion since 1991. There has been a
   continuous decrease in the income tax and the corporate tax.
b) Reforms in indirect taxes: Reforms in indirect taxes to facilitate establishment of common
   national market for goods and services like central value added tax (CENVAT) has replaced
   central excise duties to avoid cascading effects of the duties.
c) Simplification of the process: In order to encourage tax payers to pay tax, many procedures of
   paying tax have been simplified.
4. Foreign Exchange Reforms
   After liberalization policy of 1991, the following reforms were taken
       a) Devaluation of rupee: Devaluation refers to reduction in the value of domestic currency
           by the government. To overcome balance of payment crises the rupee was devaluated
           against foreign currencies. This led to an increase the inflow of foreign exchange.
       b) Market determination of exchange rate: the government allowed the rupee value to be
           free from its control. As a result market forces of demand and supply determine the
           exchange value of the Indian rupee in terms of foreign currency.


Suggest more/better/ reforms and measures to the problems discussed above.





 Prepare a list of problems faced by public sector

 Prepare a list of service which were under the government sector earlier and privatrised now
has the privatization benefited the society

Which other services do yo recomend to be privaitsiesd


 It is defined as the transfer of a function, activity or organization from the public to the private
 It means:
 1) Disinvestments of state-assets.
 2) Transferring industries from public to private ownership
 3) Permitting private participation in management of public sector undertakings.

     Case Study of Gujarat-Privatisation
 The two main objectives of privatization in India were to raise revenues to ease the fiscal crunch
 and to improve the profitability and efficiency of the divested enterprises.

 In contrast to the rest of India, where it is the government that predominantly owns and manages
 ports, the Indian state of Gujarat has implemented various forms of port liberalization since the
 1990s. This has helped it become the country's fastest growing state. Gujarat's economy has
 grown at an average of 10.14 percent per year from fiscal year 2001 to fiscal year 2006, the last
 five years for which data are available. This is comparable with China's average growth rate
 since 1978, and is distinctly faster than the growth of the other Asian tigers in the 15 years
 before the Asian financial crisis of 1997.Gujarat has broken new ground with different forms of
 privatization, ranging from private provision of port services to completely private ownership of
 new ports. The process started in the 1980s and gathered momentum rapidly after the central
 government in New Delhi enacted major economic reforms in the early 1990s. Gujarat has taken
 advantage of a constitutional loophole to convert its minor ports into some of the biggest ports in
 the country, vastly improved the availability and efficiency of port infrastructure, and facilitated
 the development of industrial centers that otherwise would not have existed. Gujarat's port
 liberalization, along with its status as one of the economically freest states in India, should serve
 as a model for the rest of India and other developing countries.
Q1. Define Privatization.


Q2. Discuss any two objectives of Privatization.



Q3.What are the two main factors that led to the increase in the growth rate of Gujarat due to



Q4.”Gujarat has broken new ground with different forms of privatization, ranging from private
provision of port services to completely private ownership of new ports.”Discuss positive impact of
privatization in context of Gujarat.



    Reforms under privatization
a) Dereservation of industries: Reservation means reservation for public sector. In IPR 1956, 17
    industries were reserved for public sector, another 12 were marked to be gradually undertaken by
    the public sector. Dereservation means that private sector was now allowed to operate in these
    industries. In 1991, 9 industries were de-reserved in one stroke. Today only 3 industries are
    reserved for public sector rest all are open to the private sector. De-reservation is also good for the
    health of public sector units. They are now no longer monopolies and they have to compete with
    the private sector. In this situation they have no option but to increase their efficiency or close
b) Disinvestment of public sector units: Disinvestment here means selling off the shares of public
    sectors companies to the private individuals and institutions. Disinvestment has been a major
    strategy by which the government has financed fiscal deficit. Government has been disinvesting
    by many methods. Two main methods are:
     Minority sale: In this method, equity is offered to investors through domestic public issues.
     Strategic sale: In this method,
        government offloads above 51 per
        cent in strategic sale.
Arguments in favour of privatization              KNOW MORE !!!!!!!
    1) It will help the profit making public
        sector units to modernize and In 1996 in order to improve efficiency, infuse
        diversify their business and also professionalism and enable them to compete
        help in making more competitive.          more effectively in the liberalized global
    2) It will help to uplift sick units which environment , the government chose 9 PSU’s and
        are a liability on public sector.         declared them as Navratnas. They were given
    3) It will use modern techniques of
                                                  greater managerial and operational autonomy, in
    4) It promotes consumers sovereignty taking various decisions to run the company
        which means better quality of life.       efficiently and thus increase their profits. Greater
    5) It introduces accountability and operational, financial and managerial autonomy
        responsibility in PSU’s.                  had also been granted to 97 other profit making
Arguments against privatization
                                                  enterprises called ‘miniratnas’. Today the total
1) Private enterprises may not show any
interest in buying shares of sick PSUs.           number of ‘navratnas’ are 16 and ‘miniratnas’ are
2) Private sector is not interested in those 62. Some examples of navratnas are BHEL, HPCL,
projects which may take a long gestation SAIL, BEL, GAIL, etc.
3) Private sector units are not interested in taking up risky projects.
4) Private sector produces with profit motives and has no consideration for social welfare   motive.

