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Every NCERT book that matters for UPSC — open a book, then a chapter. Learn each chapter's concepts, then how UPSC tests them — with diagrams, flowcharts and the past questions to attempt.
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← Indian Economic Development — all chaptersLiberalisation, Privatisation and Globalisation: An Appraisal
Start here: why this chapter matters
In simple wordsA family has been spending more than it earns for years, borrowing to cover the gap, and buying more from outside than it sells. One day the savings run out and no one will lend. A rich relative agrees to help — on condition that the family changes how it lives: fewer rules at home, sell some property, open the doors to outsiders. That was India in 1991. This chapter explains the crisis, the changes, and the long argument about whether they helped or hurt.
The reforms of 1991 are the hinge of modern Indian economic history. Almost every economy topic UPSC asks about today — GST, disinvestment, FDI, the rupee's exchange rate, WTO negotiations, the IT boom, farm distress — traces back to this chapter. It is also an appraisal: NCERT deliberately presents praise and criticism side by side, and so should you.
- Builds on Chapter 2: licensing, the public sector's commanding heights, SSI reservation and import substitution are exactly what was being dismantled.
- Leads into Unit III: Chapter 6 (Employment) takes up the ‘jobless growth’ criticism; Chapter 5 (Rural Development) the farm-sector story; Chapter 8 compares India's reforms with China's (1978) and Pakistan's (1988).
- Overlaps with Geography: India: People and Economy Chapter 8 (International Trade) and Fundamentals of Human Geography Chapter 8 (International Trade, WTO).
- Links to Class 12 Macroeconomics: balance of payments, exchange rates and devaluation (Open Economy), government budget and fiscal deficit, and the RBI's tools (money and banking).
- UPSC: GS3 lists ‘effects of liberalisation on the economy, changes in industrial policy and their effects on industrial growth’ and ‘investment models’. Prelims has asked about the New Economic Policy, devaluation, disinvestment, financial sector reform, GST and the WTO since the 1990s.
| Word | What it means here |
|---|---|
| Balance of payments crisis | Not enough foreign exchange to pay for imports and repay foreign debt |
| Foreign exchange reserves | Foreign currency (and gold) held by the RBI to pay for imports and debts |
| Stabilisation / structural reform | Short-term fixes (reserves, inflation) / long-term changes to efficiency and competitiveness |
| Liberalisation | Removing government controls and restrictions on economic activity |
| Privatisation / disinvestment | Shifting ownership or management of government enterprises to the private sector / selling part of a PSE's shares |
| Globalisation | Integrating the national economy with the world economy |
| Devaluation | A deliberate cut in the official value of the rupee against foreign currencies |
| Quantitative restriction (QR) | A limit on the quantity that may be imported or exported |
| Tariff / non-tariff barrier | A tax on imports / any other obstacle to imports (quotas, licences, standards) |
| FDI / FII | Foreign direct investment (a lasting stake in a firm) / foreign institutional investment in shares and bonds |
| Outsourcing | A firm buying a service from an outside provider — often abroad — instead of doing it in-house |
| GVA | Gross value added — output measured before product taxes and subsidies |
Reading the unit and chapter opening pages (pages 35–38), and the K.R. Narayanan quotation (page 39)
- Unit II — Economic Reforms since 1991: the unit note says forty years of planning gave a strong industrial base and food self-sufficiency, but most people still depended on agriculture; a balance of payments crisis in 1991 led to reforms, which this unit appraises.
- The chapter page lists four aims: the background of the 1991 reforms, the mechanism of reform, globalisation and its implications, and the reforms' impact on sectors — the order of sections here.
- A boxed quotation from former President K.R. Narayanan: there is a world consensus that economic development is not all and GDP is not necessarily a measure of a society's progress. The point: NCERT signals before the chapter starts that GDP growth alone will not settle the appraisal.
At a glance — the six ideas to carry away
- 1991 crisis: reserves for barely two weeks of imports, rising prices, no lender — rooted in 1980s deficits.
- $7 billion from the World Bank and IMF, with conditions → New Economic Policy: stabilisation (short term) + structural reform (long term).
- Liberalisation: licensing abolished for almost all industries; RBI regulator → facilitator; lower taxes, GST; rupee devalued; QRs removed by April 2001.
- Privatisation = disinvestment of PSE equity; Maharatna / Navratna / Miniratna autonomy for the PSEs that stay public.
- Globalisation: outsourcing (IT, BPO); WTO 1995, successor to GATT (1948, 23 countries).
- GDP growth 5.6% (1980–91) → 7.8–8.2% in the 2000s, led by services; reserves $6 bn → $646 bn; but jobs, farms and social spending lagged.
1. Background: the crisis of 1991
In simple wordsYour phone's prepaid balance is how many days of calls you can afford. In mid-1991 India's ‘balance’ of foreign currency could pay for barely two weeks of imports — oil, fertiliser, machines. Running out would mean no petrol and no fertiliser. That is a balance of payments crisis.
Two views frame the chapter. Some scholars argue that forty years of controls ended up hampering growth. Others say India, starting from near stagnation, achieved growth in savings, a diversified industry and sustained farm growth that ensured food security. Either way, in 1991 India met an external debt crisis: it could not repay foreign borrowings; reserves fell below a fortnight's imports; prices of essentials were rising.
