Chapter 20 — Liberalization, Privatization and Globalization: Exercise Solutions
I. Choose the Correct Answer
Q1. Relaxation of government restrictions is called ________. Answer: a) Liberalization
Q2. Selling PSUs to private sector is called ________. Answer: b) Privatization
Q3. In privatization, ownership is transferred to ________ sector. Answer: c) Private
Q4. Integration of a nation's economy with the world economy is ________. Answer: d) Globalization
Q5. The New Economic Policy was introduced in the year ________. Answer: c) 1991
Additional MCQs
Q1. Migration of talented persons from one country to another is ________. Answer: c) Brain Drain
Q2. Disinvestment of PSUs to private sector is ________. Answer: b) Privatization
Q3. Removing restrictions on trade and investment is ________. Answer: a) Liberalization
Q4. Who introduced the New Economic Policy in India? Answer: c) Dr. Manmohan Singh
Q5. PSU stands for ________. Answer: d) Public Sector Undertaking (not Public State Units)
Q6. Find the odd one out: BHEL, SAIL, CDP, NALCO. Answer: c) CDP — it is not a privatized PSU, while the others are PSUs that were privatized.
Q7. Which statements about LPG are correct? (i) Liberalization means relaxation of rules (ii) Privatization means selling PSUs to private sector (iii) Globalization means integration with world economy Answer: d) All i, ii, and iii are correct
II. Match the Following
| List I | List II | Answer |
|---|---|---|
| i. Globalization | 4. Nation's economy to world | i — 4 |
| ii. Privatization | 3. Government to private | ii — 3 |
| iii. Nationalization | 2. Private to Government | iii — 2 |
| iv. Liberalization | 1. Relaxation | iv — 1 |
III. Assertion and Reason
Q1. Assertion (A): PSUs were sold to the private sector. Reason (R): PSUs were running in losses.
IV. Very Short Answer Questions
Q1. What are the branches of the New Economic Policy? Answer: The New Economic Policy has three branches: Liberalization, Privatization, and Globalization (LPG).
Q2. What is privatization? Answer: Privatization is the process of selling public sector undertakings (PSUs) to the private sector and permitting private entities to set up industries that were previously reserved for the public sector.
Q3. State any two disadvantages of liberalization. Answer: 1. Increase in unemployment. 2. Loss to domestic units due to competition from foreign companies.
Q4. Name the industries reserved for the public sector. Answer: The industries reserved for the public sector are: Arms and ammunition, Mineral oils, Mining ore, and Atomic energy.
Q5. State any two advantages of globalization. Answer: 1. Increase in foreign collaboration and investments. 2. Expansion of market access for domestic companies worldwide.
V. Short Answer Questions
Q1. What is liberalization? Answer: Liberalization refers to the government relaxing laws and rules, reducing restrictions in social and economic policies, and enabling free market entry. It involves removing licensing requirements, reducing tariffs, and allowing private participation in previously restricted sectors.
Q2. What is PSU? Answer: PSU stands for Public Sector Undertaking. It is a company where the majority of shares (more than 51%) are owned by the Government — either the Central Government or a State Government. PSUs were established to promote industrial development and reduce regional imbalances.
Q3. State the three impacts of globalization. Answer: 1. Corporations gained competitive advantage from lower costs of production. 2. MNCs can manufacture, buy, and sell goods and services worldwide. 3. Boom in consumer products market due to increased availability and variety.
Q4. Write about the New Economic Policy. Answer: In 1991, India agreed to conditions set by IBRD and IMF and announced the New Economic Policy with LPG reforms: 1. Liberalization — relaxation of government restrictions on trade and industry. 2. Privatization — selling PSUs to the private sector and allowing private participation. 3. Globalization — integration of India's economy with the world economy.
VI. Long Answer Questions
Q1. Explain the advantages and disadvantages of liberalization.
Advantages of liberalization: 1. Control over prices — removal of tariffs leads to lower prices for consumers. 2. Reduction in external borrowing — more FDIs reduce reliance on foreign loans. 3. Increase in consumption — more goods and services are available to consumers.
Disadvantages of liberalization: 1. Increased dependence on foreign countries — domestic industries rely on foreign technology and capital. 2. Loss to domestic units — local businesses struggle to compete with foreign companies. 3. Increased unemployment — domestic units shut down, leading to job losses. 4. Unbalanced development — only certain sectors and regions benefit from liberalization.
