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Actual Questions
05 June 2017 17:48

Composition and 1. What is your perception of the slowing down of industrial growth in India from the mid 1960s till the mid / late
Trends 1970s. (2009, II, 20)
2. What was the shortages faced by manufacturing sector at the dawn of independence? 2010

Role of public 1. Whether public and private investments in India are complementary or competing? (2009, II, 20)
and private 2. Delineate the trends in the growth and industrial composition of public sector in India during pre liberalisation
sector period. 2012

1. Analyse the performance of MSMEs during last five years ending 2006-07. What are the major initiatives taken
Small scale and by he government to revitalise micro, small and medium enterprises 2008
cottage 2. What is your perception of the role of small scale and cottage industries in the present context of the Indian
industries economy? (2009, II, 20)
3. A number of production lines were reserved for small scale sector in pre liberalisation period. Did such
reservation achieved its objectives?
4. What was the impact of policy reservation in favour of small scale industries in India during the post-
independence but pre-liberalisation era? (2015, 10)

New Economic 1. Comment on the recent moves towards liberalization and their effects on Indian industry. (2007, II, 20)
Policy

Strategy of 1. Write a detailed note on the import substitution and export promotion strategy of India. (2007, II, 60)
industrialisation  2. It was needless export pessimism that led India to adopt import substitution strategy of industrialization in
the pre-liberalization period. Critically examine
3. Discuss the recent initiatives for augmenting power generation in India. (2015, 10)
4. What are the main components of the National Manufacturing Policy, 2014 ? Discuss (2015, 15)
5. Explain the recent policy initiatives for enhancing crude oil and natural gas production in India.(2015, 15)

6. Q. What were the shortages faced by manufacturing sector in India at the dawn of independence? (2010, II, 10)

Privatisation, 1. Is privatization a boon or a bane for India? Discuss (2007, II, 20)
Disinvestment 2. The initial rationale for growth of public sector is no longer valid since the Indian economy now has a strong
industrial base. Do you agree or disagree with this statement. Justify. 2008
3. Critically examine the arguments usually put forward in favor of disinvestment of public sector enterprises.
(2009, II, 20)
4. Can disinvestment in public sector be sustainable alternative for raising resources for government
expenditure (2012, 12)
5. Write the present policy of disinvestment of GoI. What modifications will you suggest? (2013, 25)

Role of FDI and 1. Examine the role of FDI in the Indian economy empirically. (2009, II, 20)
MNCs 2. Compare the role of FDI and FII in India's economic development. Are FDIs preferable to portfolio
investments? Evaluate. (2011, II, 30)
3. Why is capital inflow through MNCs preferred over foreign debt? (2012, 30) 
4. Write for and against FDI in retail trade of India. (2014, 15)
5. There is a need for an ‘apex agency' monitor and to regulate the entry
and functioning of transnational corporations in the context of India’s
broader national interest. Give arguments in support of your answer (2015,15)

1. National and Per- 1. Provide an analytical description of growth and change in the Indian economy
Capita Income: during the period from 1950-51 to 1966-67. (2009, II, 60)
Patterns, Trends, 2. Highlight structural changes in Indian economy before 1991. (2014)
Aggregate, Sectoral 3. What are the major factors that affected growth in post independence India
Composition till 1991 (2015, 15)
4. Q. Write on second generation economic reforms in India. (2011, II, 15)
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Broad factors 5. What factors determine size and composition of national income? Contrast
determining NI and the scenarios pre and post liberalisation. (2012, 30)
distribution 6. What do you mean by Hindu rate of growth? Why has it been argued that
poverty cannot be eradicated under Hindu rate of growth?(2012,II,10)
7. Trace growth of real per capita income in India in pre liberalisation period,
keeping in view interplay of increasing population and real income. (2012,
12)
8. Population is not just a denominator to deflate aggregates. It is determined by
level and pattern of economic development. Comment (2012, 20)
9. How does population growth affect economic development of a country ?
Can the age structure of population alter the pattern of development in
a country ? Examine in the light of the Indian experience (2015, 20)
10. India has been over-tertiarised. Do you agree (2010,20)
11. The declining share of commodity producing sectors and rising share of
Services is creating imbalances of far reaching consequences. Analyse
(2011, 30)
12. Indian growth model is service led while China’s is manufacturing led, show
implications of two model for sustainable development (2014, 10)
13. It is often said that the prime generator of economic growth in India in the post-
liberalisation period has been the service sector. Do you agree
with this view ? What has been its implication on the balance of
payments in India ? (2015, 20)
14. Skill development and thereby raising labour productivity like that in China
would be the only panacea for long term growth in India. Discuss. (2014,10)
15. How can e-governance tackle the issue of corruption and inefficiency in
government to lead to higher growth rate.  (2014, 15)
16. In the context of the information technology revolution, Digital India
Programme, is a significant instrument of administrative reforms. Do
you agree? (2015, 20)
17. Second generation economic reforms are crucial for raising growth rate of
economy. Throw light on those dimensions. (2014, 10)
18.

Measures and Trends in 1. Discuss the nature and incidence of rural poverty in India. What suggestions
poverty do you offer to solve it?  - 20 , 2007
2. Examine critically the economic reforms underway since 1991 with
reference to their effect on inequality, poverty reduction and vulnerability to
external shocks. 
3. NOT REQUIRED - Carefully examine and analyze the argument that over
the last 2 decades there is an increasing divergence between the incidence
of poverty based on the planning commission's expert committee
methodology and that based on calorie intakes as obtained from the national
sample surveys. (2009, II, 60)
4. Discuss the poverty trends - both rural and urban, between 1973-74 and
2004-05 across states in terms of pace of reduction and concentration and
relate them with changes in growth rates between the pre and the post
liberalization periods. (2010, II, 60)
5. Critically assess the Tendulkar committee's approach to measuring poverty
in India. (2010, II, 15)
6. Recent trends show that poverty incidence in urban areas is higher than its
rural counterpart in more prosperous states. What factors, do you think,
explain this? (2010, II, 20)
7. Discuss Amartya Sen's poverty measure and recent advances in poverty
measurement. (2011, II, 15)
8. "By restricting the social benefits to BPL households, the poverty line will be
fully converted from a statistical benchmark to a real life social division"
(Dreze). Discuss. (2011, II, 15)
9. Poverty alleviation strategy of the day is moving ahead of redistribution with
growth of Chenery and World Bank and Dreze and Sen's growth mediated
security and support led security strategies to empowerment, opportunities
and security lines. Elaborate. (2011, II, 30)
10. Discuss various measures of poverty with policy implications for removal of
poverty.(2012,20)
11. Explain why inspite  of poverty alleviation schemes number of poor has not
fallen much. (2012,10)
12. How is development looked upon by AK Sen in terms freedom and poverty
as  unfreedoms. Point out his narration of five dimensions of poverty.
(2013,10)
13. How are absolute and relative poverty measured? What modification in it has
been suggested by Amartya Sen? What are recent advances in area of
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poverty measurement? Discuss (2013,10)
14. What are the consequences of deviation form socialistic and mixed
economy path especially for a person BPL? (2014,10)
15. Highlight the issues of Bhagwati- Sen controversy over tacking poverty and
slow growth rate. (2014, 10)
16. Elaborate growth mediated security and support led security strategies of
poverty alleviation given by Dreze and Sen (2014, 20)
17. Market economy excludes poor from the consumer as well as
 employment market. Discuss how one can safeguard the interests of 
population below poverty line (2015)
18. Vitalization of rural economy is key to inclusive growth which is possible
through strategic management and technology up gradation (2014, 15)

INEQUALITY 1. Compare the strategies of trickle down growth with inclusive growth. Why
should strategy of inclusive growth be preferred? (2012, 20)
2. Growth and inequalities are directly related. Comment critically.
3. Explain why inspite of economic planning income distribution has turned more
unequal through time. (2012,II,10)
4. Write on dichotomy of development and urban bias in Indian economy. (2013,
10)
5. In Indian economy, dichotomy of development emerged during pre reform
period despite efforts of holistic development. Delineate the factors responsible
for it. (2014)
6. The ‘dichotomy of development’ in India emerged owing to ‘governance
deficit’ and ‘crony capitalism’. Examine. (2015, 15)
7. Explain the main factors which hindered the trickle down and agenda of
inclusive growth is being pressed for economic justice (2014, 10)
8. Elitist bias and crony capitalism have eclipsed the issues of efficient and
distributive justice in India. Elaborate (2014, 20)
9. Why socialistic model of development could not bring equitable distribution of
income in India and country remained on low growth path (2014, 10)

NEP and Employment 1. Account for changes in employment pattern in India after liberalisation. What
are your suggestions for employment security in informal sector of economy?
(2013, 25)
2. Employment pattern in India in post reform period has moved in favour
of contractual, casual and self employment. How public sector employment
deceleration would impact future of labour market in India? Elaborate
(2014,10)
3. Examine the labour policy and its impact on employment (labour) market in
India. (2014, 15)

Employment and
Poverty

Rural Wages

Employment 1. Make a critical assessment of the National Rural Employment Guarantee


Generation, New Rural Scheme of India. (2007, II, 60)
Employment Guarantee 2. Not relevant now What are the key elements of SGSY? What are the main
Scheme, Poverty problems in its implementation (2010,II, 20)
Alleviation Schemes 3. Analyze the impact of MNREGA on rural and urban wages and rural migration.
(2011, II, 20)
4. NREGS should be reoriented to create permanent assets to promote
employment and generate income in rural sector. Critically evaluate (2014,
20)
5. Rural poverty continues to be a chronic problem in India, which cannot
be taken care of by anti-poverty programmes but by creation of
permanent productive assets. Discuss

External Sector

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1. Q. Examine whether External Commercial Borrowings are a good source of funding Indian industry. (2008,
20)
2. Q. Examine the validity of the proposition that cutting imports would lead to reduction of growth in case
of Indian economy. (2008,20)
3. Q. What ar main objectives of SEZ Act? Critically examine benefits realised and criticism as regards SEZ.
Would you support SEZ policy? (2008, 60)
4. Q. TRIPS runs counter to the neoliberal argument in favour of competition. Is this fair assessment?
Discuss (2009, 20)
5. Q. Bring out the broad changes in the level, composition and direction of Indian exports and imports
since liberalization in India. (2010, II, 40)
6. Q. What are four modes of GATS? Which has been preferred by India (2010,15)
7. Q. Write on unfinished agenda of Doha negotiations of WTO (2011, 15)
8. Q. Write on Indo-ASEAN trade relations (2011, 15)
9. Q. Is India ready for full capital account convertibility? (2011, 15)
10. Q. Write in brief on SEZ and their socio-economic repercussions. (2011, II, 20)
11. Q. Examine the challenges to export diversification and increase in export competitiveness of India.
(2011, II, 20)
12. Q.NOT REQUIRED In view of the fresh fears of global financial crisis arising out of decelerating credit
ratings of US and sovereign debt crisis in peripheral Euro zone economies, analyze its likely impact on
India's trade and growth performance. Suggest measures to contain it. (2011, II, 40)
13. Q. Would a flexible exchange rate suit India better than fixed in current international scenario? (2012,
12)
14. Q. Discuss salient features of TRIPS and Indian position on GIs and plant breeders’ rights. (2012, 30)
15. Q.Examine new EXIm policy. Given competition in trade, what corrective measures would you suggest to
make it more successful in boosting Indian exports (2012, 30)
16. Q. Partial capital account convertibility cannot serve the purpose of integrating Indian economy with
global economy. Analyse critically (2013, 10)
17. Q.NOT REUIRED What are key initiative in FTP 2009-14 for market diversification and technological up
gradation to boost exports? (2013, 10)
18. Q. Discuss the issues involved in CAC. Explain India’s important CA Liberalisation measures (2014, 15)
19. Q.Subsidy is contentious issue and roadblock in WTO. Examine India’s stand for protecting tis farmers.
(2014, 20)
20. Q. Write on Look East policy of India (2014, 15)
21. Q. Wtire for and against FDI in retail trade of India (2014, 15)

Monetary policy

Monetary SD 1. Examine the nature and causes of inflation in India. Critically examine the
System and measures adopted by authorities to control it. (2007,60). 
Role of RBI
Done 2. Examine main aspects of role of RBI under present liberalised regime as
compared to regime prior to 1991.(2009,20)
See Macro
Copy Not 3. What are implications of replacement of Prime Lending rate by base rate
Needed system (2010,15)

Not 4. Critically examine : RBI’s measures to contain inflation have compromised


Needed growth. (2011, 30)

Not 5. Examine the inflationary process in last three years. What are the steps taken
Needed by the government? (2012, 12)

SD 6. An underdeveloped money and capital market has been a major cause of slow


economic growth. Give relative importance of financial sector vis a vis real
sector in Indian economy (2013, 25)

Done 7. Inflation is not purely a monetary phenomenon in India and hence scope of
monetary policy of RBI to contain it is limited. Discuss (2013, 25)

Done 8. What are the major factors behind accumulation of non-performing
assets in the Indian banking sector in recent years ? Discuss. - 2015 - 10
DO after
reading 9. Discuss the need and justification for banking sector reforms in India
Banking

Ditto - DOUBT 10. Financial inclusion is one of the most essential components of inclusive


too growth/ Comment.

Do after
reading from

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Jhingan - Ch 71 11. Non-banking financial institutions need to be effectively regulated and
monitored in India. Can you suggest some measures in this direction ?

AGRICULTURE

A. Land 1. Q. Evaluate the track record of land reform in India in its various aspects, bringing out inter-
reforms and state differences. How would  you interpret this record? (2009, II, 60)
land tenure 2. Q. What are the components of Land reforms in India? Has it been completed? If not, then
system. what are the obstacles? (2013, 10)
3. Q. Why are Land reforms still not completed in India?  what are the obstacles? (2014, 15)

B. Green 1. Q. "The success of green revolution shows the importance of state in agrarian
Revolution transformation." Comment. (2009, II, 20)
2. Q. India urgently needs yet another green revolution by infusing modern technologies like
ICT and space technologies and strategic management technologies and strategic
management techniques to come up with demand side pressures resulting in persistent
food inflation in the economy. Do you agree? (2011, II, 30)
3. Q. Why Green Revolution lost its steam and India needs yet another Green revolution of
evergreen revolution. Discuss (2014, 20)

C. Capital 1. Q. Analyze the recent trend of gross capital formation in agriculture. Has it, do you think,
formation in been responsible for the sluggish growth rate in agriculture? (2011, II, 30)
agriculture

D. New 1. Q. What is your opinion on the view that economic reform process has largely bypassed
Economic agriculture? (2015, 15)
reform and
agriculture

E. Agriculture 1. Q. Subsidy is a contentious issue and roadblock in WTO.Examine India’s stand for protecting


and WTO its farmers’ interest  (2014, 20)

F.  Food 1. Q. Agro based industries, especially food processing units, can alter the fate of India.
Processing Discuss (2015, 15)

G. Subsidies 1. Q. Do you agree that focussed and target oriented technological interventions under NFSM
have made significant impact since its inception? Justify (2013, 10)
2. Q. What are the different types of agricultural subsidies given to Indian farmers? How can
these be rationalised? (2015, 15)

H. Agricultural 1. Q. Critically evaluate the reasons for fluctuations in agricultural prices in India. What would
Prices and I. the components of an optimum agriculture price policy regime for India? (2007, 60)
Public 2. Q. High MSP induce distortions, some of which ultimately hurt poor. Explain its merits and
Distribution demerits. (2015, 15)
System What has been the impact of targeted PDS on food security of rural poor? (2009, 20)
Examine the success of targeted PDS in achieving tis objectives (2010, 30)

J. Impact of 1. Q. "Declining public expenditure in agriculture is largely responsible for deceleration in


public growth in this sector in India." Critically examine the validity of this statement. (2010, II,
expenditure 20)
on agricultural
growth

General 1. Q. What are the constituents of an optimal agricultural export policy for India (2005, 60)
2. Q. Distinguish between cooperative, contractual and corporate farming. Which of these is
best suited for India and why? (2012, 20)
3. Q. What factors are responsible for slow growth in agriculture? What steps ought to be
taken for sustained growth? (2012, 12)

Pre- Independence

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2016 - In copy
1. Give a critical account of the underdevelopment of India during British rule. (2007, 20)
2. Basically it was British colonialism that has led to economic backwardness and vicious circle of poverty in
India. Critically comment on the statement  by giving factual rationale in light tot Indian economy since
independence. (2008, 60)
3. Q. Discuss the policy of discriminating protection and its impact on Indian industrial development during 
the  £ period. (2011, II, 15)
4. Q. Discuss the process of forced commercialization of agriculture under the colonial rule. (2009, II,
20)
5. Q. During the British rule, commercialisation of agriculture was forced on the farmers, while now it is
the need of the hour. (2012, 12)
6. Q. Compare and contrast the 'Swadesi' of 1905 and the 'Swadesi' promoted later by Mahatma Gandhi. (20
10, II, 20)
7. Q. Gunder Frank held that development of one part of the world causes underdevelopment of another p
art. Does it explain industrialization of £ and the de-
industrialization of India during the £ raj? Assess. (2010, II, 30)
8. Q. Is Gunder Frank's above view still valid in the contemporary world? Substantiate your answer. (2010, II,
 20)
9. Q. Write on drain theory developed by Dadabhai Naoroji. How does it explain sustained poverty in India?
(2013,12)

Fiscal 
1. Examine the role of indirect taxed in India’s economic development. 2007, 20
2. Q. Examine the progress of tax reforms in India. (2007, II, 20)
3. Q. Critically examine the rationale and implications of FRBM Act 2003. (2008, 20)
4. Q. Discuss the implications of high i inflation on Indian economy (2008, 60)
5. Q.NOT NEEDED Critically assess the key recommendations of the 12th finance commission. (2009, II, 20)
6. Q. Critically examine the fiscal federal system as it operates in India presently. What improvements would you
suggest? (2010, II, 30)
7. Q. How is GST different form VAT? NOT NEEDED - What is grand bargain suggested by 13th FC for GST
implementation (2012, 20)
8. Q. Explain the salient features of FRBMA. Explain to what extent has GoI been able to adhere to it? (2012, 30)
9. Q.Explore the nature of tax reforms India needs to ensure "inclusive growth", spelling out their basic
components as you see them. (2009, II, 60)

73rd, 74th amendment


1. Q. State the role of State Finance Commissions in India, with particular reference to rural economy (2010, 20)
2. Q. Discuss recommendation of 13th FC with regard to local government resources (2012, 20)
1. See this - http://www.epw.in/journal/2010/30/insight/have-state-finance-commissions-fulfilled-their-
constitutional-mandates.html
3. Q. Distinguish between fiscal and political federalism How has fiscal federalism been evolving in relation to
SCS in particular and other states in general.  (2012, 20)
4. Q. Discuss the salient economic features of 73rd and 74th CA acts. (2011, II, 20)
5. Q. Delineate the role of the district planning committee. (2010, II, 15)

Planning
1. In a supply constrained economy, how was it argued in India in the 1950s that deficit financing would help raise
the growth rate? In hindsight analyze the validity of this view. (2010, II, 30)
2. Growth of Indian economy was not commensurate with level of investments during first four decades of
planning. Give reasons. (2008, 20)
3. Q. Is economic planning relevant in the context of the globalized economy of India? Elucidate. (2007, II, 20)
4. Q. Discuss Gadgil contributions to Indian Economic Planning and Policy. Evaluate the key elements of Gadgil
formula used by PC. (2010, 20)
5. Q. Throw light on wage goods model of CN Vakil and PR Brahmanand. (2011, II, 15)
6. Q. Elaborate on Gandhian versus Nehruvian visions of Indian development. Do you think Gandhian approach is
again attracting scholars and people? Give reasons. (2011, II, 30)
7. Q. Throw light on the PURA model of rural development. (2011, II, 15)
8. Discuss views of VKRV Rao on deficit financing (2012, 12)
9. Q. Mixed economy is an outcome of the compromise between laissez faire capitalism and socialist’s state
control of resources. Mention its salient features. (2013, 12)
10. Q. State basic features of Mahalanobis Model (2013, 12)
11. Q. Do you think Gandhian vision of development is still relevant in India? Explain (2014, 15)

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General Learning
03 July 2017 20:17

• Small Answers in Paper 1


○ Focus on what is asked .
○ Directly start with that ( while writing intro)
○ Add anything only at the end
○ No need to focus on the Nitty gritty mid level steps
• See Tejasvi's way of writing

• Graphs and Pie Charts example


○ Trend over time - Bar Graphs
○ Comparison wrt other countries / State / Rural urban comparison - Bar Graphs
○ Pie Chart - Sectoral Composition
• Economics Answer Writing
• Use full sentences as if writing a paper
• Use Additional info- Eg names of economists, Articles like 243 in Brackets liberally
• After writing the Eco Centric Points
• Thinks what you would write in a GS answer
• Write Intro and Conclusion
• If you know the facts and figures, its good
• If you don’t know, no issue - Write a GS answer :)

Answer Writing strategy - Namami Bansal

l. Number one, please write in an organised manner. Really long paragraphs and complex sentences should be
avoided.
You would think that optional would demand sounding like we are expert economists. So, complex definitions and
statements are good. But no! You really know something (anything) when you can explain it in the simplest way. But
of course, use Economics terms. That is indispensable but explain in a simple organised way.
2.State the Crux of the theory in the beginning and then go about explaining it. Not the other way.
3.Make diagrams wherever possible.
4.Try to bring in examples from Indian economy in paper 1.
5.Write in points, underline key phrases.
Understand the possible questions that can come from Nobel Prize winner - eg market mechanism, information
assymetry came due to Hoolstorm's Nobel Prize this year

From <http://bl og.forumi a s .com/economi cs -s tra tegy-na ma mi -ba ns a l />

Paper 2

Also, try to write in points wherever possible.


Use a lot of data to support your points.
Use examples from newspapers. Make a repository of such examples when you make notes.
Try to include flowcharts to explain your points.
Make graphs to show a trend of some data figures if it’s relevant to the question.
Have a balanced approach. Don’t write a biased viewpoint say from a very socialist angle or very liberal/ capitalist
view. Include all perspectives, factors and their repercussions.

