XI_Eco_Dev_Ch-6_Economic Reforms in India since 1991_Ques-Ans

Class XI

Indian Economic Development

Chapter - 6

Economic Reforms Since 1991

Q.1. Why were reforms introduced in India?

Ans. The economic reforms were introduced in the year 1991 in India to combat economic crisis, relating to its external debt:

a)    Various rules and plans introduced by the government for controlling and regulating the economy resulted in hampering the process of growth and development National income was growing at the rate of 0.8%.

b)    India was highly indebted country and government was not able to make repayments of loan from abroad.

c)    Foreign exchange reserves collapsed as import is more than the export.

d)    The inflation level reached 16.8% which ultimately increases the prices of essential goods.

e)    India took loan from IMF and World Bank to the extent of 7 billion dollars. In pressure, government has to liberalize its market.

Q.2. Why is it necessary to become a member of WTO?

Ans. It is important for any country to become a member of WTO (World Trade Organization) for the following reasons:

a)    WTO provides equal opportunities to all its member countries to trade in the international market.

b)    It provides its member countries with larger scope to produce at large scale to cater to the needs of people across the international boundaries. This provides ample scope to utilize world resources optimally and provides greater market accessibility.

c)    It advocates for the removal of tariff and non-tariff barriers, thereby, promoting healthier and fairer competition among different producers of different countries.

d)    The countries of similar economic conditions being members of WTO can raise their voice to safeguards their common interests.

Q.3. Why did RBI have to change its role from controller to facilitator of financial sector in India?

Ans. After economic liberalization and financial sector reforms, RBI needed to shift its role from a controller to facilitator of the financial sector. This means that the financial sector may be allowed to take decisions on many matters without consulting the RBI. The reform policies led to the establishment of private sector banks, Indian as well as foreign.

Q.4. How is RBI controlling the commercial banks?

Ans. All the banks in India are controlled through various norms and regulations of the RBI. It controls the commercial banks via various instruments like Statutory Liquidity Ratio (SLR), Cash Reserve Ratio (CRR), Bank Rate, Prime Lending (PLR), Repo Rate, Reverse Repo Rate and fixing the interest rates and deciding the nature of lending to various sectors. These are those ratios and rates that are fixed by RBI and it is mandatory for all the commercial banks to follow or maintain these rates.

Q.5. What do you understand by devaluation of rupee?

Ans. Devaluation of Rupee refers to the fall in the value of rupee in terms of foreign currency. This means that value of rupee has fallen and the value of foreign currency has risen.

Q.6. Distinguish between the following

(i) Strategic and Minority Sale

(i) Strategic Sale refers to the sale of 51% or more stake of a PSU to the private

ector who bids the highest. Minority Sale refers to the sale of less than 49% stake of a PSU to the private sector.

(ii) The ownership of PSU is handed over to the private sector. The ownership of PSU still remains with the government as it holds 51% of stakes.

(ii) Bilateral and Multi-lateral trade

(i) It is a trade agreement between two countries It is a trade agreement among more than two countries.

(ii) This is an agreement that provides equal opportunities to both the countries. This is an agreement that provides equal opportunities to all the member countries in the international market

(iii) Tariff and Non-tariff barriers.

(i) It refers to the tax imposed on the imports by the country to protect its domestic industries. It refers to the restrictions other than taxes, imposed on imports by the country.
(ii) It includes custom duties, export-import duties It includes quotes and licenses.
(iii) It is imposed on the physical units (like per tonne) or on value of the goods imported. It is imposed on the quantity and quality of the goods imported.

Q.7. Why are tariffs imposed?

Ans. Tariffs are imposed to make imports from foreign countries relatively expensive than domestic goods. This discourages imports and protects domestically produced goods.

Q.8. What is the meaning of quantitative restrictions?

Ans. Quantitative restrictions are specific limits imposed by countries on the quantity or value of goods that can be imported or exported. It can be in the form of a quota, a monopoly or any other quantitative means.

Q.9. Those public sector undertakings which are making profits should be privatized. Do you agree with this view? Why?

Ans. The following explanation is possible for this:

a)    The PSUs which are making profits should not be privatized because they are revenue generator for the government. But if a PSU is an inefficient and loss making one, then the same PSU exerts unnecessary burden on the government's scarce revenues and further may lead to budget deficit. The loss making PSUs should be privatized.

b)    Some of the PSUs like, water, railways, etc. enhance the welfare of nation and is meant to serve general public at a very nominal cost. Privatization of such important PSUs will lead to loss of welfare of poor people. Hence, only less important PSUs should be privatized while leaving the core and important PSUs to be owned by the public sector.

c)    Instead of privatization of profit-making PSUs, government can allow more degree of autonomy and accountability in their operations, which will not only increase their productivity and efficiency but also enhance their competitiveness with their private counterparts.

