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Economic Environment

and Policy (EEP)


Session-3

Economic Systems, Planning


and Reforms in India

Dr. Tarun Das, Professor, IILM

Prof. Tarun Das, IILM EEP Session-3 1


Contents of this presentation
1. Economic Systems
2. Types and dimensions of planning
3. Economic Planning in India
4. Background of reforms in India
5. Scope of reforms in India

Prof. Tarun Das, IILM EEP Session-3 2


4. Economic Systems

Prof. Tarun Das, IILM EEP Session-3 3


4.1 Various Economic Systems
• Economic system means economic relations among
various economic agents as regards ownership of
resources, modes of production, distribution and
consumption of goods and servics.
• It represents the sum total of institutions,
arrangements and methods to deal with fundamental
problems of an economy.
• Economic system determines who owns the means
of production; who provides labour; and how relative
shares of wages, interests, rents and profits are
determined.
• In brief an economic system defines the institutional
framework regulating business.
• Economic systems can be broadly classified as
Capitalist, Socialist and mixed.

Prof. Tarun Das, IILM EEP Session-3 4


4.2 Market Economy or

Capitalism
According to Karl Mark, regarded as father of socialism and
communism, there are two distinct groups of people- Capitalist
(who owns huge assets) and the Proletariat (who does not
possess any assets).
• In a capitalist society, means of production are owned and
controlled by the capitalists.
• Proletariat owns only labor. It lacks bargaining power, provides
cheap labor and makes significant contribution to output.
• But a major share of national income is taken away by the
capitalist in the form of rents, interests and profits.
• There exist wide disparities of incomes of the rich and the poor.
• High income inequalities and significant poverty ratios are
dominant features of capitalism.
• Capitalism is often called free market economy which is not
planned or controlled by a central authority and where
government intervention is minimum. Govt makes basic rules and
regulations for market players and formulates public policies for
addressing inequalities and market imperfections.
• USA and Canada are the very good examples of market economy.

Prof. Tarun Das, IILM EEP Session-3 5


4.3 Centrally Planned/ Socialist
Economy
• In a socialist economy, means of production are
owned and controlled by the state. Individual
consumers and producers loose their sovereignty.
• Govt sets the rules and goals for the nation under
which economic agents are made to work
accordingly.
• There is small level of inequality justified by the
differences of individual capabilities.
• The institution of private property does not exist to
perpetuate inequality.
• People contributes to the public exchequer according
to their capacity to pay, but receives govt transfers
according to their needs. There is fair distribution of
national income among people by the state.

Prof. Tarun Das, IILM EEP Session-3 6


4.4 Command and Communist
Economy
• It is the extreme form of centrally planned economy.
This system refers to the political and economic
development proposed by Karl Marx and developed
and implemented by V.I. Lenin.
• Under this system people rule both politically and
economically and there is a classless society.
• Totalitarian system of govt ruled by single
authoritarian party.
• All means of production are owned and controlled by
the govt which also determines types, quantity,
quality and prices of goods and services to be
produced.
• The Command economy has the following broad
principles: (1) Cooperation; (2) Collectivization; (3)
public ownership of property; (4) Equality and (5)
Central planning and People’s planning.
• China, former Soviet Union, Vietnam, and Cuba are
best examples of Command Economy.

Prof. Tarun Das, IILM EEP Session-3 7


4.5 Mixed Economy
• Mixed economic system is the middle path
between free market economy and the pure
socialist economy. It allows the co-existence of
both private and public sectors.
• Indian economy is a very good example of mixed
economy.
• Since independence and beginning of planning
Indian govt has adopted the basic principle of
“Growth with social justice and equity”.
• Initially, many heavy industries were reserved for
the public sector as these sectors are associated
with high risk, low profitability, high capital/output
ratio, long gestation period ad lumpiness of huge
capital.
• Since 1991 govt has adopted new economic policy
and has opened most of the sectors for private
investment.
• Govt is also encouraging public-private
partnership.
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4.6 Public Policies in India
• Since July 1991 Indian government has
initiated wide-ranging reforms in trade,
industry, financial and public sectors.
• To improve efficiency, productivity and
international competitiveness of Indian
industries and to impart dynamism to
overall growth process and systems.
• Emphasis is on the role of market
economy and the so-called LPG
(Liberalization, Privatization and
Globalization).

