Class 11 Economics Chapter 3: Liberalisation, Privatisation and Globalisation: An Appraisal (NCERT Indian Economic Development)

Key takeaways

A balance of payments crisis in 1991, with reserves for under two weeks of imports, led to the New Economic Policy.
The NEP has stabilisation (short term) and structural (long term) parts.
Liberalisation ended most licensing and cut trade barriers; privatisation includes disinvestment.
Globalisation is the outcome: more trade, outsourcing and WTO rules.
Growth rose but agriculture, industry and jobs showed weaknesses.

This is Chapter 3 of the Indian Economic Development chapter list for Class 11 Economics. It builds on Chapter 2 and begins the unit on reforms since 1991.

3.1Background: The 1991 Crisis

In 1991 India faced a balance of payments crisis: foreign exchange reserves fell to a level that could finance imports for less than two weeks, the government could not meet its foreign borrowing obligations, and prices rose sharply. Years of spending beyond revenue, rising imports and weak exports led India to seek loans from the World Bank and IMF.

Through the 1980s, government spending outran its income from taxes and public enterprises, and the shortfall was borrowed at home and abroad. Foreign exchange, itself borrowed, was sometimes spent on consumption, while exports did not grow enough to pay for rising imports of items like petroleum. By 1991 reserves covered imports for under two weeks and India could not pay interest due to foreign lenders. It approached the World Bank (IBRD) and the IMF for about US$7 billion, and agreed to their conditions: opening up the economy, reducing the state’s role and removing trade restrictions.

The result was the New Economic Policy (NEP), which has two sets of measures. Stabilisation measures are short term, to correct balance of payments weaknesses and control inflation. Structural reforms are long-term measures that raise efficiency and international competitiveness by removing rigidities.

Figure 3.1: What the NEP containedThe strategies of liberalisation and privatisation produce globalisation as an outcome.

Why a balance of payments crisis forces reform

A country that imports more than it earns through exports must finance the gap by borrowing or by using its foreign exchange reserves. When reserves run low and lenders lose confidence, the country cannot pay for essential imports such as oil, and cannot meet its debt payments. At that point it must seek help from the IMF and the World Bank, which lend on conditions.

In 1991 India had reserves for about two weeks of imports. The conditions linked to the loans, and the government’s own view that earlier controls had slowed growth, led to a broad programme of reforms instead of a narrow fix. The same reasoning explains why the reforms combined short-term stabilisation with long-term structural change.

3.2Liberalisation

Liberalisation removes government controls so that firms can start, grow and trade more freely. Reforms from 1991 abolished most industrial licensing, reduced the Reserve Bank’s role from regulator to facilitator in finance, lowered and simplified taxes, let the rupee’s value be set by the market and cut quantitative import restrictions and tariffs.

Main areas of liberalisation
Area	What changed
Industrial sector	Licensing abolished except for a few categories such as alcohol, cigarettes, hazardous chemicals, explosives, electronics, aerospace and drugs; public sector reserved only for defence equipment, atomic energy and railways; many small-industry reservations removed; prices set largely by markets
Financial sector	RBI moved from regulator towards facilitator; private and foreign banks allowed; freedom to open branches; foreign institutional investors (merchant bankers, mutual and pension funds) allowed in markets
Tax reforms	Lower, simpler direct taxes (income and corporation tax); reform of indirect taxes to build a common national market
Foreign exchange	Rupee devalued in 1991; exchange rate mostly determined by demand and supply
Trade and investment	Quantitative restrictions on imports removed, tariffs reduced, import licensing ended except for hazardous and environmentally sensitive goods, export duties removed

Reading the reforms as a sequence

The reforms did not all come at once, and some had begun in the 1980s. A useful way to read them is by what each removed. Industrial deregulation removed the need for a licence to start or expand. Trade reforms removed quotas and lowered tariffs. Financial reforms reduced administrative control over banks. Tax reforms lowered rates and simplified procedures. Exchange rate reforms allowed the market to set the value of the rupee.

Taken together, they increased competition and gave firms more freedom, but also exposed them to competition from imports. The result for any group depends on whether it was protected by the old system or was held back by it.

3.3Privatisation and Disinvestment

Privatisation means transferring ownership or management of public sector companies to private hands, either by withdrawing the government from them or by outright sale. Selling part of a company’s equity to the public is called disinvestment. The government also gave profitable firms more autonomy as Navaratnas and Mini Ratnas.

The official aims were to improve financial discipline, enable modernisation and use private capital and managerial skill, and to attract foreign direct investment. In the late 1990s the government granted greater operational and financial freedom to nine firms called Navaratnas and to many other profit-making enterprises, Mini Ratnas, including IOC, BPCL, HPCL, ONGC, SAIL, BHEL and NTPC in the first set. Critics argue that disinvestment undervalued public assets and that proceeds went to cover revenue shortfalls instead of building social infrastructure.

