GSEB Class 11 Economics Important Questions Chapter 8 Economic Reforms

Gujarat Board GSEB Class 11 Commerce Economics Important Questions Chapter 8 Economic Reforms Important Questions and Answers.

GSEB Class 11 Economics Important Questions Chapter 8 Economic Reforms

Short Answer Type Questions

Question 1.
What kind of economy did India adopt after independence?
Answer:
India adopted mixed economy i.e. the mixed type of economic system with a major emphasis on socialist pattern of planning.

Question 2.
What are economic reforms?
Answer:
The changes brought about in economic policies since 1991 in order to change the economic system of India from one which was highly regulated by the state to one which is more market oriented. At the same time also reduce the extent of public sector in the mixed economic system are called economic reforms.

Question 3.
What condition did international monetary organizations put in early 90s?
Answer:
The international monetary organizations imposed a condition that unless India reduces its excessive and unnecessary controls on its economic activities it will not be provided any financial assistance.

Question 4.
State any two objectives of economic reforms.
Answer:

1. Increase domestic income, employment and export income of the country.
2. Increase competitiveness of the Indian economy.

Question 5.
State the component of economic reforms
Answer:
The economic reforms focused on three main components. They are:

1. Liberalization,
2. Privatization and
3. Globalization.

Question 7.
What is MRTP? With what is replaced? Why?
Answer:
The full form of MRTP is Monopolies and Restrictive Trade Practices Act, 1969. This act prevented enterprises from growing in large scale and establish monopolies. So, it was replaced by Competition Act, 2002. Competition Act was an act that aimed at reducing unhealthy competition among enterprises.

Question 10.
What does FEMA do?
Answer:
FEMA manages earnings from foreign exchange and transactions of enterprises instead of regulating them.

Question 11.
What is privatization?
Answer:
The process of privatizing publicly owned enterprises and hence increasing the size of the private sector is called the policy of privatization.

Question 12.
State the ways for processing privatization.
Answer:

1. Through disinvestment
2. Reducing the number of areas in which only public sector can invest and allow private sector to invest in those areas.
3. By establishing public-private partnership businesses.

Question 13.
What is disinvesiment? State its types.
Answer:
The process wherein the state either reduces its share of investment in a public enterprise or withdraws its investment completely by selling its shares to the private sector is called disinvestment;

Types:

1. Partial disinvestment and
2. Complete disinvestment

Question 14.
Complete disinvestment
Answer:
The act of selling all the shares of the state in a public enterprise to the private sector is called complete disinvestment.

Question 15.
What is partial disinvestment?
Answer:
The act of selling some shares of the state in public enterprise to the private sector for example, 29% or 49% is called partial disinvestment.

Question 16.
What do you mean by minor and major disinvestment?
Answer:
When the state transfers less than 51% shares to private sector then it is called minor disinvestment. However, if the state transfers more than 51% shares to private sector then it is called major disinvestment

Question 18.
What do you mean by foreig investment? State its types.
Answer:
Investment of capital by foreign countries and companies in another country is called foreign investment.
Types:

1. Foreign Institutional Investor i.e. FII and
2. Foreign Direct Investment (FDI)

Question 20.
What do you mean bv FII?
Answer:
Those foreign companies that invest in financial institutions and bond/stock/share markets of another country are called Foreign Institutional Investors (FII). Such an investment is also called portfolio investment.

Question 21.
Why FII is considered very risky?
Answer:
Money of FII comes very fast and may also go very fast. Hence ……….

Question 23.
What is FDI?
Answer:
When the home country invites capital from foreign countries by allowing foreign investors/companies to produce and sell directly in India than such an investment is called foreign direct investment (FDI).

Question 24.
How does FDI comes in India?
Answer:
In FDt, foreign companies directly set up their business in India by constructing their plants, bringing in technology and producing or by collaborating with Indian companies for the same.

