Class 12 Economics Chapter 8 Question Answer | Economic Reforms Since 1991 | English Medium | ASSEB
Welcome to HSLC Guru! This page provides comprehensive notes, summaries, and detailed question answers for Class 12 Economics Chapter 8 — Economic Reforms Since 1991 (Liberalisation, Privatisation and Globalisation) prepared as per the latest ASSEB (Assam State School Education Board) syllabus. Whether you are revising for the Higher Secondary final examination or strengthening conceptual clarity on the New Economic Policy of 1991, this English medium guide gives you a clear, structured pathway through every important topic — from the balance of payments crisis to the rise of WTO, demonetisation, and GST.
Chapter Summary
Background of the 1991 Crisis: By the late 1980s, the Indian economy faced a severe macroeconomic crisis. Years of inefficient public sector functioning, heavy government borrowing, expensive imports of petroleum (driven up by the 1990 Gulf War), and falling export earnings led to an unsustainable balance of payments (BoP) crisis. Foreign exchange reserves fell to roughly two weeks of imports by mid-1991. The fiscal deficit had ballooned to nearly 8 per cent of GDP, public debt had crossed 55 per cent of GDP, and inflation touched 16.7 per cent. Faced with the threat of default, India approached the International Monetary Fund (IMF) and the World Bank for emergency assistance. These institutions extended loans of about 7 billion US dollars on the condition that India would liberalise its economy, reduce state controls, and integrate with the global market.
The New Economic Policy (NEP), 1991: Announced by the Narasimha Rao Government with Dr. Manmohan Singh as Finance Minister, the NEP rests on three pillars — Liberalisation, Privatisation, and Globalisation (LPG). Liberalisation meant freeing the economy from unnecessary controls: industrial licensing was abolished for most industries (only 5 retained), the Monopolies and Restrictive Trade Practices (MRTP) Act was relaxed, the financial sector was reformed (interest rates deregulated, private banks allowed, SEBI strengthened), tax reforms simplified direct and indirect taxation, foreign exchange reforms moved the rupee toward partial and then full convertibility on the current account, and trade and investment policies were liberalised by removing quantitative restrictions and lowering tariffs. Privatisation involved disinvestment of equity in public sector undertakings (PSUs), granting greater autonomy to profit-making PSUs through the Navaratna (1997) and Maharatna (2009) categories, and inviting private participation in sectors earlier reserved for the state. Globalisation integrated India with the world through liberal foreign trade, larger inflows of foreign direct investment (FDI) and foreign institutional investment (FII), transfer of technology, freer movement of capital, and to a limited extent labour mobility.
WTO and Later Reforms: The World Trade Organisation (WTO), established on 1 January 1995, replaced the General Agreement on Tariffs and Trade (GATT) of 1947. India is a founding member of WTO. Major agreements include those on Agriculture (AoA), Trade-Related Intellectual Property Rights (TRIPS), Trade-Related Investment Measures (TRIMS), and the General Agreement on Trade in Services (GATS). India has used the WTO platform to argue for fairer trade rules, particularly on agricultural subsidies and access to medicines. Two later landmark reforms include Demonetisation (8 November 2016), when 500 and 1000 rupee notes were withdrawn to curb black money, fake currency and terror financing, encourage digital payments, and widen the tax base — though it caused short-term cash shortage and slowdown — and the Goods and Services Tax (GST), rolled out on 1 July 2017, which subsumed multiple indirect taxes (excise, VAT, service tax, octroi) into a single nationwide tax with four main slabs (5, 12, 18, 28 per cent), creating a unified national market.
Critical Assessment: Three decades of reforms have produced mixed outcomes. Positive outcomes include sustained GDP growth averaging 6–7 per cent, expansion of the services sector (especially IT and ITeS), a sharp rise in exports, foreign exchange reserves crossing 600 billion US dollars, lower inflation, and emergence of India as one of the largest economies in the world. Critical concerns include neglect of agriculture (low public investment, farmer distress), jobless growth (output rising faster than employment), widening regional and rural-urban inequalities, growing dependence on volatile foreign capital, and pressure on small domestic industries from cheap imports. Overall, LPG reforms have transformed India from a closed, controlled economy into an open, market-oriented one — but inclusive and sustainable growth remains the unfinished agenda.
Textbook Questions and Answers
A. Very Short Answer Questions (1 Mark)
Q1. When was the New Economic Policy announced in India?
Answer: The New Economic Policy was announced in July 1991.
Q2. What does LPG stand for?
Answer: LPG stands for Liberalisation, Privatisation and Globalisation.