⤵ How the 1980s led to the 1991 crisis (NCERT)
Spending > revenuedevelopment spending on unemployment, poverty and population; defence and social sectors give no immediate return; weak tax collection; low PSU income
Gap filled by borrowingfrom banks, the public and international lenders — sometimes spent on consumption; no cut in ‘profligate spending’
Imports grow, exports don'tdollars needed for petroleum and other imports; too little effort to boost exports
Late 1980s: unsustainabledeficits too large; prices of essentials rise sharply
1991: crisisreserves < two weeks of imports; can't pay interest; no country or lender will lend
Response$7 billion loan from the World Bank (IBRD) and IMF → conditions → New Economic Policy
The lenders expected India to liberalise and open up: remove restrictions on the private sector, reduce the government's role in many areas, and remove trade restrictions. India agreed and announced the New Economic Policy (NEP), aimed at a more competitive environment and removing barriers to entry and growth of firms. Its measures fall into two groups:
| Stabilisation measures | Structural reform measures | |
|---|---|---|
| Time frame | Short term | Long term |
| Purpose | Correct balance of payments weaknesses; bring inflation under control | Improve efficiency and international competitiveness; remove rigidities |
| In plain words | Keep enough foreign exchange; stop prices rising | Change how the economy works — liberalisation, privatisation, globalisation |
Beyond NCERT
- Triggers usually cited: the Gulf War of 1990–91 pushed up oil prices and cut remittances from Gulf workers; political uncertainty made foreign lenders and non-resident depositors pull back.
- To raise emergency loans India pledged part of its gold reserves abroad in 1991.
- The reforms were launched by the government of P.V. Narasimha Rao with Finance Minister Manmohan Singh; the New Industrial Policy was announced on 24 July 1991, the day of the Union Budget.
- UPSC 1996: structural adjustment is gradual and multi-step; stabilisation is quick — the same split as NCERT's.
Exam traps
- The crisis was an external debt / balance of payments crisis, compounded by inflation — not a banking collapse.
- Stabilisation = short term; structural = long term. Swapping them is the standard wrong option.
- NCERT traces the crisis to inefficient management in the 1980s, and also notes some liberalisation began in the 1980s — 1991 was more comprehensive, not the first step.
2. Liberalisation: industry, finance and tax
In simple wordsBefore 1991, opening a factory was like needing a permission slip for everything — to start, to close, to make more. Liberalisation tore up most of the permission slips. It also told the RBI to act less like a strict headmaster and more like a coach, and lowered taxes so more people would pay honestly.
Deregulation of industry. Before 1991, controls worked through (i) industrial licensing to start, close or set output; (ii) many industries closed to the private sector; (iii) goods reserved for small-scale industry; (iv) price and distribution controls. After 1991:
- Licensing abolished for almost all industries except NCERT's list: alcohol, cigarettes, hazardous chemicals, industrial explosives, electronics, aerospace, and drugs and pharmaceuticals.
- Only part of atomic energy generation and some core railway activities remain reserved for the public sector.
- Many small-scale products dereserved; in most industries the market sets prices.
Financial sector reforms. The financial sector — banks, investment banks, stock exchanges and the foreign exchange market — is regulated by the RBI, which decided how much money banks keep, interest rates and lending to sectors. Reform aimed to shift the RBI from regulator to facilitator. Results: private banks, Indian and foreign; foreign investment in banks up to about 74%; banks meeting conditions can open branches without RBI approval; FIIs (merchant bankers, mutual funds, pension funds) may invest in Indian markets. Some managerial controls stay with the RBI to protect depositors and the nation.
Tax reforms (fiscal policy = taxation + public expenditure). Direct taxes (income tax, corporation tax) were cut steadily — high rates were seen as a cause of evasion; moderate rates encourage saving and honest disclosure. Indirect taxes were reformed to build a common national market: a 2016 constitutional amendment enabled the Goods and Services Tax — ‘one nation, one tax, one market’, expected to raise revenue and reduce evasion. Procedures were simplified and rates lowered.
Beyond NCERT
- Committees: Narasimham Committee (1991) on financial sector reform — it recommended cutting the SLR, CRR and directed (priority-sector) lending (UPSC 1995, 2001); Raja Chelliah Committee on tax reform; Rangarajan Committee on disinvestment; Abid Hussain Committee recommended abolishing SSI reservation (UPSC 2002).
- GST: the 101st Constitutional Amendment Act, 2016; GST came into force on 1 July 2017, replacing central and State indirect taxes such as excise, service tax and VAT.
- NCERT's ‘about 74%’ foreign investment in banks applies to private banks; the limit for public sector banks is 20%.
- NCERT's licensing list splits one official item: it is ‘electronic aerospace and defence equipment’, not electronics and aerospace in general. In 1997 UPSC put the number of licensed industries at 6; the list has since been cut further.
Exam traps
- UPSC 2000: liberalisation in India started with changes in industrial licensing — not with rupee convertibility or tax cuts.
- The RBI became a facilitator, not a bystander: it still regulates banks.
- GST: the amendment was 2016, the tax began in 2017. Its main advantage (UPSC 2017) is replacing multiple taxes and creating a single market — not cutting the current account deficit.
3. Liberalisation of the external sector: rupee, trade and investment
In simple wordsIf one dollar used to cost ₹20 and now costs ₹25, an American buying Indian tea pays fewer dollars for the same tea — so Indian exports get cheaper abroad, and foreign goods get dearer in India. That is what devaluing the rupee does.
Foreign exchange reform came first. As an immediate step in 1991, the rupee was devalued against foreign currencies, which increased the inflow of foreign exchange. It also began freeing the rupee's value from government control: now, more often than not, markets set the exchange rate by the demand for and supply of foreign exchange.