Question 25.
How were rates of exchange decided in India before globalization? How were they decided after globalization?
Answer:
Before globalization, rates of exchange were defined officially by the government. After globalization they were decided by the market.

Question 26.
What is convertibility of currency?
Answer:
When a currency can be freely converted in to foreign exchange at market determined rate of exchange it is called convertibility of currency.

Question 27.
What is balance of trade?
Answer:
The difference in value between a country’s imports and exports is called balance of trade.

Question 28.
What is trade deficit?
Answer:
The amount by which the cost of a country’s imports exceeds the value of its exports is called trade deficit.

Long Answer Type Questions

Question 1.
Give a brief idea about the economy that India followed before independence and the need for economic reforms.
Answer:

• After India became independent, there were several major social and economic issues to be addressed for stabilizing the nation. It demanded adopting such an economic system that could uplift India’s ruined economy, solve problems of widespread poverty and provide employment to people.
• To achieve these objectives, the planners of independent India adopted mixed economy i.e. the mixed type of economic system with a major emphasis on socialist pattern of planning.

Need of economic reforms:
1. By 1980s, many experts felt that the planning strategies adopted between 1947 and 1990 failed to attain the goals of economic growth and development. They believed the main reason for the failure was that the states imposed several unnecessary regulations on economic activities which then restricted people from doing economic activities. This raised a need for bringing reforms in the economy to improve it.

2. Another reason was that in the early 90s the international monetary organizations that were controlled by the developed nations of the world imposed a condition on India for providing monetary assistance. As per the condition, until India reduces its excessive and unnecessary controls on the economic activities, it should not be provided any financial assistance.

3. India’s imports were quite high compared to its exports. This caused a severe deficit in India’s ‘balance of trade’ and India had to borrow a lot of foreign exchange from international institutions.
Owing to these reasons, India reformed its economic policies in 1991. It also brought all the necessary institutional and regulatory changes needed for the reforms. The economic reforms focused on three major areas namely Liberalization, Privatization and Globalization (LPG).

Question 2.
State the need of economic reforms in India.
Answer:
Need of economic reforms:
1. By 1980s, many experts felt that the planning strategies adopted between 1947 and 1990 failed to attain the goals of economic growth and development. They believed the main reason for the failure was that the states imposed several unnecessary regulations on economic activities which then restricted people from doing economic activities. This raised a need for bringing reforms in the economy to improve it.

2. Another reason was that in the early 90s the international monetary organizations that were controlled by the developed nations of the world imposed a condition on India for providing monetary assistance. As per the condition, until India reduces its excessive and unnecessary controls on the economic activities, it should not be provided any financial assistance.

3. India’s imports were quite high compared to its exports. This caused a severe deficit in India’s ‘balance of trade’ and India had to borrow a lot of foreign exchange from international institutions.
Owing to these reasons, India reformed its economic policies in 1991. It also brought all the necessary institutional and regulatory changes needed for the reforms. The economic reforms focused on three major areas namely Liberalization, Privatization and Globalization (LPG).

Question 3.
State the meaning and objectives of economic reforms.
Answer:
Economic reforms:
(A) Meaning:
Economic reforms refer to The changes brought about in economic policies . since 1991 in order to change the economic system of India from one which was highly regulated by the state to one which is more market oriented. At the same time also reduce the extent of public sector in the mixed economic system.’

(B) Objectives:

• To encourage private and foreign investments on a large scale. This would then utilize India’s abundant natural and human wealth for its economic development that too with higher productivity.
• Optimum and efficient allocation of India’s resources.
• Reduce and restrict state expenditures. Organize resources obtained through disinvestment of non-performing public enterprises in such a manner that their utility can be increased and public welfare can be done from the same.
• Increase domestic income, employment and export income of the country.
• Increase competitiveness of the Indian economy.
• Ensure steady economic growth and development of the Indian economy in the long run.

In order to fulfill these objectives, in 1991, the government of India started making systematic reforms in its economic policy.