CASE STUDY- The divided opinion on privatization of public utilities

(adapted from THE WORLD BANK 2006)

 “Public sector utilities in developing countries have often not been efficient in providing access
to reliable water and sanitation services. [...] Countries across the world are increasingly
looking to the private sector for help in providing needed water services. Towards this end,
privatization of water and sanitation services is viewed to be a cost effective method of service
delivery that also enhances quality and performance” However, the privatization of former
publicly owned sectors or utilities always raises concerns. In cases of privatizing the water and
sanitation sector of a town, community or even a whole country causes more than only concerns
– it raises fierce protests and sometimes even violent opposition. Focusing on benefits and
challenges of privatization in sanitation and water management, we will define four
implementation stages to ensure a smooth change to privatization on the local level.

   Operating performance: The profit incentive might motivate the private provider to operate
   more efficiently than its public counterpart.
    Investment decisions: The profit incentive might lead the private operator to make deliberate
    investments decisions and miss fewer profitable opportunities to expand the business, e.g.
    extending access to unconnected households that want service and can pay for it.
    Policy and its enforcement: The presence of independent private providers might lead to
    governmental problems like trading, policy for money, as the private provider might try to shape
    those policies and pays for it with services and money. For this reason, good arrangements and
    deliberate policies and enforcement methods need to be in place.
    Generate Public Consent- Then if is accepted easily.
    Source – tools/wsp

Divided opinion on privatization of public utilities:

Answer the following questions:
 1. What are the main reasons for inviting the private sector to deliver public utilities like drinking
    water and sanitation?


2. What reactions have privatization of public utilities generated in a country and why? Was it a welcome
note or a revolt? Put forth your arguments to support your views?


3. Define the four implementation stages to ensure a smooth change to privatization?


Divide your class into groups of four and hold a radio talk show on “Should the Delhi Jal Board Be Privatised or
not”, another topic can be “Should electricity supply be privatized or not”. Give them 10 minutes to come
forward and give their presentations


    The process of globalization is popularly described as a gradual removal of barriers to trade and
    investment between nations. It aims to achieve economic efficiency through competitiveness,
    while seeking the broader objectives of economic and social development. It refers to growing
    economic interdependence among countries with regard to technology, capital, goods and
    services, information, etc.

Globalization is not a new phenomenon since the process has been happening for ages. For example,
the practice of sipping tea as an energising drinks originated in China several centuries ago.

 Once tea-drinking became popular, the product spread to different parts of the world. This is a prime
example of the process of globalization. Thus, the issue has to be studied in the context of
   Its time and impact.
   Another example of the power of globalization is China’s economy. The Chinese adopted a path
   of embracing the process of globalization in late 1970s by liberalizing their economy.
   Today, China is about to enter the World Trade Organization with the status of a developed

    Measures towards globalization
    1)Convertibility of rupee :to make the currency fully convertible i.e. allow it to determine its
    own exchange rate in international market without any official intervention

    2)Opening the economy to foreign capital : the government has taken a number of measures to
    encourage foreign capital in India. Many facilities and incentives have been offered to the foreign
    investors and non-resident Indians in the new economic policy.

    3)Long-term Trade policy: the main features of this policy is that it is a liberal policy .Under this
    policy, all restrictions and controls on foreign trade have been removed. Open competition has
been encouraged and all facilities are being provided to this end. Barring some specific goods, any
other good can be imported or exported.

