12th Standard Commerce — Liberalization, Privatization and Globalization Online Test

About Liberalization, Privatization and Globalization

Easy ~40 min study

Liberalization, Privatization and Globalization is the second chapter of Unit 7, Business Environment, in the Tamil Nadu State Board Class 12 Commerce book. It begins with the 1991 balance of payments crisis, when India took loans from the World Bank and the IMF and announced the New Economic Policy, popularly called the LPG model.

The lesson takes each dimension in turn. Liberalisation relaxed government controls and abolished the licence system; privatisation opened public sector industries to private firms through disinvestment, sale of shares and the MoU system; globalisation integrated the Indian economy with the rest of the world through trade agreements, export promotion and lower tariffs.

This page gathers the five book-back one mark questions, with answers checked against the book's key and the lesson, and additional questions on every section, each with a short explanation.

What you'll learn

• Name the three dimensions of the New Economic Policy and explain why India adopted it in 1991.
• Explain the meaning and forms of liberalisation.
• State the advantages, disadvantages and impact of liberalisation.
• Explain the meaning, forms, merits and demerits of privatisation.
• Describe the forms, advantages, disadvantages and impact of globalisation.
• List the highlights of the LPG policy.

Before you start

• The meaning of business environment from the previous chapter.
• Basic ideas of public sector and private sector enterprises.
• Simple ideas of imports, exports and foreign exchange.

Liberalization, Privatization and Globalization explained

What this lesson covers

New Economic Policy

The NEP has three dimensions: liberalisation, privatisation and globalisation. Its base in many countries was the Dunkel Draft; Arthur Dunkel submitted a 22,000 page document for the WTO, and India committed itself to the policy in 1991.

Liberalisation

• Meaning: relaxation of government restrictions in social and economic policies; the result of the New Industrial Policy that abolished the licence raj.
• Forms: freedom from industrial licensing (six industries excepted, now five), freedom to expand production, small scale investment limit raised to Rs. 1 crore, rupee devaluation in 1991, easier exports and imports.
• Impact: India became the seventh largest economy; foreign collaboration and MNCs grew.

Privatisation

• Meaning: transferring ownership from government to the private sector.
• Forms: public sector industries cut from 17 to 8, sale of PSU shares, MoU (1991) and disinvestment.
• India Scooters Limited was the first company privatised in India.

Globalisation

• Meaning: integration of the domestic economy with the rest of the world.
• Forms: foreign trade policy (TRIPS), export promotion, freedom to repatriate, reduction in tariffs, open competition.
• Pros and cons: foreign collaboration, wider markets, technology and less brain drain, against loss of domestic industries, inequality and dominance of foreign institutions.

Highlights of the LPG policy

New foreign trade agreements, FDI and FII, deregulation, overseas trade, inflation control, tax reforms and the abolition of licence.

Common mistakes to avoid

• Calling liberalisation the result of privatisation. The book says liberalisation is the result of the New Industrial Policy that abolished the licence system.
• Listing increase in unemployment as an advantage of liberalisation. It is a disadvantage.
• Saying industries reserved for the public sector were cut to 3. They were cut from 17 to 8; only three remain Government monopolies today.
• Treating professional management as a disadvantage of privatisation. It is an advantage.
• Saying globalisation narrows the gap between rich and poor. The book lists increase in inequalities as a disadvantage.

Test yourself on these with the practice test, then check the worked reasoning in the solved MCQs.

Frequently asked questions

What is the New Economic Policy?

After the 1991 crisis India took loans from the World Bank and IMF and agreed to their conditions by announcing the New Economic Policy, a wide range of reforms commonly known as the LPG model: liberalisation, privatisation and globalisation.

What is liberalisation?

Liberalisation means relaxation of various government restrictions in social and economic policies so that economies are free to enter the market. It is the result of the New Industrial Policy, which abolished the licence system or licence raj.

What is privatisation?

Privatisation is the process of transferring ownership of a business enterprise, agency or public service from the government to the private sector. Simply, it permits the private sector to set up industries previously reserved for the public sector.

What is globalisation?

Globalisation means the interaction and integration of the domestic economy with the rest of the world in foreign investment, trade, production and financial matters. It results from removing barriers between national economies.

What is disinvestment?

Disinvestment is the process in which the Government sells to the private sector those PSUs that have been running into loss. The book calls it a system of privatising government enterprises.

Who introduced liberalisation in India?

The former Prime Minister of India, Dr. Manmohan Singh, is considered the architect of Indian economic reforms. He introduced the policy of liberalisation in India in 1991.