From <http://bl og.forumi a s .com/economi cs -s tra tegy-na ma mi -ba ns a l />

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BRITISH - Pre Indpendence


18 October 2016 16:58

Indian economy in pre-independence era:


* Land system and its changes
* Commercialization of agriculture
* Drain Theory
* Laissez Faire theory and critique
* Manufacture and transport: Jute, Cotton, Railways
* Money and Credit
* Changes in Agriculture and Industry (this is not mentionecd in syllabus, but make short notes anyway)

OVERALL

1. What was India’s population in 1871? In 1921?
Answer:
1871: 250 million
1921: 305 million

2. What was India’s population growth rate during 1871-1921?
Answer: 0.4% p.a.

3. What was the mean life expectancy at birth in 1871 and 1921?
Answer:
1871: 24 years
1921: 20 years DECREASED
1947 : 32

4. To what extent, as claimed by Lord Dufferin, was overpopulation responsible for widespread poverty in
India?
Answer:
As seen, India’s overall population growth was very low in colonial times. While the birth rate was
certainly high, the death rate gave it close competition, and beat it in several decennial censuses.
Thus, India’s poverty stemmed from backwardness in production, not from a high rate of population
growth

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• DRAIN OF WEALTH  
• Instrument
1. TRADE
i. TAX - > INVESTMENT - > EXPORTS - Transfer
ii. After the Battle of Plassey in 1757, the English EIC began converting a large portion of the
tax revenue from conquered areas into funds for ‘investments’. These ‘investments’ were
then used to purchase Indian goods (from Indian money), and these goods were then
sold internationally.This represented a wholesale transfer of Indian revenues to the
Company’s coffers in Britain

iii. This meant that Britain did not need to export anything to India in return for what it
obtained from India as imports. Thus, there arose a large excess of Indian exports over
imports pretty much all the way through before the WW1. Even in face of ever-increasing
British imports (textiles etc.), India almost consistently maintained an export surplus
of over 20% over imports till 1914; this didn’t translate into any benefit for the economy.
Tax financed export, the benefits of which went to EIC
iv. Was about 2% of Indias NI

2. PRIVATE PORTION OF DRAIN
1. The servants of the company, and later officials, themselves strove to make personal gains
through ‘gifts’, bribes, and extortions of various kinds, profits from local trading
monopolies, and increasingly high salaries paid out to them out of Indian revenues  

3. HOME CHARGES
i. The 1858 Act also led to the establishment of a large bureaucratic structure in London
geared towards Indian imperial governance. This was serviced by Indian revenue, via the
so called Home Charge (which comprised civil charges, such as salaries and pensions of
British civil servants, maintenance of India office in London etc., and also military
charges, which also included charges for military affairs waged outside of India)

4. DEBTS and LIABILITIES
1. This situation was only worsened after the Charter Act of 1858, which made the future
dividends of the company, as well as all its debts and liabilities in England, a charge
upon Indian revenues

5. RAILWAYS
i. Amount paid out of Indian revenues to railway companies in England in lieu of their
guaranteed profitsn - 5% - Old Gurantee System

• Estimate
○ Enormous amount of interest paid on debts: Habib’s estimates show that if one adds up
private remittances and home charges, the size of the drain in 1897 was as large as Rs. 22.5
crore. India’s constant export surpluses were the only way in which this tribute could be
furnished to Britain (from Indian revenues, buy Indian products, then sell them abroad at huge
margins, and consequently pay the tribute). However, even this was usually insufficient to
service the obligation of the Indian government- thus, India with a constant export surplus still
faced an unfavourable balance of payments (due to obligations such as the Home Charge,
‘Old Guarantee’ payments etc.). Thus, India was constantly forced to increase the size of the
debt in sterling, and then put under reinforced pressure to increase the size of the unequited
exports to service interest obligations

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○ Dadabhai Naoroji Value estimate


• The drain amounted to half the govt. revenue, more than entire land revenue collection
and over 1/3rd of India’s savings.
• In today’s term it amounted to 8% of India’s national income.
• the loss of revenue to Britain at 200-300 million pounds which was never returned.

• Criticism
a. Political defense : Whatever was sent to England was in return for services rendered in India -
alleged benefits of good government, law and order etc. 
b. Economic defense : Loans raised in London money markets were at a much lower cost than
could be raised in 19th century India. 
c. British capital expended in India was developing or modernizing her
d. Was criticising the basic fundamentals of trade

• INTERNAL Drain Theory ( Also by Naoroji)


○ High land revenue - Drain to Landlords
○ Govt expenditure mostly on millitary and urban areas
○ Exclusion of Indians from High Paying jobs - Psychological Drain theory

Land System and its Changes in Pre-Independence India


Agriculture

Throughout the colonial period, agriculture was the mainstay of the workforce, employing over 2/3rd of the
entire labour. Yet, growth rates were low-
• Status
○ Growth
• in the 50 years before independence, average agricultural growth was about 0.3% per
annum (Sivasubramonian) (in contrast to 3% now) and during the interwar period,
○ Declining Productivity
• Betwenn 1911- 1941 population growth was higher than agricultural growth, indicating
declining per-capital food availability. (0.72% pa)
○ Below Subistence
• Food Imports dependencey - Made up 50% of all capital expenditures
○ Substitution of crops
• Decline in Foodgrains was higher - 1.14% per capita per annum
• CASH Crops increasesd though @ 0.57% per person per annum
○ Finance
• 93% credit from money lenders - AT eve of Independence
○ Tech
• 97% wooden ploughs
• 10% Improvised Seeds
• Canal - only 6.5%
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○ Landlessness
• 45%


Commercialization of Agriculture
• Definition
○ Commercialization can be defined as the process wherein farmers start producing primarily
for sale in distant markets rather than for localized consumption or for sale in domestic
markets
Or when money and trade influence agriculture (distant doesn’t necessarily mean exports;
long-distance in-country trade, made possible by railways, also counts).

• Evolution  
○ prominent around 1860 A.D. The first wave of commercial agriculture was driven largely by
Indigo and Opium.
○ However, after 1860, major wave of commercialization came from cotton, wheat, sugarcane,
tobacco, and oilseeds.
○ Cash transactions become the basis of exchange and largely replaced the barter system, -
thereby disturbing the traditional self-sufficient village economy of India

• Factors that led to the commercialization of agriculture


1. Colonial subjugation:
• British government liberalized the tariff policy, and abolished or reduced export duties
on many commodities
• Cultivation in India of many commercial crops like cotton, jute, tea, tobacco was
introduced/ expanded to meet the demand in Britain
• Introduction of Land system like Tinkathia
2. Role of Land Revenue System
i. Greater rent of land
ii. (higher incentive to grow more monetarily profitable cash crops 
3. The world demand for food and raw materials was immensely stimulated by
industrialization in Europe
• India was reduced to the supplier of raw materials and food grains, and importer of British
manufactured goods
4. Better means of communication (telegraph) and transportation (railways, steam ships,
opening up of the Suez canal in 1869) made long-distance trade in agricultural products
feasible
i. Between 1870 (Suez opened in 1869 I like 69 :P) and 1914, exports increased 500% in
value (about 80% of all exports were non-manufactured - ie planation ).
5. The American Civil War caused the British cotton demand to divert to India. This demand
was maintained even after the civil war ceased because of the rise of cotton textile
industries in India


Impact of commercialization of agriculture: - YEAR - Remember 1871 and 1921 for all
While the commercialization of agriculture in India assisted industrial revolution in Britain, it broke the
economic self-sufficiency of villages in India: - Includes Positive + Negative

1. Increasing Welfare of Landlord and decreasing of Peasants -

1. Economic theory says that agricultural productivity should have increased, but this didn’t
happen because of poor agricultural organization, obsolete technology ( only 10% used
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Improvised seeds) , and lack of resources among most peasants. ( 93% moneylender -
Usury) It was only the rich farmers; who benefited and this in turn, accentuated inequalities of
income in the rural society as No Capital Formation
2. creation of a rentier landlord class, who had no interest in channelling productive
investments towards agriculture.- due to Absentee Landlordism Their prime motivation was
to usurp as much land revenue as possible

2. Substitution of commercial non-food grains in place of food grains: Between 1893-94 to 1945-46,
production of commercial crops increased by 85% and that of food crops fell by 7%. This caused
regular famines
1. Per year -1.14%, 0.57%, -0.72%

3. Trade
1. Linking of the agricultural sector to the world market: - Suez - 500% between 1869 and 1914
Price movements and business fluctuations in the world markets began to greatly affect the
Indian farmer. Choice of crops was determined more by market demand and price than home
needs. By the 1920s, world agricultural markets had started facing persistent oversupply and
price depression; in India, major cash crops faced stagnant or falling prices
2. Commercialization affected not only the volume, but also the commodity composition of the
trade. It was no longer practically confined to ‘drugs, dyes, luxuries’, and now included in large
quantities foodgrains, fibres, and other great staples of universal consumption

4. Gross cropped area increased in most regions between 1870 and 1920, usually led by marketable
crops such as wheat, cotton, oilseeds, sugarcane, and tobacco
1. Canals expansion made wasteland cultivable
5. Regional specialization of crop production based on climatic conditions, soil etc.: Deccan districts
of Bombay presidency grew cotton, Bengal grew jute and Indigo, Bihar grew opium, Assam grew tea,
Punjab grew wheat
6. Improvement in ToT of agriculture - INTERNAL DRAIN THEORY
• Between 1870s and 1914, agri prices rose 50% in relation to the non-agri prices!
• This was a result of the worldwide phenomenon of falling industrial costs through mechanical
developments as well as increasing competition among industrial countries
• However, Impact on farmers were adverse
• Since, in permanent setllement, rents were fixed, thus gains were actually cornered by
Landlords and increased inequality
• They used it to buy more land, causing greater eviction of farmers  
7. Amartya Sen
1. FAMINES - 1943
2. Food Imports - Made up 50% of the capitl expenditures

Overall, agriculture suffered - AS ALREADY NOTED between 1901 and 1941, per capita agricultural
output declined by 14%, and foodgrain output fell by 24%, leading to a situation where during the first FYP
of independent India, the value of food imports was nearly half of the total capital investment!

Write a note on canal irrigation during colonial times.
• After 1858, initially the government tried building canals using a guarantee system akin to the one in
railways, but many private companies soon pulled out due to mounting losses
• Canals then had to be dug entirely at the governmen’ts expense, but with huge ‘Home Charges’,
money was scarce
• Government wasn’t keen on providing public goods if they were economically unprofitable; canal-
irrigated area did not exceed 6.5% of the total cultivated area in the 1890s

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Foreign Trade

Pre and Early Colonial
The Indian continent was a major link in the maritime trade between Asia and Europe. Initially, the British
used Indian cotton to pay for Indonesian spices, which were valued highly back home. However, by the end
of 1600s, Europe became a bigger market for Indian textile than Southeast Asia. Cotton goods were
exported in the form of muslin, calicoes, and silk-cotton mixes. They catered to both mass markets
(calicoes) and also became fashion trendsetters. Other important items were rice, silver, and horses.

Major trading regions were Punjab, Gujarat, Coromandel, and Bengal, and the British set up their trading
posts here (they called these ‘factories’). While initially they concentrated on seaborne trade, the
increasing importance of Indian goods in home markets led them to want to control inland trade as well,
and given their might at sea, they began asking for concessions on inland trade from Indian rulers. The
latter had to comply, because the alternative was to face the wrath of the British at sea. The English
gradually coerced their way into getting trade licenses at negligible fee; however, when they saw that the
Indian rulers were unwilling or unable to help them enforce contracts and generally provide security on
inland trade routes, they increasingly began to wrest direct control of administration.

Over time, the company became a territorial power living on land revenue, and many of its employees
established partnerships with Indians to carry on export of major goods.

Colonial Period
• betwenn 1869 and 1914 trade rose by 500% Before the outbreak of the First World War, the exports
were primarily oriented towards Britain; later, they titled significantly towards East Asia.
• But share in world trade fell from 20% In 1800 to 2% by Independence ( Madison)

• Composition - K N Chaudhary

Time Export Import Direction

18th Textiles Gold Bullions


century

1800 - Indigo, Cotton , Textiles - 60% of China (Opium) and Britain - 80% of
1850 Silk, Tobacco, Imports trade
Opium
• 1850 - Agriculturual Cotton Textiles - 35% B&C Decline to 35%. US and Japan
1914 goods - 55% Rise of import of more
Machineries as
Indianisation of Textiles
rose

1935 ( Industrial goods Manufacturing goods (Imperial Preference Treaty)


Inter rose and made 30% declined from 80% to Britain share in exports rose to 35%
war) of exports 65% ( Pneumonic - same)

Laissez Faire - After 1813 and 1833, when trade monoploy was removed

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Reasons
• After the Industrial Revolution, British interest increaingly started moving away form the prevailing
mercantilist ideology, and move towards propounding ‘free trade’ values. As noted by some of its
most forceful proponents (Adam Smith/ Ricardo), essentials of the doctrine was that the state
shouldn’t interfere in economic affairs, establish monopolies, or hinder imports by levying high,
protective tarrifs.
• In theory, this amounted to a rejection of the mercantilist dictat of using colonies as useful adjuncts,
and there would be no need to forcibly alter economic policies of colonies. In practise, this amounted
to Imperialism of Free Trade, as England was to gain greatly if other countries lifted all their tarrifs
on British imports; force was not ruled out to secure this state of affairs.

Main Instrument  
Initially, the EIC’s self-interest kept the ambitions of British industrialists in check to some extent. However,
after the Charter acts f 1813 and 1833 removed the EIC’s monopoly, and even moreso after 1858, British
Free Trade interests started dominating policy like never before. Increasingly, the hypocrisy behind the free
trade rant was consistently exposed:

Until World War 1, trade between India and Britain was effectively free of tariffs. This served the exporters
of British manufacturers, such as the Lancashire mill owners. They resisted attempts to impose or increase
any import duties, because India was one of the most important markets for them (India bought 25% of
British textile exports in 1850). The Government of India based in Calcutta was rather poor, and from time
to time advocated an increase in tariffs. However, the India Office in London listened to the British
businesses, and hence till WW1 tariffs remained negligible.

Consequences/ Critique
• The composition of exports changed in favour of peasant exports. Exports not only enabled Inda
to pay ‘tribute’ due to an export surplus. But it also financed the textile imports from Britain. India
was, thus, converted into an unprotected market for British consumer goods,
• Drain of Wealth
○ Both External
○ And Internal
• At the same time, the increment in capital base was very limited
• This led to de- industrialization. As a result pressure on land increased, causing further
pauperization of peasantry.
• In 1910, Britain's share in Indian imports was 70% ( but only 30% in exports ). This means that
apart from serving as a market,

it also placed export surpluses with other countries at its disposal, thereby enabling Briatin to
source raw materials from other nations. - Indian export surplus with other nation was thus
diverted to Britain which helped it in its trade with these countries
• Hypocrisy of Lassez Faire
1. Free trade policies could be easily dispensed with wherever the interests of the British
manufacturers so directed, for example, the brazen ‘Buy British’ policy
2. Imposition of countervailing excise in 1894
3. Overvalued Currency esp after 1893
4. Trade between unequal
1. Lack of Modern Banking system to finance the Indian exports
2. Skill, Capital deficit
5. Restrictions on Shipping

• Ranade’s views on Lassez faire ( Father of Indian Economics )


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○ He saw predominance of agriculture and backwardness of industries as the root cause of


poverty in India.
○ Ranade thought that Laissez faire policy had enchanced India’s mass poverty as it hurted the
industry.
○ o he advocated a policy of protection to the Indian industries.
○ Not only that, he wanted the government to follow a positive policy for promotion of
industrial development of India.
○ Also wanted Capitalisation and not Commercialisation of Agriculture

This resulted in the (‘Policy of Discriminating Protection’) after WW1

• Reasons
○ Provided Tariff to a fiscally starved govt
○ Infant Industry Argument - To protect from Japanese comppetition
○ Too pacify the Indian nationalists like Ranade who hasd bitterly criticised the Lassez Faire
Policy
○ Reward to India for her War Efforts
• Features

○ Some Increase in tariff dis take place - Hence, it Protected the Indian industries

○ Howwever, the protection was DISCRIMINATORY in nature


• Protection only ti theindustries which had Natural Advantage
• These were mostly those goods that did not create Competition with Britain . But, their
competition was more with other countries esp Japan ( British adversaries)
•  Hence industries like cement, woollen and heavy chemicals were denied protection.

○ Discriminating Protection was backed with the Imperial Preference Treaty


• It stated that imports from Britain and exports to Britain will enjoy the most favoured
nation treatment.
• Their main aim was to restrict the entry of other nations goods, mainly Japan, in Indian
market to eliminate the competition. 

• Positives
○ This led to diversification of industrial base and new factories came up in sugar, iron and
steel, matches, paper.
○ Manufacturing grew @ 5.6% between 1920 and 1938 ( pneumonic - same as 80s growth rate )
○ Industries like Tatas and Birls expanded ( eg Tatas in Aviation )

• Gain was little because


○ Britain share in exports rose to 35%
○ Limited only to ceertain industries
○ Over valuation of rupee continued
○ Excess capacities in the world, leading to cheaper imports.
○ Lack of technological and management advancement

Also talk about the Devaluation of Indian currncy between 1850s and 1890s due to the Silver based
Money supply and the boost to Indian export (42% devaluation between 1873 and 1895)
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And the issues that began in 1880s like CVD on Indian Exports, excise duties on imports from
Lancashire milsl were removed and the adoption of GOLD standard in 1893

Industry

Pre WW1
• Industrial employment (0.3%)
• In terms of both employment and capital investment, modern industry remained unquestionably slight
in size, relative to the whole economy
• While the textile industries (cotton and jute) attained a respectable scale, accounting for well
over half the industrial working class, other key sectors such as iron and steel, engineering, coal
etc. were very weakly developed
• Thus, capital goods industry hardly existed, while consumer goods production was heavily
distorted in its concentration on textiles alone

OVERALL PICTURE
• However, the overwhelming majority of India’s manufacturing workers were employed in small-
scale industries (10% industry at independence wherein 8% in small scale and 10% of GDP ) - At
independence
○ even though overall the employment in SSIs showed a declining trend.
• Most of these SSIs were ‘traditional’, such as handloom weaving, leather manufacturing, furniture,
carpets, pottery etc.
• ‘Modern’ SSIs, such as cotton gins, jute presses, rice mills, brick kilns etc. grew to some extent in
the interwar period. By far, the most important SSI was textiles, employing one in every four
industrial worker.
• During the colonial rule, there was some rise in large-scale industry. ,
○ But very limited
○ Only 2% of employmetn
○ 7% of GDP
• Led by Textiles
○ 60% at independence
• Gradual Indianisation of Capital
• Absence of Core Sector
• Concentrated Industries
• Male
• 3 F issues

De- Industrialisation ( of traditional SSI)

• Definition
○ the destruction of traditional Indian handicraft industries due to competition from the
products of British manufacturers during the 19th century

• Impact
○ Employment ( Amiya Bagchi ) - ( remember 1870 and 1920 again - would help to
remember)

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Time Industry - HALVED Absorbed by Agri

1881 18% 62%



1931 9% 71%

Alternatively may use independence figures

• In terms of full-time equivalents, the number of textile workers’ jobs in India fell from 6
million in 1850 to 2.5 million in 1913
• Women more affected
○ Share of World Trade

• 1800: 20 %

1913: 1.5%

• Also composition changed and Direction of Trade changed as seen above

○ Deindustrailsation in 3 broad traditional areas


• Intermediate Goods ( Yarns)
• Textile  - Most Impacted
• Decline of Indian traditional Industry and Indian becoming a Major Importer of
British Textiles
• 90% textile exports decline between 1815 and 1832
• At the same time, Indian imports of textiles increased - 25% of all British
textile exports to India by 1850
• Reasons - Raw Cotton export to England and cheaper Industrial made
cloth import
• Tools - hand implements
• Consumer Goods for Poor
○ But, Commodities for well off and exports like Silk, Carpet, Leather, Increased

○ Concentration of SSI
• better means of transportation, artisans began migrating to big industrial centers, and
SSI development happened in concentrated areas, with more than half of all SSIs being
located in UP, Punjab, and Madras
• This though led to rise in Productivity of SSIs ( Sivasubramanium )

○ Increasing pressure on land; further pauperization of the peasantry

• Reasons
○ Industrial Revolution in England
○ British Trade Policies
○ Structural Factors in India ( Morris D Morris )
i. India didn't have the market for mass goods. Per capital income was low and purchasing
power was in the hands of only a few people.

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ii. Indian towns were pilgrimage / administrative centers. Manufacturing was dispersed
into villages.
iii. Indians avoided technology change. Exchange of knowledge was also very little. Indians
didn't adopt iron casting even though it was introduced in € in 14th century.
iv. Human capital was scarce in India along with physical capital. Unskilled labor only was
plenty.
v. They accorded low social status to manufacturers. Manufacturing was strongly family
based.
○ MYRDAL
• Caste
• Counter
• Even Japan also has some form of caste system - But more flexible
• What about other countries like Africa - they don’t have caste , but still poor
• Monsoon failure
• Poor work discipline
• Lack of Punctuality
• Superstition


Stages of industrialization:

• Instead Use
○ Pre British
○ Deindustriualisation
○ 1850s - Growth of Cotton and Jute - Role of Suez, Railways, Monetary Policy, American
Revolution - Write about the Changing Trade Pattern
○ Boost due to WWs
○ Policy of Discriminating Trade and surge of Consumer Industries
○ Situation at Independence


1. Phase 1 - 1860s Pre-war period:
1. Episodes
i. After the Suez canal opened in 1869,
ii. American civil war (1861-65) which cut-off supplies of American cotton to Britain’s textile
2. Main industries that developed - Cotton and Jute
2. World War 1:
1. Demand for goods made in India (and now in worldwide shortage) increased,
2. but also inputs such as machinery, raw materials, chemicals etc., which were imported by
Indian industry, became scarce.
3. Industries that gained were cotton, jute mills, and steel
3. Interwar period:
1. LINK With Growing Indianisation , Greater Modern Industry and DISCRIMINIATING TRADE
PROTECTION and edit the following points
2. Until the First World War, the government followed a policy of LAISSEZ FAIRE in the promotion
of industry.
3. Thus, purchase of industrial goods for defense, railways etc. was heavily dependent on Britain,
and this created sudden shortages in India during the war.
4. After the war, the government spoke of promoting Indian industry, but worsening finances kept it
from doing much to support Indian industry.

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5. Indian industry faced both cheap imports and falling world prices. Within older industries such
as cotton and jute, the situation became worse; greater competition came from other centers
such as Japan. In jute, which was mostly sold abroad Indian capacity grew faster than world
demand, and falling world prices hurt it badly
4. World War II: Similar effects as WW1- excess demand (=> high prices), but supply constraints

Modern Industrial Development


1. Modern industrial development:
1.  From 1850s modern industry began to develop in India but it was confined mainly to textiles
(cotton and jute) and Bombay - Ahemdabad and Hooghly region.
2. Iron and steel began to grow only after 1907 and
3. others in 1930s.
4. Still textiles comprised of 60 % of total manufacturing output in 1951 (next being
engineering @ 8.4% and steel @ 7.6%). ( PNEUMONIC - 60% same as the imports in the 1850-
1914 period)
5. Even though the pace of development was fast by 1951 it accounted only for 7.5% of the GDP
(up from 4% in 1913). They employed only 2% of the labor force ( up from 0.3% in 1913)
2. Employment
1. Between 1860 and 1940, Employment in the modern factories grew @ 4% pa
2. Overall employment growth 0.5% ( Sivasubramanium)
3. Gradual Indianisation of capital: 
1. Happened after WW1 and Indian industries developed mainly in consumer goods sector and
by WW2 India mainly self-sufficient in it
2. intermediate goods industries like cement and iron and steel also
3. By independence, Indian capital controlled ~60% of the large industrial units.
4. In 1913, 60% under British
4. Higher Productvity in SSIs ( Sivasubramanium)
5. Growing linkages: In 1930s, there began a shift of capital from usury, landlordism to industry. Links
between industry and agriculture grew stronger. The new industries were mainly catering to home
market instead of foreign market
6. Public debt: India turned from a debtor nation to a creditor nation (from a debt of Rs. 450 cr to
positive balances of Rs. 1700 cr) by the end of WW2 mainly on the account of forced savings
enforced by £.