4) Reduction in the Tariffs: custom duties and tariffs imposed on imports and exports are
   Being reduced to a great extent.

   Favorable Effects:
          Wider markets for trade
          Larger private capital inflows
          Efficiency increased in banking and financial
           sectors due to competition.
        Cheaper and better quality, and wider variety
            of consumer goods production increased.
        Export opportunities went up
   Better access to technology.

                                                Unfavorable Effects

                                                          Reduction in Sovereignty
                                                          Increased competition may lead to
                                                           closure of some firms
                                                          Risk of being left behind
                                                Penalties are large for errors and policy

                                                                                             e    -
                                                                                             at a
centre. Photo: M. A. Sriram
 Outsourcing: This is an important outcome of the process of globalization. Outsourcing means
obtaining goods and services by contract from an outside source. The main services which are
being outsourced to India, by developed countries-BPO, banking services, accountancy, teaching
etc. This is because of availability of cheap labor in India, low wage rate for the skilled workers
and growth of IT industry in India. Business Process Outsourcing (BPO) companies are now
going away from the main metro cities to the hinterlands in search of talent as well as to
economize the cost of their operations.

“Lower cost of operations and better retention of employees are driving growth,” said a recent
National Association of Software and Services Companies (Nasscom) survey titled “Strategic
Review 2011”. If one were to go by the survey, IT-BPO firms are set to increase the total rural
BPO employee base by more than 10 times over the next three years.

 Rural BPOs are now compelling business ventures for outsourcing companies due to factors such
as availability of talent, low attrition rates, affordable real estate, and cheap labor and minimal
operational costs. According to K. Purushothaman, Regional Director of Nasscom, business
process outsourcing jobs are moving away to low-cost countries such as the Philippines and

 If India needs to retain its brand image of world's outsourcing destination, it will have to explore
newer avenues and areas. “Tier-III and rural areas are the next best options for these outsourcing
companies. Talent is available in these rural areas, but it will have to be re-oriented to meet the
requirements of the industry standards,” he adds.

“Rural India holds a lot of potential and talent waiting to be tapped,” feels Shalabh Jain,
Executive Vice-President, Asia Business Unit, Firstsource Solutions.The company has partnered
RuralShores to set up a 135-seat delivery centre at Chand, a village in Chhindwara district of
Madhya Pradesh. Firstsource and RuralShores have joined hands to set up this rural office to
empower the Indian youth and create employment opportunities.

Similarly, Thinksoft, too, has decided to set up a rural BPO. “Cost arbitrage is driving us
towards setting up rural centres,” argues Vanaja Arvind, Executive Director of Thinksoft.

The challenge, however, is not just finding skilled workforce. It lies in getting the right
infrastructure, adequate quality power and bandwidth connectivity. These are certainly worrying
factors for BPOs who seek to set up shops in rural areas.

Major BPO companies such as Firstsource Solutions, Wipro, HDFC, Tata Group, and Priamal
Foundation are making a beeline for rural areas. These companies are either partnering local
NGOs (non-government organisations) or existing small outfits to set up rural BPOs.

In order to increase the BPO presence in rural areas, Nasscom, in collaboration with the ICT
(information, communication and technology) Academy and the State governments, has been
inviting BPOs to set up their centres in rural areas. It has asked these companies to use the
infrastructure and talent available at the government college campus. This will pare the real
estate cost for companies and also reduce the attrition levels.

   Nasscom has been urging the State governments to provide subsidies to help these companies
   make a foray into rural India. Nasscom, according to Mr. Purushothaman, is working with
   many smaller BPO firms in Maharashtra, Gujarat, Tamil Nadu, Karnataka and Andhra
   Pradesh, asking them to set up rural BPOs.
Q1. Define BPO.


Q2. Why is India an important destination for outsourcing of developed countries?



Q3. Name some major BPO companies.


Q4. Why BPO companies are setting up their branches away from the main cities?


Q5. Define subsidy.(Grants given by the government is known as………)


Q6.How are the BPO’s setting up their companies in the hinterland?

Why should India be a part of the process of globalization?


1. Enumerate any two reasons for need of economic reforms?


2. Define disinvestment.

    3. State any two financial sector reforms under liberalization policy?


    4. Define privatization.


    5. Mention any two positive changes of economic reforms?


How Globalization Affects Everything Including School Tuition

Globalization is one of the most powerful forces in our world today. Borders are being
broken down and people are seeing the benefits of international trade and the ability it has to
lower the overall costs of many popular goods.