Privatisation and the public interest

A central question is which activities the public sector should keep. Defence and some basic services affect everyone and cannot be left to profit alone, while many manufacturing and service activities can be run by private firms. The textbook gives telecommunications as a case where state monopoly led to long waiting times for connections once private operators could also provide the service.

Privatisation also raises concerns about jobs and about selling assets below their value. Safeguards include fair valuation, open bidding and regulation of private providers.

3.4Globalisation

Globalisation is the integration of a country’s economy with the world economy through trade, investment and technology, so that events elsewhere affect local conditions. It is the outcome of liberalisation and privatisation. Outsourcing of services to India and the rules of the World Trade Organisation are two important aspects.

Outsourcing

Outsourcing is hiring a service from outside the firm, often from another country, that was earlier done internally. Fast communications and information technology made it practical: call centres, record keeping, accountancy, music recording, film editing, clinical advice and even teaching are now delivered from India to firms abroad. Low wages and skilled labour made India a favoured destination.

The World Trade Organisation

The WTO was founded in 1995 as the successor to the General Agreement on Tariffs and Trade (GATT), set up in 1948 with 23 countries. It aims at a rule-based trading system without arbitrary restrictions and covers trade in goods and services. India has kept its commitments by removing quantitative restrictions and cutting tariffs, while arguing for the developing world. Some scholars question the benefit, since developed countries keep farm subsidies and barriers while asking developing countries to open their markets.

3.5An Assessment of the Reforms

The reforms raised GDP growth, increased foreign investment and foreign exchange reserves, and helped exports of software, auto parts and engineering goods. But growth was led by services rather than agriculture and industry, and critics point to weak job creation, falling public investment in agriculture, an industrial slowdown and limits on government revenue.

GDP growth rose from 5.6 per cent a year in 1980-91 to 6.4 per cent in 1992-2001. Foreign exchange reserves rose from about US$6 billion in 1990-91 to about US$125 billion in 2004-05, about 21 times as much, and foreign investment grew from about US$100 million in 1990-91 to about US$150 billion in 2003-04. Prices were kept in check.

Figure 3.2: Reserves under reformReserves in 1990-91 would have financed less than a fortnight of imports; those of 2004-05 were far larger.

Criticisms

Where critics found shortcomings
Area	Concern
Employment	Growth was not matched by enough jobs
Agriculture	Slower growth; less public investment in irrigation, roads, power and research; lower subsidies; exposure to cheap imports and export-led crop choices
Industry	Cheaper imports reduced demand for domestic goods; poor infrastructure; trade barriers in rich countries
Disinvestment	Alleged undervaluation; proceeds used to plug revenue gaps
Fiscal policy	Tax cuts and lower tariffs reduced revenue, limiting social spending

The book’s figures belong to the period it covers. For current growth, reserves and investment, use the latest Economic Survey.

How to evaluate the reforms fairly

A fair assessment looks at several tests. One is growth: whether GDP and exports rose. A second is stability: whether the external position and prices improved. A third is distribution: whether gains reached farmers, workers and the poor. A fourth is capacity: whether public investment in infrastructure, agriculture and social sectors was maintained.

The textbook finds gains on the first two tests and concerns on the last two. It also warns that its figures belong to a particular period. When writing an answer, state the period, support each claim with a figure and give both sides before reaching a view.

Worked Examples

Example 1: Faster growth, shorter doubling time

Given: GDP growth was 5.6 per cent a year in 1980-91 and 6.4 per cent in 1992-2001.
Formula: Doubling time ≈ 70 ÷ growth rate
Steps: 70 ÷ 5.6 = 12.5 years; 70 ÷ 6.4 = 10.9 years. Rise in growth = 0.8 percentage points, or 14.3 per cent of the old rate.
Answer: At the higher rate, output doubles about 1.6 years sooner.

Example 2: Disinvestment target

Given: In 1998-99 the disinvestment target was ₹5,000 crore and the amount raised was ₹5,400 crore.
Formula: Excess = achieved − target; percentage = excess ÷ target × 100
Steps: 5,400 − 5,000 = 400. 400 ÷ 5,000 × 100 = 8.
Answer: The government beat its target by ₹400 crore, or 8 per cent.