Cons about the Modern Industrualisation Process


1. Absence of core sectors:
1. under development of capital goods and modern banking and insurance sectors.
2. India relied on imports to meet ~90% of its machinery needs in 1951.
3. also maintained dependence on foreign technicians
2. Share limited - At independence

1. Employment 2% up from 0.3% in 1913 - pneumonic -3

GDP 7.5% up from 4% though in 1913)

3. Showed high regional concentration, with most of the industries located in Bombay and Calcutta
(transport links, labour markets, and because these cities were located close to sites of cotton and
jute cultivation, respectively)
4. Factory employment was dominated by the textile industry, primarily in cotton and jute spinning and
weaving mills - 60% of total output in 1951
5. Primarily male-dominated
6. Credit, Skill and Technology shortage
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Major Industries ( Syllabus)

Cotton:

 Evolution
• Begin With Deindustrialisation - and this sector worst affected
• Initial attempts to establish cotton textile factories in India were made in the 1850s. However, the
major spurt came because of the American Civil War, Spread of Railways ,development of Suez
Canal and devaluation of Indian rupee
• From 4 in 1862, the number of cotton mills in Bombay grew to 49 in 1885 ( Congress Year)
• China became a major export destinations- India’s success in exports can be gauged from the fact
that exports of Indian cotton yarn to China exceeded those of England in 1878
• Cotton mills continued expanding, with Ahmendabad being the next big centre
• At Lancashire’s continued insistence, by 1882, practically all import duties were eliminated
• However, the constant devaluation of the rupee due to global conditions (gold standard v/s India
being on silver currency) helped the Indian manufacturers tide over; Indian exports of yarn to China
maintained their edge over Britain
• In 1893, Britain adopted currency measures partly to shut off benefits that Indian cotton mills
received from the rupee’s continuous devaluation; the new policy hurt India’s exports of yarn and
cloth to China and other countries
• However, due to mounting Home Charges, GoI had to re-introduce a 5% tariff in 1894; under pressure
from Lancashire, a 5% ‘countervailing excise’ duty was also imposed on Indian exports (against free
trade principles)
• However, Indian cotton industry was resilient, and continued growing- by 1914, the number of mills
had risen to 270
• Most of this performance was limited to spinning yarn; when it came to manufactured cloth, Indian
mill production of cotton goods was dwarfed by the size of net imported fabrics
• Thus, Lancashire mills maintained a firm grip on the Indian market; it is likely that a substantial part
of the expansion of Indian cotton mill production was at the expense of the surviving domestic
handloom industry
• Throughout, an outstanding feature of the Indian cotton industry was that in capital as well as
management, the industry remained steadfastly Indian
○ Counter
• Built of British capital, machinery
• Hence, British problem was not really that of discrimination, but it was more of
indifference to India, as seen by the Lassez Faire Policy and Inadequate investment in
Human Capital ( Education ) and Infrastructure

Crisis
• Mini Crisis post WW1Before the First World War, cotton mills were selling primarily to
handloom weavers in India and China. After the war, the Chinese market was taken over by
Japan; the loss of this market, as well as increasing competition at home (more and more
cotton mills), led the cotton mill owners to want to save on labour costs. This intensified
industrial unrest. The process eventually culminated in the bankruptcy of many of Bombay’s
cotton mills.
• Deindustrialisation in traditional handicrafts

Jute:
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  Evolution
1. It was an export oriented industry. Earlier raw jute  was exported and in 20th century jute products
exported to US and Germany. It was developed to serve foreign interests
• Beginning from a factory being established in 1835, Dundee soon monopolized the world market for
jute sacks
2. India had jute handlooms in Bengal , but due to colonialization of economy, they were killed and
raw jute was exported instead.
3. In 19th late century, mills came up. Due to rising cost of labor, £ lost their comparative advantage
and mills came up in Bengal.
4. fter the 1870s, Indian jute industry held the virtual monopoly in the world.
• European Unlike the Bombay cotton mills, the Calcutta jute mills had practically no Indian owners or
even managers

. During the war and interwar periods, world trade declined, and so did the demand for jute. To
counter this, the Indian industry unsuccessfully tried forming a cartel, but this only promoted
entry of new firms, which were easily willing to undercut the existing firms. The result was excess
production, unstable profits, and increased competition. In any case, a large part of the industry
was doomed already for having delayed technical improvements. - Just as Cotton suffered during
War period - Mini crisis

After Independence Steps

• National Jute Board


• Grant in Aid to Jute producing states for promotion of Jute Industry
○ Devloved by the Finance Commission
• Mandatory Jute Packaging Act , 1987
○ 20% in Sugar
○ Similarly in Food
○ Have Been diluted since 2012
• JUTE - ICARE scheme
○ TO extend extension facilities in jute
• Jute Modernisation Fund Scheme
• National Center for Jute Diversification
• Jute Technology Missions
• Plantation of Jute along the states of WB , Bihar, Orissa, Assam, Tripura
• Normal MSME schemes - KVIC, SIDBI
• Jute Policy 2005
• Jute Design Cells

Major problems faced by the Jute Industry in India

• After independence most of the jute-producing areas went to Bangladesh (erstwhile East Pakistan)
resulting in acute shortage of raw jute (raw material required for Jute production)

• Indian Jute industry is facing very stiff competition from other jute producing countries viz.
Bangladesh, Philippines, Japan and Brazil

• 10% export subsidy in Bangladesh

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• As such the market for jute goods has shrunk due to invention of synthetic substitutes as a
replacement of Jute

• Wage rates need to be linked with productivity, new sophisticated machinery needed, but labour
unions is resistant → businessmen not doing new investment.

• Labour unrest and strikes have further added problems for this industry

• The provision of mandatory use of jute bags in Food and Sugar industry have been diluted in
2012

RAILWAYS

Reasons for developing railways:


1. Ambitions of railway-linked industries such as steel locomotives, railway tracks, signalling
equipment etc.- these had growin massively since 1830 in England, needed more avenues to expand,
India was perfect
2. Desire of Lancashire manufacturers to achieve access to the inland cotton regions, for cheap supply
of cotton, and also to expand market
3. Make army movements easier and Political Unity
4. As an afterthought, Brits also said that railways could supply cheaper grain in large quantitites to
regions affected by famine
5. Administrative Unity

Terms at which Railways were developed:


• Developers would get land free from the Government of India
• ‘Old Guarantee’ system: They would get a return of 5% on their capital, if they ran at a loss or
secured inadequate profit. This eliminated the incentives to maintain economy, or for employing
Indian labour (cheaper), instead of highly paid Europeans
• The railways would be entirely managed with only nominal governmental supervision
• Government had the option to take over the ownership of the lines, provided it paid the price to the
company not at the valuation of the real assets, but at the current stock market valuation in London!
○ Lord Mayo helped create State Railways

Functioning: Key Negative Features
1. High costs of construction - 5% Old Gurantee system
1. Estimates from 1875 show that guaranteed interest payments for railways amounted to
about 1% of the national income
2. Old Gurantee System also minimised the need to reduce Costs
3. Freight rates for short distances were excessively high

2. Britain reaped all Backward Linkage Everything needed for railways, apart from coal, came from
Britain;
1. (even labour - old guarantee system)
2. All the railway administration, supervisory and technical staff (including ticket checkers, drivers
etc.) were Europeans

3. Entire railways system was installed in a haphazard manner with no single plan for railway
construction. Lines were laid down without planning, and only to meet immediate concerns of
Lancashire, the army, tea planters etc.
4. Complex multiplicity in forms of organization

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5. Indian passengers were overcharged for miserable conditions of travel


1. Open racial apartheid, with Europeans travelling in separate, less crowded carriages
6. Led to
1. Deindustrialisation - Greater Marketing of Industrial outputs
2. Commercialisation of Agriculture
7. Reduce Displacement d the intensity of famines (while enlarging their area at the same time)
(think how?)
1. During famines, by bringing supplies to the core area of distress, the railways did help to
restrict the rise of prices there, but they correspondingly raised prices in areas they had drawn
their supplies from, and thus the effects of scarcity became more widely felt
8. Seriously reduced food supplies available within the country in times of famine by moving large
amounts to ports for exports, and during wars for armies(even during times of famines, food
exports weren’t curbed, because of mounting Home Charges justification given was that it wouldn’t
be ‘sound economics’(free trade))
1. Reason given by Amartya Sen for the scale of the 1943 famine

Functioning: Key Positive Features


1. Coverge
1. On an average, nearly 1,000 km of railway lines were opened every year between 1859 and
1909
i. 4.5 km per year now
ii. Cobb Douglas, low hanging fruit
2. Area theoretically served by the railways extended to 75% by 1914
2. Agriculture
1. Commercialisation of agriculture - By creating a National market
i. Since the railways immensely reduced transportation costs, they leveled off prices
prevailing in different regions
2. Railways created a firm foundation for regional specialization in different crops.(
transportation cost in HO) Each region could concentrate on crops grown best and least
expensively within it, and take full advantage of a countrywide market
i. Some crops had previously been grown locally at high prices due to inaccesiblity; this
stopped
3. Many crops could also now be produced for markets- extent of area under cotton, rice,
wheat, jute, oilseeds etc. expanded in areas where these were produced best
4. Owing to these factors, there came about a shift from food to non-food crops:
i. Between 1911- 1941
1. Per capital food production decreased @ 1.14% p.a
2. Per capita cash crop rose @ 0.57% p.a
3. Overall per capita decline @ 0.72% p.a
3. Concentration of Industries
1. Increased Productivity - Sivasubramanium
2. Migration
4. Disaster
1. Reduced the intensity of famines
5. Socio Political
1. National Integration
2. Spurred flow of people and Nationalistic ideas

Because of the negatives, railways failed to act as the agent of Take off in India unlike countries like
Germany or USA where it helped to initiate the industrial revolution

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Money and Credit



Monetary Policy
Primary goal of monetary policy in colonial India was to stabilize economic transactions between Britain
and India by means of a stable exchange rate. An appreciation hurt Indian exporters, while depreciation
hurt Government of India’s chances of paying back its sterling obligations to the India Office in London.
Many scholars argue that rupee was constantly overvalued (esp after 1893 pegging to gold via
pound)to ensure that budgetary payment obligations to Britain were met, and this policy hurt Indian
business interests.

Indian exchange rate was initially on the silver standard, wherein there were two ways money could be
transferred between India and the rest of the world: the Council Draft (wherein India Office sold Council
Bills at a fixed exchange rate; these bills were redeemable in India), or by means of silver. In 1898, a ‘Gold
Exchange Standard’ was introduced (not the same as Gold Standard- think how).

During Mughal times, a uniform silver-based currency was introduced pretty much all across the
country. Tradition was of ‘open’ minting, where anyone with silver could go to a mint and get it
converted into currency. British maintained this policy; while they also issued some paper currency
that was redeemable in silver, it had very low circulation.

Thus, the quantity ofsilver exercised a major influence on the money supply of the country. Since
India had little silver reserves, the size of silver imports had a major impact on the money
supply. Trends in silver imports:

• Pre-1757 (Plassey):
○ Some silver imports to pay for company’s expenses,
○ but impact muted due to low volume
• 1757-1850:
○ After the victory at Plassey, Brits started paying for their Indian expenses by Indian
revenues.
○ Thus, silver imports declined ,
○ and a long-term deflationary trend set in in India (MV=PY)
• 1850-1893:
○ Many countries across the world moved to the gold standard, which led to a spurt in demand
for gold, and decline in demand for silver. Thus, global silver prices fell.
○ 2 IMPACT
• INFLATION
• Since silver was still the currency-base in India, this led to huge imports of silver
into India => money supply increased, and so did prices (=> inflation).
• Thus, during 1873-96, when the industrial world faced the ‘Great Depression’
and saw falling prices, India experienced inflation.
• Prices increased, but money wages for labourers etc. were fixed Land rents were
fixed
• Thus, redistribution of income from the poor to rich landlords

• DEPRECIATION
• This also led to a fall in the pound-sterling value of rupee (depreciation). Pound was
on the gold standard, and India’s silver currency stock was increasing even with

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stagnant production levels. Thus, between 1873 and 1895, the rupee fell by 42%
against the pound (Mundell Johnson model)
• Depreciation led to boost in Exports

• 1893 Onwards
○ The immediate impact of this was that ‘Home Charges’ (fixed in sterling) increased for the
Government of India, and colonial officers could only send a reduced value of remittances back
home to England. The colonialists were obviously worried about this, and also about the impact
of this on trade (good for Indian exporters, bad for British interests – especially so in the cotton
industry, where Indian cotton factories were giving stiff competition to Lancashire in the export
market). Thus, in 1893, the government decided to close all Indian mints to silver coinage
(decrease supply) , till the desired rupee-sterling ratio was achieved.
○ India was now pegged to the sterling at 1s 4d, and through the sterling, to the gold standard.
This peculiar form of gold standard (through a silver currency) still required that a large amount
of Indian revenues be used up to buy and keep substantial reserves of gold in England. The
entire arrangement was quite profitable for Britain and fairly expensive for India CASE STUDY of
BRITISH influence on INDIAN TRADE & ECONOMY

The Ratio Controversy is the name given to the interwar strengthening of Indian nationalist protests at the
overvaluation of the rupee; the controversy was worsened by the conduct of Indian monetary policy during
the great depression, which seemed to serve British interests at the expense of Indian ones.

Credit

After 1870, banking and insurance grew rapidly; however, this growth occurred in a condition of
pervasive capital scarcity, poor regulation, and opaque business communities. Overall, the aggregate
rate of savings and investments remained low, and choice of assets mainly traditional.
• At Independence, Savings rate was 10% of GDP  

The market for money, thus, suffered from a dualistic structure- rich clients, good government securities,
and stable banks formed one segment, whereas poorer clients, risky securities, and unstable (Indian Joint-
Stock) banks formed another. This kept the risks of banking panics persistently high.

Informal Sector
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Banks rarely, if ever, lent to peasants and artisans. The informal sector stepped in to fulfill the needs of
local small-scale moneylending, and existed to finance agriculture and craft traders (93% dependence on
moneylenders at the time of independence ) Most of the clients of moneylenders were people in need of
quick money, and who couldn’t give any security. The strengths of the moneylenders were their intimate
knowledge of clients, and absence of regulations, meaning low transaction costs for their customers

Formal Sector
Exchange banks financed trade to and from India; the Presidency banks mainly served businesses
connected with European enterprise, Exchange banks: Financing of foreign trade was almost entirely
restricted to European exchange banks. This further consolidated British firms’ control over India’s
foreign tradeand Indian Joint-Stock banks fulfilled that need for Indian businesses.

The Indian Joint-Stock banks, however, were characterized by a history of booms followed by crashes.
Among these were some stable banks (the big 5- Allahabad bank, Bank of Baroda, Bank of India, Punjab
National Bank, and Central Bank of India). However, many Indian banks were backed by lesser-known
firms, and were less conservative about their clients as compared to the big 5. Given that they didn’t
have big names, they felt like they had to offer high incentives to attract borrowers and depositors;
this, combined with the lack of an explicit regulatory system, led them to take excessive risks.

Indigenous system of banking (based on hundis) was run by local, rural moneylenders (‘shroffs’). They
were said to ‘finance the entire internal trade of India’. However, from the Mughal times when the shroffs
used to engage in deposit-banking, under the colonial rule the government and officials weren’t interested
in making deposits with them. Thus, they had no means of recharging their circulating capital, and were in
essense reduced to small-scale lenders.


Agricultural Credit market

Saw a Large growth in rural credit ( Informal).

Reasons
1. Commercialisation of Agriculture
1. Cash crops like cotton required more finances, because of relatively higher input costs and
investments in things such as land preparation, irrigation, fertilizers etc.
2. Cash crops also remained on the field longer than food crops, thus requiring a longer waiting
period between investment and sale of crop
2. Higher production of non-food crops meant peasants had to buy food crops from the market, which
could lead them to borrow
3. Monetization of tax and it’s non-synchronization with harvest cycles required money advances
4. Debt Trap
5. Supply side : The railways, growth of market towns, and new profit opportunities increased the
mobility, migration, settlement, and enterprise of persons of trader-moneylender class

Issues
• Usury
○ Bargaining Power of tenants limited due to caste hierarchies
○ Illiteracy - Duped into making Farcical Contracts
• Rigidity
○ Rents had rigidity in their pricing
○ But, The agriculture prices showed large variability due to monsoon and supply inelasticity (
Cobweb Model )
○ Internal Drain

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• Thus at Independence, 93% of all rural credit came from moneylenders, and only about 1% from
the government banks (rest from cooperatives and commercial banks)


Industrial Credit market

• Issues
○ Savings Rate of only 10% at independence
• Hence, Capital Scarce and High interest Rate
○ Modern Institutions limited
• Modern banking institutions developed very slowly
• Presidency Banks more for European finance and thus out of reach
• Stock market was a rather small and insignificant institution in the 19th century.
○ and the traditional community-based informal financial institutions remained sectarian in
choice of their clientele.
○ Weak surplus generation
• Given that capital was scarce, there was a tendency to overcapitalize during booms
(machines were bought at time of rising prices at the high prices).
• Similarly, to generate investor confidence, most Indian firms used to pay excessive
dividends in times of boom,
• thereby making generation of excess reserves only a secondary priority.
• Also led to GREATER RISKS

Given this state, pioneers in large-scale industry came almost entirely from communities that specialized
in trading and banking activities. There was, thus, an almost perfect correlation between hereditary trader-
bankers and large-scale industry

Indian Economy @ Independence


Social Indicators

Education:  Literacy 15%

Health:  Mortality rate 2.7%


1.

IMR 180

Life Expactancy 32

Urbanization:  15%

Cons of British Empire economically - Bipan Chandra


• Savings rate
○ Net savings @ 3% of GDP
○ Reasons
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• High taxation and then misspent


• Moneylenders
• Financial institutions absent
• Drain of wealth
• Home charges, salary, pension
• Princes- Consumes 20% of the GNP
• Wrong priorities of expenditure
○ Meagre expenditure on development of agriculture or social infrastructure
• Life expectancy at 32 at independence
• Literacy at 16%
• Women at 8%
• IMR at 180
○ Millitary expenditure after 1890 at about 50%
○ A bulk also absorbed in maintaining administration
• Regressive Tax regime
○ Direct taxes very low
○ Farmers exploited
○ Upper middle and upper class paid little
• Distorted Trade regime
○ India - Raw materials on which no equivalent economic return
○ Imported manufactured goods
○ No protection from cheap industrial imports
• Only in 1918 some trade barriers were put
• Agriculture
○ Not enough attention
○ Bengal famine
○ Permanentn settlement
○ Though irrigation was one field where some progress - Irrigation cover at 27% at independence
○ See Above Gaurav notes
• Industry
○ See above

Positives of The British Empire economically


• Infrastructure
○ By independence
• 60k km of railway lines
• 90k km of paved roads
○ Telegraph highly devloped
○ Although
• Railways no backward linkage to India as made from British tech
• Mainly for industries to ports connection and raw materials evacuation
• Not based upon Indian industrial needs
• Telephone not developed
• Indian industrial base developed
○ See above Gaurav's
○ Also, Bipin says it was done independently and not as junior partners of Britain

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Non economic Paradoxes


• Unity of India
○ Pro
• Unified Indian territorily and beyond (burma, lanka)
• Common administration, education system everywhere
○ Con
• Divide and Rule
• Justice
○ Pro
• Rule of Law
• Independent judiciary
○ Cons
• Repressive laws
• Indeoendence of judiciary limited
• Collector both District Magistrate as well as the Development in charge
• Ilbert Law failure
• Court procedures costly- Only rich could benefit
• Benevolent despotism
○ Element of democracy
○ But very limited powers and suffrage
○ Even by 1935- limited to only 15% - men with property
• Modern Bureaucracy
○ Pro
• ICS was seen as honest, efficient and full of integrity (Bipan Chandra)
• Steel Frame of India
• Hence, Sardar Patel wanted to continue with the British legacy
○ Con
• Huge corruption in lower rungs
• Economic paradox

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Land Reforms
07 May 2016 17:43

Land Tenure System

Pre-£ System

1. Land was owned by the tiller so long as he paid revenue. The zamindar was only a revenue collector and
had no police / judiciary powers.
2. Land was not tradable mainly because (a) Consent of village community was needed and it generally didn't
come for village outsiders. (b) Pressure on land was not so much. (c) Social
factors where association with land was considered a mark of respect.

When the Mughal power started declining, these military tax-collector officials, and anyone else with
influence (like nawabs and other powerful court officials), grabbed power where they could to become de-
facto hereditary landlords and petty chiefs in their local areas, and emerged as a new class of landlords with
something akin to property rights over the land. They increasingly came to control the administration of the
their lands. This concentration of power in the hands of the Tax collector was called gentrification

During these times (as also the Mughal ones), the burden of taxation was fairly high (sometimes up to 50%),
but there was also a history of remissions and rescheduling in times of distress.

In come the British


When the British were just settling in, they realized that the demand for British products in India wasn’t very
high, whereas Indian handicrafts and clothes were quite popular in Europe. To minimize outflow of British
currency to India (basic tenet of mercantilism), they decided that Indians should be made to pay themselves
for the imports they send to Britain. The colonial government also needed money to maintain the large
administrative machinery and army.

Permanent Settlement 57% - Pneumonic - 19 * 3

Ryotwari 38% 19 * 2

Mahalwari 5%.



Rationale
1. Welter of Rights Issue
a. Competing claims on Land
2. Peasant Rights showed large variation - could be individual or Village rights or Zamindar rights -
Need to standardise
3. By 1850, land revenue accounted for about 60% of total British Government revenue. Thus,
land revenue and its collection were the most important policy issues during the colonial period.
4. Existing local elites knew about the land better
5. Economic Theory says Marketing of A resource ( Land here), leads to a better efficiency
6. To weaken Military elite who were a threat to state power

 Issues
1. Disruption of traditional mechanism
1. landlord now had property rights over the lands in his jurisdiction, instead of tiller
2. Tillers became tenants who could be summarily dismissed
3. disrupted the traditional patron-client relationship between landlords and tillers, which used to
serve as an insurance against natural calamities

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2. Growth of ABSENTEE LANDLORDISM
1. moneylenders and traders
2. weren’t interested in disposseing the peasants of their lands-
a. they rather used land mortgages as measures of coercion,
b. to exercise substantial control over agricultural produce, charge usurious rents, and exercise
market control.
3. Many level of intermediaries were created
a. Which further increased the rents to be paid
4. Investments in agriculture drastically declined even further

3. Prevented growth of capitalist farming in India: -


1. Declining Productivity - Blyn - 0.72%
2. Food Imports dependencey - Made up 50% of all capital expenditures
3. Reasons
a. Absentee landlordism
b. small size of landholdings because large landowners leased out their holdings to many small
farmers;
c. Zamindar didn't invest because hi sland could be confiscated on non payment of rent
d. Tenant didn't invest because of frequest transfer of land and all benefits accruing to the land
owner

4. Cash Crops - Given high rents, many farmers moved from growing food crops to cash crops like cotton
and sugarcane, leading to famines - Data of BLYN - 0.57%

5. Issues in Agriculture
1. In 1954, 93% of all rural credit came from moneylenders
2. 97% of all farms utilized wooden ploughs
3. Rare use of improved seeds, artificial fertilizers etc.  

6. Landlessness
1. 45% owned no land, and worked as farm laborers

7. Compounded by , Deindustrialization led to large number of sharecroppers.


1. This gave more power to landlords to extract ever-greater rents.
8. ed to widespread famines, and ultimately, non-realization of expected revenue by the British.


 Ryotwari Issues ( Thomas Munroe, 1820)
• Ryotwari should, in principle, have eliminated the need for any intermediary between the state and the
peasantry, and initially this was the attempt.
• The results were mixed.
• Benefits
○ In western India, the erstwhile office holders did lose their strongholds
○ ; in southern India, many of them emerged as substantial cultivators themselves, while in other
areas it was a mix of both.
○ As Abhijit Banerjee shows, greater public investement occurred in these areas, since it was easier
to raise rents here
• Farmers had property rights over their lands. However, collection was strict, and rent was expected
even in harsh times of famines.
• In theory, the settlement was supposed to be direct, but a large number of intermediaries developed
anyway, bringing the system close to what was followed in permanent settlement areas. In essence,
then, the difference between Ryotwari and Zamindari areas was reduced to one of the possibility of
increments in tax (which was allowed in Ryotwari areas, but not in zamindari areas).
• Where ryotwari system took place properly, the resulting individualism caused a faster decline of
panchayati raj institutions and mode of governance much faster than in mahalwari settlements.