Q2. Explain the impact of LPG on the Indian economy.
Impact of Liberalization:
- New business opportunities abroad.
- Increase in Foreign Direct Investment (FDI).
- New markets for Indian goods.
- Easier access to bank loans for businesses.
Impact of Privatization:
- Positive financial growth of the economy.
- Decreased fiscal deficits and public debts.
- Increased efficiency and productivity.
- Better quality of goods and services.
Impact of Globalization:
- MNCs operate worldwide, bringing technology and capital.
- Boom in consumer products market.
- Job creation from foreign companies setting up operations in India.
Q3. Explain the highlights of LPG (SOFI).
SOFI — Highlights of LPG: 1. S — Steps to regulate inflation through market-oriented policies. 2. O — Opportunities for overseas trade opened up for Indian companies. 3. F — Foreign Investments — both FDI (Foreign Direct Investment) and FII (Foreign Institutional Investment) increased. 4. F — Foreign Trade Agreements — India signed multiple trade agreements. 5. I — MRTP Act amended — Monopolies and Restrictive Trade Practices Act was modified to promote competition. 6. I — Deregulation — removal of unnecessary controls and licensing.
Q4. Explain the forms of privatization (MSC).
Forms of Privatization — MSC: 1. M — MOU (Memorandum of Understanding): An agreement between the government and the PSU to raise productivity and performance. It sets targets and accountability. 2. S — Sale of PSU shares to private sector: The government sells its shares in PSUs to private investors, reducing its stake below the majority. 3. C — Contraction of PSUs: The number of industries reserved for the public sector was reduced from 17 to 8, opening more areas to private participation.
Q5. Explain the forms of globalization (FREE).
Forms of Globalization — FREE: 1. F — Foreign Trade policy: Includes TRIPS (Trade-Related Aspects of Intellectual Property Rights) and GATS (General Agreement on Trade in Services). 2. R — Reduction in tariffs: Lower import duties to facilitate international trade. 3. E — Export promotion: Policies to encourage and support exports from India. 4. E — Encouraging open competition: Allowing foreign companies to compete in Indian markets.
Q6. Explain the advantages and disadvantages of privatization.
Advantages of Privatization (RIP): 1. R — Reduction in government burden — the government no longer has to fund loss-making PSUs. 2. I — Increase in efficiency — private management brings better productivity. 3. P — Professional management — private sector brings expertise and innovation.
Disadvantages of Privatization (LIP): 1. L — Lack of welfare — private companies focus on profit, not social welfare. 2. I — Ignores weaker sections — the poor and marginalised are not a priority. 3. P — Political pressure — privatisation decisions are often influenced by political considerations.
Q7. What are the advantages of disinvestment?
Advantages of disinvestment: 1. Greater private capital inflow into PSUs. 2. Ability to sell loss-making PSUs and reduce government liability. 3. Forces PSUs to become more efficient and competitive. 4. Increases economic activity and stimulates the market.
Common Mistakes
- Confusing nationalization (private to government) with privatization (government to private).
- Stating that PSU stands for "Public State Units" — it is "Public Sector Undertaking."
- Forgetting that the New Economic Policy was introduced in 1991, not 1990 or 1992.
- Mixing up the SOFI, MSC, and FREE mnemonics — each applies to a specific sub-topic.
- Listing only advantages without disadvantages (or vice versa) when the question asks for both.
- Confusing CDP as a privatized PSU — it is the odd one out in the list.
- Stating that liberalization means "removing all government control" — it means reducing or relaxing restrictions, not eliminating all regulation.
Exam Checklist
- [ ] Can define liberalization, privatization, and globalization with examples
- [ ] Can list the advantages and disadvantages of liberalization
- [ ] Can list the advantages (RIP) and disadvantages (LIP) of privatization
- [ ] Can explain the three forms of privatization (MSC — MOU, Sale of shares, Contraction)
- [ ] Can explain the four forms of globalization (FREE — Foreign trade policy, Reduction in tariffs, Export promotion, Encouraging open competition)
- [ ] Can explain the highlights of LPG (SOFI)
- [ ] Can state the industries still reserved for the public sector
- [ ] Can explain the impact of LPG on the Indian economy
- [ ] Know the advantages of disinvestment