⤵ What devaluation is meant to do
Rupee devaluedmore rupees per dollar
Exports cheaper abroadIndian goods more competitive → more exports
Imports dearer at homeless import demand
More foreign exchange flows ineases the balance of payments (NCERT: inflows increased)
Caveatimported inputs such as oil cost more in rupees — so the trade balance does not necessarily improve
Trade and investment reforms aimed at international competitiveness, foreign investment and technology, and efficiency. Before 1991, India used quantitative restrictions on imports and very high tariffs, which cut efficiency and slowed manufacturing. Reforms: (i) dismantle QRs on imports and exports; (ii) reduce tariffs; (iii) remove import licensing (except for hazardous and environmentally sensitive industries). QRs on manufactured consumer goods and farm products were fully removed from April 2001; export duties were removed.
Reading the Work These Out box on banks, taxes and reserves (page 43)
- It asks for examples of a nationalised bank, private bank, foreign bank, FII and mutual fund; a visit to a bank; whether your parents pay taxes; and the form and size of India's foreign exchange reserves.
- It includes a blank table: USA, UK, Japan, China, Korea, Singapore, Germany — fill in each currency and the rupee value of one unit. (Answers in the in-text section; check today's RBI reference rate for values.)
- The point: reserves were once kept as gold and silver; today they are mostly foreign currency assets.
Beyond NCERT
- The 1991 devaluation was carried out in two steps in early July 1991. A dual exchange rate (LERMS, 1992) was followed by a market-determined rate from 1993.
- FEMA (Foreign Exchange Management Act, 1999) replaced the stricter FERA.
- UPSC keys: devaluation = cutting the currency's value against major currencies (1994); it may promote exports because export prices fall abroad (1999); exports grew after 1991 because of devaluation (2000, A and R both true); devaluation necessarily improves export competitiveness but does not necessarily improve the trade balance (2021).
Exam traps
- Devaluation lowers the rupee's foreign value; it does not raise it.
- QRs were removed in stages, the last in April 2001 — not all in 1991.
- Import licensing remains only for hazardous and environmentally sensitive items.
- UPSC 1996: cutting import duty on capital goods was an important liberalisation tool, because it helps firms upgrade technology (A and R both true, R explains A).
4. Privatisation and disinvestment
In simple wordsA family owns a shop it runs badly. It can sell a few shares in the shop to neighbours and still run it (disinvestment), or sell the whole shop to an experienced shopkeeper (strategic sale). Or it can keep the shop but give its best manager more freedom to decide things (the ‘ratna’ status).
Privatisation means shedding the ownership or management of a government enterprise, either by the government withdrawing from ownership and management or by outright sale. Selling part of a PSE's equity to the public is disinvestment. The government's stated aims: financial discipline and modernisation, use of private capital and management, and a boost to FDI. It also gave some PSUs autonomy as Maharatnas, Navratnas and Miniratnas.
Reading Box 3.1 — Navratnas and Public Enterprise Policies (page 44)
- Named after the nine jewels of King Vikramaditya's court, the status gives selected PSEs more financial, managerial and operational autonomy to compete in a liberalised world.
- Examples: Maharatnas — Indian Oil, SAIL; Navratnas — HAL, MTNL, IRCTC; Miniratnas — BSNL, Airports Authority of India.
- Many profitable PSEs were set up in the 1950s–60s for self-reliance, infrastructure and jobs; the status improved their performance.
- Two sides: scholars allege the government partly privatised these firms through disinvestment instead of helping them become global players; lately it has decided to keep them public and let them raise funds and expand abroad.
- Beyond NCERT: the Navratna scheme began in 1997, Maharatna in 2009–10. Statuses change — HAL was raised to Maharatna in 2024 — so learn the categories, not the lists.
⤵ The disinvestment debate (NCERT, section 3.6)
Annual target1991–92 target ₹2,500 crore — exceeded; about ₹46,000 crore raised in 2022–23
Supportersefficiency, financial discipline, private management, FDI; money for the budget
Criticsassets undervalued — a loss to the government; proceeds used to plug revenue gaps, not to develop PSEs or social infrastructure
NCERT's questionis selling part of government companies the best way to improve their efficiency?
Beyond NCERT
- Minority vs strategic sale (exercise Q6): minority sale keeps government control; a strategic sale transfers management control. Example: Air India was sold to the Tata group in a strategic sale completed in January 2022.
- UPSC 1993's key: the most complete mode of privatisation is transferring ownership and management to the private sector.
- Disinvestment proceeds are a capital receipt; selling PSU shares and downsizing bureaucracy can help control the fiscal deficit (UPSC 2010). A National Investment Fund was created for proceeds; UPSC 2010 tested its fund managers and its use for social sectors.
- NCERT's ‘mobilise ₹3,040 crore more than the target’ is best read as ‘mobilised about ₹3,040 crore — more than the ₹2,500 crore target’.
Exam traps
- Disinvestment ≠ privatisation in every case: a minority sale leaves the PSE in government hands.
- UPSC 2011's key: the government disinvests because it ‘no longer intends to retain management control’ (statement 2 only) — debatable for minority sales; keep the key, and note that proceeds were not mainly for repaying external debt.
- Maharatna is the highest tier, then Navratna, then Miniratna.
5. Globalisation, outsourcing and the WTO
In simple wordsWhen you call a bank's helpline in New York, the person who answers may be sitting in Bengaluru. When a factory in Pune sells parts to a carmaker in Germany, and a Mumbai firm buys a steel company in Europe, the world economy is behaving like one big marketplace. That is globalisation.
