Class 5
INDIAN ECONOMY
LESSON 3
LIBERALISATION, PRIVATISATION AND GLOBALISATION
GLOBALISATION
Globalisation means integrating the national economy with the world economy through removal
of barriers on international trade and investments.
Changes brought by Globalisation in Indian Economy
Globalisation resulted in creation of a borderless world or global village. The changes seen in
Indian Economy as a result of globalization are as follows:
A list of high investment industries was prepared where automatic permission will be available
for investments upto 51% in Foreign Direct Investments (FDI).
No permission was required to hire foreign technicians.
No permission was required to test domestically developed technology outside India.
Indian Rupee was devalued to encourage exports and foreign investments in India.
A 5 year export-import policy was announced in 1992-1997, to boost up India’s foreign trade. This
policy removed all the major restrictions and allowed the market forces to play a greater role in
export and import.
The rate of customs duty was significantly reduced from around 250% to 10%.
Effects of Globalisation
Positive Effects Negative Effects
Globalisation resulted in Globalisation is criticized because:
Greater access to global markets It is more beneficial to the developed
Access to advanced technology nations as they get to expand themselves
Better prospects for skilled people to Domestic companies have to face
utilize their talents competition from MNCs
Opportunity to large industries to become Developed countries sometimes transfer
international leaders old and outdated technologies
Outsourcing
Outsourcing means contracting out or transferring some of the activities to a third person instead of
performing itself. E.g. security services are given to outside agencies. Due to growth of communication
and Information technology, outsourcing has become global. Now information can be transferred from
one place to another in a single click on real time basis. India has become one of the most favoured nation
for outsourcing due to the following reasons:
India has vast manpower with necessary skills
MNCs get attractive offers from Indian Government in the form of tax concessions, etc.
Availability of cheap labour and low wage rates
Strong Information Technology network in India
Class 6
INDIAN ECONOMY
LESSON 3
LIBERALISATION, PRIVATISATION AND GLOBALISATION
World Trade Organisation (WTO)
WTO was established in 1995. It is the successor organization to GATT (General Agreement on
Trade and Tariff), which was made in 1948 with 23 countries. The major objective of WTO is to facilitate
international trade. At present there are 164 member countries associated with WTO. All these countries
are required to follow the rules and policies of WTO. As a part of WTO, India took various steps including
removal of various quantitative restrictions on imports and reducing the tariff rates.
Functions of WTO
a) To facilitate international trade by removing various tariff and non-tariff barriers.
b) To create a formal rule-based trading system, so that countries are not able to put arbitrary
restrictions.
c) To increase the flow of trade in goods as well as services.
d) To ensure optimum utilization of resources.
e) To protect the environment.
According to some scholars India should not be a part of the WTO, because (i) most of the
international trade happens between developed countries and (ii) developing countries are mostly
cheated by the developed countries by making discriminatory policies.
Overview of the New Economic Policy
The New Economic Policy of Liberalisation, Privatisation and Globalisation has both positive as
well as negative impacts on the economy. Let us discuss the same:
Positive Impacts of NEP
a) Increase in rate of economic growth: The NEP resulted in an overall growth of GDP in India.
Manufacturing as well as service sector showed tremendous growth after the NEP.
b) Inflow of Foreign Investment: Due to liberalization and globalization, huge amount of foreign
funds got invested in India. Foreign investments increased from US $ 100 million in 1990-91 to US
$ 73.5 billion in 2014-15.
c) Rise in Foreign Exchange Reserves: India became the largest foreign exchange holder of the world.
Our forex reserves increased from US $ 6 billion in 1990-91 to US $ 321 billion in 2014-15.
d) Rise in Exports: After the NEP, export of most of the items like auto parts, textiles, etc. increased
rapidly.
e) Control on Inflation: Due to increase in production, tax reforms, etc. inflation was reduced
significantly from around 17% in 1990-91 to 5.5% in 2014-15.
f) Increase in role of private sector: Due to privatization and liberalization, private sector got a
chance to showcase its talent and hence, its area of operation increased immensely.
Negative Impacts or Criticism of NEP
a) Unemployment: Despite NEP and growth in GDP, unemployment still remains a very severe
problem for India.
b) Neglect of Agriculture: So much emphasis was given to manufacturing and service industry that
agriculture sector got ignored.
(i) Public investment related to agriculture like irrigation facilities, power, etc. was reduced.
(ii) Subsidy on fertilizers was removed which badly affected the farmers.
(iii) Due to liberalization Indian farmers started facing competition from other countries.
(iv) Due to focus on increasing revenue through exports, production of cash crops was increased.
c) Low Industrial Growth: Industrial Growth was slow due to the following reasons:
(i) Due to globalization, Indian industries had to face competition from foreign products which
were both good in quality and cheaper in price.
(ii) Investment in improving infrastructure like power plants, roads, etc. was very less, due to
which investment in industries could not improve.
(iii) India removed various quota restrictions, but developed countries continued with it.
d) Failure of Disinvestment Plans: Disinvestment policy was not successful because government
assets or companies were sold at low prices and the amount received was not utilized for
development of infrastructure for a better future, but for repayment of government loans.
e) Poor Tax collection: After NEP, tax rates were reduced. However, due to liberalization and
globalization, imports were also relaxed and collection of customs duty was also reduced. Further,
in order to attract the foreign investment, many tax incentives were provided, which resulted in
lower tax collections.
f) Unbalanced growth: Growth was limited to few sectors like communication, IT, entertainment,
etc., whereas important sectors like agriculture which provided livelihood to millions of people
was ignored.