The economic reforms focused on three main components. They are:

1. Liberalization
2. Privatization and
3. Globalization.

Question 4.
What were the main objectives of the economic reforms?
Answer:
Objectives:

• To encourage private and foreign investments on a large scale. This would then utilize India’s abundant natural and human wealth for its economic development that too with higher productivity.
• Optimum and efficient allocation of India’s resources.
• Reduce and restrict state expenditures. Organize resources obtained through disinvestment of non-performing public enterprises in such a manner that their utility can be increased and public welfare can be done from the same.
• Increase domestic income, employment and export income of the country.
• Increase competitiveness of the Indian economy.
• Ensure steady economic growth and development of the Indian economy in the long run.
• In order to fulfill these objectives, in 1991, the government of India started making systematic reforms in its economic policy.

The economic reforms focused on three main components. They are:

1. Liberalization
2. Privatization and
3. Globalization.

Question 5.
Write a short note on liberalization.
Answer:
Liberalization:

• The policy of increasing the freedom given to the private enterprises by allowing the market forces to play their role and reduce interference of the state is called the policy of liberalization.
• In other words, liberalization refers to relaxing the policy and the restrictions imposed on economic activities.

Liberalization in terms of India:
In the’context of Indian economy, liberalization refers to ‘Increasing the role of private sector and market oriented processes in economic planning in place of state regulated economic processes in India’s mixed economic system’.

Following things take place during the process of liberalization:

• The state gradually reduces the controls imposed by it on the economic activities.
• The role of market forces of demand and supply increases in decision making of economic activities
• The government systematically allows the private sector to invest in those areas which were previously reserved for the public sector.
• The government slowly and systematically reduces the protection granted by the state to domestic industries against foreign competition. This means that the government stops giving additional favour to the domestic industries and hence reduces the discrimination between domestic and foreign enterprises.
• This way a healthy market situation is generated even for the foreign companies and they start investing in the Indian markets.

Question 6.
Which activities occur when a nation decides to adopt liberalization?
Answer:
Following things take place during the process of liberalization:

• The state gradually reduces the controls imposed by it on the economic activities.
• The role of market forces of demand and supply increases in decision making of economic activities
• The government systematically allows the private sector to invest in those areas which were previously reserved for the public sector.
• The government slowly and systematically reduces the protection granted by the state to domestic industries against foreign competition. This means that the government stops giving additional favour to the domestic industries and hence reduces the discrimination between domestic and foreign enterprises.
• This way a healthy market situation is generated even for the foreign companies and they start investing in the Indian markets.

Question 7.
What is FERA? Why was it replaced by FEMA?
Answer:

• FERA was replaced by FEMA. Moreover, the word ‘Regulatory’ was removed from FERA and was replaced by the word ‘Management’.
• The full form of FERA is Foreign Exchange Regulation Act, 1973. This act regulated earnings from foreign exchange and transactions of enterprises.
• FEMA means Foreign Exchange Management Act, 1999. This act manages earnings from foreign exchange and transactions of enterprises instead of regulating them.

Question 8.
State the noteworthy changes that took place in the industrial policy as a part of liberalization.
Answer:

• Major changes were made in the industrial policy. One of the noteworthy changes was opening those areas for private sector in which initially only the public sector was allowed to invest.
• Currently, qnly three sectors are reserved for the public sector namely, atomic energy, some minerals related to atomic energy and railways.
• Another noteworthy change was that the government raised the limit of investment for small scale units. This helped such units to modernize and produce faster and better.

Question 9.
Give the meaning of privatization and state its process.
Answer:
Privatization:

• The process of privatizing publicly owned enterprises and hence increasing the size of the private sector is called the policy of privatization.
• In India, the public sector enterprises are owned and managed by the state i.e. government. Hence, privatization means process of transferring ownership of economic enterprises from public sector to private sector either partially or fully.

Process of privatization:
Privatization can take place in the following ways:

1. Through disinvestment
2. Reducing the number of areas in which only public sector can invest and allow private sector to invest in those areas.
3. By establishing public-private partnership businesses.