Mahalwari issues (parts of North India (North-West Provinces (1822), Punjab, Awadh, United Provinces)
• initially involving mostly the already existing taluqdars. However, even here (especially in Awadh), the
revenue assessment from these mahals was very high, and a lot of the land went into payment
overdues, and was subsequently auctioned.
• Thus, even in Awadh, there was a shift from the old landowning class of taluqdars to a new
commercial landowning class. As a result,
• Awadh came to have something very similar to the Permanent Settlement system, even though it started
out as a mahalwari area.

Reasons for Different Land Revenue Systems in Different Areas:


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1. Influence of individual administrators, and their ideologies (Munroe, Holt Mackenzie etc.). For example,
Permanent Settlement was initially introduced in Madras, but Thomas Munroe later convinced the
administration to use Ryotwari settlement
2. Political Events: In Awadh, initially the mahalwari system was introduced. After the 1857 mutiny, the
British felt that having big landlords on their side would help prevent such revolutions, and hence
zamindari was reinstated in 1858 (was called taluqdari, but was essentially the same thing)
3. Date of conquest: Areas that came under British control later were more likely to have Ryotwari
system, because of shifts in views of economists and others in Britain


Persisting Differences Till Today Due to Varying Land Tenure Systems:

Zamindari and Ryotwari areas differed in their subsequent development. Even during colonial times, given that
rents could not be raised in Permanent Settlement areas, most public investments in irrigation etc.
flowed towards Ryotwari areas (more productive agriculture in these areas would allow collection of more
land revenue).

Abhijeet Banerjee and Lakshmi Iyer show that post-independence, although there was a massive effort to
improve agricultural productivity, erstwhile zamindari areas were slower to adopt HYV seeds etc. Could be
because of:

1. Income inequality:
1. In areas with zamindari systems, landlord classes grew rich and peasants poor, so inequality
increased. In Ryotwari areas, everyone was exploited, so everyone was impoverished
2. Political environment:
1. Zamindari system created a political ethos of class-based resentment in those areas, which
persists even till today (Bihar, Maoists etc.). Peasants in non-zamindari areas were much more
likely to work harmoniously with local elites
3. Persisting effects of public investments:
a. It was easier to raise rents in Ryotwari areas, which gave the British some leeway to invest more in
canals, irrigation, railways etc. in Ryotwari areas

Land Reforms
Reforms

1. Zamindari abolition acts: ○ Haque - Area under tenacy decreased from


All states passed anti-zamindari acts in a about 50% in 1951 to 20% by 1960
staggered way and in paper zamindari was ○ heir biggest flaw was they could obtain land for
abolished. Even in Ryotwari and Mahalwari 'personal cultivation' which was defined
areas, moneylender zamindars were abolished. loosely to include personal supervision by the
zamindar or any member of his Family

2. Tenancy regulation: a. Positive - Haque - Area under tenacy


decreased from about 50% in 1951 to 20% by
1. Allowed tenants to buy the land at minimal 1960
cost b. Negatives
2. To put a ceiling on rent payable, 1. By 1992, ownership right confered to
3. to make sure evictions don't take place only 4% of cultivated area - PS APPU
except as per law 2. only became underground.
4. and in the event of eviction for personal 1. Were renamed as farm servants or
cultivation, at least a minimum land is left sharecroppers
with the tenant. 2. Voluntary surrender used as a
guise
3. In UP and W Bengal sharecroppers were
not even considered to be tenants.

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4. Decline in tenancy led to eviction of
tenants and rise in landless labor
5. Land accounts missing
1. Same land rotated between many
Bargadars
2. Informal contracts
6. Legal barriers
1. Over 5 lakh cases related to land
reforms in AP alone
2. Led to Sankari Prasad Case and
3. 1st amendment to the
constitution
7. No motivation of tenants to buy land
and get involved in disputes
8. Some zamindars were just bigger than
the peasants. Taking their land away,
impoverished them
c. By 2000, Ownership rights - 2 main states
WBengal 12%

Kerala 23%

3. Land ceiling: There were 2 rounds 0of reforms a. Zamindars to exploit the loopholes and evade
legislations - one in 50s and other in early 70s. the laws.
i. They made benami transfers, transfered
land in the names of other members of a
households,
ii. fired their tenants (the acts had a
provision that land will belong to the
person ultivating it for x years).
b. Also, Land ceilings were fixed very high
c. Subjective relaxations for plantations
d. By 2000 ( APPU) only 2 mha land which is <
2% was declared as surplus and distributed
among 4.76 mm peasants.
e. West Bengal’s share of total surplus land
distributed was almost 20% of the all-India.
i. Operation Barga
1. Launched in 1977 and was time
bound
2. Aim
a. Registration of share
croppers
b. Permanent occupancy and
heritable rights
c. 25% to Zamindar
3. Success
a. Before Operation Barga,
registration only of 15%.
b. After, registration touched
60%
c. Took place in just 10 years
d. Voice to rural poor,
neutralised lower level
officials
e. Bengal- 20% share in surplus
land distribution after land
ceiling, 12% share in tenants
conferred rights
1.
4. Loan Waivers: All principal / interest dues to a. Large debt overdue
moneylenders were waived i. All India average of 45% in 70s
ii. In Bihar - 80%
iii. With rise of peasantry led political
parties in 80s and 90s this only led to

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policies like debt waivers resulting in a
vicious circle

5. Consolidating scattered land holdings into 1. On the national scale only 1/3rd of the
Cooperatives consolidable area has been consolidated -
Haque
a. Punjab and Haryana have been able to
complete the task. Some states have not
even begun.
b. State led cooperatives- poor quality of
land, inefficiency, over bureaucratised
c. Leadership of cooperatives by dominant
individuals who often siphoned off the
govt support like credit, machinery for
private use

PS Appu also complains of Lack of Political will and Bureaucratic Apathy

Indirect Effects of Land Reforms


1. Positives
a. Reduction of absentee ownership: There are enough studies to indicate that the quantum of
absentee ownership in 70s was much less serious than in 50s. Absentee ownership had reduced
much more in unirrigated areas than in irrigated areas. The transfer of land under the forewarning
impact of tenancy and ceiling legislation to the resident cultivators was on a much larger scale in
dry areas
b. Besley and Burgess -
a. Reduced Poverty
b. Increased Rural Wages
c. Change in givt mentality from rent seeker to agri facilitator
i. Now rent less than 1%
d. Helps in availing of Bank Credit
e. Empowers people
f. Collapse of feudal structure
g. Inclusive Growth

2. Negativs
a. It led to increase in landless labor as former tenants were driven out.
○ The eve of reform ~50% of the area was under tenancy which has come down to 20% (Haque) now
as tenancies have gone underground. This means a loss of access to 30% to the tenants
○ Sine only 4% transfer of ownership and 2% effect of land ceiling
○ Rich peasants preferred to avoid wage related disputes with the new labor and thus preferred
more mechanization.
• Casulasiastion of labour - 25% to 40%
b. Ghatak and Besley and Burgess
c. Hurt Capitalist Farming
d. And write all the cons of Pro Tenant laws - Haque

21st Century Land Reforms - PC


1. Female empowerment.
2. Pro owner tenancy laws.

Ghatak (2007) Conclusions


• Overall, land reforms seem to have had a negative effect on agricultural productivity. However there is
considerable variation across types of land reforms and across states.
• Decomposing by type of land reform, the main driver for this negative effect seems to be land ceiling
legislation.
• In contrast, the effect of tenancy reform, averaged across all states, turns out to be insignificant.
• However, in West Bengal, one of the few states where tenancy laws were implemented rigorously, the
negative relationship between land reform and productivity is absent.
○ Hence, effects could have been positive had it been done properly
• Finally, tenancy reform seems to have increased the inequality of operational holdings in India if we
exclude West Bengal, which suggests that in anticipation of the new tenancy legislation, landlords could
be engaging in eviction of tenants in states, other than West Bengal, where tenancy reform had been
poorly implemented.

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Besley Burgess (2000) Conclusions

Reform Effect on productivity Effect on Poverty

Tenacy - + (reduced poverty)

Consolidation + 0

Ceiling 0 0

Abolition of intermediaries 0 +(reduced poverty)

Overall Land reforms have had positive impact on agriculture wages.

Stiglitz - Tiger economies quickly reinvested surplus in LAND reform, education, infra which enabled them to
grow faster and maintain inclusive development

Are tenant cultivators as efficient as owner cultivators?

a) No
1. Investment Argument
• : A sharecropper tenant would be unlikely to invest in the land because
○ he would have to share the benefits with the landlord.
○ his tenancy tenure is not fixed and he may be evicted in the next year itself
• Similarly landlords are also unwilling to invest because
○ the tenant will free ride in this case.
• . Reason (a) can be overcome if there is an agreement on joint sharing of costs as well. But reason (b)
remains. And this is made even worse due to Indian laws which favor tenant and hence makes landlord
unwilling to sign long term lease agreements. Thus there is an urgent need to reform tenancy laws.
Yes
1. Pooling Argument: In tenancy lands, the skills and knowledge of both the landlord and the tenant are
applied and hence production better. Where cost sharing is agreed to, the capital available is higher - at least
working capital for sure and fixed capital to some extent.
2. Agricultural Technology Argument: One way out is equipment being owned by landlord and cost shared or
rented to tenant. Another way out is the existence of large rent market for agriculture equipment. This way
fixed capital can be paid for like working capital.

Institutional Reforms

(a) Tenancy Reforms


1. Current tenancy laws impede modernization of agriculture. The number of economically unviable
landholdings is increasing. But the marginal farmers have to stick to it and can't lease it out because of pro-
tenant legislations.
Also casusing mechanisation -> casualisation
2. Similarly corporate houses need to get into agriculture, but they can't because of archaic legislations on
tenancy.
3. Female empowerment.

(c) Institutional Credit Reforms


1. Agricultural credit needs to be given in the name of the tiller, not the land owner.

CASE STUDY
• 0 landless scheme - Kunnur, Kerala
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○ Each landless household has got a minimum of 3 cents of land
○ Though, people still complaining that land is infertile
• Landlessness " 42% and rising (38% in 93)
• Sada Baimana
i. Scheme in Telangana
ii. Registration of farm land at 0 cost
iii. 3 lakh aspirants
• Jharkhand- No registration charges for land under the name of Women

Draft Land Reforms Policy, 2013


1. For women
i. All new land distribution among landless will be in women's name
ii. 50% of land holding to fores communities for women
iii. Identify uncultivated arable land with govt and distribute it to women's groups
iv. STEP Taken
i. JHARKHAND - No regostry tax for land under Women's Name
2. Downward revision of land ceiling limits
3. Computerisation of land records

Land Leasing as planned by NITI Aayog


What’s there in the proposed model law?
• Leasing
○ Farmers and farmer groups be allowed to lease out land. The definition of ‘farm land’ is proposed
to be broadened to include food processing.
○ Automatic resumption after lease period is over.
○ Adverse possession law by state govt be removed - Says tenant cultivating beyond a certain no of
years be granted the ownership
• Tenants
○ One of the key objectives of the model law is to facilitate insurance, disaster relief, and bank
credit to the tenant without mortgaging of the leased land. Since the draft model law moots clear
ownership of land with the lessor, it disallows using the asset for mortgage purposes.
• Right now only land owners can claim insurance, disaster relief
○ In case land is sold before the tenure of the lease is complete, the rights of the tenants will be
secure. No changes will be made in the land records.
• Other details
○ Attestation of the lease is proposed to be done at the level of the sarpanch, local bank official or
notary.
○ The Model Act proposes quicker litigation process in case of disputes via special tribunal

Benefits
Land Leasing  ( Haque)
• Agricultural productivity
○ Tenants have short duration to escape fro Adverse Possession Law . This deters investment in
land.
○ Landowners keep their land fallow in the fear of losing land. This not only leads to
underutilisation of land but also access of poor to land is restricted.
○ They dont have access to credit and other government schemes. Hence productivity suffers.
○ Would promote Land Consolidation
• Equity
○ The informal tenancy leads to exploitation - Eviction, rotation, don't prefer putting land under
Tenancy due to Adverse Possession Law
• Occupational diversification
○ Land owners will lease out their land and invest in non farm enterprise.
○ Small and marginal farmers can lease out their land and supplement non farm income with rental
income.
○ Due to reduction in pressure on land, small farmers will be able to augment size of their operational
holding.

MP has enacted a law for thus. Other states like gujarat too following up

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• Digitisation of land records


a. Marking with GIS. Creation of a unique Land Identification number, GIS augmentation, linking with
banks, insurance
b. Provide better access to credit, insurance
c. Assures ownership to land owners - dbt can be targeted now
d. Tenacy is also recorded and they too get the benefit

• According to McKinsey, 90% of land records are unclear


○ Costs 1.3% of GDP every year
○ Pnemonic - Almost costs - Cost due to Judicial Delays, Benefir due to GDP are about 1% of GDP

Cooperative farming refers to an organisation in which:

    each member-farmer remains the owner of his land individually.


    But farming is done jointly.
    Profit is distributed among the member-farmers in the ratio of land owned by them.
    Wages distributed among the member-farmers according to number of days they worked.

This kind has been tried before but was mismanaged by bureaucracy, bogus landowners etc. leading to
disinterestedness, lack of competition. Lack of expertise also hinders.

Corporate farming is a term that is used to describe an agricultural operation that involves the production of
food and food-related products on an exceptionally large scale - Extensive Farming
corporate marketing is not just about agriculture itself, but also all the other components that are found under
the broad umbrella of agricultural production, marketing, and distribution. 

Cons: Loss of markets for small farms, possibility of exploitation by overuse of chemicals, changing soil
character, monopolisation etc.

Contract farming involves agricultural production being carried out on the basis of an agreement between the
buyer and farm producers (EG PEPSI and farmers) . Sometimes it involves the buyer specifying the quality
required and the price, with the farmer agreeing to deliver at a future date.

cons: similar to corporate farming but contract can be modified to allow farmer to farm by himself and provide
a promised amount of crop to the investor later, needs regulation

From <https://groups.google.com/forum/#!msg/econsiasprep/eZ0dAkGIVak/j6U30FaVCAAJ;context-
place=forum/econsiasprep>

Bhoodan
• Acharya Vinoba Bhave, JP
• Sarvodaya Samaj
• Padyatra
• Persuaded to part with at least 1/6th of land
• Result
○ Quantity
• 4 million acres transferred (7%)
• Out of targeted 60 million
• Fizzed out later
○ Quality
• Most lands transfered were
• Either infertile or
• Disputed
○ Redistribution
• Bihar - Less than 50% of Bhoodan land distributed even after 40 years and govt had to shut
down

Gramdan
• Basically a collectivisation program
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• Voluntary
• Successful in Orissa where caste, class boundaries had not yet developed

Milk Cooperatives
• Beginning
○ Kaira district famers approached Sardar Patel for check against middlemen exploitation
○ Set up a cooperative - Kaira disrict Union - Helped by Tribhuvandas Patel
○ Verghese Kurien - CEO
○ 24 hours veterinary service, machineey to make butter milk poweder, computer tech for better
logistics
○ Elections held in democratic spirit
• Operation Flood
○ Shastri expanded it all over India through Operation Flood on Anand Pattern
○ 22% of all maketed milk from Operation Flood
○ Room very high for improvement
○ 3 phase
1. metro target
2. Focus on vaccination
3. Focus on AI, R&D
• Benefits
○ Milk growth
• Earlier 0.7%
• After Operation flood, 4% per annum
• India largest producer
○ Dairy equipment capital industry
• Indigenous development
• 93% endogenous
○ 60% - Landless, small and medium farmers
○ Benefit also to SC, ST, Muslim
○ Women cooperatives
• With the help of SEWA
• 6000 women milk cooperatives set up
○ Idea used to set up cooperatives in other industries
• Dhara in Vegetable Oil
• Lijjat Papad

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Industries
08 August 2017 17:06

Share

INDUSTRY

Also note the way of writing , and use this whenever question asks for a trend

Phase 0 (1900-47): - PRE INDEPENDENCE

1. Very Limited growth of modern Industries . At independence


a. Modern factory sector never employed more than 2% of labor force.
b. Moden industries only 7% of GDP
c. Per capita income increased only 20% between 1900 to 1947
2. Composition of Manufacturing: Consumer goods dominated the industrial production.
a. 90% of core goods imported
3. Dominated by Textile Industry -
a. 60% of Manufacturing output
4. Technology: Research institutions and research in companies almost non-existent. Indians not appointed
to higher skilled jobs.
5. Gradual Indianisation,
a. By Independence, 60% of Industries, owned by Indians
b. In 1913, 60% under British
6. Regional Concentration : Regionally only a few states had industry. Only a few sectors like sugar,
textiles etc. dominated whole industrial output.
7. De Industrialisation of Traditional Industries
8. Export orientation had been against country's interests.
9. Male dominated
10. Dominatio nof SSIs

Phase 1
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• 1951-1967 - ALL OVERALL GROWTHS ARE WRONG AND NEED TO BE ALTERERD


• Results

Agri 1.8%

Industry 6.3% ( = 1.8 +4.5 )



Services 4.5%

Overall 3.5% -Hindu rate of growth

Per capita- 1.5 %

• Composition of Growth
1. Dominated by Industrial Growth
i. Grew @6.3%
2. Even within industries, it was led by Manufacturing sector - 8% pa
i. Reasons
• Manufacturing got increasing share in the successive plans and also saw accelerating
rate of growth in each plan.
• 1st FYP spent 3% resources on industry while 2nd and 3rd FYP spend 20%.
3. Led by Public Sector -
• (50% of GCF on PSUs )
• Share in GDP Doubled to 15% from 7.5%
4. Rising share of capital and basic goods while falling share of intermediate and consumer
durables in manufacturing:
i. Capital goods grew @ 16% p.a. in this period (never to be repeated).
ii. Capital goods share rose from 4.5% in 1956 to 15% in 1965-66
5. The share of agro based industries was declining in this period while that of metal based rose
6. Greater growth was seen in the Organised sector, which grew at a rate of 8%

• Division of Growth - Plan Wise


• In 1st FYP - 3.5%
• Bulk of the Growth in 2nd FYP where Economy grew @ 4.5%

Industry 6.5%

Agri 3%

Per capita 2%

• In the 3rd FYP, due to thce combined effect of Wars and Agrarian Crisis, Growth fell to 3%
• Even though the Industries growth was higher (7%)

• Guiding Policies
• Industrial Policy Resolution, 1948 - TOO GENERAL POINTS
i. Some industries like arms, railways, atomic energy would be a state monopoly.
ii. Some industries like steel, telephone etc. would allow existing firms to continue but all new
firm swould be state owned
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iii. Some industries would be where government can regulate and license private firms
iv. Remainder are open to private firms.
• Industrial Policy Resolution, 1956
i. Agriculture: Left entirely for private sector except wherever state could play a supporting role.
ii. Industry:
• Divided into 3 schedules
• Schedule A 17 industries only for public sector except existing private ones.
• Schedule B 12 industries to be progressively state owned and private houses will
need licenses and will be regulated.
• Schedule C Rest of industries left for private sector but public sector could always
participate.
iii. Development of infrastructure would be done by state.
iv. State would support MSMEs.
v. The state would address regional imbalance of growth.
• Why such a policy
• East India Company Syndrome
• Socialistic Leaning
• Private itself wanted state led growth - Bombay Plan and Bombay Manifesto
• Market Failure
• Crowding in Effect
• SOC and Externalities

Phase 2 (1965-80): Inward Orientation and Industrial Stagnation


• Overall growth:

Agriculture 3.3%
○ Industry 4.1%

Services 4.3%.

GDP grew 3.8%

• Composition of Growth
1. Industrial growth fell
i. from 6.3% to 4.1%
2. Overall manufacturing Fell 4.5% p.a. (down from 8.5% p.a)
3. even more drastic was the fall in capital goods:
i. Capital goods 6.5% p.a (down from 16% p.a. in previous period). I
ii. Only the consumer goods sector showed a moderate decline.
4. The entire organised sector declined and witnessed a modest growth of 6% down from 8%
5. Pubic sector GCF to GDP declined from 9% to 5%
i. Due to weaker fiscal conditions, IMF imposed austerity, war and focus on Agriculture

• Causes of Structural Retrogression

1. More regulations:
• MRTP, 1969 (to check the expansion of industrial houses with assets > Rs. 20 cr
• FERA - Import export control

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• Industrial Disputes Act, 1976 (firms with > 300 workers had to take government permission
before laying off workers)
• Contract Labor Act, 1970 (firms can't hire contract labor in industries where labor is seen to
be essential to the main activity)
• Urban Land Ceiling Act, 1976 (can't own vacant land beyond the ceiling but gave
discretionary powers to the state governments to exempt from ceiling)
• over 800 items reserved for SSIs
• No industry in municipal areas

2. Government resorted to freezing all wage increases, compulsory bank deposits according to
the income slabs, increasing taxes.

3. Share of resources to Manufacturing Sector by Planning commission declined from 20% in


prvious period to 18%

4. Decline in public investment in investment followed by decline in private investment:


i. There was a decline in GCF public sector to GDP from 9% in 1967 to ~5% in 1971. (green
revolution period)
ii. There was a sharp decline in public investment which was born by infrastructure sector.
i.Share of infrastructure in public investment fell from 36% in first half of 60s to 30%
in 70s. (cost of green revolution ?? Or suspension of Mahalanobis ?? Suspension of aid
ii.The growth in Infrastructure was only 4% pa
iii. The main reason was the high Fiscal Deficit - Had reached 7.3% of GDP on account of the
recurrent wars, IMF induced austerity and focus on Green Revolution

5. Oil shocks, wars and drought: In early 1970s there was a drought which led WPI to shoot up from
5% in 1971-72 to 25% in next 3 years. Then oil shock happened.
6. Faltering demand from agriculture as well as rich ( Eco Survey - Income gap of top to bottom
narrowed)

Performance of Industrial Licensing


1. Hazari Committee
1. Impact of licensing to channelise investment was DOUBTFUL
2. The system had created powerful rent seekers.
3. Licensing was creating underutilization of capacity.
1. MRTP
4. Licensing was creating concentration of economic power.
1. Perhaps no - Banerjee and Pikkety, Eco Survey
5. Licensing was creating corruption as it gave discretionary power to the licensing authorities.
6. Licensing was creating regional imbalances. More than 60% of licenses went to Maharashtra,
Gujarat, W Bengal and TN.
1. Hazari Committee

Phase 3 (1980-91): Recovery - ALL OVERALL GROWTHS ARE WRONG AND NEED TO BE ALTERERD
• Overall

Agriculture: 3.5%

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Industry: 7%

Services: 6.8%.