Q.10. Do you think outsourcing is good for India? Why are developed countries opposing it?

Ans. Yes, outsourcing is good for India because:

a)    Employment: For a developing country like India, employment generation is an important objective and outsourcing proves to be a boon for creating more employment opportunities. It leads to generation of newer and higher paying jobs.

b)    Exchange of technical know-how: Outsourcing enables the exchange of ideas and technical know-how of sophisticated and advanced technology from developed to developing countries.

c)    International worthiness: Outsourcing to India also enhances India's international worthiness credibility. This increases the inflow of investment to India.

d)    Encourages other sectors: Outsourcing not only benefits the service sector but also affects other related sectors like industrial and agricultural sector through various backward and forward linkages.

e)    Contributes to human capital formation: Outsourcing helps in the development and formation of human capital by training, imparting them with advanced skills, thereby, increasing their future scope and their suitability for high ranked jobs.

f)     Better standard of living and eradication of poverty: By creating more and higher paying jobs, outsourcing improves the standard and quality of living of the people in the developing countries. It also helps in reducing poverty.

g)    Greater infrastructural investment: Outsourcing to India requires better quality infrastructure. This leads to the modernization of the economy and larger investment by the government to develop quality infrastructure and develop quality human capital.

Developed countries are opposing this because outsourcing leads to the outflow of investments and funds from the developed countries to the developing nations. Also the MNCs contribute more to the development of the host country than the home country.

Q.11. India has certain advantages which make it a favourite outsourcing destination. What are these advantages?

Ans. The advantages which make it a favourite outsourcing destination are:

a)    Easy Availability of Cheap Labour: As the wage rates in India are comparatively lower than that of in the developed countries, MNCs find it economically feasible to outsource their business in India.

b)    Skills: Indians have reasonable degree of skills and techniques also knowledge of international language, English.

c)    Stable Political Environment: The democratic political environment in India provides a stable and secured environment to the MNCs to expand and grow.

d)    Availability of raw material at cheaper rate: India is well enriched in natural resources. This ensures the MNCs cheap availability of raw material and undisturbed and perennial supply of raw materials. This enables proper and smooth operation of MNCs.

Q.12. Do you think the navaratna policy of the government helps in improving the performance of public sector undertakings in India? How?

Ans. The government has decided to give special treatment to some of the important profit making PSUs. The granting of navaratna status resulted in better performance of these companies They were given greater managerial and operational autonomy, in taking various decisions to run the company efficiently and thus increase their profits. They also became highly competitive and some of them are becoming the giant global players. Therefore, the navaratna policy has certainly improved the performance of these PSUs.

Q.13. What are the major factors responsible for the high growth of the service sector?

Ans. There are various factors which are responsible for the high growth of the service sector:

a)    Reforms introduced in 1991, removed various restrictions on the movement of international finance which led to huge inflow of foreign capital, foreign direct investments and outsourcing to India. This encouraged the service sector growth.

b)    Availability of cheap labour and skilled labour at lower wage rate.

c)    The revolution in Information Technology (IT) field in India has also played a major role in the high growth of the service sector.

d)    Indian economy is experiencing structural transformation that implies shift of economic dependence from primary to tertiary sector. Due to this transformation, there was increased demand of services by other sectors which y boosted the service sector.

Q.14. Agriculture sector appears to be adversely affected by the reform process. Why?

Ans. The economic reforms of 1991 have not been able to benefit agriculture, where the growth rate has been decelerating. The reasons are:

a)    Public investment in agriculture sector especially in infrastructure, which includes irrigation, power, roads market linkages and research and extension, has been reduced in the reform period.

b)    Removal of subsidies on fertilizers pushed up the cost of production of agriculture. This made farming more expensive, thereby, adversely affecting the poor and marginal farmers.

c)    Since the commencement of WTO, this sector has been experiencing a number of policy changes such as reduction in import duties on agricultural products, removal of minimum support price and lifting of quantitative restrictions on agricultural products.

Q.15. Why has the industrial sector performed poorly in the reform period?

Ans. The industrial sector has performed poorly in the reform period due to:

a)    The cheaper imports of foreign goods have replaced the demand of domestic goods.

b)    Due to lack of infrastructure, the domestic firms could not compete with their developed foreign counterparts in terms of cost of production and quality of goods.

c)    Developing countries like India still does not have the access to global markets of developed countries due to high non-tariff barriers.

d)    The domestic industries were given protection during the pre-liberalized period but at the time of liberalization, the domestic industries were still not developed up to the extent it was thought and consequently, they could not compete with the multi-national companies.

Q.16. Discuss economic reforms in India in the light of social justice and welfare.