Q3. Who was the Finance Minister of India in 1991?
Answer: Dr. Manmohan Singh was the Finance Minister of India in 1991.
Q4. When was the WTO established?
Answer: The World Trade Organisation (WTO) was established on 1 January 1995.
Q5. What did the WTO replace?
Answer: The WTO replaced the General Agreement on Tariffs and Trade (GATT) of 1947.
Q6. When was demonetisation announced in India?
Answer: Demonetisation was announced on 8 November 2016.
Q7. When was the Goods and Services Tax (GST) introduced?
Answer: GST was introduced on 1 July 2017.
Q8. What is meant by disinvestment?
Answer: Disinvestment means the sale of equity shares of public sector undertakings (PSUs) by the government to private investors.
Q9. Name any two Maharatna companies of India.
Answer: ONGC (Oil and Natural Gas Corporation) and SAIL (Steel Authority of India Limited) are two Maharatna companies.
Q10. What is FDI?
Answer: FDI (Foreign Direct Investment) refers to investment made by a foreign company or individual in the productive assets or business operations of another country.
B. Short Answer Questions (2-3 Marks)
Q1. What were the main reasons for the economic crisis of 1991?
Answer: The main reasons for the 1991 economic crisis were:
(i) Persistent high fiscal deficit reaching nearly 8 per cent of GDP.
(ii) Severe balance of payments crisis with foreign exchange reserves enough for only about two weeks of imports.
(iii) Sharp rise in oil prices due to the Gulf War (1990-91), which inflated the import bill.
(iv) High rate of inflation (around 16.7 per cent) and inefficient public sector enterprises.
(v) Heavy external borrowing leading to a debt trap.
Q2. Define Liberalisation. Mention any two areas of liberalisation.
Answer: Liberalisation refers to the relaxation or removal of government restrictions and controls in the economy, allowing greater participation by private players and market forces. Two important areas of liberalisation are:
(i) Industrial Liberalisation: Abolition of industrial licensing for most industries (except a few like defence and atomic energy).
(ii) Financial Sector Liberalisation: Reduced role of the RBI as a regulator, allowing private and foreign banks to operate, and deregulating interest rates.
Q3. What is meant by Privatisation? Explain its forms.
Answer: Privatisation means transferring ownership, management, or control of public sector enterprises to the private sector. Its forms include:
(i) Disinvestment: Selling part of the equity of PSUs to private investors.
(ii) Strategic Sale: Selling majority shareholding along with management control to a private buyer.
(iii) Granting autonomy to PSUs through Navaratna and Maharatna status to make them globally competitive.
Q4. What is Globalisation? Mention any two of its features.
Answer: Globalisation refers to the process of integrating a country’s economy with the world economy through free flows of goods, services, capital, technology, and labour. Two features are:
(i) Removal of trade barriers such as quotas and high tariffs to encourage international trade.
(ii) Free flow of foreign direct investment, foreign technology and skilled manpower across borders.
Q5. What are Navaratnas and Maharatnas?
Answer: Navaratnas (introduced in 1997) are nine high-performing Central PSUs given greater operational and financial autonomy to compete in global markets. Maharatnas (introduced in 2009) are even larger profit-making PSUs with annual turnover and net worth crossing prescribed thresholds, given still greater autonomy to invest, form joint ventures and expand globally. Examples of Maharatnas include ONGC, SAIL, IOCL, NTPC and BHEL.
Q6. What is demonetisation? State its main objectives.
Answer: Demonetisation is the act of withdrawing the legal tender status of currency notes of certain denominations. On 8 November 2016, the Government of India demonetised 500 and 1000 rupee notes. Its main objectives were:
(i) To curb black money and unaccounted wealth.
(ii) To eliminate fake currency and stop terror financing.
(iii) To promote a cashless and digital economy.
(iv) To widen the tax base and increase formalisation of the economy.
C. Long Answer Questions (5-6 Marks)
Q1. Discuss the major measures of liberalisation introduced in India since 1991.
Answer: The major measures of liberalisation since 1991 are:
(i) Industrial Sector Reforms: Industrial licensing was abolished for almost all industries except a few like defence, atomic energy and explosives. The list of industries reserved for the public sector was reduced from 17 to 3. The MRTP Act was replaced by the Competition Act, 2002.
(ii) Financial Sector Reforms: The RBI’s role shifted from regulator to facilitator. Private and foreign banks were allowed; banks gained freedom to set interest rates within a band; SEBI was made the regulator of the capital market.