Globalisation is generally the integration of a country's economy with the world economy — but it is complex: a set of policies that create networks across economic, social and geographical boundaries, so that events far away affect India. It tends towards a ‘borderless world’.
⤵ Why outsourcing came to India
Fast communicationgrowth of IT and the Internet: text, voice and images digitised and sent in real time
Firms in rich countries buy services from outsideBPO and call centres, record keeping, accountancy, banking, music recording, film editing, transcription, clinical advice, teaching
India's advantageslow wage rates + skilled manpower + reasonable accuracy
ResultIndia a global outsourcing destination after reform — new jobs in big cities
Reading Fig. 3.1 — Outsourcing: a new employment opportunity in big cities (page 46)A line drawing of a globe with a satellite above it; on one side a young woman, on the other a young man with a headset, each at a computer screen showing the same message. The point: a satellite and the Internet link workers in different countries in real time, so a service can be done in India for a client abroad.
Reading Box 3.2 — Global Footprint! (page 46)
- Indian firms going abroad: ONGC Videsh (projects in 16 countries); Tata Steel (founded 1907; operations in 26 countries, sales in 50, nearly 50,000 employees abroad); HCL Technologies (offices in 31 countries, about 15,000 employees abroad); Dr Reddy's Laboratories (plants and research centres worldwide).
- The point: globalisation is two-way — Indian companies became multinationals too.
- The figures come from a website accessed in 2014, so treat them as dated.
World Trade Organisation (WTO): founded in 1995 as the successor to the General Agreement on Trade and Tariff (GATT), set up in 1948 with 23 countries. It administers multilateral trade agreements, aims at a rule-based trading regime without arbitrary restrictions, seeks to expand production and trade in goods and services, use world resources optimally and protect the environment, and removes tariff and non-tariff barriers for greater market access. India has been at the forefront of fair global rules and the interests of developing countries, and has kept its commitments by removing QRs and cutting tariffs.
Two sides on the WTO (NCERT): some scholars question its usefulness for India, since most world trade is among developed nations; and developing countries feel cheated — they are forced to open their markets while rich countries complain about others' farm subsidies yet keep their own markets hard to enter.
Beyond NCERT
- GATT was signed in 1947 and came into force on 1 January 1948; the Uruguay Round (1986–94) created the WTO, extending rules to services, intellectual property (TRIPS) and agriculture. India is a founder member. UPSC 2001: the earlier name of WTO was GATT; UPSC 1996: WTO's aims include free trade and protection of intellectual property.
- WTO farm-subsidy categories (amber, blue, green boxes) and India's public stockholding for food security are the core of the Mains 2023 and 2026 questions — see Fundamentals of Human Geography Chapter 8 and India: People and Economy Chapter 8 for trade details.
- FDI vs FII (UPSC 2011): FII increases capital availability in general; FDI targets specific firms and sectors and is more stable.
6. The reforms appraised: growth and the external sector
In simple wordsAfter a family changes its ways, its income rises faster and its savings grow. But one child (agriculture) is not doing better, another (industry) is struggling against cheaper rivals, and the parents have less to spend on school and health. Is the family better off? It depends on whom you ask — which is exactly where NCERT leaves the question.
Growth is measured by GDP. After 1991 GDP grew rapidly for two decades: from 5.6% a year in 1980–91 to 7.8–8.2% in 2002–12, and 9.4% in 2021–22. Services drove the growth; agriculture's growth slowed over most of the period; industry fluctuated. 2012–13 saw a setback across sectors.
Reading Table 3.1 — Growth of GDP and Major Sectors (page 47)
- Seven periods: 1980–91 (agriculture 3.6, industry 7.1, services 6.7, total 5.6); 1992–2001 (3.3, 6.5, 8.2, 6.4); 2002–07 (2.3, 9.4, 7.8, 7.8); 2007–12 (3.2, 7.4, 10, 8.2); 2012–13 (1.5, 3.6, 8.1, 5.6); 2013–14 (4.2, 5, 7.8, 6.6); 2021–22 (4.8*, 12.7*, 9.2*, 9.4).
- Services outgrew total GDP in every period except 2002–07 (equal at 7.8) and 2021–22 (9.2 vs 9.4).
- Note the asterisk: 2021–22 sector figures are GVA, the total is GDP — two measures in one column. The book says GVA is GDP plus subsidies on production minus indirect taxes (strictly, product subsidies and product taxes).
- 2021–22 is a rebound year after the Covid contraction, which flatters industry (12.7).
NCERT's text vs its own table
- The text says services grew faster than overall GDP ‘during 2007–22’; in 2021–22 services (9.2) were slightly below GDP (9.4).
- ‘The growth of agriculture has declined’ holds for most periods, but agriculture's 2013–14 (4.2) and 2021–22 (4.8) figures are above 1980–91's 3.6. Read it as ‘lower on average and volatile’.
- The exercise table on page 54 gives 5.5 for 2012–13 and 6.4 for 2013–14, but Table 3.1 gives 5.6 and 6.6 — different estimates (GDP series revisions) for the same years.
The opening of the economy raised foreign investment (FDI + FII) from about US $100 million in 1990–91 to US $23 billion in 2022–23, and foreign exchange reserves from about US $6 billion (1990–91) to about US $646 billion (2023–24) — among the world's largest. India became a successful exporter of auto parts, pharmaceuticals, engineering goods, IT software and textiles, and inflation was kept under control.
Reading Fig. 3.2 — IT industry is seen as a major contributor to India's exports (page 48)A photograph of a large open-plan office: rows of cubicles with desktop computers, people working at screens, more rows stretching into the background. The point: the services-led growth in Table 3.1 is concentrated in sectors like IT, employing educated urban workers — which is also why critics say growth reached ‘select areas’ only (section 7).