Overall 5.6%

• Composition of Growth
○ Industries jumped from 4.3% to 7%
○ Overall manufacturing: 8% p.a. (up from 4.5% p.a. in previous period and same 8% in 1st period)
○ This growth was fairly diversified.
○ moderate rise in capital goods: Capital goods: 8% p.a (up from 6.5% p.a. in previous period).
○ Sharp jump in consumer goods
• 8% up from 4 %in 70s
• Consumer durables: 11% p.a. (up from 8% p.a. in previous period).
• Consumer non-durables: 11% p.a. (up from 4% p.a. in previous period).
• Consumer non-durables sector was a slow growing sector but the rising service sector
boosted this sector

• Causes of Industrial Recovery


1. Liberalization of policies.
Early Liberalization Efforts
• Licensing ease
• Exemption from licensing: In 1978 the limit for exemption from licensing was
raised progressively to Rs. 3 cr. In 1983 it was raised to Rs. 5 cr and then in 1988
to Rs. 15 cr.
• Delicensing:
• Took in 2 rounds
• 1st round - 32 industries were dilicensed
• 2nd Round - Moved to a NEGATIVE List of 26 industries
• Relaxations to MRTP
• MRTP limit was raised from Rs. 20 cr to Rs. 100 cr in 1985.
• In 1983 MRTP companies were allowed to setup without approval new capacities
in industries of high national importance and import substitution potential.
• Minimum economies of scale: This was defined for some industries and units
were encouraged to expand till they reached this limit.
• The undertakings which reached 80% capacity utilization were allowed fresh
capacity extension of 25% in 5 years.
• Backward area promotion: MRTP and FERA companies were allowed to setup
units in backward areas.
• FERA
• In 1985 government allowed unrestricted entry of FERA companies into 21 high
technology sectors.
• Helped set up the IT Industry
• Backward Area promotion - to MRTP and FERA
• 7. Incentives for export promotion: 100% export oriented units were given further
exemptions. They were allowed to buy their import content @ international prices.
MRTP and FERA companies were allowed.
• Broad banding of industry: Instead of minor classifications, broad sectors were
defined which enabled manufacturers to better cater to the demand without requiring
additional approvals.
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• Enhancement of investment limit for SSI: They were increased.

2. Expansionary fiscal regime.


i. DATA required
3. Growth in infrastructure:
i. There was a marked increase in infrastructure investment.
ii. Infrastructure investment grew by 10% in first half of 80s and then to 18% by 1987-88. In 70s
its increase was only 4%.
4. Growth of agriculture sector:
i. As GR spread, agriculture growth picked up @ >3%.
ii. Complementarities generated
5. Growth in service sector:
i. This led to increased demand for consumer durables.
ii. Grew to 6.8% from 4.8%
6. Which came 1st - Industrial Growth or Total growth ?
i. Opposite claims
ii. Balakrishnan et al - Manufacturing boom led to the higher growth ( 5.7%)
iii. Virmani - Higher growth led to growth in Industries ( Greater demand generated due to
growth in Agri and Services )

• Policy - Industrial Policy, 1980


a. Concept of economic federalism i.e. to setup few nucleus plants in the district and let ancillary and
cottage industries grow around it.
b. The limits for MSME definitions were increased. To promote handloom, khadi etc. so as to
develop village areas.
c. To correct regional imbalances through encouraging regional dispersion of industries.
d. Unauthorized excess capacity was to be checked.
e. Automatic extension of capacity by 25% over 5 years for some more industries.
• The Liberalisation came after reports of Committees like Abid Hussian Committee, Narimhan
Committee and Sengupta Committee
• The shift was huge
• Panagariya Therefore classsifies this stage ( 1986 onwards ) as the most imortant shift in the
Indian economy, more than the LPG

Phase 4.1 (1990s)


Overall Growth

Economic Reforms of 1991 - 8th FYP

• Industrial Licensing
a. Licensing was abolished except for certain defence and strategic industries.
b. Licenses not needed for capacity expansion as well.
c. Thus areas reserved for public sector exclusively were reduced from 18 to 3.
d. Non-polluting industries could now be located close to the cities. No approval needed for
industries outside this limit.
e. MRTP was kept alive (repealed and replaced in 2002 by Competition Act) but the focus is on
increasing competition. Threshold limits were abolished. Pre-approvals are no longer required. The
CCI only checks monopolistic behavior and scrutinizes mergers.

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f. FERA - Projects where capital imports were required would be auto-approved if financed via
equity infusion or imports constitute < 25% of investment.

• Foreign and Trade


○ Trade
• Shift from Import Substitution to Export Promotion
• Import licensing norms were liberalised
• Automatic approval for technology agreements provided it is funded by equity infusion
• Move away from direct Export based susbsidies to promotional measures
• Reduction in Custom Duties
• Came down from a peak of 150% to about 12% average now
○ FDI
• 1. Automatic FDI approvals with varying participation rates except a few sensitive ones. RBI
needs to be notified just 30 days in advance of bringing funds.
• 2. Foreign Investment Promotion Board FIPB constituted to scrutinize FDI in other areas.
• Movement to a Negatove List for FDI
○ Currency
• Managed Floating Rate currency
• Led to about 20% devaluation
• Partial and then full convertibility of Current account was introduced
○ FTA
• Before the LPG, we only had FTA with very few countries like Nepal and Bhutan which were signed
just after independence
• The Main Shift took place after the LPG
• SAPTA - 93, SL -98, Thailand, Mercosur PTA , Singapora CEPA, ASEAN

• Public Sector
• 1. Disinvestment policy was adopted. Listing to bring about discipline and buybacks also allowed.
• Upto 20% of Disinvestmetn
• 2. Sick industries to be referred to BIFR (Board for industrial & financial reconstruction)
• 3. Focus will be on strategic, high-tech sectors where monopoly would be preserved. Thus areas
reserved for public sector exclusively were reduced from 18 to 5 and subsequently to 3.
• MoU for more professional management and greater autonomy. However, some arm twisting by
the government like in case of LIC, forced buying of other PSU stocks or investment of cash surplus
undermines the stated policy.
• 5. Public sector defence companies can now setup JVs with private companies under PPP.

• Capital
• SEBI set up in 1992
• Managed floating rate
• About 20% DEVALUATION
• Reduction of tax rates started in 1992
• Custom duty at a peak of 200%. To 40% in the mid 90s
• Income tax peak of 97% to 30%
• Banking
• Floor limits on SLR reduced from 38% to 25% to reduce financial repression on the asset side
• Private banks since 1990
• SARFAESI

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Short Run Impact


Foreign exchange reserves shot up to $20 billion from $ 1 billion in July 1991. Inflation came down to 6 percent from
13 percent by mid-1993. The reformers virtually abolished industrial licensing.

Industrial growth in the 1990s- COMPOSITION - A GENERAL SLOWDOWN



1. 1990s were kind of schizophrenic when it came to industrial growth; we saw everything from crisis (1991-
92, growth was -2.3%), reform, adjustment, recovery, rapid growth (1993-96, avg. growth 13%) and then a
decline again

2. Overall growth slowed down form 80s. Based on IIP, general industrial production growth slowed
down from 7% in 80s to 5.6% in 90s. - NO NEED to learn the following. Just know the trend
a. Manufacturing grew @ 7.6% in 80s while only 6.5% in 90s,
b. mining fell from 8.4% to 3.3% and
c. electricity generation from 9% to 6.6%.
d. Overall the share of manufacturing rose in the industrial production while that of mining and
electricity fell.

3. Stagnant share of industry in GDP: In 1990, industry constituted 24% of GDP, in 2000 25% and today
30% (16- manufacturing). Compared to other developing countries this is very less (50% in China,

4. Sharp deceleration in capital and basic goods while rise in consumer goods: Capital goods and basic
goods showed a marked decline in the 9th FYP as compared to 80s and early 90s. Capital goods declined
from 8% to 4.5% while basic goods declined from 7.4% in 80s to 4%.
a. Only consumer and intermediate goods showed an increase from 6% to 6.3% and from 5% to 9%
respectively.
b. Because of decline in Public Expenditure - Share of GDP fell from 10$ to 5% before rising to 8% later
in the 200s
c. Consumer goods increased because of greater growth of services

5. Unregistered manufdacturing declined more While there was an investment boom in registered sector
(due to fall in prices) the unregistered sector has suffered (due to lack of access to bank credit as SCBs
are no longer forced to lend to them)
a. Unregistered manufacturing share in GFCF declined from 45% in 80s to 20% in 90s

• Employment growth declined:


• employment growth turned negative at -2% in the latter half of the 1990s
• Because of the decline in the unregistered segment which employed more people

• Export-oriented industries played a large role in growth of manufacturing employment in the 1990s
  
• Labour productivity in manufacturing declined during the 1990s, especially during the second half of
the reform period, due to faltering pace of implementation of structural reforms, binding infrastructure
constraints, and lack of required industrial restructuring
•  

Reasons for Industrial Slowdown of 90s


• Credit

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• credit crunch due to tightening of liquidity by RBI since 1995-96.


• As inflation high
• Due to populst measures by coalition govt
• Credit slowdown from banks specially to SSIs. In 90s growth of SSI credit decelerated to 12%
from 20% in 80s.
• Hence, unregistered manufacturing GFCF declined
• The proportion of corporate funds locked up in inventories and receivables went up steadily leading
to a scarcity of working capital.
• Slowdown in public investment.
• As in 2nd phase 1965-1980
• The resources spent on industry kept on declining
• . Share of infrastructure in GFCF declined from 30% in 1990-91 to 20% in 1998-99.
• Reasons
• Tax to GDP fell in the 90s
• FD high
• Lagged effect of slowdown in agriculture growth and hence demand. A study of land productivity of
major crops in 80s vs 90s shows a clear decline in all except rice in 90s. (Thus overall gagro growth did
ot slow down) This is perhaps a result of falling public investment in agriculture.
• Savings rate declined because of fiscal polcies
• Decline due to greater subsidies burden and higher interest payments
• Hence, fiscal deficit ate into net savings
• Led to a combined debt of 90% by 2003 which led to passing of FRBM
• 5. Slowdown in world economy and exports.
• Asian Crisis - These countries made up 1/6th of India's exports
• Nuclear ban
• J curve effect - Virmani (2012)
• Rebalancing of historically distorted sectors which raise the price of previously slow growing
sector
• Adjustment costs - due to certain capital immobility
• Gestation lags in investment
• Resources needed to absorb new technology
• Reforms not enough - saturation effect

Phase 4.2: After 2002

Overall Growth
1. , but in 2008-09 plummeted to .5%. Since then it tried to recover between 5-8% in subsequent 2 years, but in
2011-12 again fell back to 2.5%.
Composition of Growth
1. Faster growth in exports: Export based manufacturing grew @ 20% in 10th FYP as against 6% in 9th FYP.

Industrial growth from 2002-present:



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10th plan period (2002-2007):

Industrial growth recovered significantly between 2002 9% pa


and 2007 (10th plan), and remained around
• Debt fuelled - Later NPA crisis

Manufacturing growth was running high @ 13-15%

manufacturing sector’s share in GFCF went up from 27% in 1980s to 40% in


2000s

Capital goods sector witnessed double digit growth since


2003;

• Exports grew rapidly, from 6% p.a. in 9th plan to


20% during 10th plan

Sectoral share of industry in GDP started rising after several years of


decline (was about 27% in 2006)

Investment led 40% of GDP

FDI led Share in GCF DOUBLED from 3% to 6.5%


in 2005-06

INFRASTRURURE 5% of GDP to 9% of GDP ( doubled)


This growth momentum was gained due to rising demand both domestically and externally, and also because
of the cumulative effect of industrial and trade policy changes carried out since 1991.

However, due to the financial crisis in 2008 and its knock-on effects, growth in industry (IIP) reduced to
only about 2.5%. Some of these effects were:
• Increase in input costs:increase in price of crude oil and other inputs such as metals and ores
• Decline in export demand: export growth declined from 30% in 2007-08 to 4% in 2008-09
• Decline in access to funds:Freezing of trade credit by foreign banks, depreciation in rupee

2008-present:
Subsequently, industrial growth recovered between 2009-11, but again lost momentum thereafter; industrial
sector grew by just 1% in 2012-13, and 0.4% in 2013-14. Capital goods sector showed a very weak
performance, after being hit by a steady deceleration in fixed investment. Core industries (coal, steel,
electricity, fertilizers, crude oil, natural gas, cement, and refinery products) growing only by 2%, as compared
to 5+% during the two preceding years

Primary reasons were decline in credit flows and investment, and fragile economic recovery post 2008:
• Decline in investment; particularly, corporate investment declined, and debt levels rose; this also put
pressure on domestic banks by increasing NPAs, which led to further credit crunch
• High inflation and consequent high interest rates led to higher input costs
• Drop in domestic and external demand
• Government policies: difficult business environment (India ranks 134 in WB’s Ease of DB index), labour
deployment rigidity, infrastructure deficit, environmental clearances, difficulties in land acquisition, and

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high costs of commercial bank credit, especially for SMEs (long processing times, high collateral
demand)

Share of manufacturing in employment has been stagnating. This reflects the failure of the reforms to
promote labor-intensive manufacturing. Overall, employment opportunities available in the manufacturing
sector in 2009 were less than what were available in 2004. Some possible reasons:
• Growing capital intensity of production
• Sub-contracting of manufacture of parts and auxiliary services to the unorganized sector might mean that
some of the employment seen to be lost from the registered sector reappeared in the unorganized sector,
but there is no way to confirm this

Comparing India’s industrial performance between 1981-1991 and between 1992-2008, overall, the
manufacturing GDP grew by 6.3% p.a. in 1980s, and 6.5% since 1991, which is hardly a significant increase.
This shows that the dismantling of the much reviled ‘permit raj’ has not led to the acceleration of industrial
growth or of labor-intensive manufacturing, but there hasn’t been any de-industrialization either as the critics
feared (share of industrial output and employment in total have not declined)

Manufacturing’s share in GDP has thus stagnated, and its share in merchandise exports has declined in favor
of primary products

Reforms

Thus, overall performance of the industrial sector can be summarized as follows:
• There have been some gains from reforms:
• Many lines of manufacturing have become competitive
• Relative price of capital goods has declined
• Share of PSUs in manufacturing GDP has declined by half since 1991 to 8%
• Competition has increased, with easier import and entry of new firms
• Boom in IT services can be traced back to early focus on heavy industry and technical education
• The restructuring and competitive pressure seem to have spurred innovation and product development;
global competence has been gained by some Indian companies, who have been acquiring firms in
developed countries
• Industry’s share of domestic output and employment has stagnated
• Share in exports has declined, with rising share of primary exports (such as iron ore)
• Reforms have failed to promote labor-intensive, export-led growth

The reforms clearly failed to yield faster output, employment, and labor-intensive growth; manufacturing
sector, especially, has remained slack. This isbecause of:

• Supply factors:
• Persisting labour-market rigidities:
• Infrastructural bottlenecks: pre-1991, public sector used to provide much of the infrastructure, like in
most industrializing economies. Reforms encouraged entry of private and foreign capital in infrastructure
services; this might be ill-founded, given the long gestation periods and low rates of returns associated
with such projects
• Poor market integration
• Badly drafted and regressive anti-competitive regulation, and bankruptcy laws
• Incomplete financial integration including full convertibility of the currency
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• There is a dominance of large-sized factories in manufacturing Indian firms are either too large (1000+
workers), or too small (<10); firms employing 100-500 people are relatively less; international evidence
shows that mid-sized firms are much more efficient than the other two kinds, but India suffers from this
‘missing middle’

• Demand factors (not that important; even the author, Nagraj, says that there aren’t many takers for this view):
• Public investment has been declining
• Farmers are getting more impoverished, as the growth rate of crop production has declined, and mass suicides
in several areas are becoming common. If we believe that the pace of workforce transformation depends on
agricultural productivity to sustain non-agricultural employment, then poor agricultural growth is surely
retarding industrial progress

In this scenario, self-help by industry emerges as a major way forward in rectifying the slow-growth situation
of manufacturing and overall industry in India. Some of the steps that industry could take collectively are:
• Expansion of training institutes run by industry
• More focused collective action to demand quality and accountability for delivery of public services in a
time-bound manner from the government
• Large industries must adopt a nurturing attitude towards their suppliers, which are invariably MSMEs
• Increase R&D expenditure

On the government side, there is a need for the government to move from focusing on budgets and controls
towards promoting coordination between producers and policymakers, and to set-up a good quality business
regulatory environment that has:
• Low compliance cost for doing business in India
• Simple regulations (in land and environment, labour etc.)
• Fair competition
• Stability in policy regime

Other policy reforms needed are:
• A more flexible labour regime
• A transparent bankruptcy law
• Land acquisition laws
• Reforms in higher education
• Modernizing social safety nets
• Agriculture reforms
• Infrastructural reforms
• Further trade liberalization ( Eco Survey - amogst the most heavily protected esp in manufacturing
products )

ROLE Of Public and Private Sector


• Role of Public
• Write points on PSU and Planning Reasons - Market Failure
• Role of Private
• Govt failure
• License Rah, Inspector raj, etc
• Private investment Complementarirites
• Theory
• Supply side boost - Domar
• Private investment also depends on marginal efficiency of capital - KEYNES
• VRV Rao = On India
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• Roads, Railways , SOC


• Vs Neoclassicals
• Crowding In
• RBI report - LONG RUN multiplier for Public Investment in India is 2.4
• Sectors like Railways have much more (5.8)
• ( Ajay Chhibber)
• For every 1% increase in public investment, private investment rises by 1.1%
• Financing by deficit is a definite crowding in as r goes down
• History
• 1970s - Industrial Growth = 4.1% correlated with decline in Public Investments in Infra ( 36%
share in GCF to 30% )
• Public Investment declined and so did the Private Investment
• 1990s -
• Agri
• Industry
• Gulati and Sawant on role of Public Investment in Agri
• Bahal Et al have found out that public investment crowded out private investment during
1952-1980 while during 1980-2012, public investment crowded in private investment. They
attribute crowding out of private investment before 80s to inward looking growth strategy of
India and myriad restrictions on private sector.
• Opposite side
• Interest rate effect - DATA required
• 1980s divergence
• 2008 onwards - Public Investment high but Private investment low

Strategy of Industrialisation - See Trade - Export led vs ISI

See Infrastructure
• Trends
Trends
1. Falling share of public investment in infrastructure: Share of public sector in 3 main groups of
infrastructure - EGW, transport, communications was 45% in 1990-91. This came down to 23%
in 2005-06.
2. Infrastructure spending increased faster than GDP in 50s and 60s, slowed down in 70s and
since 80s have kept pace with the GDP growth.
3. India spent 5% of its GDP in infrastructure in 2004-05 that rose to 9% in 2011-12
compared to 9% of China.

industry-
questions

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PSU
Saturday, August 15, 2015 6:11 PM

History

Phase 1: 1950 - 65
1. The focus on public sector increased. The share of public GCF in total GCF doubled bwtwenn 1st and 3rd
FYP to 50%
2. There was an explicit shift in the policy regarding public sector from independence to mid 50s. Earlier
public sector was expected to step in where private sector would find it difficult. Now it sought to
control commanding heights of the economy - IPR, 1956
3. Public sector doubled from 7.5% of GDP in 1950-51 to 15% in 1970-71.

Phase 2: 1965 - 80
1. There was a decline in GCF public sector to GDP from 9% in 1967 to ~5% in 1971.
2. Due to the High Fiscal Deficit and conditions imposed by the IMF

Phase 3: 1980 - 90
1. In 1980s, the profits of PSEs declined sharply leading to a fall in public savings from 3.5% in 1980-81 to
1% in 1990-91.
2. Another reason for the 1991 Crisis

Phase 4: 1990 - till date


1. Write about steps taken
a. BIFR
b. 20% disinvestment plan
c. MoU
d. 18 to 5 to 3
2. Investment trend:
a. Decreased then Increased
b. Investment as a % of GDP was falling from ~10% in 1991 to ~ 5% by 2002- 03. Since then it has
been rising and is now close to 8% of GDP. Private investment has also seen a rise since then and
looks like a case of crowding in instead of crowing out.
i. Bahal - Crowding in from 1980 onwards
c. Decline in Investment due to the Fiscal Crisis of 91

3. Productivity trend: Studies have shown (Nagraj) that despite declining share in investment as a % of
GDP, public sector has maintained its share in GDP. This indicates higher capital productivity trend.
Their ACOR (average capital output ratio) declined from 7 in 1981-82 to 4 in 2001-02. ,
a. One way of higher capital productivity could come from a shift in investment towards labor
intensive sectors but this is not the case as no such shift has been noticed.
b. Share of infrastructure in public GCF has gone up from 33% in 1973-74 to 54% in 2001-02.
c. Possible effect of MoU of indpependence with govt and BIFR and rationalisation of workforce

4. Improved profitability:
a. has increased from about 8% in 1970s to 21% in 2003
b. In 2010-11 PSUs made a profit of ~$20bio (up from $5 bio in 2001-02) on assets of ~$190 bio (up
from $75 bio in 2001-02) i.e. 10% RoA. They contribute ~$30 bio to the central exchequer ( 2 lakh
crore ). Total market cap is $300 bio. The losses of loss making CPSEs have gone up from $2 bio in
2001-02 to $4 bio in 2010-11. But the profits of profit making CPSEs have gone up from $7 bio in
2001-02 to $23 bio in 2010-11. Number of loss making CPSEs has declined.
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5. Fall in employment: It is declining. It even turned negative since 1990s which is also a reason for
higher productivity ( Nagraj)

6. Total contribution in GDP was 8% for CPSEs and 12% including state PSEs. Overall contribution of
public sector is 25% of GDP out of which 9% comes from sovereign duties and 2- 3% from railways
and other departmental entities. (OECD - 40%) Their exports are ~$20 bio while imports are $105 bio
leading to a trade gap of $85 bio

7. However, net financial health is still poor - Kelkar


a. Returns lower than Private - Hence optimal allocation of resources not done

8. The real culprit for this isn’t inefficiency, but inadequate pricing of the utilities and infrastructure
services, and lack of recovery of user charges for the services tendered(ratio of price deflators for
public sector output and GDP was only 85 in 2011). - NAGRAJ
i. Hence, Nagraj says that Privatisation need not be the right suggestion and instead calls
for rationalisation of Prices
ii. Kelkar - Though calls for Disinvestment and Privatisation

Disinvestment
• Policy of 2014 has reversed the 2009 policy not to engage in strategic disinvestment

Benefits of Disinvestment
• Govt
○ Procceeds for the government
• Provided 50k crore in FY 17
○ Capital Appreciation
○ Sick PSUs are sold
• Can help break from the cycle of Debt Trap
• Air India
○ Can invest in Projects with Greater Externalities like Raliways and create Crowd In
• PSUs
○ Capital Infusion
○ Tech and Managerial practices
○ Rationalisation of Workforce - Baumol Cost Disease
• Nagraj - Productivity is lower because of being overstaffed
○ Pricing rationalisation - Nagraj
• Economy
○ Govt
• X inefficiency - Leibenstein
• DUP - Bhagwati
• FRIEDMAN " The government solution to a problem is usually as bad as the
problem"
• Bimal Jalan - Political Interference is UNAVOIDABLE in PSUs
○ Gains due to competition
○ Better capital allocation - Returns on PSUs lower - Kelkar
○ Hence Post disinvestment returns in no of former PSUs have increased - Maruti, BALCO
• Social - Goals of Wide Ownership
○ Disinvestment Policy
• Con - NCAER study - Retail participation is only 0.5% in share market

• Cons of Discinvestment
• Cons
1. Undervaluation / Underpricing of Assets are seen -
1. CAG - Balco
2. Creating a loss to the Exchequer
2. Dividend Income falls in the future
1.
3. Used to Finance Deficit
1. Violation of Golden Rule of Capital Allocation
4. Social Goals and Unemployment

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1. As the nobel laureate Stiglitz - The Social Costs due to Unemployment may exceed the
economic gains due to Privatisation
5. Market Failure
1. Failure can also exist in the market
2. Esp in STRATEGIC sales where Monopoly and concentration of wealth may arise
3. Too fast can be Destabilising - Russia
6. Can create Price Inflations
1. especially in SR as govt subsidies reduce
2. EG Bolivia - Water Privatisation where water Pricces were significantly increased and
caused widespread chaos
7. Corruption
1. As Stiglitz notes and has been pointed by CAG, corruption in disinvestment is widely
prevalant and ultimately hurts the exchequer