Example 3: A farmer after the reforms (illustrative)

Given: A farmer spends ₹1,500 on half an acre of groundnut and sells 2 quintals at ₹1,000. Later input costs rise 20 per cent and the price falls to ₹850.
Formula: Profit = revenue − cost
Steps: Earlier: 2,000 − 1,500 = +500 (33.3 per cent on cost). Later: cost 1,500 × 1.2 = 1,800; revenue 2 × 850 = 1,700; profit = −100.
Answer: Profit of ₹500 turns into a loss of ₹100, showing how higher costs and cheaper imports can squeeze small farmers.

Example 4: Effect of a tariff cut

Given: An imported good costs ₹500 before duty. The tariff falls from 60 per cent to 20 per cent. The domestic product sells for ₹700.
Formula: Landed price = price × (1 + tariff)
Steps: Before: 500 × 1.6 = 800 (above 700, so the domestic good is protected). After: 500 × 1.2 = 600 (below 700).
Answer: The import now undercuts the domestic firm by ₹100, which must cut costs or price.

Common Mistakes

Saying globalisation is a policy. Liberalisation and privatisation are policies; globalisation is their outcome.
Calling all disinvestment “privatisation of loss-making firms”. Profitable firms have also been partly sold.
Mixing up stabilisation (short term, balance of payments and prices) with structural reforms (long term, efficiency).
Quoting the book’s reserve and growth numbers as current figures.

10 Important Questions for Class 11 Board and School Examinations

Questions are written in original words. Marks are shown beside each question.

Q1Which of these was a cause of the 1991 crisis? (a) reserves enough for years of imports (b) reserves falling to under two weeks of imports (c) falling prices (d) a trade surplus 1 mark · MCQ

The correct option is (b).

Q2The WTO replaced (a) the IMF (b) GATT (c) the World Bank (d) UNCTAD 1 mark · MCQ

The correct option is (b) GATT, in 1995.

Q3Assertion (A): Globalisation is an outcome of liberalisation and privatisation. Reason (R): These policies remove barriers to trade and investment. Which is correct? 1 mark · Assertion-reason

Both A and R are true, and R explains A.

Q4What is disinvestment? Why was it used? 3 marks

Disinvestment is the sale of part of the equity of public sector undertakings to the public or private investors.

The government fixes annual targets for it. The aims were to improve financial discipline, to modernise firms and to use private capital and management. Critics argue that assets were undervalued and the proceeds used to cover revenue shortfalls instead of building social infrastructure. In 1998-99 the target was ₹5,000 crore and ₹5,400 crore was raised.

Q5Distinguish between stabilisation and structural reform measures. 3 marks

Stabilisation measures are short-term steps to correct balance of payments weaknesses and control inflation, while structural reforms are long-term steps to raise efficiency.

Stabilisation: devaluing the rupee, keeping enough foreign exchange reserves, and holding down prices.
Structural reform: ending industrial licensing, opening trade and reforming tax and finance.
Stabilisation deals with the crisis; structural reform removes the rigidities that caused slow growth.

The 1991 New Economic Policy contained both.

Q6What is outsourcing? Why has India become a destination for it? 4 marks

Outsourcing is the hiring of a service from an outside provider, often abroad, that a company earlier produced within itself.

Fast communications and information technology made it possible to send voice, text and data across continents in real time.
India has low wage rates, so services cost less than in rich countries.
India also has a large pool of skilled, English-speaking workers.
Examples: call centres, accountancy, record keeping, music recording, film editing, clinical advice and teaching.

It has created many jobs in Indian cities.

Q7Explain the financial sector reforms of 1991. 4 marks

The financial sector reforms of 1991 aimed to move the Reserve Bank from regulator to facilitator and to open banking to competition.

Private sector banks, Indian and foreign, were allowed to start.
The foreign investment limit in banks was raised to around 50 per cent.
Banks meeting conditions could open branches without RBI approval.
Foreign institutional investors, such as mutual and pension funds, could invest in Indian financial markets.
Banks could raise resources in India and abroad, but the RBI kept powers to protect depositors.

Banks gained freedom on many decisions without consulting the RBI.

Q8Assess the impact of the reforms on agriculture and industry. 6 marks

The reforms raised overall growth but agriculture and industry slowed and faced new pressures.

Agriculture: public investment in irrigation, power, roads and research fell, and fertiliser subsidy cuts raised costs for small farmers.
Import duties and quantitative restrictions on farm goods were reduced, exposing farmers to foreign competition.
A shift to export crops put pressure on foodgrain prices.
Industry: cheaper imports lowered demand for domestic goods, and poor infrastructure, especially power, added to the problem.
Rich countries kept non-tariff barriers, for example on textiles.

Growth came mostly from services.

The book’s conclusion is that the reforms brought benefits such as higher growth, more foreign investment and a stronger external position, but they did not solve the problems of employment, farming and industry. Critics add that Indian farmers faced global competition without enough support, and that growth based on services alone left many workers outside its gains.