Question 10.
How can privatization take place?
Answer:
Privatization can take place in the following ways:

1. Through disinvestment
2. Reducing the number of areas in which only public sector can invest and allow private sector to invest in those areas.
3. By establishing public-private partnership businesses.

Question 11.
Give the meaning and process of disinvestment.
Answer:
Meaning and process of disinvestment in India:
(A) Disinvestment:

• The process wherein the state either reduces its share of investment in a public enterprise or withdraws its investment completely by selling its shares to the private sector is called disinvestment.
• In other words, the process by which the state ‘disinvests’ from public enterprises is called disinvestment.

(B) Process of disinvestment:
The process of disinvestment consists of following two aspects:
1. Complete disinvestment:
The act of selling all the shares of the state in a public enterprise to the private sector is called complete disinvestment.

2. Partial disinvestment:

• The act of selling some shares of the state in public enterprises to the private sector for example, 29% or 49% is called partial disinvestment.
• When the state transfers less than 51% shares to private sector it is called minor disinvestment.

However, if the state transfers more than 51% shares to private sector then it is called major disinvestment
1. Over and above owning public enterprises, the state also controlled certain areas of investment.

• Also, the private sector was not allowed to invest in certain areas of strategic importance and public utility. However after privatization in 1991, government opened most of these areas for the private sector.
• These areas included banking, education, communication, transportation, etc. Both private as well as foreign companies were allowed to invest in these areas then.

2. Presently, the state controls and does not allow private investment only in few specific areas like atomic energy, certain minerals related to atomic energy, railways and defence.

3. After independence there was a significant rise in the number of public sector enterprises under the central government. However, after 1991 they did not rise much.

• On March 31, 1951 there were only 5 public sector enterprises under central government. The number rise to 233 in 1990, 217 in 2010 and 300 in 2015.
• Even today, the process of disinvestment from old enterprises continues and simultaneously the state also establishes new enterprises.

Question 12.
Explain globalization and the process of globalization in India.
Answer:
(A) Globalization:

• The process of increasing a country’s economic integration with the rest of the world by increasing trade in goods and services, increasing movement of physical and financial capital, increasing exchange of technology and increasing investments between the countries is called globalization.
• The process of globalization can be done by gradually decreasing the policy controls that restricts and slows foreign trade.

(B) Process of globalization in India:

• In 1991, International Monetary Fund (IMF) declared a list of several nations who had taken enormous loans from IMF. The IMF forced those countries to globalize and upgrade the technologies and hence grow their nations. Until the countries did this, the IMF would not give any further loans.
• India was one of those countries. Hence, India had to relax its policies of providing undue protection to domestic industries from foreign competition. Thus began the process of globalization in India and India allowed its people ; to conduct more trade with other nations.

(C) The process of globalization underwent the following systematic process:

• The Import-Export licensing policy was made simpler and easier.
• India became member of World Trade Organization (WTO) in 1995. By doing so, India had to abide the rules of world trade.
• India began convertibility of Indian rupee into other currencies at market rate by gradually reducing conversion at the official rate. Hence, the value of our currency was now determined by the means of trade and not by the. government.
• India achieved sector wise systematic increase of foreign direct investment in India.
• Investors and producers in India were allowed to increase financial collaborations with their foreign counterparts.
• India changed its policies and stopped giving undue protection to Indian investors and enterprises against foreign competition.
• India strengthened its social and cultural ties with other nations. India also relaxed its policies of granting visas to people of other nations.

Question 13.
India relaxed its policies of providing undue protection to domestic industries from foreign competition. Give reason.
Answer:

• In 1991, International Monetary Fund (IMF) declared a list of several nations who had taken enormous loans from IMF. The IMF forced those countries to globalize and upgrade the technologies and hence grow their nations.
• IMF also declared that until the countries did this, it would not give any further loans.
• India was one of those countries. Hence, India had to relax its policies of providing undue protection to domestic industries from foreign competition.