Ans. If the economic reforms have given us an opportunity in terms of greater access to global markets and high technology, it has also compromised the welfare of people belonging to poor section. It devastated the local producers as well as the farmers. It results in the greater inequalities of income and wealth. Further, the economic reforms developed the areas that were well connected with the metropolitan cities leaving the remote and rural area undeveloped. It results in growth of service sector of India especially in the form of quality education, superior health care facilities, IT, tourism, multiplex cinemas etc. were out of the reach of the poor section of the population.

X_Economics_Chapter-3_Money & Credit_Practice Set_Part 2.

Class X           Chapter – 3

Money and Credit  -  Practice Questions (2)

Ques. What are the functions of Money?

Ans. The major functions of Money are as follows:

1.            Money as the Medium of Exchange:

This is the primary function of money. People exchange different goods and services through the medium of Money. By serving this way, money has solved the problems faced in barter system.

2.            Money as a Unit of Account:

Money serves as a unit of account or measure of value. Different commodities are measured in different units e.g. milk in liters, cloth in meters, potatoes in kg. Therefore, the exchange of goods for each other had been difficult. But money has given them a single measuring rod i.e. now, the value of these goods can be expressed in common unit of money.

3.            Standard of Deferred Payments:

Deferred payments are payments which are made some time in future. Debts are now expressed in terms of money. Money has made it easier to borrow and repay the loans because the value of money generally maintains a constant value through time.

4.            Money as a Store of Value:

Wealth can be stored in terms of money for future. Thus, the value is stored in most liquid asset form i.e. money. By spending money, we can quickly get any commodity in future.

Ques. What is ‘Liquidity of Money’?

Ans. Liquidity of Money: Liquidity means convertibility into cash. The ability to convert an asset into money quickly without any loss in its value is called liquidity of the asset. Money is the most liquid asset of all. One can convert money into any commodity or any other asset easily, quickly and without any loss at any point of time.

Ques. Define Bank.

Ans. Bank: Any institution which accepts deposits from the public and advances loans is called a bank. Thus, a bank acts as a financial intermediary.

Ques. What is banking?

Ans. Banking: Banking means the accepting deposits of money from the public (repayable on demand or otherwise, and withdrawable by cheques, draft etc.) for the purpose of lending.

Ques. What do you mean by Commercial Bank?

Ans. Commercial Bank: The financial institution which performs the function of accepting deposits from general public and giving loans for investment with the aim of earning profit.

Ques. What are the primary functions of a bank.

Ans. The primary functions of a bank are as follows:

1.            Bank accepts deposits: A commercial bank accepts deposits in the form of current, saving and fixed deposits. Bank collects savings of individuals and firms. Deposits are the lifeline of a bank.

2.            Bank gives loans and advances: Bank gives loans particularly to the businessmen and entrepreneurs and thereby earns interest. This is the main source of bank’s income. Bank keeps certain amount of deposits as reserves and gives the balance amount as loans and advances.

Ques. What is a Central Bank? Name the central bank of India.

Ans. Central Bank: The central bank is apex institution of monetary system of a country. It organizes, supervises, regulates and develops the monetary system of the country.

            In India, the name of central bank is Reserve Bank of India (RBI). At present, the governor of RBI is Urjit Patel (took the charge in Sep, 2016), preceded by Raghuram Rajan.

Ques. What are the functions of the central bank of a country?

Ans. The functions of central bank are as follow:

1.            Issue of Currency: The central bank is given the sole monopoly of issuing currency in order to secure the volume of currency and credit in the economy. In India, all currency notes except one rupee note and coins are issued by RBI. One rupee notes and coins are issued by government mints.

2.            Banker to the Government: Central bank functions as a banker to the government -  both central and state governments. It carries out all banking business of the govt. Government keep their money in the current account with central bank. Central bank accepts receipts and makes payments on behalf of the governments.

3.            Banker’s Bank and Supervisor: The central bank regulates and supervises the functioning of all banks of the country. Central bank acts as banker’s bank in three capacities:

(a)          Custodian of the cash reserves of banks.

(b)          Lender of last resort.

(c)          Acts as a bank of central clearance, settlements and transfers.

4.            Controller of Credit and Money Supply: Central bank controls the credit and money supply through its monetary policy which consists of two parts – currency and credit. It serves this purpose through different monetary policy instruments.

Ques. Differentiate between central bank and commercial banks.

 Ans.

Central Bank	Commercial Bank
·                     It is the apex bank in the money                    market of the country.	·                     It is merely a unit in the banking                    structure of the country.
·                     Its primary aim is public welfare.	·                     Its primary aim is to make profit.
·                     It has the sole monopoly to                    currency notes.	·                     Its not authorized to issue                    currency notes.
·                     It cannot deal with public.	·                     It directly deals with the public                    and business firms.
·                     It acts as a banker to the govt.	·                     It has no such responsibility to govt.
·                     It is a custodian of nation’s Gold                    and Foreign Exchange Reserves.	·                     It does not perform such function.
·                     It decides the monetary policy to                    stabilize the economy.	·                     It plays supplementary role in that                    & is regulated by the central bank.