Beyond NCERTUPSC 2017 asked what happened after 1991: India's share of world exports rose, FDI inflows rose, reserves rose enormously — but agriculture's share of GDP fell (key: 2, 3 and 4). Keep NCERT's table-based reading: growth rose, led by services.
7. The reforms appraised: the criticisms
In simple wordsA rising tide lifts boats — but only those already floating. Critics say the reform tide lifted IT offices and city consumers, while farmers, small factories and weavers found their costs rising and their markets flooded with cheap imports.
NCERT lists the main criticisms, while noting that the evidence shows they are ‘not completely true’ — so present them as arguments, not settled facts:
| Area | Criticism (NCERT) |
|---|---|
| Growth and employment | Reform-led growth has not created enough jobs (Chapter 6) |
| Agriculture | Growth decelerated; public investment in irrigation, power, roads, markets, research and extension fell; partial removal of fertiliser subsidy raised costs for small and marginal farmers; lower import duties, low MSP and lifting of QRs exposed farmers to world competition; export orientation shifted land from foodgrains to cash crops, pressuring food prices |
| Industry | Slowdown from weak demand — cheaper imports replaced domestic goods; poor infrastructure and power; developing countries must open up while rich countries keep non-tariff barriers (NCERT: US textile quotas) |
| Disinvestment | Assets undervalued; proceeds used to fill revenue gaps, not to build PSEs or social infrastructure |
| Fiscal policy | Limits on public spending, especially social sectors; tax cuts did not raise revenue as hoped; lower tariffs cut customs revenue; tax incentives to foreign investors cut it further |
⤵ How the reforms hit a dryland farmer — NCERT's case of Mahadeva (page 49)
Beforehalf-acre groundnut, Anantapur (drought-prone): cost ₹10,000; 2 quintals × ₹7,000 = ₹14,000 income → ₹4,000 surplus
Less public spendingno new irrigation project; less research and extension → crop disease unchecked
Subsidy cutseed and fertiliser dearer → cost of cultivation rises
Imports freedcheap imported edible oil floods the market → groundnut price falls
Afterprice no longer covers cost — loss
Reading Box 3.3 — Siricilla Tragedy! (page 51)
- Power sector reforms in many States ended subsidised electricity and raised tariffs steeply.
- Powerloom weavers' wages depend on cloth produced, so power cuts meant wage cuts, on top of the tariff rise. A livelihood crisis followed; 50 powerloom workers died by suicide in Siricilla.
- The box asks whether power tariffs should not be raised, and how to revive small industries hit by reform.
- The point: reform costs fall hardest on small, informal producers. Beyond NCERT: Siricilla, in ‘Andhra Pradesh’ in the book, is now in Telangana (formed in 2014).
Dated statements in the chapter
- ‘USA has not removed its quota on textiles from India and China’: the Multi-Fibre Arrangement quotas ended on 1 January 2005 (Beyond NCERT). Use the example as history; the general point about non-tariff barriers still stands.
- Box 3.2 company figures are from 2014; Box 3.1 statuses have changed since.
8. Conclusion: opportunity or threat?
In simple wordsA new highway reaches a village. Some villagers start businesses selling to the city; others find city goods undercutting their own. Whether the highway is good depends on who can use it. NCERT's conclusion on globalisation is the same: it depends on who gains access.
| Globalisation as an opportunity | Globalisation as a threat |
|---|---|
| Greater access to global markets | A strategy of developed countries to expand their markets |
| Access to high technology | Compromised the welfare and identity of people in poor countries |
| Large firms of developing countries can become global players (Box 3.2) | Market-driven globalisation widened disparities among nations and people |
| In India (some studies): the crisis reflected deep inequalities, and externally advised reforms aggravated them; gains went to high-income groups and select services (telecom, IT, finance, entertainment, travel, real estate, trade) rather than agriculture and industry, which employ millions |
Why NCERT ends without a verdictEconomists still disagree, and the evidence cuts both ways: growth, reserves, exports and consumer choice improved; jobs, farm incomes and regional and income equality lagged. A good answer separates what the reforms did (removed controls, opened the economy) from what governments did or did not do alongside them (public investment, education, health, rural infrastructure) — many critics blame the second, not the first.
Reading the Recap box (page 52)Nine points: the crisis (falling reserves, imports outpacing exports, high inflation) and pressure from the World Bank and IMF; domestic reforms in industry and finance; external reforms in foreign exchange and imports; reduced role of the public sector through disinvestment; globalisation as the outcome of liberalisation and privatisation; outsourcing; the WTO's rule-based regime; agriculture and industry growth down, services up; agriculture not benefiting, with lower public investment; industry slowed by cheaper imports and lower investment. Note that the Recap keeps only the critical side of the appraisal — add the gains from section 6 in answers.
Beyond NCERT — UPSC on the reforms
- Mains GS2 2016 asked whether India's governmental system responded adequately to LPG — use the RBI's facilitator role, tax reform, GST and the critique of social spending.
- Mains GS3 2013 asked how Indian-owned companies fared against MNCs after liberalisation — Box 3.2 (Tata Steel, HCL, Dr Reddy's) is evidence for, cheaper imports and closures for small units are evidence against.
- Prelims 1994 and 1999 asked why planning survived after 1991 (long-term perspective in market-friendly ways) and why industrial planning became less important (industrial investment moved to the private sector).