Question 14.
Why India’s requirement for foreign exchange was very high before the economic reforms? What solution did it bring to this as a part of economic reforms?
OR
Explain the need and beginning of foreign investment in India.
Answer:

• Foreign investment i.e. investment of capital by foreign countries and companies in India became an important component of the process of globalization in India.
• India needed massive foreign exchange for investment, imports of essential goods and services, technology imports, etc. Under a relatively closed and controlled economy of India, it met these needs by borrowing the fund from international organizations and foreign governments.
• Initially India had put several controls on foreign investments in India. Hence, we had to buy more goods and technology from abroad. To satisfy India’s buying it needed huge foreign exchange.
• However, after 1991, India allowed foreign companies to directly invest in certain sectors of India that too in increased proportion.
• When these foreign companies started producing in India, our need to import started getting satisfied with this local production.
• Thus, India’s dependency on foreign borrowings reduced. Moreover, investment done by these companies in India created employment, produced a variety of goods, raised tax incomes and brought new technologies.

Types of foreign investment:
Foreign investment in India came through

1. Foreign Institutional Investment (or Investor) i.e. FII and
2. Foreign Direct Investment (FDI).

Question 15.
Write a short note on types of foreign investment.
OR
Write a short note on: Foreign Institutional Investor (Fll).
OR
Write a short note on: Foreign Direct Investment.
Answer:
Foreign capital in a country comes in two ways. They are:

1. Foreign Institutional Investor (FII) and
2. Foreign Direct Investment (FDI)

1. Foreign institutional Investor (FII):

• Those foreign companies that invest in financial institutions and bond/ stock/share markets of another country are called Foreign Institutional Investors (Fll). Such an investment is also called portfolio investment. Fils are the big companies such as investment banks, mutual fund houses, etc. who invest considerable amount of money in the Indian markets.
• Such companies have to register in India as Foreign Institutional Investors. Then they buy such stocks from the bond/share market of India.
•  Thus, instead of investing in plant and machinery in another country like India these companies invest in the financial market.
• The limit of investment that these companies can make is decided by India.
• These investment companies do not have direct stake in the management of the ‘home companies’ i.e. the companies of India for which they buy share, bonds etc. from the market. As a result, the home companies do not get capital directly in their hands. They get it through the shares that Fils buy from the Indian market.
• An important characteristic of such investment is that home countries or say companies of home countries i.e. home companies receive the investment very fast and may also lose it very fast if the Fils sell the shares.
• Hence, funds take a flight in and out of the country easily. So this is considered to be a risky and unstable kind of foreign capital.

2. Foreign Direct Investment (FDI):

• When the home country invites capital from foreign countries by allowing * foreign investors/companies to produce and sell directly in India than such an investment is called foreign direct investment (FDI).
• In FDI, foreign companies directly set up their business in India by constructing their plants, bringing in technology and producing or by collaborating with Indian companies for the same.
• These companies either manage the entire business or have a partial control in management in case if they are collaborating partners.
• For example, Vodafone fully owns its business in India. Similarly, in Tata-AIG insurance company, AIG which is a foreign company has collaborated with Tata in India.
• India has systematically allowed FDI in increased proportion in various sectors and hence India’s foreign exchange earnings have increased.

Nature of Foreign Direct Investment:

• It is a physical establishment in the form of direct investment and hence a stable form of investment.
• It brings machines, materials and wealth to the home country.
• It brings new technology to the country.
• It brings a different work culture.

Question 16.
State the challenges before the foreign trade policy of India.
OR
State the challenges that India faced as a part of its foreign trade policy.
Answer:
To bring about economic reforms India had framed foreign trade policy. This policy regulates India’s trade with other countries.