X_Economics_Chapter-3_Money & Credit_Practice Questions_Part 3.

Class X           Chapter – 3

Money and Credit  -  Practice Questions (3)

Ques.1. In situations with high risks, credit might create further problems for the borrower. Explain.

Answer: In situations with high risks, credit might create further problems for the borrower. This is also known as a debt-trap. Taking credit involves an interest rate on the loan and if this is not paid back, then the borrower is forced to give up his collateral or asset used as the guarantee, to the lender. If a farmer takes a loan for crop production and the crop fails, loan payment becomes impossible. To repay the loan the farmer may sell a part of his land making the situation worse than before. Thus, in situations with high risks, if the risks affect a borrower badly, then he ends up losing more than he would have without the loan.

Ques.2. How does money solve the problem of double coincidence of wants? Explain with an example of your own.

Answer: In a barter system where goods are directly exchanged without the use of money, double coincidence of wants is an essential feature. By serving as a medium of exchanges, money removes the need for double coincidence of wants and the difficulties associated with the barter system. For example, it is no longer necessary for the farmer to look for a book publisher who will buy his cereals at the same time sell him books. All he has to do is find a buyer for his cereals. If he has exchanged his cereals for money, he can purchase any goods or service which he needs. This is because money acts as a medium of exchange.

Ques.3. How do banks mediate between those who have surplus money and those who need money?

Answer: Banks keep small portion deposits as cash (15%) for themselves (to pay the depositors on demand). They use the major portion of the deposits to extend loans to those who need money. In this way banks mediate between those who have surplus money and those who need money.

Ques.4. Look at a 10 rupee note. What is written on top? Can you explain this statement?

Answer: “Reserve Bank of India” and “Guaranteed by the Government” are written on top. In India, Reserve Bank of India issues currency notes on behalf of the central government. The statement means that the currency is authorized or guaranteed by the Central Government. That is, Indian law legalizes the use of rupee as a medium of payment that can not be refused in setting transaction in India.

Ques.5. Why do we need to expand formal sources of credit in India?

Answer: We need to expand formal sources of credit in India due to:→ To reduce dependence on informal sources of credit because the latter charge high interest rates and do not benefit the borrower much.
→ Cheap and affordable credit is essential for country’s development.
→ Banks and co-operatives should increase their lending particularly in rural areas.

Ques.6. What is the basic idea behind the SHGs for the poor? Explain in your own words.

Answer: The basic behind the SHGs is to provide a financial resource for the poor through organizing the rural poor especially women, into small Self Help Groups. They also provide timely loans at a responsible interest rate without collateral.
Thus, the main objectives of the SHGs are:
→ To organize rural poor especially women into small Self Help Groups.

→ To collect savings of their members.

→ To provide loans without collateral.

→ To provide timely loans for a variety of purposes.

→ To provide loans at responsible rate of interest and easy terms.

→ Provide platform to discuss and act on a variety of social issues such education, health, nutrition, domestic violence etc.

Ques.7. What are the reasons why the banks might not be willing to lend to certain borrowers?

Answer: The banks might not be willing to lend certain borrowers due to the following reasons:

→ Banks require proper documents and collateral as security against loans. Some persons fail to meet these requirements.

→ The borrowers who have not repaid previous loans, the banks might not be willing to lend them further.

→ The banks might not be willing to lend those entrepreneurs who are going to invest in the business with high risks.

→ One of the principle objectives of a bank is to earn more profits after meeting a number of expenses. For this purpose it has to adopt judicious loan and investment policies which ensure fair and stable return on the funds.

Ques.8. In what ways does the Reserve Bank of India supervise the functions of Banks? Why is this necessary?

Answer: The Reserve Bank of India supervises the functions of banks in a number of ways:
→ The commercial banks are required to hold part of their cash reserves with their RBI. RBI ensures that the banks maintain a minimum cash balance out of the deposits they receive.

→ RBI observes that the banks give loans not just to profit making businesses and traders but also to small cultivators, small scale industries, small borrowers etc.

→ The commercial banks have to submit information to the RBI on how much they are lending, to whom, at what interest rate etc.
This is necessary to ensure equality in the economy of the country and protect especially small depositors, farmers, small scale industries, small borrowers etc. In this process RBI also acts as the lender of the last resort to the banks.

Ques.9. Analyse the role of credit for development.

Answer: Cheap and affordable credit plays a crucial role for the country’s development. There is a huge demand for loans for various economic activities. The credit helps people to meet the ongoing expenses of production and thereby develop their business. Many people could then borrow for a variety of different needs. They could grow crops, do business, set up industries etc. In this way credit plays a vital role in the development of a country.