Class 7
INDIAN ECONOMY
LESSON 3
LIBERALISATION, PRIVATISATION AND GLOBALISATION
Goods and Services Tax (GST)
GST is a comprehensive indirect tax which replaced many indirect taxes in India. It was introduced by
passing the Goods and Services Tax Act 2017 in the Parliament. The Act became applicable from 1 st July
2017. GST was introduced in India with the slogan of ‘One Nation, One Tax’.
Features of GST
a) Applicability: GST applies to the whole of India including Jammu and Kashmir.
b) Charge: GST is charged on ‘supply’ of goods and services.
c) Multiple Rates: In India, there are different rates of GST like 5%, 12%, 18%, 28%, etc.
d) Different Types of GST: There are various types of GST like Central Goods and Services Tax (CGST),
State Goods and Services Tax (SGST), Union Territory Goods and Services Tax (UTGST) and
Integrated Goods and Services Tax (IGST).
e) Destination Based Tax: The amount of GST is received by those States which are receiving the
goods and services.
f) Modes of Payment: GST can be paid through internet banking, debit card/credit card, National
Electronic Fund Transfer (NEFT)/Real Time Gross Settlement (RTGS).
g) Effect on Prices: After implementation of GST, luxury goods have become costlier and essential
items have become cheaper.
h) Removal of Cascading Effect: With the implementation of GST, cascading effect got eliminated,
i.e., taxes on tax were abolished.
i) Value Added Tax: GST is charged on the value that is added to the goods or services. If government
has received tax on Rs.5000 worth of goods and these goods are resold for Rs.7000, then
government will receive tax only on the next Rs.2000, i.e., the value which was added to the goods
by the next seller.
j) Ultimate burden on consumer: The amount of GST paid by the seller at the time of purchase of
goods is adjusted with the amount of GST received by him at the time of supply of the goods.
Hence, ultimate burden of GST falls on the consumer. E.g. If X purchased goods worth Rs.5000
from Y and paid Rs.500 as GST, such GST paid at the time of purchase will be called Input GST.
When the goods are sold by X to Z for Rs.7000, he receives Rs.700 as GST at the supply, which is
called Output GST. Now, out of the entire Rs.700 received by X, he can adjust Rs.500 already paid
him at the time of purchase, i.e., X can adjust the Input GST before making payment of the Output
GST, and pay only Rs.200 to the government. Thus, Input GST can be used later on by X. This
concept is also called Input Tax Credit.
k) Registration: Registration under GST depends upon the turnover of the organization. If the
turnover exceeds the limit prescribed by the Government, then registration becomes compulsory.
GST Council
GST Council is a constitutional body for making recommendations to the Government regarding various
issues related to GST.
Members: As per Article 279A of the Constitution of India, GST Council shall be a joint council of Central
and State Governments with the following members:
Finance Minister as the Chairperson.
Vice Chairperson to be chosen from amongst the Ministers of State Government.
Minister of State (Finance) and Minister of Finance/Taxation of each State as the Members.
Quorum: 50% of the total number of members of GST Council shall be the quorum.
Manner of Voting: Every decision shall be taken by a majority of atleast 75% of the members present and
voting, with Central Government having 1/3 rd weightage and 2/3rd weightage to the State Government.
Intra State and Inter State Supply
Intra State Supply: Intra State Supply means the supply where supplier and recipient are in the same state.
Here, two types of taxes are charged, CGST and SGST/UTGST.
Inter State Supply: Inter State Supply involves supply between two different states or union territories or
one state and one union territory. Here IGST is charged which is paid entirely to the Central Government.
IGST is later on distributed by the Central Government to the respective State Government.
GST on Imports: Import of goods and services are treated as Inter State Supply.
Class 8
INDIAN ECONOMY
LESSON 3
LIBERALISATION, PRIVATISATION AND GLOBALISATION
Demonetisation
Demonetisation is the act of declaring a currency not to be a legal tender. Usually, when people involve
in some illegal activities, they do not disclose the income received to the government. This income is not
deposited in the banks as well. So, people hide this money at some secret place in the form of cash. Since
is amount is huge, they prefer to use notes of high denomination so that they need lesser space to keep
them. Hence, to stop such practices, government sometimes declares the notes of high denomination as
not to be a legal tender anymore and the currency kept by the people become just a piece of paper.
Demonetisation is, therefore, a step taken by the government to protect against illegal activities and black
money.
Sometimes, government provides a time period within which people may deposit their cash with
the banks, failing which their entire cash would become useless. Whenever any person comes to
deposit such cash, government can inquire about the source of income and collect taxes at higher
rates
Demonetisation shows the change in attitude of government towards tax evaders.
Through demonetisation, cash comes to the formal financial system.
Demonetisation helps to create cashless economy.
Due to demonetisation, cash transactions reduced significantly and digital transactions increased
rapidly.
Tax collection of government also increased due to demonetisation as more people started to
disclose their income to the government.
In India, demonetisation has taken place several times. The last time it was declared on 8 th November,
2016 by Hon’ble Prime Minister Shri Narendra Modi, when currency notes of Rs.500 and Rs.1000 were
declared not to be legal tender.