Prof. Tarun Das, IILM EEP Session-3 9


4.7 Reorientation of Public Policies
 To create enabling environment for Public-
Private Partnership (PPP);
 To link fiscal incentives to productivity;
 To streamline public investment programs;
 To repair market failures;
 To strengthen structures and institutions;
 To put emphasis on multi-stakeholders
consultations, flexibility, decentralization,
selectivity, prioritization, outputs, outcomes,
implementation, evaluation, monitoring and
co-ordination of policies and programs.

Prof. Tarun Das, IILM EEP Session-3 10


4.8 Redefining the role of Bureaucracy

There is a distinct change of the mind set


and role of the government officials:
 From a controller to an enabler
 From a supplier to a facilitator
 From an operator to a policy maker
 From a regulator to a trustee of social
equity and environmental sustainability.

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4.10 Markets and Institutions
 Efficient markets are central for rapid and successful
economic development.
 But, the real markets are neither competitive nor
perfect. Government’s role is to repair market failures
and to correct market imperfections by strengthening
institutions.
 Institutions play an important role in developing fair,
competitive, inclusive, efficient and integrated markets.
 Institutions are also essential for implementing and
evaluating public policies.
 Institutions include organisations, rules, regulations,
laws, conventions and informal norms.

Prof. Tarun Das, IILM EEP Session-3 12


4.11 Role of Public
Institutions
Successful development requires sound and
strong public institutions:
 To protect property rights,
 To regulate market agents,
 To maintain macro-economic stability,
 To ensure social equity and justice,
 To provide social safety nets,
 To resolve conflicts.
All these help in reducing transactions costs
and provide incentives for competition.

Prof. Tarun Das, IILM EEP Session-3 13


4.12 Building Efficient Institutions
 Institution building is diverse involving all
stakeholders viz. policymakers, corporate
bodies and civil society.
 It is an evolutionary and cumulative
process, and requires open mind by all
stakeholders to accept new ideas and
innovations and to reward merits.
 Most of the institutions that support
markets need to be developed by the
government for regulating, stabilizing and
legitimizing their scope and functions.

Prof. Tarun Das, IILM EEP Session-3 14


4.13 Institutions for Good
Governance
Good Governance requires the development and
strengthening of the following institutions:
 Economic and political institutions- Law and
order, tax administration, social security
systems, regulatory institutions, labour laws.
 Independent audit- financial, physical
performance and policy audit.
 Independent judiciary,
 Free Press,
 Private voluntary organisations (NGOs, self
help groups, Consumers Welfare
Associations, and Civil Societies).

Prof. Tarun Das, IILM EEP Session-3 15


4.14 Progress until now
 Significant progress has been made in
India in these respects since 1991.
 Indian economy today is more liberal and
open, and there is greater participation of
people in development.
 Regulatory bodies have been set up for
seaports, airports, telecom, electricity,
insurance, pension, (POL under
consideration).
 Govt is setting up Competition
Commission
 Although progress is slow, outdated laws
and Acts are being amended.
Prof. Tarun Das, IILM EEP Session-3 16
1.1 Types of Planning
Policy planning versus physical planning
Indicative planning versus target setting
Consistency versus optimizing approach
Sectoral versus economy wide planning
Selective versus all purpose planning
Learning versus blue print approach
Consultancy versus dirigist approach
Monitoring trends versus forecasting
future
Sound public investment programs versus
overall investment planning
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1.2 Dimensions of Planning
Macro planning (National level)
Meso (Middle level- States, UTs)
Spatial (over space- SEZs, EPZs)
Regional (over regions- planning for
North Eastern States)
Local (Municipalities, Corporations)
Sectoral (over industries/ sectors)
Micro (at unit levels- corporate
planning)
Inter temporal (over time)
Intergenerational (over generations)

Prof. Tarun Das, IILM EEP Session-3 18


1.3 Desirable characteristics
of an Ideal Planning Model
• Internal consistency
• Comprehensiveness
• Dynamic to take care of changes over time
• Unique and stable solutions
• Easy testing and calibration of the model with
the help of available data, computer capacities
and algorithms, statistical techniques
• Model should be continually tested, reviewed,
calibrated, monitored, updated, simulated and
improved to make it more realistic.