• CONCLUSION
• As Pranob Bardhan notes, it is Competitive Environment rather than Ownership that creates
Efficiency . Hence, more than Privatisation, govt should look for LIBERALISATION
• Eg Succesful PSUs in China

• Challenges of Disinvestment ( focusses more on why low )

1. Every year only 60% of Trageted Disinvestment achieved


2. Strategic Disinvestment minimal
3. Govt Shareholding in SUUTI has not gone down
1. Specified Undertaking of Union Trust of India
2. By it, govt owns as much as 10% in Axis Bank, ITC, etc
4. No buyers
1. Bad health of the firm
2. Erstwhile Disinvestment Commission said that attempts to revive the heath of the firms
be made before selling
3. Flawed logic - Why sell if we manage to revive it
5. Strategic Disinvestment in Banking missing
1. Bank Nationalisation Act, 1970, SBI act prevents the shareholding to fall below 51%
2. P J Nayak committee has therfore called to scrap it
6. NIF channelling
7. Bought back by Public Companies
8. Retail Participation only 0.5%

• Why Proceeds low then targeted


• Economic
• Unfavourable Economic Conditions
• Over Ambitious Targets
• Pricing of the IPO over the market appetite
• Delay and lack of secrecy in listing
• Political
• Opposition from trade unions
• People not being taken into confidence
• Possible Corruption

• Changes required
1. SUUTI
2. NIF -
1. Currently- 75% for social sector schemes. There is a need to earmark the funds for capital
expenditure or for Greater capital infusion in the PSUs themselves to enhance the efficiency
2. 14th FC - Wind up NIF and transfer the proceeds to the Consolidated Fund
3. Remove Limit on Disinvestment especially for PSBs
4. Need for greater secrecy in handing of PSUs
1. Else information leaking out, leads to quick capital movement in share market to pursue
Arbitrage
5. Monetisation land of PSUs - See below

• Public and Private

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• Why PSU:
1. Economic
a. Scale of investment efforts required in heavy industries cannot be met by pvt sectors
b. Pvt. investors may demand higher risk premium
c. Pricing policy of PSEs can generate investible surpluses for further investment in the
economy
d. Crowd in
i. Bahal , RBI, Gulati
2. Strategic
a. sectors like Defence, Nuclear, presence of government is essential.
3. Social
1. Check Concentration of Wealth and resources - Social Justice
2. East India Company syndrome
3. PSEs can be model employer through its welfare policies for workers.
4. Bombay Plan
5. Control of resources for socially desirable direction
a. Externalities
4. Benefits of Planning - Hyperlink
5. Cons of Private

• Recent plans
○ National Disinvestment Policy, 2014
○ 25% disinvestment in 5 public insurance companies (no LIC)
• In wake of falling profits
• Public shareholding will provide greater transparency
• Also greater accountability and questions over sich performance
• Also needed in wake of 1500 crore Nuclear Liability Insurance where nuclear giants need
confidence in the insurance companies
○ Modi
• Govt has no business being in business
• Yet pace still lethargic
○ Budget
• FY 17 - 45k crore accumulated - record high
• FY 18 - Target of 70k crore
• Possible listing of IRCTC
• Sale 4 times that pf Flipkart
○ Monetising land of PSUs
○ NITI Aayog recommended PSUs for disinvestment and strategic sales and monetisation of factories,
land and plants.
○ These will be valued. Different methods like relative peer review and discounted cash flow etc.
will be used
○ Prospective buyers will be found.
○ Government is planning to create an SPV to hold all the land resources of loss making PSUs for
monetising it.
○ Benefit - 1 million acre expected , urban infrastructure, opportunity cost of idle land, revenue to
PSUs and govt, Vijay Kelkar committee recommended it
○ Issues with monetising land
• Public Sector Land Development Authority proposed for this never came up - similar concerns
now
• Absence of a single comprehensive land database hinder identification of land 
• Opposition from trade unions, illegal encroachment
○ Way froward
• Land records computerisation - Karnataka Model should be emulated ( Bhoomi)
• Approach state governments to use it for public purpose

Ways of Disinvestment

• IPO

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○ Open market sale
○ Via the Share Market
○ ead to dispersed ownership, and strengthen institutions and corporate governance in the
country

• Strategic sales ( Note - It is Strategic sale not strategic disinvestment


○ TO a STRATEGIC Partner - Eg BALCO
○ Con
• serve to increase the concentration of power and wealth in the hands of a few business
houses (which proved to be detrimental in some Latin American countries and in Russia),
but provide the following benefits:
○ Benefit
• Sometimes, the buyer brings in essential technology/ expertise
• Buyer can exert sound governance inputs into the firm
• If share prices fall below a certain mark, buyers can completely buy out the government
• Share Market value may be too low

 Strategic sales have been often used in countries which lack domestic capital markets, but this is
not a constraint that India suffers from . Hence, Open Market is a beter way to Disinvest

• Employee - Management Buyout

• Another instrumentality for partial disinvestment could be the sale of underperforming or underutilized
assets of the PSUs, such as excess land

Govt policy of Disinvesment

• 1991-92 - LPG
○ Govt took policy decision to disinvest up to 20% of the equity in selected PSUs
○ The sectors limited for PSEs reduced from 18 to 3
• Rangarajan Committee in April 1993 . Disinvestment could go up to
○ 49% for industries reserved for public sector.
○ 26% for industries which require govt ownership due to strategic reasons
○ 100% for all others
• Disinvestment Commission, 1996 –
○ aim to formulate procedures for disinvestment. Aim was that revenues generated from
disinvestment would be allocated for education and heath and for creating fund to strenghthen
PSEs.
○ By 1999, recommended disinvestment of 58 PSEs
• o By 2000-01, govt policy – restructure and revive potentially viable PSEs, close down sick PSEs, bring
down govt equity in all strategic PSEs to 20%.
• o Post 2004 – Disinvestment programme stalled since it has to be in conformity with National Common
Minimum Proramme.
• Navratnas were to be retained.
• o 2005 – Govt. constituted National Investment Fund to strengthen profitable PSEs from
disinvestment and also invest in social sector.
• o 1991-2006 – Rs 50k cr from disinvestments

Health of PSEs
• Sick companies to BIFR
• MoU with PSUs to increase indpendence
• With a view to delegating enhanced financial and operational powers to CPSEs, the government
introduced the Navratna Scheme in July 1997.
• In December 2004, the government established a Board for Reconstruction of PSEs (BR PSE) to advise
on revival / restructuring of sick and loss-making CPSEs. The BRPSE has made recommendations in
respect of 62 CPSEs until 31 October 2011. The government, in turn, has approved proposals for revival of
43 CPSEs and closure of two.
• PSEB

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○ To select MDs of PSUs

Disinvestment Policy, 2014


The salient features of the Policy are:

(i) Citizens have every right to own part of the shares of Public Sector Undertakings

(ii) Public Sector Undertakings are the wealth of the Nation and this wealth should rest in the hands of
the people

(iii) While pursuing disinvestment, Government has to retain majority shareholding, i.e. at least 51% and
management control of the Public Sector Undertakings REMOVED NOW- Instead Strategi
Disinvestment can be done

Approach for Disinvestment


On 5th November 2009, Government approved the following action plan for disinvestment in profit making
government companies:

• Already listed profitable CPSEs (not meeting mandatory shareholding of 25%) are to be made
compliant by ‘Offer for Sale’ by Government or by the CPSEs through issue of fresh shares or
a combination of both

• Unlisted CPSEs with no accumulated losses and having earned net profit in three preceding
consecutive years are to be listed

• Follow-on public offers would be considered taking into consideration the needs for capital
investment of CPSE, on a case by case basis, and Government could simultaneously or
independently offer a portion of its equity shareholding

• In all cases of disinvestment, the Government would retain at least 51% equity and the
management control

• All cases of disinvestment are to be decided on a case by case basis

• The Department of Disinvestment is to identify CPSEs in consultation with respective


administrative Ministries and submit proposal to Government in cases requiring Offer for Sale of
Government equity

• STRATEGIC DISINVESTMENT
• Consultation process
• NITI Aayog to identify and recommend
• Recommendation to be considered by Core Group of Secretaries on Disinvestment
• Finallly CCEA

PSBs
• This is not a part of the policy but are nonetheless connected to govt policies in general
wrt PSUs
• But, laws like SBI Act, 1955 declare that government shall remain as the Majority Investor
• This clause checks against Strategic Disinvestment

Licensing
• Currenlty required in 5 industries
○ Electronic aerospace and defence
○ Hazardous chemicals
○ Industrial explosives
○ Tobacco
○ Alcohol
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Corporate Governance
• SEBI
○ 25% listing
○ Independent Directors
○ At least 1 woman director
• Found that about 20% of PSUs have failed to meet these norms

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MSME
Saturday, August 15, 2015 12:14 PM

Draft MSMEs Policy


· Policy mooted on the line of Prabhat Kumar committee
recommendation
· Intended to increase the threshold of rupee investment in Small,
Micro and Medium Enterprises along with the change the
classification of MSMEs.
· Called for setting up an overarching policy-making authority
headed by the Prime Minister.
· Raising the limit of MUDRA loans for micro units from ₹50,000 to
₹1 lakh, for small units from ₹50,000-5 lakh to ₹1-10 lakh and for
medium enterprises from ₹5-10 lakh to ₹10-25 lakh.
· A single law for micro and small enterprises employing less than
40 persons, social security cover for micro entrepreneurs,
· The policy suggest reassessment of the impact of bankruptcy
code on MSMEs, replication of the Telangana model for statutory
clearances of start-ups, creation of land banks by State
governments.

• Benefit
Pnemonic - the no 7 is inherently associated
○ 37% of GDP
with MSME
• 30% of manufacturing output - MAKE IN INDIA \
• DECLINING
○ Export
• 40%
○ Employment
• Generation of employment for 8 crore people
• Highest employment generation per capita of investment due to labour intensive nature
• Instrument of Inclusive Growth Women, SC, ST, minorities

○ RESILIENCE
• 10% even in years of financial crises
• April' 16 shows 7% decline for Micro & Small category ( not entire MSME) & 0.1% for the
industey as whole
○ Backward and forward linkages are very high
• Forward linkages with the LSIs- Large Scale Industries
○ Low capital costs
○ Competitive advantage in meeting small order quantities
○ Equity
• Regionally dispersed
• Bulk of MSMEs under SC/ ST/ OBC/ Minorities/ Women

• Problems
○ Credit
• Declining Gross Bank Credit share
• RBI report
• Only 5% avail funds through formal institutions
• 2% through informal
• 93% depend on self financing - same as Informal sector in India
• Credit to clusters program severely underfunded - Mehrotra
○ Small Size - Prevents from reaoing the benefits of Economies of Scale
• See below
• Average employee size is 3
• Bulk is Micro (40%)
○ Outdated Technology
○ Skilled Manpower shortage
○ Weak Infrastructure
○ Marketing
• Lack of Market information
• Value addition and marketing of products are limited
○ Policy issues
• Ease of Doing Business issues - Numerous Labour laws , Corruption
• MSMED Act amendment is pending

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• Govt Policy Response
○ Before LPG - 3

Institutional • KVIC board ( Khadi and Village Industries)


Mechanisms • SIDO ( Small Industries Development Organisation ),
• NSIC ( National Small Industries Corporation)
• SIDBI,

Incentives • Procurment Policy


• Interest subvention
• Tax concessions, etc

Reservation • The above 2 are prevalent are all over the world
• But reservation was a unique practise to India
• Began with 47 items in 1967
• Increased to 836 in 1991
• Benefits
• Protection, Infant Industry Argument, Equity , Certain items are technically
more suited to MSME
• Cons

• Peter Pan Syndrome -
○ incentivises a tendency to Not Grow and
○ has created a Missing Middle ( Rakesh Maira)
• Reserved MSMEs do not show better growth or capital utilisation than the
unreserved sector ( Bala Subramaya, 1995 )
• Reserved sector only made up 6% of the total SSI production. Hence, policy
did not create desired diversification
• Reservation takes away the benefits of Free Competition like Dynamic
Efficiency gains, choice to customers, Optimal utilisation of resources, etc
• Dereaservation would help in better integration with the LSIs, and better
consumer awareness due to better marketing in association with LSIs
• Other issues as that with Strategic Trade Theory
• quality. Abid Husain’s committee showed in the mid-1990s that small-scale
reservation was responsible for our miserable export performance, and
wanted it scrapped.
• Conclusion
• Incentives, Infr, Procurment support, credit subsidies, etc may be better ways to
help grow MSMEs

○ Newer support

Steps Taken What else required

Credit • MUDRA bank , SIDBI, NABARD, EXIM • Strengthen Credit Gurantee Scheme
Bank • Cluster centric Approach for
• Small Finance Banks expansion of Bank
• Credit Linked Capital Subsidy Scheme ( • Alternative sources of Capital - VCs /
CLCSC) Private Equity
• PSL
• Sub category for Micro too
• 7.5% - New addition
• PMEGP - financial assistance to help
create new MSMEs
• SEBI has allowed creation of Stock
Exchange for MSME
• Atal Pension Yojana

Infrastructure • SFURTI - Traditional Industries Infra • Creation of Hostels for Industrial


• Cluster Development Program workers
• 50 such clusters have been set up • Public Infra

Technology • ASPIRE • Focus on R&D for Manufacturing


• A Scheme for Promoting process
Innovation and Rural • Technology Transfer
Enterpreneurs • CSR
• ZED • Incentivise Patent Creation
• Zero Deffect, Zero Effect
• For quality improvisation in MSME

outputs
• Also focus on cleaner energy
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• Technology Acquisition and Developmetn
Program
• Skill India
• India Inclusive Innovation Fund (I3
Fund)
• By ministry of MSME
• For developing innovative ideas at
the grassroot level
• National Manufacturing Competitiveness
Program

Marketing and • PSUs and Central Ministries procure 20% • Creation of B2B portals
Procurement of their requirements from MSMEs • Establish Information Dissemination
• Schemes like Mahila Haats centers
• Marketing organisations on cluster
mode
• Inclusion of Private sector in
Procurement Policy

Policy • Special Ministry of MSME since 1999 • Pass the MSME Amendement Bill
• Udyog Adhaar number (UAN) • Increases the limit of MSME
• India Enterprise Development Service • Helps in expanding the base of
• Apprenticeship Amendment Act, Make in MSMEs and reduces the Peter
India , etc Pan Syndrome
• Corporate Tax rates reduced to 25% • Labour Laws

• Impact of LPG on MSME


• Impact of Globalisation
• Trade
• This allowed LSIs to procure inputs from Imports.
• Growth of Import of Raw materials and intermediaries increased from 2% in 1970-
1990 to 9% between 1990 and 2005
• Thus, the dependency on MSMEs reduced
• FDI
• Negative - Greater copetition, Competition in Labour Market ( Attracted skilled labour)
• Positive - Greater base of MNCs led to greater demand of inputs . Also led to provision
of Technology
• Impact of Privatisation
• Since, PSUs engage in Procurement from SSIs (20%) and have prefernital pricing policy from
MSMEs, Privatisation also had impact on MSMEs
• Positive - Proportion of Profit making firms have gone up, hence more procurment
• Negative - Share of PSUs have gone down
• Impact of Liberalisation
• No of items reserved for MSMEs have been progressively reduced ( 20 in 2014)
• Positive - Greater linkages with LSI and better market information and marketing and gains
due to dynabmic efficiency
• Negative - Have been exposed to greater competition
• Overall
• Gains/ Losses due to LPG have been uncertain
• Negative
• declined considerably in terms of units (no of SSI) ( 10 % p.a. growth in units pre-
liberalization, and only 4% after)
• and even employment (7% v/s 4%),
• Positive
• but has improved marginally in terms of output
• and exports

• When we consider registered SSIs, the performance is much better; although growth of
units has slowed down,
• employment growth has increased from 4% to 9%;
• Output Increased from 4% to 27%, and
• exports Increased from 4% to 47%
• Pneumonic
• In general - all to 4%
• Registered - from 4% to 10% employment and 20% growth

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INFORMAL ECONOMY
• Basically the unregulated business and the unorganised sector
○ Unirganised Workers Social Security Act, 2008

• Contributes 50% of the GDP and employ around 90% of non formal and non farming occupation
• By contrast IT and auto sector have created only 5 million jobs since liberalisation
• Largely managed by the OBC, SC , ST classes
• However, receive only 4% of the institutionalised finance , borrow mainly from the greedy
moneylenders
• Caught in perpetual cycle of poverty
• Daily income much lower
• Job security absent
• Gov't needs to finance the sector
• Also helps in the upliftment of backward classes
• Seeds of entrepreneurship are ending here - needs to be groomed

• MUDRA BANK

• Review
○ Mckinsey Study - Between 2013-1017, MUDRA has created about 75% of Jobs during the
period
• 2nd highest - Govt Expenditure
○ Upto Jan 2016 - 70k crore has been lent, 1 crore borrowers
• Although, govt financing has been less, the MFI loans have been rechristened as MUDRA
loans@ roughly 3k crore
• Budget target - 1.8 lakh crore
○ 40% of loans under Shishu (<50k ) shows the inclusive nature
○ Con - The interest charged for MFIs very high at 19% actually while scbs charge 8-9%

○ Details
• Re-finances MSME sector
• Initial corpus 20K crore
• Financing via the current ground level financiers, MFIs (Micro Finance Institutions)
• Why and why not normal commercial banks?
• Banks find it risky
• Last mile coverage missing
• Only 27% of villages have banks within 5km radius

• Banks don't have inadequate experience in understanding these clients


• Costs of overhauling an existing system
• Focus on SC, ST, Women, OBC
• 65% funds to SC, ST
• Loans upto 10 lakh
• 3 parts
• Shishu upto 50k
• Kishore - 50k to 5 lakh
• Tarun- 5 lakh to 10 lakh
• Collateral free
• Will issue a smart mudra card
○ Benefits
• MFIs can now take cheaper loans from the dedicated MUDRA bank, rather than commercial banks
• Interest rates decreases
• Currently interest rates for that sector is as high as 100-200%
• % of households availing institutional loans - 17%
• Indirectly incentivizes them to be registered
• Control Shadow Banking

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• Updtae - MFIs to be controlled by RBI not Mudra
• Financial deepening
• Write about benefits of MSME sector
• Much more employment, 50% of GDP, equality,...
• The success of Small Banks which are to spend more on PSL depends on MUDRA
• How's it better than previous such schemes
• Ensures poor are not subjected to collateral requirements
• ICT- Borrowers givem Debit cards through which they can withdraw loans directly from
ATMs
• MUDRA converges MFIs lending
○ Challenge
○ Base Rate
• Banks get loans at 6.7% from Mudra but they are reuired to lend above Base Rate
• In fact, it is seen that the loan for MSME is usually 1-2% above the Base Rate because of
the greater risk involved
• Hene, limited end user benefit
○ Provision says MUDRA bank will regulate MFIs, currently under RBI?
• Overlapping of powers, and shouldn't there be a single regulator?
• Clarity over this required
○ Experience shows other refinance institutions like SIDBI, NABARD have waned over time due to
lack of lending, political pressure and lack of professionalism
• Difference of MUDRA, SIDBI
• The financing institutions to which SIDBI lent were limited
• MUDRA has much more greater freedom
○ MFIs may step away due to fear of regulation
○ MFI act as middlemen

Classification based on Investment made


• Manufacturing
○ 25 lakh
○ 5 crore
○ 10 crore
• Services
○ 10 lakh
○ 2 crore
○ 10 crore
One Important portion are the MSME, which is mostly unorganised and unregistered

Cottage Industries
• Small scale industrial activity that are carried out in people's homes
• Eg Weaving
• In Geography, it is generally used for refereing to the Textile Industry

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FDI
08 June 2017 16:27

In 2016, the Government has brought most of the sectors under automatic approval route, except
a small negative list comprising atomic energy, manufacture of cigars and tobacco, real estate
business, lottery, gambling and chit fund etc.
• With these changes, India is now one of the most open economies in the world for FDI

Foreign Direct Investment


Definition
1. It consists of net equity investment of foreigners in India in enterprises where they express a lasting
interest (usually through management influence) +  
2. Net reinvestment of earnings and dividends +
3. Inter-corporate loans (parent lending to subsidiary)
4. See new Mayaram committee definition

FDI

Pro
1. Savings & Capital Gap: It helps to relax domestic savings gap. It provides equity financing and additional
capital.
2. Forex Gap
3. Technology ,
4. Managerial Skills
5. Competition benefits
6. Govt Revenues
7. ToT
8. Employment boost esp in Labour Abundant countries

Cons
• Disruption to tradition industries
○ Hence, talks about quality of FDI - see below

• Rao and Dhar (2011)

o Only 50% of the FDI input since can be truly classified as FDI

o 40% of the FDI are only short term flows leading to greater volatility

o 10% Round Tipping wherein the FDI is used merely for Tax Avoidance


• Kumar and Gupta
• Not directed towards exporting.
• Share of FDI I exports is 10%
• Unlike 55% in China
• Reasons- Factor market dstortion - Aluwhalia

• Goldar (2014) - Around 70% brownfield

• Equity
• 50% directed towards Mumbai and NCR

FDI and growth


• Positive - Bhagwati
• If Growtha nd welfare are the ultimate objectives, then FDI is he best Way to ensure so
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• Subramanium (2007)
○ International Experience suggests dependence on international capital is not essential for
growth
• The net result depends on the Quality of FDI , which depends on
○ When FDI is in modern Technology Intensive Sectors, then it crowds in Investment and when in
conventional sectors, it creates greater crowding out effects
○ R&D
○ Export Orientation
• Steps to Improve Quality of FDI
○ Phased Manufacturing or Local Content Requirements
• Eg in Auto industry , which led to development of Auto components industry
• Similar is Planned in the electronics industry - Phased Manufacturing Program
• Issue - TRIMS
○ Export Oriented FDI
• Such FDI minimises conflict with Domestic Investments
• Can be done via Export Content Requirements ( SEZ)
○ Direct FDI in Modern Technology Intensive sectors
• Would maximise Crowd In
○ Direct FDI in Rural areas
○ Discourage Brownfield FDI

• Neoclassical Solution to FDI ( WRITE BOTH to make a balanced answer )


a. Enactment of a FDI promotion law. 
b. Urge states to cooperates.- CSIA
c. Develop SEZs.
d. Make bank finance easily available.