Challenges faced by the foreign trade policy of India:

• India needs to control import of certain products so that it can protect domestic production from competition by foreign goods.
• Ensure enough imports of technology, machines, spare parts as well as, resources to help increase domestic production and import substitution.
• Control imports of those goods that are not needed for India’s development. This would help to save foreign exchange.
• Encourage exports so that earning of foreign exchange can be increased. This will help to make payment for items that we import.
• Many Indian goods could not compete against the quality of foreign goods. Hence it was difficult to increase the exports.
• Promote export of goods produced by small scale sector.
• The challenges of foreign trade are different from those of domestic trade as foreign trade involves foreign exchange.
• The foreign trade policy of India was formulated and amended from time to time so that India could deal with the above challenges in the best possible manner.

Question 17.
Explain the various stages of India’s foreign trade policy.
Answer:
India’s foreign trade policy can be understood in two parts. They are:

1. Foreign trade policy before globalization (1991)
2. Foreign trade policy after globalization (1991)

1. India’s foreign trade policy before globalization (1991):

• After independence India had to establish its administrative, economic and state functions in the interest of the nation.
• India had just relieved itself from the long and torturing British rule who came to India for trade. Hence, India feared importing goods from foreign countries might again make them puppet of those countries.
• On the other hand, India had no choice but to regulate imports in order to develop itself and solve the problems of poverty as well as scarcity of foreign exchange. Also, India did not have much to export.
• After independence, India adopted a mixed economic system and aimed at strategic development through planning.
• India aimed at establishing huge basic industries for its development. In order to establish such huge industries India had to import costly machinery, technology and spare parts. This led to scarcity of foreign exchange. Hence, India imposed restrictions on importing consumer goods.
• In the initial years of the foreign trade policy India emphasized on protecting the domestic industry against foreign competition. To do so it laid various restrictions on import and promoted export.
• Also, initially it promoted exporting traditional items related to agriculture,
  handicrafts, gems and jewelry. Later, it also promoted the export of non-traditional industrial goods.
• Before globalization, the rates of exchange were determined officially rather than by market.
  The rupee was devalued against the foreign currency. This would encourage exports and reduce imports.
• By devaluating the rupee the government succeeded in making the imports of goods costly. However, since the items of imports were necessary for India’s industrialization there was no significant decline in quantity of imports.
• As a result, import bills increased and there was a deficit in India’s Balance of Payments.
• To solve this situation India also adopted a policy of import substitution. Import substitution is a policy of substituting imported products with domestically produced goods.

Conclusion:
Since India feared that allowing foreign countries to again enter in India for trade would enslave it, it tried to adopt a conservative approach of development. However, this approach did not work well for India and it had no choice but to allow foreign competition in India through the economic reforms of 1991.

2. India’s foreign trade policy after globalization (1991) :

• Though India made progress after independence, it was heavily indebted to international financial institutions. It was forced by the International Monetary Fund (IMF) to adopt economic reforms and undergo globalization.
• Hence, in 1991 India reformed its economic policies to boost trade and investments.
• India left its old and restricted foreign trade policy and adopted a new, bold and outward trade policy.
  India also allowed its currency i.e. Indian Rupee should be converted into foreign currencies at market rates from the earlier method of converting at official rates.
• It made import-export licensing easy. Today, strict licensing method exists only for crude, edible oils and chemical fertilizers.
• With promotion of FDI and privatization, foreign companies can now sell variety of goods in India.
• After globalization India’s trade with non-traditional trade partners i.e. new countries increased.
• The new trade policy aimed at increasing India’s percentage share in world trade.
• India became a member of World Trade Organization (WTO) in 1995. India changed its trade policy according to the rules framed by WTO. For example, India made changes in import-export rules for agricultural goods, trade related investment measures, etc.

Conclusion:
Thus, after the economic reforms of 1991, India expanded its view and ‘ aimed at globalization. It also developed various trade policies that would help to strengthen its economy. After 1991, India made these policies liberal, market-oriented and outward looking for promoting trade and development.

Question 18.
State and explain favourable effects of economic reforms.
Answer:
Favourable effects of economic reforms:
The reforms in the economic policy that took place in the form of liberalization, privatization and globalization increased the importance of market forces of demand and supply.