The negative side effects of globalization are that often people and industries in certain parts
the world are often displaced when the same goods they produced at one time are replaced
by similar goods from another country which are priced significantly cheaper. There is no
doubt in almost anyone’s mind who had been involved in marketing in the past ten years the
train of globalization has left and it is simply your choice as to whether or not you get on the

There are a lot of problems which businesses face when deciding to take a franchise to
another country. First of all is that there are widely different preferences in the world
wherever you go. Many companies believe that their products are universally appealing and
therefore ignore these differences.
 This strategy can actually have a significant cost savings because by standardizing
everything from your product to your marketing approach there is a significant amount of
cost savings. Globalization has changed the costs for culinary schools in Texas and MBA
programs in Utah. You gain profits because of economies of scale. Many units can be
produced without adjusting fixed costs.
On the other hand many companies believe that products and marketing strategies need to
change by the culture or region they take franchises to. For instance Oreo cookies sells its
products in China as well as the United States. In China they discovered that the American
cookie was too sweet for Chinese consumers and therefore reduced the sugar content of the

In addition they also realized that there was a vast income difference between American and
Chinese consumers and that Chinese could not afford to buy the big packages of cookies that
Americans could. Therefore they designed smaller packages which the people could afford.

Obviously the ability to standardize and the advantages that it brings because of its
economies of scale are extremely advantageous. But the truth is that the real strategy which
is used by most companies will have to be a mix of the two. Culinary schools in Texas are
a great example of this. The first rule of thumb would be to standardize wherever possible.
This will cut down on costs and spread fixed costs out over time. But, where it is necessary to
customize the marketing mix for products in order to make them a part of main stream
culture this should be done.
 These types of changes should be done with care however, only changes with known
quantifiable or qualitative reasons should be made. Merely stating an opinion is not enough
to succeed in a foreign market. Many companies have attempted to enter foreign markets
and have failed miserably because they did not do enough market research.

Answer the following questions.

 1. Define Globalization.

 2. What is meant by Franchising?
3. Why companies are getting huge profits?

4. What are the marketing strategies to increase the sale of the product?

    Increasing production
    Lowering price
    Offer packs

5. What do you mean by economies of scale?

6. How will you make your product more innovative? Discuss.

7. “Many companies have attempted to enter foreign markets and have failed miserably”, Justify
   this statement in light of market research, taking the example of Mac Donald.

8. “To reap the advantages of globalization, the products need to be standardized”, Explain this sentence in
   light of advantages of standardization.

9. Analyze the case of Oreo Cookies in context of its expanded market to China.

10. State Positive and Negative effects of globalization?
The negative side of globalization
(source Excerpted from A.K.Mehta and Sayrabh Ghosh assisted by Ritu Elwadhi,”Globalization, Loss of
livelihoods and entry into poverty” and P.Sainath, The swelling ‘Register of Deaths’, The Hindu 29 December

                                        RENDERED DESTITUTE: Shantabai, wife of Neelakanta
                                        Sitaram Khoke who committed suicide in Yavatmal.
                                        Over 300 farmers have taken their own lives in
                                        Vidharbha this year. Of these 64 did so in December
                                        alone. — Photo: P. Sainath

                                     Many small land owning farmers and farming households and
                                     weavers are descending into poverty due to globalization related
                                     shock and lack of perceived income earning opportunities in relatively
well performing states in India. Where households have been able to sell assets, or borrow, or generate
income from alternative employments the impact of such shocks may be transient.

However if the household has no assets to sell and no access to credit, or is able to borrow only at very high
rates of interest and gets into severe debt trap, the shocks can have long duration ramification in terms of
pushing the household below poverty line. The worst form of crisis is suicides. The count reached 3000 in
Andhra Pradesh alone in December 2005 and is rising.

India has the largest area under cotton cultivation in the world covering 8300 hectares in 2003. The low yield
of just 300kg per hectare pushes it into third position in production. High costs, unstable yields, decline in
world prices, global glut in production due to subsidies by USA, and opening up of domestic market due to
globalization have increased the exposure of farmers and led to agrarian distress and suicides especially in the
cotton belt of Andhra Pradesh and Maharashtra. It has made survival of millions of small and marginal
farmers extremely difficult.