FDI History
• India started with a high level of Trade Liberlisation (Bhagwati - Stage 4)
• However, since the 60s as BoP crisis started, restrictions on FDI were put
○ Restrictions on FDI that was not accompanied with technology transfer,
○ and that seeked more than 40% ownership

FDI since 1990


1. Policy Change
a. Liberalized policy was put into place. FDI can happen in more markets, ownership structures.
b. Automatic routes were provided in many sectors where the investor merely has to notify RBI 30
days in advance from bringing the funds. Dividend balancing requirements have been removed.
c. Role of FIPB: In normal cases it has to process in 6 months. It can even meet the investor in person
to expedite the process. It is empowered to approve 100% FDI in cases of high technology
transfers.
d. And now FIPB abolished
e. As per 2004-05, apart from a negative list, automatic route within prescribed limits is to be
followed for others. Procedures for FDI were also simplified and include things such as
conversion of CBs and preference shares into equity.
f. Write about the individual sector - Noted below

Trends / Recent Reforms


1. Idia's Share in Global FDI is rising
a. But, it is just abpout 2.5% of Global FDI ( UNCTAD )
b. India 10th position
2. India's Gross Capital flow was 15% of GDP in 91 which has increased to 60% now
3. Source countries: Mauritius and Singapore = 60% of FDI since 2000
4. Destination
a. Manufacturing = 40% , Services = 20%
b. Services > Computer Hardware > Telecom > Automobiles
5. Destination states: Mumbai: 32%, NCR: 19% = Mumabi + Delhi - 51% of FDI
6. Outbound FDI was 60% of inbound FDI in 2011-12. Chief sectors are manufacturing.
7. 2005-06 as turning point
a. FDI suddenly increased
b. Rose from 3% of total GCF to 6.5% of total GCF
i. Still lower than the developing world - 10% of GCF
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c. Continued for a couple of years
d. Before getting hit by GFC
e. And as a share of GCF, fell to 4% ( For most developing economies - It is about 10% )
f. Similar change in 2005-06 was seen with respect to Outwards FDI
8. Slowdown in 2012
a. According to RBI The study suggested that institutional factors, such as, policy uncertainty, are
causing the slowdown in FDI inflows to India despite robustness of macroeconomic variables

9. Current Data
○ Foreign investment
• Net FDI of 44 Billion $ in 2015-16
• Up from 35$ last year
• FDI of 55 billion dollars after including re-invested profit and everythin
• India one of the largest in the world
• Growth rate of FDI - very high
• But, in FY08, growth rate of 100% was seen after which GFC caused it to stangnate
• Sectors - Telecom, Services, Construction, Computer
• Countries - Singapore, Mauritius continue at top
• FII
• Very volatile data
• Total capital inflows= 90 billion $ because of ECB, etc. Was at a peak of 110 in 2007

Why recent Surge ?


• FDI Liberalisation
○ Retail
• Single Brand retail allowed nationally - 30% offset criteria - Waiver only if Cutting Edge tech -
Issue - what is cutting edge ? - APPLE , Xiomi
• Multi Brand retail - Depends on state govt
○ Pharma
• 100% in Greenfield Projects
• Brownfield - Reduced to 74% after it was found that the route was being misused
○ Defence
• 100% FDI -- Modern
• 49% under the Automatic route
○ Primary Sector -
• Plantattions, Food Procesing, , Animal Husbandry- 100% FDI
○ Also on Aviations, , Cable TV , etc
○ Capital
• FDI limits are lower
• Investment limit in Stock Exchanges is 15% - Par with domestic companies
○ Startup
• All startups can now raise Foreign Venture Capital under the Automatic Route
• Further reforms requied - ECB, Innovative FDI
• FIPB has been done away with
• Change in Procurment norms - Govt Procurment order, 2017

• Better Global Investment climate


○ Global FDI jumped by 40% in FY 2015, highest since the crisis levels
• CSIA
• Permamnet residency status to Investors

• Boost in Ease of Doing Business


○ GST, Bankruptcy, Single Window clearacnes ( Jharkhand), Documents for Shipping and reduction in
turnaround time, Labour reforms ( Rajasthan), improvement in infrastructure, E- Biz Platform, Time
taken to register,Model Shops Bill, Removal of Minimum paid up capital for opening of a startup,
Boost in Infrastructure, IP policy, Make in India, Skill India, Startup India, Digital India
• Structural Reasons
○ Fastest growing major economy - > 7%
○ Buyont middle class
○ Rcognition of Indian comparative advantage in Knowledge based Idustrues
• Normal reaons for FDI

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○ Horizontal Integration, Vertical integration, Diversification of risk, Greater returns, Access to raw
material, Buying a Potential rival, Tarriff factories

Constraints to FDI
• Restrictions - FERA, lack of convertibility
• Norms like Tecg Transfer, local procurement - all points of TRIMS
• Expected depreciation of currency, political crisis
• Low Income , urbanisation
• Infrastructure
• BIT
• Retrospective Taxation
• GAAR
• Ease of Doing Business - 131st
• Does not enjoy Geographical Contiguity to larger markets like US. Europe. Hence, it can't reap benefits of
Investment for Trade purpose , as countries like Mexico/ Eastern Europe do

Q. Compare the role of FDI and FII in India's economic development. Are FDIs preferable to portfolio
investments? Evaluate. (2011, II, 30)
Q. Examine the role of FDI in the Indian economy empirically. (2009, II, 20)
Debate: FII inflows: good or bad?
In 1990-91, India's Gross Capital Flows were 15% of GDP which became 54% of GDP in 2010-11.
(a) Good
1. Efficiency Argument: They help in bringing international best practices into domestic institutional and
legal framework. To encourage FIIs, a country has to mend its laws and institutions. They increase depth
of the market, help lower capital costs.
2. Law of Large Numbers Argument: Just like not all bank deposits may be withdrawn @ the same time
except for a bank run, not all FII flow will be withdrawn @ the same time. A part of it is core.
3. Beggars can't be Choosers Argument 
(b) Bad
1. Subramaniam (2007) shows that international experience suggests that higher growths have not been
associated with higher CADs. This means dependence on foreign capital is not essential for growth. This
can be attributed to the fact that even successful developing countries have limited absorptive capacity
for foreign resources - either because their financial markets are under developed or their economies are
prone to over valuation caused by rapid capital inflows.
2. A similar distinction can be drawn between equity and debt creating capital inflows. While equity flows
may be allowed, debt flows should be treated with caution.

1. What are the benefits of FDI over FPI?


Answer:
FDI flows represent longer-term investments made abroad bringing together capital, technology, and
managerial know-how, market-access in some cases, along with entrepreneurship. They are thus
seen as catalysts for domestic development. FPIs, in contrast, tend to be short-term and speculative in
nature. They are often seen to be bringing volatility to the financial and exchange rate markets

FDI in Retail
Context
1. Retail accounts for 14% of GDP and employs 9% of the workforce (next only to agriculture). ~95% of
it is unorganized retail. Share of organized retail in other Asian countries is 20-25%.
2. It is argued that in other countries like China, Poland, Brazil organized retail is 20-25% and entire retailing
sector accounts for 20-25% of the employment. In India organized retail is low and retailing accounts for
only 9% of the employment. This means higher the organized retail, higher the employment
opportunities. This argument is flawed. It can also be the case that in other countries, rest of the
economic activities are less labor intensive and hence the share of retail in employment is high. In India,
other activities may be more labor intensive. Also organized retail accounts for 5% of share in retail
yet employs only 1.25% of the people engaged in retailing. This clearly indicates it is less labor
intensive.
Features of the Proposal  
1. A proposal has been accepted by the Cabinet to allow 51% FDI in multi brand retail.
2. Such companies will have to invest a minimum of $100 mm out of which at least 50% should go in
back end infrastructure development like storage and logistics.
3. They will be restricted to towns >1 mm population.
4. They will have to source 30% material from Small Enterprises (<$1 mm).    
5. Retailers will have to get clearance from the Foreign Investment Promotion Board and a license from the
concerned state for every case. 

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Employment scenario
05 October 2016 21:53

CURRENT DATA
• Services - 28.6%
• i

Scan through TEJASVI - Poverty and Inequality and Employment and Riju

8.-
Employment-

8.-
Turnaround…

• On top of it Budget 2017, pays undue attention to it


• Jobless growth in past, current bleak picture and fear of automation and isolationist world
make it a agraver picture than it appears in the first glance

Also see Labour

Go through Gaurav once again and filter out other points - Eg Cons of Unemployment surveys -
covered by him- but not done here

Reasons for Unemployment in Developing Countries


Lack of Wage Goods (Vakil, Brahmananda)
(a) Proposition
1. The basic reason for unemployment in developing countries was the deficiency of availability
of essential consumer goods or the wage goods.
(b) Model
1. The disguisedly unemployed people who are employed in agriculture or the explicitly
unemployed, when engaged in modern sector or public works, will have to be supplied with
wage goods so that newly employed labor can subsist. If the wage goods are not sufficiently
available then there new employment can't be sustained.
2. Wage goods gap: As people are engaged in new industries, their incomes will increase. So will
the income of people engaged in agriculture (due to lessening of burden there). So
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consumption of wage goods is going to increase. If the new industries are not producing wage
goods, a deficiency of wage goods or the wage goods gap is going to arise even when
accounting for release of wage goods consumed by people when they were disguisedly
unemployed.
AK Sen's Contribution
1. According to Sen, the quantum of wage employment in a country depends on the total supply
of wage goods on one hand and the real wage rate on other. If E represents the quantum of
employment which can be provided, M represents the supply of wage goods and W the real
wage rate then E = (M/W). Thus if M is less than what is required to supply all labor force, all
workers can't be fully employed.
Other Factors
1. Lack of capital stock.
2. Use of capital intensive techniques.
3. Inequitable distribution of land.
4. Neglect of role of agriculture in employment generation.
5. Lack of infrastructure.
Disguised Unemployment
AK Sen's Analysis on Disguised Unemployment

1. He distinguished between marginal productivity of labor and marginal productivity of


laborers. He explained that it is the marginal productivity of laborers which is zero over a
wide range and not the marginal productivity of labor. In fact marginal productivity of labor is
zero just at the margin. 
2. If say a farm needs 40 man days of work and in a family there are 4 people. Then each will
work for 10 days and the combined family will not put an additional day of work. Thus
marginal productivity of labor is zero only at the margin. But there are more individuals than
needed to do the work, so work will be shared among them and each will work less. Thus
marginal productivity of laborers is zero over a wide range. Even if we withdraw 2 of them,
remaining two will work for 20 day each and total output will not suffer.
Employment Strategies in Developing Countries
Growth Oriented Strategy
1. This was the strategy followed by Mahalanobis, Lewis, Harrod. It believed that it is hard to
generate employment in India without development of capital goods.
2. But its main drawback is that it treats labor and capital as perfect complementary factors. It
also doesn't sufficiently recognize the importance of wage goods constraint for generation of
employment opportunities. Also the employment generation of modern industrial sector has
been negligible. 

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3. Another drawback is that it ignores the possibility of absorbing labor productively in


agriculture. Focus on agriculture could have led to better development as green revolution
showed. Thus it ignored all agriculture related development.
Wage Goods Strategy
1. It neglects capital goods industry. In developing countries availability of both wage goods and
capital goods forms a constraint. We can't ignore any one.
Labor Intensive Technologies Strategy (Singer, Myrdal)
1. They attribute the unemployment problem to use of capital intensive technologies as despite
rapid growth commensurate growth in employment has not been seen.  These capital
intensive technologies not only fail to create new employment but also destroy traditional
employment (backwash effect). Moreover it accentuates the inequality situation.
Rural Public Works Strategy (Dandekar, Rath, Minhas, Bhagwati)
1. They consider regular development as incapable of alleviating the problem of unemployment.
It started on a regular basis in 1977-78 as a part of 'Food for Work Programme' and thus
sought to alleviate the constraint of food grains / wage goods standing in the way of
developmental works.
2. But another view is that it can at best be an interim strategy and a long run solution to
unemployment can only be achieved through economic development.

Trends
Source: Mehrotra et. al. and Papola and Sharma. Papola shows employment trends.
Employment growth deceleration: 
• Long term trend is of decline in employment growth, along with acceleration in economic
growth. Hence there is a long term trend of declining employment elasticity of growth.

• Period 1: 1983-84 to 199


○ Job growth per unit of GDP was 3 times during 1980s in comparison to 2000s
• Period 2: 1993 to 2004-05
○ During 1993-94 to 2004-05, the population growth decelerated (<2%) thereby leading
to deceleration in labour force growth. However the employment growth grew more
slowly than labour force. This led to increase in unemployment rate form 6.1% in 1993-
94 to 8.2% in 2004-05 
• Sharp drop in agricultural employment. Workforce in agriculture and allied sector
fell from 61% to 52% during 1993-94 and 2004-05. There was 9 percentage point
drop in comparison to 4 percent point during the period 1983 to 1993-94.
• Non agri-sectors poor performance: Decline in employment elasticity of growth as
the employment elasticity of sectors went down. Also the growth of sectors with
high elasticity also fell.
○ Hence, in the same time, decline is also seen in the Poverty elasticity of growth ( Dev and
Ravi)
• Sectoral composition
○ Employment in agriculture had been rising since Independence in absolute terms. It rose
by 21 million during 2000-05. During these period, agriculture growth was stagnant. This
means low wages and productivity.
○ Employment growth has been high in secondary sector. Growth rates of construction
have been quite high. Here the issue is not employment content of growth but low
growth of output itself.
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○ Employment growth in tertiary sector has been declining despite high GDP growth rate.
This declining employment elasticity except for financial services is a cause of concern.
Performance of trade and transport and financial services has been excellent.
○ This led to asymmetry in changes in share of employment and GDP.
• Organised v/s Unorganised
○ Organised sector employment increased at 1.2% during 1983- 94, it declined at 0.3%
during 1994-2005.
○ Manifestation of dualism
• Missing middle (Mazumdar and Sarkar)
• Productivity gap-> wage differentia;
• Labour laws only applied to organised sector.
○ Reasons
• Capital intensive: Labour laws and ease of capital imports
• Outsourcing
• Decline in public sector employment
○ This trend results in the phenomenon of working poor

Sector 1972-73 1983 1993-94 1999-00 2004-05 2009-10

Regular Wage 15 14 13 14

61 57 55 53 56 51
Self Employed

Casual Wage 23 29 32 33 28 33

• Sectoral composition:  structural change in employment was witnessed in 2004-05.


○ Workforce in agriculture fell during 2004-05 and 2009-10 by 25 million and non
agricultural employment rose by 24 million. hence employment grew by 1.1 million.
○ When the employment growth was stagnant in other sector, secondary sector had high
growth rate and compensated for negative growth rates in agriculture. Construction
sector mainly absorbed labour force from agriculture sector given its high employment
growth rate whereas manufacturing had negative growth rates. Negative growth rate in
manufacturing was due to
• falling demand for manufacturing exports especially textiles, leather, gems and
jewellery due to Global Financial crisis
• Rise in capital intensity
• Rising import-intensity of manufacturing output: Capital goods production fell
due to shift towards imports form China. Similarly, during this period there

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was an increase in non oil trade deficit. Hence import competition displaced
domestic manufacturing.
• Rising wages: Due to higher rural wages, landless
labour that would otherwise migrate to richer rural areas
(e g, Punjab, Haryana and Tamil Nadu) or to urban areas were
encouraged to stay and work locally. This results in shrinkage
in the volume of the unskilled labour available for the manufacturing sector. 
Since it was both industrial (manufacturing and non-manufacturing) and
services growth that was driving high GDP growth, skill shortages emerged
at the higher end of the salary/skill distribution, increasing
salaries of the skilled and highly skilled.This inflated input costs, encouraging
manufacturers to import final goods from China or to shift to more capital
intensive processes.
• Organised industrial
sector: Goldar (2009) and Chandrashekhar (2009) show that exports and dom
estic demand growth has mainly favored products which are more skill and te
chnology intensive. Moreover the relative cost of capital to wages has also go
ne down leading to substitution of capital for labor.

Main problems
• Bulk of the increase is in informal sector
• Asymmetrical change in output and employment shares of sectors

Industry
Unemployment
Challenges to formal sector employment and role of private sector, state and centre in solutions
• Contractualisation of labour due to labour law rigidities: Competitive federalism: States like
Rajasthan have amended labour laws to attract large manufacturing companies producing
good jobs.
• Spatial mismatch between labour and employer: “Relocation Model”-Firms in labour
intensive industries like apparel are shifting to two and third tier cities since high living costs
in big cities are making these uncompetitive. Benefits are
○spreading economic development to underdeveloped areas
○reduces spatial mismatch in the labour market 
○improve competitiveness by raising firms’ access to lower cost labour 
○increase in female labour force participation since 70 per cent of the employees of
India's largest apparel exporter are women.
○ Female labour force participation will lead to greater economic growth.
• Regulation induced taxes on formal workers like mandatory contribution to EPF. Providing
workers greater choice will reduce this tax, which is incident on the workers also. Economic
incidence of a tax depends upon supply and demand of labour. Tax is in form of transaction
costs for workers due to multiple accounts, compliance costs for firms

Contractualisation of labour since 2000s


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• Example: Zero hour contract where there are no stipulated hours of work but the employee is
required to be available if the employer needs him. This is latest example of flexible hiring
from Britain.
Why?
• Contract workers are paid less than regular workers
• It provides flexibility in hiring and laying offs: In case of regular workers, there is a need for
intimation to government and payment of compensation for termination.
• Labour intensive sectors like automobile, construction, mining  have project based labour
requirements. Hence they require greater flexibility.
• Third party agents are used for hiring contract labour. Hence obligations under Contract
Labour Act is shifted to agents. This reduces compliance costs
• Worker protection and rights are not employer’s liabilities.

Impact
• Hiring is expensive through labour firm
• There is less incentive in investing in labour’s training: There is evidence that
hiring contract workers today hurts a firm’s productivity tomorrow, precisely because
contract workers do not accumulate “firm specific human capital”
• Worker right protection is absent
Way forward
• Legal framework mandating absorption of contract workers employed for greater than a
threshold period.
• Protection of rights of contract workers
○ Government recently allowed contract workers in textile sector and set a minimum wage
for them also.
○ Social security measures for all.

• Reasons for jobless


○ Inconsistency with comparative advantage - Highly skilled - eg high growth such as business
services, finance - low employment

○ Substitution of labour with capital - Automation


• WB study - 69% jobs vulnerable to automation
• China has even higher ar 80%, it being unskilled manufacturing focussed

○ Labour Laws distortion

○ More people joining the workforce


○ GDP growth has been helped by Better Balance of Trade due ro reduced imports - But this
does not generate jobs

○ Amartya Sen's reasons


• Lack of wage goods
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• Lack of capital
• Capital Intensive tech
• Lack of infra
• Inequitable Distribution of Land
• Neglecting role of agri in employment
• Interestingly he doesn't use labour laws as the reason

How to create jobs ?


• Labour Intensive Sectors - Focus on Textiles, Leather- measures GST slab, tax waiver on
exports, rationalising duties towards artificial fibre, employment support
• Even in services sector such as Tourism - will have dual benefits of economic as well as
distribution benefits as well as stress reduction
• Construction sector
• Close correlation to Investment/ GDP which has fallen to 27% - NPA crisis solve
• PMAY, MGNREGA, PMGSY

• Skill development - To reduce mismatch


• MSME
• Startups
• Management system - So that employees and employers can come close to each other
○ Need to boost National Career Services Portal
• EODB
• More growth as CEA says - Pick it up to > 8%

Schemes for Employment


1. MGNREGA
2. PM Employment Generation Program
a. Subidy to set up Micro Enterprises in both rural as well as Urban areas
b. Eg Khadi, Coir
3. Deen Dayal Upadyaya Antyodaya Yojana ( in short DAY - NRLM ) ( the SHG scheme - modelled
on SJGSY and NRLM)

4. National Career Services Portal


a. Online portal to help find jobs. One of the big problems
b. Recommendation - Still small size, and mostly public departments/ companies involved
which anyway have high demands. Need to invite and incentivise Private companies to
set up
5. Rojgar Melas

6. PM Rojgar Protsahan Yojana


a. Govt pays the 8.3% EPF contribution for the next 3 years
b. Reduces load on firms and more employment

7. Skill - Skill India and its smalller parts - DDUGKY


8. Startup - Startup India and others related

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9. Make in India
10. EODB - Liberealisation of rules, Labour reforms, Single window, GST, Bankruptcy

• Falling employment elasticity - JOBLESS Growth


○ Planning commissison data

1983-94 0.52

• 94. 99 0.16

99 -04 0.44 (rise)

04-09 0.01

• ILO recent data - Elasticity at 0.15

○ Manufacturing worst affected

1983-84 0.6

00-04 Rise in the no of jobs (12 million) - then declined due to recession

04-09 -0.3 substitution of labor by capital because period off high growth

• Although Export Oriented Industries have had a emplyment elastiicty of 0.5 during
90s
• Reason for ELI

• Good jobs
• Registered Manufacturing makes up 50% of the Good Jobs in the formal
sector- Eco Survey
• Inormal sector share has fallen in manufacturing for the 1st time ever
between 2005-10, while formal rose

• Premature non industrialisation


• Share of manufactuting in GDP

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• Peak at 10%.
• Compared to 30% Korea
• Inconsistent figures. Only use the term, No data here
• Employment - stable at 3%
• Inter state
• Except Gujarat, no state above 20% of GDP
• No major state above 6% in employment share
• Peak also for poorer states like Bihar - Limited Domestic convergence in
Registered Manufacturing at about 2000$ PPP. Very low
• Reasons
• Distortion in labour, land, capital market
• Speciaisation away from comparative advantage - more skilled labour in
RM and services - Eco Survey. Similar- Gordon and Gupta for services
• Missing middle
• India is further moving away from Labour Intensive Industries into the
Skill Intensive Sector - Kocchar, Rajan, Subramanium

○ Services
• 04-09, rise by 4 million
• Although like manufacturing, stronger growth in the 1st half- 18 million
• Dichotomy
• High growth in sectors like Finance, Business services (@20%), IT,
communication
• But they contributed only 10% to employment
• But rise has bene in the Low quality jobs such as Retail Trade
• Rising labour productivity
• Gordon and Gupta (2009)
• Normal case- share of services in employment to rise faster than
share in GDP
• Not so, in India
• Because of jobs with high productivity

○ Where did jobs go?