Q9Explain the trade and tax reforms since 1991. 6 marks

Trade reforms removed quantitative restrictions and cut tariffs, and tax reforms lowered and simplified taxes.

Import licensing was abolished except for hazardous and environmentally sensitive items.
Quantitative restrictions on consumer goods and farm products were removed by April 2001.
Tariff rates were reduced and export duties removed to improve competitiveness.
Income tax and corporation tax rates were lowered, because very high rates encouraged evasion.
Indirect tax reform aimed at a common national market, and procedures were simplified for better compliance.

Lower tariffs and tax cuts, however, reduced the revenue from customs and limited social spending.

Taken together, these steps opened the economy to competition and simplified taxation, and they were meant to raise efficiency and compliance. The costs were lower customs revenue and tax incentives for foreign investors, which narrowed the room for development and welfare spending.

Q10A good costs ₹400 to import before duty. Find its landed price at a 50 per cent tariff and at a 25 per cent tariff. 4 marks · Numerical

The landed price is ₹600 at 50 per cent and ₹500 at 25 per cent.

Formula: price × (1 + tariff).

Steps: 400 × 1.5 = 600; 400 × 1.25 = 500.

Final answer: ₹600 and ₹500; a lower tariff cuts the price by ₹100.

10 Points for State PSC and UPSC Aspirants

In 1991 India’s reserves covered about two weeks of imports; the rupee was devalued in two steps in July 1991 and gold was pledged to raise foreign exchange.Why it matters: the immediate triggers of reform.Source: Reserve Bank of India; NCERT
The New Industrial Policy of 1991 abolished industrial licensing for most industries and reduced the list reserved for the public sector.Why it matters: the core of liberalisation.Source: DPIIT
The Narasimham Committee (1991 and 1998) recommended financial sector reforms, including reducing statutory reserve requirements.Why it matters: committee-name questions are common.Source: Reserve Bank of India
FERA (1973) was replaced by the Foreign Exchange Management Act (FEMA), 1999, moving from control to management of foreign exchange.Why it matters: an act-replacement question.Source: India Code; RBI
The Goods and Services Tax began on 1 July 2017 after the 101st Constitution Amendment, with the GST Council deciding rates.Why it matters: the major indirect tax reform.Source: GST Council; PIB
The WTO started on 1 January 1995, succeeding GATT (1948), and is headquartered in Geneva.Why it matters: standard institution facts.Source: NCERT; WTO
DIPAM, in the Finance Ministry, manages disinvestment of central public sector enterprises.Why it matters: the agency behind disinvestment.Source: Ministry of Finance; PIB
The Navaratna and Mini Ratna schemes of the late 1990s give profitable central public sector enterprises more autonomy.Why it matters: know the categories.Source: Department of Public Enterprises; PIB
FDI policy is set by DPIIT, and many sectors allow investment under the automatic route without prior approval.Why it matters: link reforms to current FDI policy.Source: DPIIT
Outsourcing and IT-enabled services have made services a leading source of India’s exports.Why it matters: explains why the service sector led post-reform growth.Source: Economic Survey

These are revision notes, not official predictions of exam content.

Quick Revision

1991: reserves for under two weeks of imports; IMF and World Bank loan.
NEP = stabilisation + structural reforms.
LPG: liberalisation, privatisation (policies), globalisation (outcome).
Licensing abolished except few industries.
Disinvestment = sale of equity of PSUs.
WTO (1995) replaced GATT (1948).
Growth up; agriculture and jobs lagged.

Glossary:

Liberalisation Privatisation Globalisation Disinvestment Outsourcing World Trade Organisation

Related chapters: Indian Economy 1950-1990, the policy regime that preceded the reforms; Poverty, one of the outcomes the reforms are judged by; Open Economy Macroeconomics for balance of payments and exchange rate.

Sources

NCERT textbooks: Indian Economic Development, Class 11, National Council of Educational Research and Training. Syllabus reference. Accessed 23 October 2026.
Department for Promotion of Industry and Internal Trade, Government of India. Accessed 23 October 2026.
Reserve Bank of India. Accessed 23 October 2026.
Goods and Services Tax Council. Accessed 23 October 2026.
Economic Survey, Ministry of Finance, Government of India. Accessed 23 October 2026.
Press Information Bureau, Government of India. Accessed 23 October 2026.

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Drafted with AI assistance from the NCERT chapter structure, in original words. Content is checked and approved by Dr. Anamika Shrivastava, PhD Economics, before publication. Read how this site works or send a correction.

Syllabus year 2026-27 · Last updated 23 October 2026