NCERT's ‘Work These Out’ and activities — short answers
Give an example each of a nationalised bank, private bank, private foreign bank, FII and a mutual fund. (page 43)
Nationalised bank: Punjab National Bank (or Bank of Baroda). Private bank: HDFC Bank. Foreign bank: Citibank or Standard Chartered. FII (now called foreign portfolio investor): a foreign pension or sovereign fund investing in Indian shares, e.g. GIC of Singapore. Mutual fund: SBI Mutual Fund.
Visit a bank; observe its functions and chart them. (page 43)
Accepting deposits (savings, current, fixed); giving loans (home, crop, business); payments (cheques, NEFT/UPI, drafts); lockers; government schemes (pensions, subsidies via direct benefit transfer); foreign exchange at authorised branches.
Do your parents pay taxes? Why and how? (page 43)
Everyone pays indirect taxes (GST) on purchases. Earners above the exemption limit pay income tax — by deduction at source (TDS) or advance tax, and file returns online. Why: a legal duty, and taxes fund public services.
In what form are India's foreign exchange reserves held, and how large were they last year? Fill in currencies of the USA, UK, Japan, China, Korea, Singapore, Germany. (page 43)
Form: foreign currency assets (mostly), gold, Special Drawing Rights and the reserve tranche position with the IMF. Size: about US $646 billion in 2023–24 (NCERT); check the RBI's weekly statistical supplement for the latest. Currencies: US dollar, pound sterling, yen, renminbi (yuan), won, Singapore dollar, euro (Germany's currency since 2002; it used the Deutsche Mark before). Use the RBI's reference rate for rupee values.
Disinvestment: a worldwide wave to improve PSEs, or outright sale of public property to vested interests? (page 45)
For: efficiency, discipline, professional management, FDI, funds for the budget, competition. Against: undervaluation, loss of public assets, proceeds used for current deficits, job losses, private monopolies. A middle view: transparent, fairly priced sales of non-strategic units, with proceeds used for capital investment.
Prepare a poster of news clippings, logos and advertisements of Maharatnas, Navratnas and Miniratnas. (page 45)
Use the Department of Public Enterprises' current lists (statuses change). Typical clippings: annual results, capacity expansion, status upgrades, overseas acquisitions.
Should only loss-making companies be privatised? Why? (page 45)
Not necessarily. Selling loss-makers stops the drain but fetches little; selling profitable non-strategic units raises more money and lets them grow, but forgoes dividends. The criterion should be strategic importance and who can run it better, not just profit or loss. (Same issue as exercise Q9.)
Should PSE losses be met from the public budget? (page 45)
Yes where the loss reflects a public service obligation (e.g. a remote rail line, low-price supply to the poor) — that is a social cost. No for losses from inefficiency; those call for restructuring, autonomy, or sale.
Debate: globalisation as a threat (smaller role for government) or an opportunity (new markets). (page 47)
Use the opportunity/threat table in section 8 with Indian examples: IT, pharma, auto parts and Indian multinationals on one side; farm distress, small-industry closures and jobless growth on the other.
List five companies with BPO services in India, with turnover. (page 47)
Examples: Genpact, WNS, Firstsource, TCS, Infosys BPM, Wipro. Turnover: take the latest figures from each company's annual report — they change every year.
Share your experience of online classes during Covid-19. (page 47)
Points: access depended on devices and data; digital divide between rich and poor, urban and rural; new skills; the same IT networks that power outsourcing.
Is call-centre employment sustainable? What skills help workers earn a regular income? (page 47)
Partly: work depends on foreign contracts, automation (chatbots, AI) and night shifts. Skills: communication and languages, domain knowledge (banking, health, insurance), analytics and IT skills, customer-relationship software — moving up from voice work to knowledge services.
If multinationals outsource to cheap-labour countries, what happens to people in their home countries? (page 47)
Some lose jobs (call centres, back offices) — hence opposition in developed countries; but firms save costs, consumers pay less and new higher-skill jobs may arise. This is exercise Q10's ‘why developed countries oppose it’.
Should farm subsidies be removed to make agriculture internationally competitive? How? (page 49)
Argue both: removal frees funds and stops overuse of inputs (Chapter 2, Box 2.6), but most Indian farmers are small and rich countries subsidise their own farmers heavily. Middle path: shift from price subsidies to public investment (irrigation, research, markets) and targeted income support.
What could be done for farmers like Mahadeva? (page 49)
Restore public investment in dryland irrigation and research and extension (disease control); targeted input support; crop insurance; MSP and procurement for oilseeds; use of import duties when world prices crash; farmer producer organisations for marketing; crop diversification suited to drought.
Box 3.3: should power tariffs not be raised? How can small industries hit by reforms be revived? (page 51)
Tariffs must cover costs for power utilities to survive, but steep sudden rises can wreck small units. Suggestions: targeted power subsidy for small and household units; reliable supply (power cuts hurt more than tariffs); cheaper credit; technology upgradation; cluster schemes; social security for workers.
Suggested activity 1: draw a line graph of GDP growth 2012–13 to 2021–22 and interpret it. (page 54)
See the line graph at the top of the exercise section. Interpretation: growth rose to about 8% by 2015–17, slowed to 6.5% (2018–19) and 3.9% (2019–20), collapsed in 2020–21 (the book prints 5.8 — it was −5.8), and rebounded to 9.4% in 2021–22.
Suggested activity 2: public and private sectors side by side (electricity, buses) — merits and demerits of the dual system. (page 54)
Merits: competition improves service and prices; public sector ensures supply in unprofitable areas; choice for consumers. Demerits: private firms may cream off profitable routes, leaving loss-making ones to the public sector; regulatory burden; unequal service quality.