(iii) Tax Reforms: Direct tax rates (income tax, corporate tax) were reduced and procedures simplified. Indirect taxes were rationalised, finally culminating in the GST in 2017.
(iv) Foreign Exchange Reforms: The rupee was devalued in 1991, made partially convertible in 1992, and fully convertible on current account in 1994.
(v) Trade and Investment Policy Reforms: Quantitative restrictions on imports were dismantled, tariff rates reduced sharply, and FDI limits raised across most sectors. Export licensing was liberalised.
These measures collectively dismantled the “licence-permit-quota raj” and opened the economy to competition.
Q2. Explain the meaning, objectives and impact of Privatisation in India.
Answer: Meaning: Privatisation is the transfer of ownership and management of public enterprises from the government to the private sector, fully or partially.
Objectives:
(i) To improve efficiency and productivity of public enterprises.
(ii) To reduce the financial and administrative burden on the government.
(iii) To raise resources for development through disinvestment.
(iv) To encourage competition and consumer welfare.
(v) To make Indian PSUs globally competitive through Navaratna/Maharatna status.
Impact: Privatisation has improved efficiency, profitability, and accountability of many enterprises and brought in new technology and managerial expertise. However, critics argue it has reduced state control over strategic sectors, led to retrenchment of workers, and concentrated economic power in a few large business houses. The benefits to consumers — wider choice and better quality — have been significant, especially in telecom, aviation, and banking.
Q3. What is WTO? Discuss India’s role in the WTO and the major agreements relevant to India.
Answer: The World Trade Organisation (WTO) is an international organisation set up on 1 January 1995 to regulate global trade. It replaced the General Agreement on Tariffs and Trade (GATT) which had operated since 1947. The WTO has more than 160 member countries; India is a founding member.
Functions: WTO administers trade agreements, provides a forum for negotiations, settles disputes, monitors trade policies, and assists developing countries.
Major agreements relevant to India:
(i) Agreement on Agriculture (AoA) — covers market access, domestic support and export subsidies.
(ii) TRIPS (Trade-Related Aspects of Intellectual Property Rights) — sets minimum standards for patents, copyrights, trademarks.
(iii) TRIMS (Trade-Related Investment Measures) — restricts trade-distorting investment rules.
(iv) GATS (General Agreement on Trade in Services) — liberalises services trade.
India’s Role: India has been an active member, often leading developing nations on issues like agricultural subsidies, food security stockpiling, public health and access to generic medicines (Doha Declaration). India has also used the dispute settlement mechanism to challenge unfair restrictions on its exports.
Q4. Critically evaluate the impact of LPG reforms on the Indian economy.
Answer: The LPG reforms have produced both significant gains and serious challenges.
Positive outcomes:
(i) Higher GDP growth — average 6–7 per cent growth, faster than the pre-reform “Hindu rate” of 3.5 per cent.
(ii) Boom in services sector — IT, ITeS, telecom, banking and finance grew rapidly.
(iii) Rise in exports and a sharp jump in foreign exchange reserves (over 600 billion US dollars).
(iv) Lower inflation and greater consumer choice due to competition.
(v) Inflow of FDI and technology modernising Indian industry.
Negative outcomes / criticisms:
(i) Neglect of agriculture — low public investment, withdrawal of subsidies, farmer distress and suicides.
(ii) Jobless growth — output rose much faster than employment, particularly in manufacturing.
(iii) Regional imbalance — rich states (Maharashtra, Gujarat, Tamil Nadu) benefited more than poorer states.
(iv) Rural-urban divide and rising income inequality.
(v) Volatile capital flows exposing the economy to global shocks.
Hence, the reforms transformed India into a fast-growing open economy, but inclusive and sustainable development remains an unfinished task.
Q5. Discuss the objectives and impact of Demonetisation (2016) and GST (2017).
Answer: Demonetisation (8 November 2016): The government withdrew the legal tender status of 500 and 1000 rupee notes. Objectives included curbing black money, eliminating fake currency, stopping terror financing, encouraging digital payments and widening the tax base.
Impact of Demonetisation:
(i) Short-term cash crunch hurt small businesses, daily wage workers and the unorganised sector.
(ii) Digital transactions and bank deposits rose sharply.
(iii) Income tax filings increased; the tax base widened.
(iv) Long-term effect on black money was limited as nearly 99 per cent of demonetised currency returned to banks.
Goods and Services Tax (1 July 2017): A unified destination-based indirect tax that subsumed VAT, excise, service tax, octroi and similar levies. It has four main rate slabs — 5, 12, 18 and 28 per cent — and is administered jointly by the Centre and States through the GST Council.