• As a result, determination of prices, wages and interest became market oriented, more realistic and less regulated.
• Due to reduction in regulations, producers started making decisions regarding production, investment and distribution on the basis of market trends.
• The difference between domestic and foreign investments became narrow.

All these gave rise to various favourable effects for India which are discussed below:

• Consumers started getting a variety of goods of international quality that too easily and at reasonable prices.
• India’s foreign exchange reserves increased.
• India’s exports increased.
• Along with increase in FDI, the risk of certain investments and debt burden of the state for importing costly technology etc. reduced.
• Large scale investments increased in the private sector. This in turn increased production and employment.
• Factors of production became more mobile within the nation and also between nations.
• During the period of too many regulations, corruption, bureaucratic hurdles, delayed decisions and rigid administration were quite common. All these have gradually reduced after reforms.
• There are certain sectors which are quite significant for the growth and development of the nation. However, these were neglected due to scarcity of capital and government regulations.
• These sectors got a boost after reforms when private sector was allowed to invest in them. For example, natural gas pipelines, roadways, modernization of railways, etc.
• Shortage ot goods and services were overcome. In fact many more varieties of goods and services came to market.
• Social and cultural ties with other nations improved.

Question 19.
India adopted a narrow minded trade policy after independence. Give reason.
Answer:

• After India became independent, there were several major social and economic issues to be addressed for stabilizing the nation.
• It demanded adopting such an economic system that could uplift India’s ruined economy, solve problems of widespread poverty and provide employment to people.
• Moreover, India had just come out of the Jong and torturing rule of the British rule i.e. rule of a foreign country. So, India was also under a fear that if it would again relax its foreign trade policies and conduct import-export freely then it may again fail in the trap of some foreign rule.
• Hence, India adopted a narrow-minded trade policy after independence.

Question 20.
Although India was conservative about its foreign trade policy, it could not do without having a huge amount of foreign exchange. Give reason.
Answer:

• After independence, India focused on establishing large scale basic industries to improve its economy.
• To do so, India needed massive foreign exchange for investment, imports of essential goods and services, technology imports, etc.
• Under a relatively closed and controlled economy of India, it met these needs by borrowing the fund from international organizations and foreign governments.
• These funds were utilized to buy advanced goods, services and technology from abroad.
• As a result, in spite of being conservative about its foreign trade policy India could not do without having a huge amount of foreign exchange.

Question 21.
FDI brings new products, services and technologies in the country. Give reason.
Answer:

• When the home country invites capital from foreign countries by allowing foreign investors/companies to produce and sell directly in India than such an investment is called foreign direct investment (FDI).
• In FDI, foreign companies directly set up their business in India by constructing their plants, bringing in technology and producing or by collaborating with Indian companies for the same.
• These countries then produce new products and services of international quality and standards. For example, with arrival of multinational foreign companies we now use countless products and services such as electronics, banking and insurance, various types of food chains, etc.
• Thus, FDI brings new products, services and technologies in the country.

Question 22.
There was a deficit in India’s Balance of Payments after independence. Give reason.
OR
India adopted the policy of import substitution
Answer:

• Before India adopted globalization, the rates of exchange were determined officially rather than by market.
• India itself devalued the rupee against the foreign currency. It believed this would encourage exports and reduce imports.
• By devaluating the rupee the government succeeded in making the imports of goods costly.
• However, since the items of imports were necessary for India’s industrialization there was no significant decline in quantity of imports.
• As a result, import bills increased and there was a deficit in India’s Balance of Payments.
• To solve this situation India also adopted a policy of import substitution i.e. substituting imported products with domestically produced goods.

Question 23.
India’s dependency on foreign borrowings reduced.
Answer:

• After 1991, India allowed foreign companies to directly invest in certain sectors of India that too in increased proportion.
• When these companies started producing in India, our need to import started getting satisfied with products produced in India by these foreign companies.
• Thus, India’s dependency on foreign borrowings reduced.