Suggested activities 3–4: list multinationals in India at Independence and today; name foreign brands of biscuits, shoes, computers, cars, TVs and stationery — before or after 1991? (pages 54–55)
Older MNCs (e.g. Hindustan Lever — now Hindustan Unilever, ITC, Bata) existed before 1991; many brands in cars, computers and electronics (e.g. Hyundai, Samsung, LG, Dell, HP) entered or expanded after 1991. Note name changes and countries of origin.
Suggested activities 5–6: WTO meetings; was there an alternative to reforms at the behest of the World Bank and IMF? (page 55)
WTO issues: farm subsidies, public food stocks, fisheries subsidies, e-commerce duties, dispute settlement. On 1991, argue both: yes, alternatives were limited — reserves were nearly exhausted and no one else would lend; but the pace, sequence and social safeguards were choices — some economists favoured gentler adjustment with more public investment.
NCERT exercise — answer outlines
Try each question yourself first, then open the outline to compare. The exercise has no multiple-choice questions; the self-check below uses questions written for this page.
1. Why were reforms introduced in India?
The 1991 balance of payments crisis: reserves for barely two weeks of imports, inability to pay interest, rising prices, no willing lenders — rooted in 1980s fiscal deficits, borrowing for consumption and imports outpacing exports. The World Bank and IMF loan ($7 billion) came with conditions to liberalise. Also, controls were seen as hampering efficiency and growth.
2. Why is it necessary to become a member of WTO?
Access to world markets on rule-based terms; protection against arbitrary restrictions by others; a dispute settlement forum; voice in framing global rules for developing countries; lower tariff and non-tariff barriers for Indian exports. Staying out would mean facing others' discrimination without any say.
3. Why did RBI have to change its role from controller to facilitator of financial sector in India?
Tight control (interest rates, credit allocation, reserve requirements, branch licensing) made banks inefficient and limited competition; reform aimed at a competitive, efficient financial sector — private and foreign banks, FIIs, freedom to open branches and raise resources — with the RBI guiding rather than deciding everything, while keeping safeguards for depositors.
4. How is RBI controlling the commercial banks?
By deciding the amount banks must keep with themselves (cash reserve ratio and statutory liquidity ratio), interest rate guidelines (policy repo rate), lending norms to sectors (priority sector), licensing and branch rules, and supervision of management to protect account-holders.
5. What do you understand by devaluation of rupee?
A deliberate reduction in the official value of the rupee against foreign currencies by the government/RBI under a fixed or managed rate — more rupees per dollar. In 1991 it made exports cheaper and imports dearer and raised foreign exchange inflows. (A fall under a market rate is called depreciation.)
6. Distinguish between (i) strategic and minority sale (ii) bilateral and multilateral trade (iii) tariff and non-tariff barriers.
(i) Strategic sale: a controlling stake with management transferred to a private buyer (e.g. Air India, 2022); minority sale: part of the shares sold, government keeps control. (ii) Bilateral: trade or agreements between two countries; multilateral: among many countries, e.g. under the WTO. (iii) Tariff: tax on imports; non-tariff: quotas, licences, standards and other restrictions.
7. Why are tariffs imposed?
To protect domestic industry by making imports dearer; to earn revenue; to discourage luxury or harmful imports; to save foreign exchange; to counter unfair trade (anti-dumping duties).
8. What is the meaning of quantitative restrictions?
Limits on the quantity of goods that may be imported or exported (quotas, import licences), rather than on price. India removed them in stages, the last in April 2001.
9. Those public sector undertakings which are making profits should be privatised. Do you agree with this view? Why?
Arguments for: higher sale value; private capital and management may expand them; frees government funds. Against: government loses dividends; profitable PSUs (often ratnas) serve strategic and social aims; risk of undervaluation and private monopoly. Balanced view: decide by strategic importance and efficiency, not profitability alone; keep strategic ones public with autonomy.
10. Do you think outsourcing is good for India? Why are developed countries opposing it?
Good: jobs for educated youth, foreign exchange, skills, IT-led services growth, Indian firms going global. Limits: concentrated in big cities; some routine, night-shift jobs; vulnerable to automation. Opposition abroad: loss of domestic jobs, wage pressure, data-security worries.
11. India has certain advantages which makes it a favourite outsourcing destination. What are these advantages?
Low wage rates, a large pool of skilled, English-speaking graduates, reasonable accuracy, time-zone difference allowing round-the-clock work, IT and telecom infrastructure, and a liberalised policy for foreign firms.
12. Do you think the navaratna policy of the government helps in improving the performance of public sector undertakings in India? How?
Yes, largely: more financial, managerial and operational autonomy (investment decisions, joint ventures, raising funds) lets firms compete; NCERT says status led to better performance. But: autonomy is limited by government ownership; disinvestment of the same firms is criticised as partial privatisation.
13. What are the major factors responsible for the high growth of the service sector?
IT and telecom revolution; outsourcing to India; liberalisation of finance, insurance and telecom; FDI; rising urban incomes and demand for trade, transport, hotels, entertainment, real estate; skilled manpower; services need less infrastructure than industry.
14. Agriculture sector appears to be adversely affected by the reform process. Why?
Falling public investment (irrigation, power, roads, markets, research, extension); partial removal of fertiliser subsidy; lower import duties and removal of QRs → cheap imports; low MSP; shift to cash crops for export, pressuring food prices; small farmers least able to cope (NCERT's Mahadeva case).