Impact of GST:
(i) Created “One Nation, One Tax, One Market,” removing inter-state barriers.
(ii) Improved tax compliance through input tax credit and online filing.
(iii) Reduced cascading of taxes; logistics and supply chains improved.
(iv) Initial implementation problems for small traders and frequent rate revisions caused some disruption.
Together, demonetisation and GST mark the most ambitious effort to formalise the Indian economy after the 1991 reforms.
Additional Multiple Choice Questions (MCQs)
Q1. The New Economic Policy in India was launched in:
(a) 1985 (b) 1990 (c) 1991 (d) 1995
Answer: (c) 1991
Q2. The Finance Minister who introduced the 1991 reforms was:
(a) P. Chidambaram (b) Dr. Manmohan Singh (c) Yashwant Sinha (d) Pranab Mukherjee
Answer: (b) Dr. Manmohan Singh
Q3. WTO came into existence on:
(a) 1 January 1995 (b) 1 April 1995 (c) 1 January 1991 (d) 1 July 1997
Answer: (a) 1 January 1995
Q4. Which of the following is NOT a part of LPG reforms?
(a) Liberalisation (b) Privatisation (c) Globalisation (d) Nationalisation
Answer: (d) Nationalisation
Q5. The Maharatna status was introduced in the year:
(a) 1997 (b) 2009 (c) 2014 (d) 2017
Answer: (b) 2009
Q6. Demonetisation in India was announced on:
(a) 8 November 2014 (b) 8 November 2015 (c) 8 November 2016 (d) 1 July 2017
Answer: (c) 8 November 2016
Q7. The GST was implemented in India on:
(a) 1 April 2017 (b) 1 July 2017 (c) 1 January 2018 (d) 1 April 2018
Answer: (b) 1 July 2017
Q8. Which agreement of WTO deals with intellectual property rights?
(a) AoA (b) GATS (c) TRIPS (d) TRIMS
Answer: (c) TRIPS
Q9. Disinvestment refers to:
(a) Setting up new PSUs (b) Sale of equity of PSUs (c) Increasing taxes (d) Banning foreign investment
Answer: (b) Sale of equity of PSUs
Q10. India’s foreign exchange reserves in 1991 were sufficient for imports of about:
(a) 6 months (b) 3 months (c) 1 month (d) 2 weeks
Answer: (d) 2 weeks
Fill in the Blanks
Q1. The New Economic Policy was introduced in the year __________.
Answer: 1991
Q2. WTO replaced __________ in 1995.
Answer: GATT
Q3. Selling of equity of public sector undertakings is called __________.
Answer: Disinvestment
Q4. GST stands for __________.
Answer: Goods and Services Tax
Q5. The Maharatna category was introduced in __________.
Answer: 2009
True or False
Q1. India became a founding member of WTO in 1995.
Answer: True
Q2. Liberalisation means more government control over the economy.
Answer: False
Q3. Demonetisation withdrew 500 and 1000 rupee notes from circulation.
Answer: True
Q4. ONGC is a Navaratna company.
Answer: False (ONGC is a Maharatna company)
Q5. GST has subsumed multiple indirect taxes into a single tax.
Answer: True
Glossary
| Term | Meaning |
|---|---|
| LPG | Liberalisation, Privatisation and Globalisation — the three pillars of the 1991 New Economic Policy. |
| Liberalisation | Removal or relaxation of government controls and restrictions on economic activity. |
| Privatisation | Transfer of ownership and management of public sector enterprises to the private sector. |
| Globalisation | Integration of the domestic economy with the world economy through free flows of goods, capital, technology and labour. |
| BoP Crisis | Balance of Payments crisis — when a country cannot pay for its essential imports or service its external debt. |
| Fiscal Deficit | The excess of the government’s total expenditure over its total receipts (excluding borrowings). |
| Disinvestment | Sale of equity shares of public sector undertakings by the government. |
| Navaratna | Status given in 1997 to nine high-performing PSUs to grant them greater autonomy. |
| Maharatna | Status introduced in 2009 for very large profitable PSUs giving them still greater financial and operational autonomy. |
| FDI | Foreign Direct Investment — long-term investment by a foreign entity in productive assets of another country. |
| FII | Foreign Institutional Investment — short-term portfolio investment by foreign entities in stock and debt markets. |
| WTO | World Trade Organisation, established 1 January 1995, regulates international trade. |
| GATT | General Agreement on Tariffs and Trade (1947), the predecessor of WTO. |
| TRIPS | WTO agreement on Trade-Related Aspects of Intellectual Property Rights. |
| TRIMS | WTO agreement on Trade-Related Investment Measures. |
| GATS | WTO General Agreement on Trade in Services. |
| Demonetisation | Withdrawal of the legal tender status of certain currency notes; in India done on 8 November 2016 for 500 and 1000 rupee notes. |
| GST | Goods and Services Tax — a unified indirect tax introduced on 1 July 2017 in India. |
| SEBI | Securities and Exchange Board of India — regulator of the capital market. |
| MRTP Act | Monopolies and Restrictive Trade Practices Act — replaced by Competition Act, 2002. |
| Convertibility | The freedom to convert domestic currency into foreign currency at market rates. |
| Tariff | A tax imposed on imported goods to protect domestic industries. |
| Quantitative Restriction | A limit on the quantity of a particular good that can be imported or exported. |
| Jobless Growth | A situation in which the economy grows but employment opportunities do not expand proportionately. |
| IMF | International Monetary Fund — provides short-term loans and policy advice to member countries facing BoP problems. |
Important Points to Remember
- The 1991 economic crisis was triggered by a balance of payments emergency, with foreign exchange reserves falling to nearly two weeks of imports.