Scholars cite several factors that have led farmers to commit suicides:
    The shift from traditional farming to the farming of high yielding commercial crops without adequate
        technical support combined with withdrawal of the state in the area of extension services in form of
        counselling on farm technologies, problems, and remedial steps.
    Decline in public investment in agriculture in last 2 decades.
    Low rates of germination of seeds provided by global firms, spurious seeds and pesticides by private
    Crop failure, pest attack and drought.
    Debt at very high interest rates of 36% to 120% from private money lenders
    Cheap imports leading to decline in pricing and profits
    Lack of access to water forced farmers to dig bore wells on loans that failed, increasing the misery of
   1. Surf the internet and read papers to collect parallel articles that highlight the miserable state of
      small and marginal farmers in India.

   2.   What are the reasons that are leading to farmers committing suicides?

   3. Discuss and list the measures that can be undertaken by the government of improve their state of

   4. Surf the internet and describe the state of farmers in cotton growing belts of India? Explain how
      globalization has contributed to this?

   Activity –

   Divide the class in groups of four and through a skit let them present the merits and demerits of

Appraisal of New Economic Policy: (1991)
 Achievements of the New Economic Policy in India

By the turn of the 20th century, India had progressed towards a free-market economy, with a
substantial reduction in state control of the economy and increased financial liberalization. This
has been accompanied by increases in life expectancy, literacy rates and food security, although
the beneficiaries have largely been urban residents. In 2003, Goldman Sachs predicted that India's
GDP in current prices would overtake France and Italy by 2020, Germany, UK and Russia by
2025 and Japan by 2035, making it the third largest economy of the world, behind the US and
 India is often seen by most economists as a rising economic superpower and is believed to play a
major role in the global economy in the 21st century. The achievements of NEP can be explained
as follows:
     Increase in National Product:
        Before the inception of new economic policy, the growth rate in real national income was
        4.7%. In 1993-94, growth rate rose to 5.0 percent at 1993-94 prices and in 1996-97 it rose
        to 8.2 percent. However, in 2000-01 growth rate was witnessed to be 6.2 percent.
     Fiscal Deficit:
        The main thrust of new economic policy is to bring down fiscal deficit to the extent of 3
        percent of GDP. It came down to 5.2% in 1992-93. No doubt, after the launching of
        economic policy fiscal deficit has reduced but still Govt, is far away from its target. It
        again moved to 6.4% in 2000-01.
     Foreign Currency Reserves:
        New economic reforms have favourable impact on foreign currency reserves which had
        fallen to the extent of US $5.8 billion. These increased to US $292.9billion dollars in
   Agricultural                                                                  Production:

             Agricultural production has also been favourably affected by new economic
     reforms. Before, the implementation of new economic reforms, growth rate of agricultural
     production was 3%. In 1992-93, growth rate of agricultural production increased to 6.6%
     and 6.3% in 2000-01.
   Industrial output
     India is fourteenth in the world in factory output. Manufacturing sector in addition to
     mining, quarrying, electricity and gas together, account for 27.6% of the GDP and employ
     17% of the total workforce. Economic reforms introduced after 1991 brought foreign
     competition, led to privatization of certain public sector industries, opened up sectors
     hitherto reserved for the public sector and led to an expansion in the production of fast-
     moving consumer goods
   Control of Inflation
    Economic Reforms have controlled inflation from 16.8% in 1991 to 11.4% in 2009-2010.
   Foreign Investment:
     One of the benefits derived from global integration is the increased inflow of FDI. FDI
     was at US$ 33.1 billion, in 2009-2010.
   GDP                                        Growth                                    Rate

India’s GDP Growth Rate. The economy has posted an average growth rate of more than 7%
in the decade since 1997, reducing poverty by about 10 percentage points
   Source - Main articles: Economic liberalisation in India and Economic development in India
   Challenges of the New Economic Policy:
          Agricultural Crisis: 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 lead to
           widespread distress migration. The reasons being:

              1. Public investment in agriculture was low.

              2. Competitiveness of small farmers in global market reduced due to withdrawal of
                 subsidies, minimum support price, and reduction of import duties and lifting of

              3. Shift towards cash crops lead to shortage of food crops.

          Lack of alternative employment in rural India. Growth without jobs can neither be
           inclusive nor can it bridge divides.