Prof. Tarun Das, IILM EEP Session-3 19


1.4 Economic Planning in India (1)
 Since the beginning of the five year plans in 1951
Indian govt has adopted a mixed economic system
guided by “Socialistic Pattern of Society” and basic
objective of “Growth with Social Justice and Equity”.
 Although basic objective remains the same, the
emphasis and the type of planning model differed in
subsequent five year plans.
 Over the years Indian economy has become more
liberal, more globalized and more people oriented.

Prof. Tarun Das, IILM EEP Session-3 20


1.5 Economic Planning in India
Plan and Planning
(2)
Focus on Ave.
period Model growth

First Plan Harrod Agriculture/ 3.6


(1951-56) Domar rural sector

2nd Plan Mahalanobis Heavy 4.3


(1956-61) Model Industry

Third Plan Leontief Public Sector 2.9


(1961-66) input-output enterprises

Plan Holi- Swaminatha Green 4.0


day(66-69 n Model Revolution
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1.6 Economic Planning in India
(3)
Plan and Planning Focus on Ave.
period Model growth

5th Plan Sukhomaya Poverty 4.8


(1974-79) Chakravarty reduction

Annual No Model Control of -4.9


(1979-80) inflation

Sixth Plan Sukhomaya Industrial 5.6


(1980-85) Chakravarty Liberalisation

7th Plan
Prof. Tarun Das, IILM Leontief ICT,
EEP Session-3 5.7 22
(1985-90) Input- Transport
1.7 Economic Planning in India
(4)
Plan and Planning Focus on Ave.
period Model growth

8th Plan Leontief Growth and 6.2


(1992-97) Input- Poverty
Output reduction
9th Plan As above As above 5.5
(1997-02)

10th Plan As above As above 7.8


(2002-07)

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11th Plan As above Faster and 9%
Economic Reforms in India

Prof. Tarun Das, IILM EEP Session-3 24


2.1 Background of Economic Reforms in
India
• It is well known that in 1990-91 India faced
an unprecedented foreign exchange crisis
due to adverse impact of the Gulf war n the
Indian economy.
• Our foreign exchange reserves dwindled to
less than $1 billion sufficient to finance only
two weeks imports of essential items.
• Non-resident Indians started withdrawing
their deposits at a faster speed.
• International credit rating organizations
downgraded Indian scrips.

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2.2 Background of Economic Reforms in
India
• Windows of international commercial lending
were closed for Indian corporate bodies as they
lost confidence on the Indian economy.
• At home there was fall of industrial output, high
inflation at 16 percent and widespread
unemployment.
• In order to create International confidence the
government o India had to lift gold physically
from the chest of the Reserve of Bank of India at
Bombay and deposit it with the Bank of England
at London and the Bank of Japan at Tokyo.

Prof. Tarun Das, IILM EEP Session-3 26


2.3 Core Objectives of Reforms
• At that time in July 1991 the new govt
with Narasimha Rao as PM and
Manmohan Singh as Finance Minister lost
no time to initiate wide-ranging reforms
in trade, industry, financial and public
sectors;
• To improve efficiency, productivity and
international competitiveness of Indian
industries and to impart dynamism to
overall growth process.
• Emphasis is on the role of market
economy and the so-called LPG
(liberalization and privatisation along with
globalization).
Prof. Tarun Das, IILM EEP Session-3 27
2.4 Indian Economy in
Pre-Reforms Period
 Mixed economy, but too closed
 Far behind world-wide globalization
 High level of control, licenses and regulation
 Monopolistic practices in public utilities
 Complex tax regime with high rates
 High tariff walls & QRs on imports
 Rigid factor markets-land, labour, capital
 High fiscal deficits and public debt
 Precarious balance of payments