- India had to mortgage gold reserves to the Bank of England in May–July 1991 to secure short-term loans.
- The IMF and World Bank loan of about 7 billion US dollars was conditional on structural adjustment reforms.
- The rupee was devalued by about 18–19 per cent against the US dollar in two stages on 1 and 3 July 1991.
- Industrial licensing was abolished in 1991 for all but a small list of industries — currently only defence equipment, atomic energy substances, dangerous chemicals and tobacco-related products require a licence.
- FERA (Foreign Exchange Regulation Act, 1973) was replaced by FEMA (Foreign Exchange Management Act, 1999), which is more liberal.
- The Competition Act, 2002 replaced the older MRTP Act.
- Maharatna companies must have an average annual turnover of more than Rs. 25,000 crore and net worth of more than Rs. 15,000 crore over three years.
- Navaratna PSUs enjoy autonomy in capital expenditure up to certain ceilings without prior government approval.
- India’s foreign exchange reserves crossed 600 billion US dollars in 2021, a sharp contrast to the 1991 crisis.
- The GST Council, headed by the Union Finance Minister with State Finance Ministers as members, decides GST rates and rules.
Difference Between Liberalisation, Privatisation and Globalisation
| Basis | Liberalisation | Privatisation | Globalisation |
|---|---|---|---|
| Meaning | Removal of government controls and restrictions. | Transfer of ownership of PSUs to private sector. | Integration of national economy with the world economy. |
| Focus | Domestic policy framework. | Public sector enterprises. | External sector and global linkages. |
| Tools | Delicensing, deregulation, tax reforms. | Disinvestment, strategic sale, autonomy. | Lower tariffs, FDI inflow, technology transfer. |
| Objective | Greater efficiency through competition. | Better management and resource mobilisation. | Wider markets, capital and technology access. |
Timeline of Major Reforms
| Year | Event / Reform |
|---|---|
| 1991 | Balance of Payments crisis; New Economic Policy announced; rupee devalued; New Industrial Policy. |
| 1992 | Partial convertibility of rupee on current account (LERMS). |
| 1993 | Establishment of SEBI as the statutory regulator of capital markets. |
| 1994 | Full convertibility of rupee on current account. |
| 1995 | India becomes a founding member of the World Trade Organisation (WTO). |
| 1997 | Navaratna scheme introduced for nine high-performing PSUs. |
| 1999 | FEMA replaces FERA. |
| 2000 | SEZ (Special Economic Zone) policy announced. |
| 2002 | Competition Act replaces MRTP Act. |
| 2009 | Maharatna scheme introduced for very large profitable PSUs. |
| 2016 | Demonetisation of 500 and 1000 rupee notes on 8 November. |
| 2017 | Goods and Services Tax (GST) implemented from 1 July. |
Examination Tips
- Always remember the three pillars of the 1991 reforms — Liberalisation, Privatisation and Globalisation (LPG).
- Memorise key dates: NEP — July 1991, WTO — 1 January 1995, Demonetisation — 8 November 2016, GST — 1 July 2017.
- For long answer questions, structure the answer with a clear introduction, points (with sub-headings) and a brief conclusion.
- Use specific examples — Navaratnas, Maharatnas, IT exports — to strengthen your answers.
- For evaluation-type questions, present both the positive outcomes and the criticisms in a balanced manner.
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