Question 24.
FIIs are considered a risky and unstable kind of foreign capital. Give reason.
OR
The funds obtained through Fils take a flight in and out of the country easily.
Answer:
The investment made by foreign companies in financial institutions and bond/stock/share markets of another country is called Foreign Institutional Investor (FII).

• The foreign companies interested in the home companies buy its shares or stocks or bonds. The home company thus receives the money via. the investment made by the foreign companies and hence this mode of obtaining money is very fast.
• However, the darker side of this form of money is that if the foreign company feels that the Indian company in which it has invested is not doing well then it may any time withdraw its money from the market. It can do this by simply selling the share/stock/bond of that company that it has bought.
• Hence, funds take a flight in and out of the country easily and thus this is considered to be a risky and unstable kind of foreign capital.

Multiple Choice Questions

Question 1.
What was not the objective of economic reforms?
(A) Increase competitiveness
(B) Ensure steady economic growth
(C) Restrict state expenditure
(D) None of these
Answer:
(D) None of these

Question 2.
Which of the following was not focused during economic reforms?
(A) Privatization
(B) Liberalization
(C) Globalization
(D) None of these
Answer:
(D) None of these

Question 3.
In which of the following does the discrimination between domestic and foreign enterprise by the state gets narrowed gradually?
(A) Privatization
(B) Globalization
(C) Liberalization
(D) All of these
Answer:
(C) Liberalization

Question 4.
MRTP ACT was replaced by _______
(A) Competition Act
(B) FEMA Act
(C) FERA Act
(D) Market Act
Answer:
(A) Competition Act

Question 5.
FERA is replaced by _______
(A) Competition Act
(B) MRTP
(C) FEMA
(D) Market Act
Answer:
(C) FEMA

Question 6.
In FERA, the word ‘regulatory’ was replaced with _______
(A) Market
(B) Monetary
(C) Monopoly
(D) Management
Answer:
(D) Management

Question 7.
How many sectors are now reserved for public sector?
(A) 2
(B) 3
(C) 5
(D) 6
Answer:
(B) 3

Question 8.
If _______ % shares are transferred to private sector it is called minor disinvestment.
(A) 49
(B) <50
(C) 50
(D) <51
Answer:
(D) <51

Question 9.
In March 1951, there were _______ public sector enterprises under central government and in 1990.
(A) 5 ; 233
(B) 217 ; 243
(C) 20 ; 231
(D) 25 ; 217
Answer:
(A) 5 ; 233

Question 10.
_______ public sector enterprises were held by government in 2010 and 2015
(A) 233 ; 217
(B) 217 ; 300
(C) 217 ; 233
(D) 360 ; 217
Answer:
(B) 217 ; 300

Question 11.
Who in 1991 declared several nations as highly indebted?
(A) World Bank
(B) IDB
(C) IMF
(D) UNESCO
Answer:
(C) IMF

Question 12.
When did India become the member of WTO?
(A) 1991
(B) 1951
(C) 1995
(D) 2001
Answer:
(C) 1995

Question 13.
Through which ways does foreign capital comes?
(A) Foreign Institutional Investment
(B) Foreign organization
(C) Foreign direct Investment
(D) Both (A) and (C)
Answer:
(D) Both (A) and (C)

Question 14.
India adopted a mixed economy with focus on ________ planning.
(A) Socialist
(B) Reformist
(C) Capitalist
(D) Democratic
Answer:
(A) Socialist

Question 15.
Before globalization, India _______ to reduce imports.
(A) Hoarded stock
(B) Devalued rupee
(C) Focused on swadeshi goods
(D) Ignored FDI
Answer:
(B) Devalued rupee

Question 16.
Today, strict licensing exists for ________
(A) Plastic
(B) Crude oil
(C) Chemical fertilizers
(D) Both (B) and (C)
Answer:
(D) Both (B) and (C)