Prof. Tarun Das, IILM EEP Session-3 28


2.5 Rationale for Reforms
Over control, over regulation, licensing and
high taxes and duties resulted in :
Low efficiency and productivity
High transactions cost
Corruption and rent seeking
Non-optimal allocation of resources
Sub-optimal choice of size, technology and
location of industries
Low quality but high prices of products
Bureaucratic inefficiency and red tape
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2.6 Unique Features of Reforms
 Gradual, Step by Step, Evolutionary and Cumulative
Approach, not a Big Bang, Shock Therapy or
Revolutionary Approach
 General political consensus
 Strong emphasis on “human face”
 Sovereignty and nationality constraint
 Agency constraint- ideology of party in power
 Preference for national-level decentralization
 Prioritisation and sequencing of reforms
 No write-off / rescheduling of external debt
 Practically no sacrifice made by people

Prof. Tarun Das, IILM EEP Session-3 30


2.7 Challenges of reforms
 To break the nexus among vested interests so
that reforms can be implemented,
 To change the mind-set of all policymakers
and bureaucrats to accept change,
 To achieve sustained growth with equity and
social justice so that fruits of reforms reach
everybody,
 To involve all stakeholders in the process of
development, because we know that no
reforms can succeed unless we are able to
take the people along with us.

Prof. Tarun Das, IILM EEP Session-3 31


2.8 Reorientation of Public Policies
 To create enabling environment for public-
private partnership
 To link fiscal incentives to productivity
 To streamline public investment programs
 To reorient planning for multi-stakeholders
consultations, flexibility, decentralisation,
selectivity, monitoring and co-ordination
 To repair market failures
 To strengthen structures & institutions

Prof. Tarun Das, IILM EEP Session-3 32


MAJOR REFORMS

Prof. Tarun Das, IILM EEP Session-3 33


3.1 Macro adjustment policies
• Macro adjustment policies can be broadly
divided into two groups- stabilization
policies and structural reforms.
• While stabilization policies aim at reducing
macro economic imbalances by attacking
demand, structural reforms aim at
increasing supply and improving
productivity and growth by encouraging
competitiveness, efficiency and dynamism
of industries and the corporate sector.

Prof. Tarun Das, IILM EEP Session-3 34


3.2 Economic Reforms since 1991

Structural Reforms
Stabilisation Policies
• Reforms in agriculture,
• Fiscal policies industry and infrastructure
• Monetary policies • Reforms in trade and
• Exchange rate policy external sector
• Tariff policy • Financial sector reforms
• Wage-income policy • Public sector reforms
• Administered price • Social sector reforms
• Factor market reforms
policy
- Land, Labor, Capital

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3.3 Paradigms of Reforms since 1991
Pre-Reforms Period Post Reforms Period
1.Quantitative licensing 1.Abolition of industrial and
on trade and industry trade licensing
2.Removal of state
2. State regulated monopolies, privati-sation
monopolies of utilities & divestment
and trade 3.Liberalisation of financial
3. Govt control on and capital markets
finance and capital 4.Liberal regime for FDI,
markets portfolio investment,
4.Restrictions on foreign technology
foreign investment
and technology
Prof. Tarun Das, IILM EEP Session-3 36
3.4 Paradigms of Reforms since 1991
Pre-Reforms Period Post Reforms Period
5.Import substitution 5.Export promotion and
and export of export diversification,
primary goods no import bias
6.High duties & taxes 6.Significant reduction
with multiple rates and rationalisation of
and large dispersion all taxes and duties
7.Sector-specific 7.Sector-neutral
monetary, fiscal and monetary, fiscal and
tariff policies tariff policies
8.End-use specific, 8.Flexible interest rates
multiple & controlled without any end-use
interest rates

Prof. Tarun Das, IILM EEP Session-3 37


3.5 Paradigms of Reforms since 1991
Pre-Reforms Period Post Reforms Period
9.Foreign exchange 9.Abolition of exchange
control, no converti- control, full converti-
bility of rupee bility on current A/C
10.Multiple and fixed 10.United and market
exchange rates determined exch.rates
11.Administered prices 12.Abolition of all
for minerals, utilities, administered prices
essential goods except for few drugs
12.Tax concessions on 12.Rationalised and
exports and savings being phased out