          Failed to provide essential public utility services to the poor – like safe drinking water,
           electricity, proper sanitation etc.

          Failed to generate environmental concerns –The threat of climatic changes poses a
           challenge to future generations.

          Slowdown of industrial growth due to adverse effect on SSI, fall in demand for indigenous
           goods due to demonstration effect for western goods and cheaper imports.

          Fall in Tax revenue- due to tariff reduction on imports and tax concession to FDI. This has
           a negative effect on development and welfare expenditures

       All these lead to the second generation reforms introduced in 2001 onwards.

Case study
The impact of economic reforms on the industry in India

- A case study of the software industry

By Narayana N. R. Murthy (Chairman of the Board
Infosys Technologies Limited)

This paper underscores the importance of first creating a suitable policy structure and
then allowing the industry to develop freely. The rapid growth and development of the
Indian software industry after the liberalization of the economy in 1991 validates this
understanding. The period until then was one of sluggish growth for the industry; the
private sector was subject to numerous controls and had restricted access to technology.
However, the economic reforms of 1991 changed the Indian business context from one
of state-centered, control orientation, to a free, open market orientation - especially for
hi-tech companies. It allowed Indian companies to start competing effectively on a
global scale.
As evidence of this, India's software exports increased from US$ 128 million in 1991 to
US$ 6.2 billion in 2001. Similarly, India's domestic software sales increased from US$
115 million in 1991 to US$ 2 billion in 2001. Infosys further exemplifies this – the
company grew from Rs. 1 million and 12 employees in 1982 to about Rs. 90 million
and 300 employees in 1992, to Rs. 19.5 billion and over 10,000 employees in 2001.
As evident, the economic reforms benefited corporations in numerous ways.
    • Decentralization of power to regional and state offices led to speedier decision-
       making and reduction in friction to business.
    • Market determined pricing of Initial Public Offerings (IPOs) made equity a viable
       financing option.
    • Current account convertibility removed restrictions on availing foreign currency,
       led to easier foreign travel, and facilitated hiring of foreign consultants and
       international branding efforts.
    • Entry of multinational companies enhanced the competitive environment for
       Indian companies, thus, forcing them to benchmark themselves against global

However, the more substantial benefits were reduction in the interference of the
bureaucracy, enhancement of the confidence of Indians in exploring global markets,
and India emerging as an attractive destination for Foreign Institutional Investors
The reform process in India has benefited the nation tremendously and is now
irreversible. In fact, successive governments have continued the reform process. These
governments irrespective of their political affiliations have introduced measures to
improve the speed and flexibility of decision-making of corporations. These include
measures such as allowing listing on foreign exchanges, and formulating acquisition
norms as well as regulations for Employee Stock Option Plans (ESOPs).
We also need to understand the lessons that the success of the reform process has, for
the economy as a whole. The only way we can solve the problem of poverty is by
creating more jobs. Moreover, the Indian consumer deserves better products and

Thus, we need to encourage competition from world-class companies. Moreover,
Indian companies should benchmark themselves globally in terms of quality, cost,
time, customer responsiveness, investor friendliness and corporate governance
practices. Further, our government has to enhance its efficiency in every interface it has
with businesses. Finally, we, Indians, can succeed only if our political leadership,
bureaucracy, corporate leadership and academia work collaboratively.
Answer the following question:-

   1. Comment on the impact on industrial development before and after the economic

   2. How much software exports have increased after economic reforms?

   3. Why are foreign companies keen to invest in India?()

   4. Define de-centralization.

   5. Give three ways how the economic reforms have benefited the corporations.

      Second Generation Reforms (source – Indian Economy – Ruddar Dutt)
      Former Finance minister Yashwant Sinha in his budget speech 2000-01 stated very clearly that
      the government intends to carry forward the process of implementation of the Second
      Generation Reforms. These are mainly development driven. For implementation, he laid down
      following objectives.

            Strengthen the foundations of growth of our rural economy, especially agriculture and
             allied activities.

            Nurture the revolutionary potential of the new knowledge-based industries such as
             InfoTech, biotechnology and pharmaceuticals.
              Strengthen and modernize traditional industries such as textiles, leather, agro
               processing and the SSI sector.

              Mount a sustained attack on infrastructure bottlenecks in power, roads, ports, telecom,
               railways and airways.