15. Why has the industrial sector performed poorly in the reform period?
Falling demand for domestic goods as cheaper imports replaced them; inadequate infrastructure and power; low investment; rich countries' non-tariff barriers limit Indian exports; small units hurt by competition and higher costs (Siricilla). (Table 3.1 shows industry's growth fluctuating rather than uniformly poor.)
16. Discuss economic reforms in India in the light of social justice and welfare.
Gains: faster growth raised incomes and revenues that can fund welfare; choice and lower prices for consumers; reserves and stability. Concerns (NCERT): limits on social-sector spending; jobless growth; farm distress; gains concentrated among high-income groups and select services; regional and income inequality; disinvestment undervaluation. Conclusion: growth is necessary but not sufficient — reform needs complementary public investment in health, education, agriculture and social security (the K.R. Narayanan quote).
What to remember
Numbers
Reserves in 1991not enough for even two weeks of imports
World Bank + IMF loan$7 billion
GATT1948, 23 countries
WTO founded1995
Quantitative restrictions fully removedApril 2001
GST constitutional amendment2016 (GST in force 1 July 2017 †)
Foreign investment limit in banks (NCERT)about 74% (private banks)
GDP growth 1980–91 → 2007–125.6% → 8.2%
GDP growth 2021–229.4% (after the 2020–21 contraction)
Services growth 2007–1210% — the highest in Table 3.1
Foreign investment (FDI + FII)$100 million (1990–91) → $23 billion (2022–23)
Forex reserves$6 billion (1990–91) → $646 billion (2023–24)
Disinvestment 1991–92target ₹2,500 crore; about ₹3,040 crore raised
Disinvestment 2022–23about ₹46,000 crore
Mahadeva's groundnut (half acre)cost ₹10,000; income ₹14,000 before reforms
Siricilla powerloom workers50 suicides
New Industrial Policy †24 July 1991
One-liners
- 1991 crisis = balance of payments + inflation, rooted in 1980s deficits.
- Stabilisation = short term; structural reform = long term.
- Liberalisation started with industrial licensing.
- RBI: from regulator to facilitator.
- Devaluation: exports cheaper, imports dearer.
- Disinvestment = selling part of PSE equity; strategic sale = control passes.
- WTO (1995) replaced GATT (1948).
- Post-1991 growth was services-led; agriculture lagged.
Traps to avoid
- Stabilisation is short-term, structural reform long-term — not the reverse.
- Liberalisation began with licensing reform, not convertibility.
- Devaluation lowers the rupee's value; it does not necessarily improve the trade balance.
- QRs ended in April 2001, not 1991.
- GST amendment 2016, rollout 2017.
- Minority disinvestment keeps government control; only a strategic sale transfers it.
- 74% foreign investment applies to private banks; public sector banks: 20%.
- Exercise table's 2020–21 ‘5.8’ is really −5.8.
- Services did not outgrow GDP in 2021–22 (9.2 vs 9.4), despite the text.
- US textile quotas ended in 2005; NCERT's statement is dated.
How to strategise
Prelims — what UPSC asks
- The NEP's logic: stabilisation vs structural adjustment (1996), where liberalisation began (2000), import-duty cuts on capital goods (1996), why planning survived and why industrial planning faded (1994, 1999), outcomes after 1991 (2017).
- Rupee and external sector: devaluation defined (1994), its effect on exports (1999, 2000), what it necessarily does (2021); FDI vs FII (2011). Convertibility questions (1993–2015) need Class 12 Macroeconomics as well.
- Committees and reforms: Narasimham on financial reform (1995, 2001), Abid Hussain on SSI dereservation (2002), committee matching (1997), licensing reduced to 6 industries (1997), GST's advantage (2017).
- Privatisation and WTO: most complete mode of privatisation (1993), why the government disinvests (2011), disinvestment and fiscal deficit (2010), National Investment Fund (2010); GATT as WTO's earlier name (2001), WTO's aims (1996).
Mains — where it appears and how to answer
- GS2: has the governmental system responded adequately to LPG? (2016); WTO's mandate and India's stance (2014, shared with Fundamentals of Human Geography Chapter 8).
- GS3: Indian companies vs MNCs after liberalisation (2013); GST rationale and delay (2013) and subsumed taxes and revenue (2019); public expenditure management after liberalisation (2019); farm subsidies and WTO issues (2023, 2026).
- Answer frame: crisis (causes) → NEP (stabilisation + structural) → LPG measures by sector → outcomes with data (Table 3.1, $6 bn → $646 bn) → criticisms (jobs, agriculture, industry, disinvestment, fiscal) → balanced conclusion with the opportunity/threat framing.
- Draw the NEP tree or the Table 3.1 bars; quote NCERT's own Mahadeva or Siricilla case for the critical side, Box 3.2's Indian multinationals for the positive side.
Self-check
Tap an option. NCERT's own exercise questions come first; the rest test the figures and common confusions.
1. Which one of the following is correct regarding stabilisation and structural reform measures of the New Economic Policy?
2. In 1991 India's foreign exchange reserves were sufficient to finance imports for about:
3. Devaluation of the rupee means:
4. The aim of financial sector reforms, according to NCERT, was to change the role of the RBI from:
5. Selling part of the equity of a public sector enterprise to the public is called:
6. The WTO was founded in ___ as the successor to ___.
7. According to NCERT Table 3.1, which sector grew fastest in 2007–12?
8. Quantitative restrictions on imports of manufactured consumer goods and agricultural products were fully removed from:
UPSC questions from this chapter
Open any question to attempt it in the Question bank — your attempt is saved to your progress.