Prof. Tarun Das, IILM EEP Session-3 38


3.6 Paradigms of Reforms since 1991
Pre-Reforms Period Post Reforms Period
13. No change, budget
13.Explicit subsidies on
subsidies on LPG and
food, fertilisers, and kerosene introduced
some essential items 14.No change, but user
14.Hidden subsidies on charges are being
power, urban rationalised, and subsidies
targeted
transport, public
15.Acts governing consumer
goods, POL rights, IPR, independent
15.General lack of regulatory authority
consumers protection
and other rights

Prof. Tarun Das, IILM EEP Session-3 39


3.7 Paradigms of Reforms since 1991
Pre-Reforms Period Post Reforms Period
16.Central planning, 16.Decentralisation, sound
discretion, high institutional framework,
reforming civil services
degree of 17. No change- corporate
bureaucracy governance and social
17.Outdated responsibility introduced.
Companies Act 18. No change in labor policy,
little change in land markets
19. No change
18. No exit policy for
land and labour
19.Outdated legal
system and
commercial laws

Prof. Tarun Das, IILM EEP Session-3 40


3.8 Industrial Sector Reforms
Status in June 1991 Status in Nov 2008
(a)Govt.licensing required (a)Licensing abolished
for most industries which except for 9 industries
accounted for 66% of which account for less
new investment than 10% of production
(b)Restrictions on (b)MRTP Act amended.
expansion under MRTP ( c)Many items
( c)Reservation of 836 dereserved.
items for SSI units (d)Only four viz.defense,
(d)18 major industries atomic energy,some
reserved for public sector
minerals, rail reserved
for public sector.
Prof. Tarun Das, IILM EEP Session-3 41
3.9 Public Sector Reforms
Status in June 1991 Status in Nov 2008
(a)Budget support to (a) Budget Support
PSEs: 1.5% of GDP abolished.
(b) Price and purchase (b)No price preference,
preference for PSEs but purchase
( c) Preferential treatment preference exists
for bank credits ( c) No preferential treat-
(d) No hard budget ment for bank credits
constraints (d) MOUs strengthened
(e) No disinvestment (e) Divestment allowed
(f)SICA does not include (f)SICA amended to
sick PSUs cover sick PSUs
Prof. Tarun Das, IILM EEP Session-3 42
3.10 External Sector Reforms
Status in June 1991 Status in Nov 2008
(a)Fixed exchange rate (a)Exchange rate is
determined by RBI market determined
(b)QRs on 91% of imports (b)Most QRs removed
(c)Imports of 55 goods (c)Most items
canalised decanalised
(d)439 items of exports (d)Abolished except for
minerals
are s.t. export licenses (e)Abolished & agriculture
(e)Export taxes on agro (f)Fully convertible on
products & minerals current account,
(f)Rupee not convertible partially convertible on
capital account.

Prof. Tarun Das, IILM EEP Session-3 43


3.11 External Sector Reforms
Status in June 1991 Status in Nov 2008
(g)Strict Exchange control (g)FERA replaced by
and FERA FEMA
(h)Restrictions on foreign (h)FDI liberalised, no
investment and restrictions on
technology transfer technology transfer
(i)Restrictions on joint (i)Liberalised
ventures abroad
(j)Direct export subsidies (j)Abolished
on specific sectors
(k)High tariff walls (k)Significant reduction
of import duties

Prof. Tarun Das, IILM EEP Session-3 44


3.12 Financial Sector
 Capital markets
• Establishment of SEBI as regulator
• Liberalisation in primary/ secondary markets
 Banking
• Major Steps taken for tackling NPAs
• Reduction of government equity
• Reduction in CRR, SLR & lending rates
 Insurance
 Opened for private and foreign participation
Establishment of IRDA as a regulatory entity