              According the highest priority to human resource development and other social
               programmes and policies in education, health and other social services, with special
               emphasis on the poorest and weakest sections of society.

              Strengthen our role in the world economy through rapid growth of exports, higher
               foreign investment and external debt management.

              Establish a credible framework of fiscal discipline, without which other elements of
               our strategy can fall.

              Reduce public debt, the burden of interest on the debt-servicing charges.

              To save environment- to improve air quality, have clean rivers and water bodies and to
               raise energy efficiency.

We can conclude in the words of Arvind Pangaria – “ If India grows at 6% per annum on a sustained
basis, it will take 14 years to reach the current level of per capita income of people’s Republic Of
China, 36 years to reach Thailand’s and 104 years to reach that of USA. Thus the need for accelerated
growth can hardly be overemphasized.
 At the same time the task of implementing reforms in a democracy is complex, therefore those
wishing for rapid reforms will need to be patient. The good news however that, the experience of past
decades is shows that change can occur. Moreover the success of the reforms in delivering growth and
poverty reduction must make the road to further
Reforms less bumpy. The support for reforms today, though far from universal, is fortunately much
stronger than it was ten years ago”.

Multiple choice questions (New economic policies)

Q1) Production of crops for sale in the market rather than for self consumption is known as
   a. Subsistence agriculture
   b. Occupational structure
   c. Commercialization of agriculture
   d. None of these
Q2) Which Indian industry was adversely affected due to partition?
   a. Handicraft industry
   b. Iron and steel industry
   c. Cement industry
   d. Paper industry

Q3) what is meant by birth rate?
    a. Birth rate refers to number of children born per 1000 in a year
    b. Birth rate refers to number of children born per 10000 in a year
    c. Birth rate refers to number of children born per 100 in a year
    d. None of these
Q4) what was the main reason for the stagnation in agriculture under the British rule?
    a. Political and social relations
    b. Land settlement system
    c. Food surplus area went to Pakistan
    d. Famines and drought
Q5) what do you mean by devaluation of rupees?
    a. Increase in the value of domestic currency
    b. Reduction in the value of the domestic currency by the government
    c. Reduction in the value of foreign currency
    d. None of these
Q6) the sale of a part of equity holding held by the government in any public sector undertaking to
private investor
    a. Globalization
    b. Disinvestment
    c. Liberalization
    d. Privatization
Q7) when was new economic policy announced?
    a. 1994
    b. 1991
    c. 2004
    d. 2012
Q8) the main causes for economic reforms in 1991:
    a. Growing inefficiency in use of resources
    b. BOP crisis
    c. Mismanagement of firms in the economy
    d. All the above
Q9) what do you mean by globalization?
    a. Removing all the trade barriers
    b. Transfer of ownership from public to private sector
    c. Integration of national economy with the world economy
    d. None of these
Q10) How many industries are registered under the public sector in IPR 1956:
    a. 19
    b. 17
    c. 10
   d. 4

Short Answer Question
1. Give one reason for low level of agricultural productivity during the colonial rule?
2. Which traditional industries was India particularly well known for before the advent of the British
3. What is meant by subsistence agriculture?
4. Why is NEP called the policy of economic reforms?
5. Define mixed economy?
6. When was new economic policy announced?
7. Define liberalization?
8. Give the meaning of privatization?
9. What do you mean by globalization?
10. Give the reasons for the need for economic reforms?
11. Define planning?

Long Answer Questions
1. Explain the state of agriculture in India at the time of independence.
2. Critically apprise some of the shortfalls of the industrial policy pursued by the British colonial
3. Give a brief account of India’s demographic profile during the British rule.
4. Discuss the state of India’s foreign trade during the colonial rule.
5. Discuss the achievements of Indian economy during the period 1947-1990.
6. Explain in detail the need for economic reforms?
7. Give an appraisal of the new economic policy.
8. Enlist the objectives of the second generation economic reforms of 2001.
9. Explain the main feature of privatization of Indian economy.
10. What do you understand by globalization? Give its main features.
11. Explain the micro and macro problems faced by the industrial sector in India during 1950-1990?
12. Give arguments in favour and against privatization?
13. Enlist the favourable and unfavourable effects of globalization?
14. Give your stand on privatization of public utility services?
15. Explain three positive and negative effects of NEP?

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