Prof. Tarun Das, IILM EEP Session-3 45


3.13 Progress of Financial
Sector Reforms
Status in June 1991 Status in Nov 2008
• Indian firms not • Indian firms allowed to
allowed to raise funds raise foreign funds by
from foreign stock GDR, ADR, FCCBs &
exchanges offshore funds
• Portfolio investment • FIIs, NRIs and OCBs
by foreign investors in allowed to buy stocks
Indian companies not in Indian markets s.t.
allowed overall limit of 74%
• Foreigners not • FIIs/ NRIs/ OCBs
allowed to buy G-secs allowed to buy G-secs
Prof. Tarun Das, IILM EEP Session-3 46
3.14 Fiscal Reforms
 Fiscal Responsibility and Budget Management
Act 2003
 Reduction and Targets on fiscal deficit,
revenue deficit and public debt
 Simplifying rules and procedures
 Strengthening tax administration
 Widening tax base & enhancing buoyancy
 Rationalisation and Reduction of rates

Prof. Tarun Das, IILM EEP Session-3 47


3.15 Social Sector
 Greater involvement of states
 Revamping of poverty alleviation and
employment generation programmes
 High priority to:
• Universal education
• Basic health
• Drinking water
• Sanitation
• Women and child development

Prof. Tarun Das, IILM EEP Session-3 48


4.1 Second Generation Reforms
Emphasis on
• Reforms at Micro, Sectoral and State
Levels
• Reforms in Factor Markets- Land and
Labour
• Agriculture reforms
• Infrastructure financing
• Targeting of Subsidies
• Hard budget constraints and control of
contingent liabilities
Prof. Tarun Das, IILM EEP Session-3 49
4.2 Agricultural Reforms
Greater thrust on rural infrastructure
Review of Essential Commodities Act
Focus on micro finance, rural credits
Introduction of Kisan credit cards
Amendment of Acts relating to agro-
based products
Setting up Agricultural Export Zones
Expansion of futures and forwarding
trading to agricultural products
Watershed development

Prof. Tarun Das, IILM EEP Session-3 50


4.3 Infrastructure Development
New Electricity Act 2003
Reforms in SEBs for Energy audit, commercia-
lisation of distribution and restructuring of SEB
Accelerated Power Development and Reform
Enactment of Energy Conversation Act 2001
Larger funds for National Highway Development
Model BOT schemes for roads/ bridges
Corporatisation of DOT and sea ports
Private investment in airports
Convergence Act covering telecommunications, IT
and broadcasting

Prof. Tarun Das, IILM EEP Session-3 51


4.4 Financial sector
Establishment of Clearing Corporation
Screen based trading in G-securities
Replacement of Public Debt Act by Government
Securities Act
Reduction of govt equity in banks
Voluntary Retirement Scheme (VRS) in banks
Setting up of Asset Reconstruction Companies
Legislation on securitisation
Legislation to facilitate foreclosure in banking sector
Private banks, insurance, provident companies
allowed

Prof. Tarun Das, IILM EEP Session-3 52


4.5 Industry
• Abolition of SICA and BIFR
• Competition Commission set up
• Companies Act being amended
• Dereservation of SSI sector
• Petroleum sector liberalised
• Privatisation of PSEs
• Amendment in Industrial Disputes Act
• Amendment in Contract Labour Act
• Phased decontrol in fertilisers

Prof. Tarun Das, IILM EEP Session-3 53


4.6 Human Development
Greater outlay on social sectors
Better micro-credit facilities to women
Enhancing social security cover for
landless labourers and children in Below-
Poverty-Line families
Educational loan facilities for students
Private Pension Fund set up
social insurance for old age

Prof. Tarun Das, IILM EEP Session-3 54


4.7 Fiscal Reforms
 Fiscal Responsibility and Fiscal
Responsibility Act 2003
 Expenditure control
• Downsizing government departments
• Reduction of controlled interest rates
 Revenue enhancement
• Introduction of VAT at state level
• Single rate of central excise @ 16%
• Expansion of service tax
• Enlarging scope of TDS

Prof. Tarun Das, IILM EEP Session-3 55


4.8 Future Agenda
 Coordinating state level reforms
 Accelerated privatisation
 Liberalisation of labour and land laws
 Strengthening regulation in infrastructure
 Development of debt and bond markets
 Provident and pension fund reforms
 Thrust on state provision of basic needs
 Rationalisation of user charges for public utilities

Prof. Tarun Das, IILM EEP Session-3 56


Thank you
Have a Good Day

Prof. Tarun Das, IILM EEP Session-3 57

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