• To the INFORMAL SECTOR
• Informalisation of economy
• 93% in informal in 2010 vs 91% in 1999

• Rising share of informal employment even in ORGANISED sector (organised is


perhaps a sector, informal is type of employmen, beause of outsourcing, ad
hoc workers or other forms o casualisation ) @ 55% in 2012 up from 48% in
04-05

• Casualisation of labour

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• In agri, from 25% after endependence to 51% now


• Construction - see below
• Registered Manufacturing - 12% to 25% from 1999
• Ill effects
• Formal sector has 15 times more productivity than informal in textile
industry

• CONSTRUCTION
• Between 2004 and 09

Construction rise by 18 million jobs

• Agriculture Decline by 12 million

Manufacturing Decline 5 million

Services Rise by 4 million (modest)

• Since, 2000, 50% of non agricultural jobs in the constrution sector

○ Reasons for falling Elasticity


• Shift to High Skilled Job
• Automation - 1 robot approx equivalent to 7 workers
• High employment sectors such as Textiles, Leather falling out
• ER

• Current share
Currently

Agri - 47%

Manufacturing 13 %

Construction - 12%

Total secondary 13+12 = 25 %

Services - 28%

• Agriculture share declining because


○ Pull factor
• Lewis model
• Kundu and Saraswati
• Distresss migration reducing

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• The urban migration reduced till LPG and then rising


○ Mechnisation
○ Landlessness rising
• (Anyone with land less than 0.02 hectare )
• 42% of the households landless
• Up from 38% in 91

• Gender trends
○ Dichotomy of 2 halves
• Rise then fall
• In the 1st half of 2000s, women employment rose - rise by 26 million
• 2nd half fell by 21 million
○ Participation in workforce
• ILO - Female Labour Force Participation
• 27%
• Dropped from 35% in 1990
• Ban has 56% (Garment industry)
• Region wise
• Stagnant in urban
• Declining in rural
• Ill effects
○ Data
• Mckinsey
• GDP could rise by 60% in 2025 if equal women participation
• Fortune 500
• 35% greater return to shareholders in companies having more
women
○ Women share
• World - 37% of employment
• India- 17%
• In India, actual could be larger, but women are mostly unpaid
○ Working women commands respect from the family
• Else subject to domestic abuse
• Their position in the family greatly enhances
○ Ethical - Everybody has a right to do what he/she wills and desires

• Reasons - See My M&P notes


• Supply Side
• Income Effect of Husbands
• Education Effect
• Greater awareness about educating children and Return to children
upbringing more than unskilled labour
• More remittance flow - Need to work less-
• Demand Side
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• Mechanisation of agriculture (Himanshu)


• Agri wages rising - Landowners prefer hiring men ( Himanshu )
• Slow growth in sectors like Textiles and Leather where share of women is
high
• Workplace separate from Houses - difficulty in travelling
• Security

• Women are not averse to employment as the higher Women Participation in


MGNREGA (56%) shows. But, declining women employment shoes, Farm
mechanisation may be at fault

○ Goldin (1995) found a U shaped curve ,


• First decline with income effect
• Then rise
• Criticism
• Weak evidence of U curve
• Why so much variation internationally - Studies show Indian demale
participation can't be completely explained by U curve
○ Steps required
• Textile, Leather, Footwear, Tourism
• PMEGP
• Public creche facilities
• Skill , Education
• SHG , Startups
• Stigma reduction
• Security
• Learning from Ban and Japan ( Womenomics was central to Abenomics )

○ Other concerns
• Wage gap
• between men and women at 27% very high as per Monster Job Survey
• Unlike 18% worldwide
• Article 39(d) - Equal Pay for Equal Work

• Artirition Rate at women very high at 18%

○ Fall mostly in rural areas, urban areas - modest rise


• Overall unemployment of women at 8.5%
• Against 5% overall
○ Consistent with sectoral

Agri drop to 75% from 79%


• Feminisation of agriculture is reversing
• • Intesesting 75% women in agri sector
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Secndary rose to 17%

Tertiary unchanged at 8%

○ Way out
• Apparel sector
• Ban example -56% particpation rate
• Eco Survey - India's larest apparel exporter has 70% women
• Also suggests RELOCATION to tier 2 and 3 cities where labour liviing
conditions cheaper
• Additional benefit women employment
• Textile growth
• India 4 times more share in apparel in 1990 than Ban, China
• Now Ban = 1.5 more . China = 2 times more

• Labour force
○ Urban labour force increasing at TWICE rural
• 3.3% vs 1.6%
• Proof of urbanisation
○ Demographic dividend
• Indian labour force ro rise by 30% in next 20 years
• Drop by 5% in China, West
○ Male vs Female- declining female
○ A general decline seen in Labour force growth rate because of Education effect
• 15-24 popultion which continues in educational institutions doubled from 30
million to 60 million between 2004 and 2009

○ Contractualisation/ Informalisation
• 77% of households had no salaried person
• Eco survey
• Contract workers in registered manufacturing increased from 12% to 25%
from 1999
• NITI Aayog recommendation
• Introduce Fixed term employment

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• Will act as a Bridge between Full scale and contractual employment benefiting
both parties

○ Govt employment programs benefit


• 25% households reported positive
• MGNREGA, SGSW
• Positive - NE states like Tripura, Mizoram - over 70%

UNEMPLOYMENT
• NSSO figures
○ 2% in rural
○ 3% in urba
○ 2.7% total
• Causes
○ Education failing, seasonal - agri economy, tech replacing, social desire only to join if
good, geographical immobility, high wages, trade union
• Effect
○ Reduced economy, crime, hypertension,
• Solution
○ Labour reforms, awareness, unemployment allowance, MNREGA, self employment
through SETU, MSME focus
• Theory
○ Unlike in West, we don’t have unemployment because of a reduction in AD
○ But, more because of Structural Employment
○ Hence, Keynesian measures to boost AD can only lead in Inflation as pointed by Rao
• How to measure
○ Chronic unemployment- unemployment for major part of year
○ Weekly status unemployment- without an hour of the work oh the surveyed week
○ Daily status unemployment

Characteristics of Indian labour market:


• Low participation of women (28%, global average is 40%)
• Low education levels (52%/ 77%)
• High share of agriculture (53%/ 33%)
• High level of informality- regular wage employment is less than one-fifth of the total
employment
• Official rates of unemployment are very low (2% by PS+SS, 8% by CDS), but poverty levels are
very high (around 30%) => acute underemployment
• Reducing youth employment
○ Age group 15-24
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○ 33% employed
○ Down from 45% in 1991
○ Higher enrolment rate in higher education also a reason

TFP
• Growth in income can be via growth in labour, capital and TFP
India has been witnessing increasing growth coming from TFPG (some studies put it at
3.7% now).
2. But TFPG tapers to zero as an economy moves closer to the production possibility
frontier. But India is estimated to be far from the PPF.

• PMSBY and PMJJBY


• PM Suraksha Beema Yojana (PMSBY)
• Accidental insurance
• Universal
• Rs 12 a year
• Risk coverage upto 2 lakhs
• Anybody upto the age of 70
• Elaboration Required
• PM Jeevan jyoti Beema Yojana (PMJJBY)
• Universal Life insurance
• till anybody with age < 50
• risk coverage upto 2 lakhs
• Rs 330 every year - auto debited from bank account
• To be done by Public Insurance companies and opting Private
• Pros
• Social security net
• Universal
• Low cost - affordable
• No restriction based on money- No leakage
• Ease
• Simple enrollment form/ technique
• Customer deals with banks, which in turn with insurance providers
• Similarly while recovery, they deal with banks
• BC (Business Correspondent) model - Increases employment & reach
• Savings- More savings now into long term investments than gold/ real estate
• Probably the largest insurance scheme in the world
• Till now combined subscription of 10 crore
• Although skewed in terms of urban, male
• Challenge
• Lack of awareness
• Banking cost associated with no balance/ low deposit accounts
• Urban male mostly
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• However, in past only 1 out of 8 insurance schemes have been successful


• Innovative ideas- Suraksha Bandhan
• Marketing scheme for the insurance schemes
• On lines of Raksha Bandhan
• Anyone can gift 1 year of the 2 insurance schemes at rs 351
• Current status
• 10 crore people under PMSBY
• 3 crore under PNJJBY
• Unfavourable Premium to Claims ratio - Making it financially unviable

• ATAL pension scheme


• PRAN provided
• Permanent retirement account number
• Target audience
• Informally employed
• Only for those who don't pay Income Tax
• Mechanism
• Govt would contribute 50% of the subscribers contribution or Rs 1000 PER
ANNUM whiever is lower
• For Contribution varying from 42 to 210 per month, APY gurantees a monthly
pension of 1000 to 5000 per month
• Challenges
• Acount closed/ deavtivated if contribution is not regular
• People are mostly informal
• Hence, their savings irregular
• Chances of default
• Selling pension is more difficult than insurance because people procrastinate about
their old age
• Review
• 2 million subscribers
• Target of 20 million

• Elaboration Required

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Income
23 June 2017 10:12

Sector 1951 1981 1991 2015-16 ( NSO )

○ Agri 53 36 30 15.5%

Industry 17 26 28 31.5% (pnumonic - Agri *2 + 0.5)

Services 30 38 42 53

○ Manufacturing
• 14.5% in 1991 to 18% now
• Share of Construction sector declining - 8% now

1950s as Structural Divide and 1950 - 1980


• Deepak Nayar - More Important Structural Break than the 80s statistically
• Betwenn 1950 and 1980, India grew at an average rate of 3.5% incontrast to 1% growth betwenn
1900 - 1950 ( Sivasobramanium)
○ Hindu Rate of Growth - Professor Raj Krishna
○ Origin in the Hindu belief of Satiation of wants
○ But, this has proved to be a myth
• PCY
○ 1900-1950 - 0.2%
○ 1950-1980 - 1.4%
• Due to 2.1% population growth
• International Comparison - Nayyar
○ 1950-1965
• India's growth rate of Output per worker was close to world average
• But paled to the Tiger economies
• And high Population growth led to lower PCY
○ 1965-1980
• Indian economy slowed down to about 3% which was lower than the world, which in contrast
had accelerated

• Broad Macro Issues


1. Saw High Volatality of growth
i. Ranged from -5% to 10% ( 1975 - Emergency year )
ii. Due to Dominant share of Agriculture ( 53% in 1951 ; 53,17,30) , Recurrent droughts, wars and
Global Crisis
2. Savings rate was absymally low
i. @ 10% durings the 1950s
3. ICOR increased - Deepak Nayar

i. 1950-1965 1965-1980

2.8 5.1

ii. Reasons of Increasing ICOR - Quote Nayyar


1. Acts like MRTP, Urban Land ceiling, Industrial Disputes,…..
2. Red Tapism
3. And growing inefficiency due to inadequate Competition under Import Substitution
Model
4. Design of Mahanalobis Model
5. Ineffiency in Public sector ( whose dominance increased )
4. Write other points of Industry and Agriculture

• Transition Sectorally

Sector 1951 1981

○ Agri 53 36

Industry 17 26 - almost same since then

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Services 30 38

1980s as Structural Divide


1. SHIFT

a. 1951-1980 1981-2004

Growth rate 3.5% 5.6%

b. Per Capita Income up from 1.4% to 3.6%


i. As population growth stabilised and fell to <2% in the later half and 1.6% now
c. ICOR declined from 5.1 to 3.5
2. Cite this as most important shift
a. Panagariya, Virmani
3. International Comparison
a. Growth up to 5.7%, which was Higher than even the Asian Countries
b. Nayyar - Growth not just because of catching up
4. Reasons
a. TFP increase
i. Most Imp factor - Bosworth - IN contrast growth < 80s was more due to increase in inputs
rather than increase in TFP
ii. TFP growth rate increaed to 2% in 1980-2000 period as compared to 0.3% in 1950-1980
iii. ICOR declined from 5.1 to 3.5
iv. Reasons
1. Panagariya - particularly because of Shift from a Positive list approach to a Negative
list ( 26 industries ) approach
2. Deepak Nayyar - Broadbasing of industries most important
3. Other liberalisation policies , Lowering of Tax Rates
4. Attitude Change - Subramanium
a. Pro Business ,though still not Pro Market
b. Expansionary fiscal policy
i. Infrastructure Investment growth rate jumped up to 10% in the early 80s and upto 17% in the
late 80s as compared to 4% in the 70s
ii. FD went up from 5% in 70s to about 9% by late 80s
iii. 20% External Borrwings to GDP
iv. Public Savings declined from about 5% in 1980 to 1.5% by 1990
v. Made this UNSUSTAINABLE
c. Rise in savings due to bank nationalisation spurred investment - Basu
i. Savings rate rose to 20% for the 1st time in 1980
ii. Hence, Investment increased from 20% to 26%
d. Growth in SERVICES
i. Data from Bosworth shows that TFP in services improved
ii. Puzzling - Services said to have limited TFP growth ( Baumol) - Needs further research -
BASU
e. Effect of Green Revolution which also pulled up Industries due to Complementarity
5. Shift sector wise

1981 2014

Agriculture 36 14

Industry 26 26

Services 38 60

BoP Crisis of 1991


• Reasons
○ Spillover of High Fiscal Deficit
• Was Persisitently high
• 6% in the beginning of 80s to 8% by the end
• Reasons
• Subsidy - we say how Agri subsidy roe to 7% from 4.4% of agri GDP
• Decline in the profitability of the Public sector firms
• Public Savings declined from about 3% to about 1%
• In between 1984-- 9187, fiscal expansion regime was adopted
• In 1985-87, taxes and imports were liberalised
• Dependence on Foreign Borrwings increased
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• Rose to 20% by the late 80s
○ Structural reasons of BoP
• persistently overvalued exchange rate
• high tariffs
• Inefficiencies generated by the inward looking industrial policies like SSI, MRTP, License Raj
○ Dynamic
• Adverse global developments in 1990-91
• i.e., the slowdown in world trade following recession in the industrial world
• the disruption in Eastern Europe (USSR disintegration)
• the Gulf crisis of August 1990,
• which raised the oil prices
• Remittances reduced
• the drying up of external financing partly because of Basel 1 in 1989 due to a
conscious attempt of international banks to reduce exposures in order to meet capital
adequacy norms
• erosion in the country's international confidence also becaue of political instability in the
period
• Short term liquidity to India dried
• Result
○ CAD of 3.2 % of GDP, which was unsustainable then
○ Forex reserved dipped to <1 billion $, equivalent to
• 1 week's import
• cover 11% of external debt. Now 75%
• Measures
○ Short Term measures
• Import containment,
• raising of loans against the pledge of gold
• , launching of the Remittances in Foreign Exchange (Immunities) Scheme to encourage one
time transfers
• India Development Bonds to recoup the loss of non resident deposits
• negotiation of facilities with the IMF and contracting fast disbursing loans from the World
Bank and other multilateral/bilateral donor
○ Long term
• LPG reforms
See below

1991-2002
• Overall growth = 5.5%
○ Same as the 80s
○ If we take from 91 till now
• Then much higher at 6.5%
• ICOR increased slightly from 3.5 to 4.1
• Fiscal Deficit declined
○ But then rose - FRBM
○ Debt of 90% to GDP
• Industry
○ Variability, Manufacturing up, Employment Down, Registered gain, Boost in Consumer goods

• DATA on rise since LPG

GNI per Capita - 2.25 times rise



Life expectancy at birth 10 years up

Expected years of schooling 4 years up

1. 2003-2008 Boom

• Average CAGR was about 8.8%
• ICOR fell from 4.1 to 3.4
• Manufacturing - 13%
• Capital Goods > 10 %
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• Reasons
1. World Economy
i. Exports grew at a rate of 20%
ii. World Trade grew @ 15% unlike 3% in previous 6 years ( Asian Crisis)
iii. US liberalised Outsourcing norms - IT, BPO boom ( Nagraj)
2. Effect of Telecom liberalisation ( TRAI) - Nagraj
3. FDI
i. Rose from 3% of GCF to 6.5% of GCF
ii. Much lesser than the developing world of 10% though
4. Rural demand high because of
i. High MSP, Rurl wages
ii. MGNREGA - led to growth in Consumer Goods
5. Debt led boom
i. 20% growth rate in NFC
ii. I to GDP up to 40%
6. Supply side effect of Higher Infrastructural Growth
i. Rose from 5% of GDP to about 9% of GDP
7. Virmani (2012) - Because of J curve of growth induced by reforms in 1991
• An initial negative curve, then a positive one
• TRENDS
• Private Corporate Boom
• Became Engine of Investment
• Investment of private went up from 12% to 17% of GDP
• CONSTRUCTION boom
• Esp non Residential Construction
• Employment 3% to 10%
• Rise in Manufacturing - 13%
• Rise in Capital Goods > 10%
• Agriculture - weak - 2% growth
• Fall in Unregistered Manufacturing
• As Seen post LPG due to credit shortage
1. Nagraj - Narrow Based Sectoral growth Effect of Telecom liberalisation ( TRAI) Led by
Transportation, , Logistics, Construction & Finance , IT
• Double digit growth
• debt-led boom, leading to rapid monetary policy expansion, inflationary pressures, real
exchange rate appreciation, and widening current account deficits
• Volatility has reduced
• Because of the diversification in the economy
• Employment Trend
• Jobless Growth
• Manufacturing stagnant
• Construction Boost

• Issues
○ NPA crisis because of Debt led boom
○ Accompanied by High inflation because of increase in rural wages, etc
○ Lasted as long as the world economic growth and FDI favourable
• Benefits
○ Growth
○ Poverty
○ Social Outcomes

• Why slowdown after the crisis


○ AD down due to the world economic crisis
○ Droughts of 2009 that led to a long period of inflation
○ Investments down as policy paralysis, scams taking place
○ More important the role of latter than the decline in investment
○ Because, according to revised estimates, investments began to decline from a peak of 38% in 2007-
08 only in 2014
○ Thus, ICOR actually increased from 4 to a higher value - Just say increased
○ Had ICOR been same, we could have achieved a growth rate of 7.5% even when we grew of less
than 5% during 2012
○ Stalled projects worth 9 lakh crore 2 years ago

TERTIARY sector and Is India getting over Tertiarised ?


○ Traditional Belief

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○ KUZNETS and Chenery
○ Reasearch during 1950s- 60s
○ As an Economy grows, and share of Agriculture Declines
○ The share of Industry increases significantly
○ And rise in services is modest
○ And only later does a transition to the services takes place
○ Modern Belief
○ KONGSAMUT et al (Pneumonic - KONG sa MUT - Ecstasy ;) )
○ Empirically found that the rise in services sector is more than what Kuznets Predicted
○ Their Pattern
• Initially, as Agriculture declines, share of both Industry and Services increase
• In the next stage, industry stagnates/ declines and Services grow disproportionately
○ WB study supported KONGSAMUT study
○ Indian Experience
○ Gordon and Gupta show that Indian growth pattern is closer to the Kongsamut study

Sector 1951 1981 2014

○ Agri 53 36 14

Industry 17 26 26

Services 30 38 60

○ Services and Industry both grew almost equally till the late 80s.
○ India became an outlier after that period
○ Since then, Services has taken off and indystry share has remained constant
○ This has created a Situation of IDEOSYNCRATIC growth ( Kochhar, Rajan, Subramaniumhar )
○ Where we are still poor, but a tertiarised economy
○ At the same time, India is a Negative Outlier in terms of Employment in Services ( Kochhar, Rajan,
Subramanium)
○ Due to the skill intensive nature
○ TREND
○ 38% to 60%
○ Employment - Negative Outlier - Kochar et al
○ Growth leaders - Modern - Business Services ( 20%), Communication, Financial Services
• Narrow Base - Nagraj
○ Traditional services like Trade, Transport have remained laggard
○ Service exports
• Software exports made up about 50 % of exports in 2011
○ Causes
○ Natural Shift
• Income Elasticity of Service Demand > 1
• Trade in services is relativesly modest. And these services have to be provided locally
• Wagner Rule
• Public Expenditure has risen due to growth of welfare state
• Give Data after Reading Fiscal Consolidation
○ Specific
• Outsourcing - NAGRAJ
• Development of IT - Industrial Policy of 1980
○ Reasons to no manufacturing
• Industry became an outlier because of the Lower growth in Indian Infrastructure sector
in the 90s ( Kochhar paper)
• Write Data here
• Unusually skill internsive - Kocchar
• Incomplete Labour Reforms - Kocchar et al
• Premature non idustrialisation of manufacturing is taking place
• Rodrik- Growing instance throughout the world
• Competition

○ Cons
1. Baumol- low productivity-
i. And there is limited expansion in the Productivity of the sector
ii. Traditional View
iii. However, as Subramanium shows, India's service sector productivity is quite high
iv. Growth rate moderated to 7.7% in FY 17
2. Employment
i. 3. PC - Services alone can't absorb 250 million additional income seekers in next 15
years- Manufacturing has to be the engine of growth

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ii. Skill Intensive - Gordon adn Gupta - high TFP - hence less than commensurate
employment
iii. Registered manufacturing
• 50% of all good jobs - Economic Survey
3. Inequality
i. Growth of the modern vs the traditional
ii. Skewed FDI
i. in telecommunication, finance
iii. Unconditional International Convergence is Weak- Economic Survey
1. Hence, catching up using services may be a difficult task
4. Low Linkages with Agriculture
i. Unlike Industry ( Lewis Model), its utility in pulling Agriculture is low
5. Exports
i. Prevents depreciation of rupee
ii. Inadequate focus on Manufacturing has led to a high CAD
iii. Export Led Industrilisation could not be achieved
6. Limited Tradability
i. Hence, it requires simultaneous growth in Complementary industries - Rodrik
ii. Although, Goldar reaches an opposite result
7. Does not match India's comparative advantage - Subramanium
8. Kaldor's 3 laws of manufacturing
i. Strong positive correlation between manufacturing output growth and GDP growth
ii. Between Growth of Manu and Productivity of Manu
iii. Between Growth of Manu and Productivity outside Manu
1. When China entered mobile industry, it only manufactured electric connectors and
cable. However, with tech infusion and rising productivity ( Verdoon's Law), it started
manufacturing even the high end models - Eco Survey
9. DEBRAJ RAY -
i. The classical feature of underdevelopment - unorganised sector - employer of last resort

○ Pros
1. High productivity
i. Matches Chinese productivity in Manufaturing - Subramanium
2. Contribution to GVA growth
i. In 2015-16, Service Sector made 66% of GVA growth
3. Growth potential
i. Historically Expansion very high - 30% in 1951, 60% now
ii. Under penetration in rural
iii. IT, education , health, trade under utilised
4. Contribution to GCF
i. Share has risen from 53% in 2011-12 to 60% in FY 16
5. Forex Earner
i. Between 2012-2015 , Services Exports averaged 150 billion $
ii. In 2003-08 , 35% CAGR
iii. Makes up 20% of the FDI
6. Inclusive
i. Domestic convergence - Economic Survey 14
7. Linkages - Goldar et al -
i. Supply of service own demand as raise industrail productivity
ii. And will lead to grwth of both services and industry
iii. India in 80s - when high service growtj raised incomes and increased the demand for
cunsumer goods ( esp consumer durabls - 11% pa growth)
8. Resilience- 9% growth even after 2008 crisis
9. Internationally
i. Developed countries - 70% Economy in Services sector
10. THEORY OF UNBALANCED GROWTH - HIRSCHMANNN
i. Our comparative advantage
11. Environmental
12. SERVICES can become India's agent of TAKE OFF
i. In all countries, take off has been led by unbalanced growth in one or a few sectors
1. Steam Engine in Britain, Railways and Mass manufacturing in USA, timber in Sweeden, etc

Services share GVA Employment

India 60 28.6

CHina 45 35

• NSS survey
○ Global level
• Service generates more jobs
• Employment eleasticity to GDP 3 times as in agei, inustry

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○ India
○ Between 2005-10, 4 million jobs in services as compared to 18 million in construction sector
○ Even within the services, traditional sectors like trade contribute most to employment
○ Reason- Eco Survey points out the jobs are of highly skilled type

RODRIK's 5 criterion

Criterion Registered Services Construction


Manufacturing

High Productivity Y (in India - 8k $m,Korea Y N


)

Unconditional Convergence
• Domestic Y Y Y
• International N (Rodrik - India Y( for finance, real Y
outlier. World Y) estate, BPO) N for
low productivity
ones


Expansion N (Premature Non Y (27% post Y
Indust..) independence to 50%
now)

Alignment with COMPARATIVE N (Kocchar - skill N (Y for low skill Y


Advantage intensive) ones)
Hence, Make in India
requires
Skill India

Tradibility (Subramanium - Domestic Y Y (Somewhat) N


Market alone can't pull demand)

Skill INDIA
○ Kochhar et al ( Same Paper) - RM unusually skill intensive ( For eg wrt Asian Countries )
• This was true in the Mahanalobis led model
• And has only accelerated since then
• India is moving away from Labour Intensive Industries
• Part of Explanation - Incomplete Labour Reforms and that in Primary Education, India is a
negative outlier
○ Also Diversification of Manufacturing has reduced - Kocchar - even though share declining
○ Similar with services for most
○ Given Premature Non Industrialisation, Choice between
• Lewisian economy wrt unskilled labour - JEANS - hostory defying -
• Lewwesian economy wrt skill - curren tgeneration at loss

INTER STATE growth DISPARITY

Patterns, trends, aggregate and sectoral composition and changes therein in National and Per Capita
Income
Rates of economic growth in India during the 20th century (CSO data):

  1950-2004 1960s 1970s 1980s 1990s 2000s 2002-07 (X) 2007-12 (XI)

Agriculture 2.5 2.5 1.3 4.4 3.2 2.5 2.4 3.3

Industry 5.3 6.3 3.6 5.9 5.7 7.7 9.2 6.7

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Services 5.4 4.8 4.4 6.5 7.3 8.6 8.8 9.9

GDP 4.2 4 3 5.6 5.8 7.2 7.6 7.9

GDP per capita* 2.1 1.8 0.9 3.7 3.3 5.5    


* The growth rate of per capita income roughly equals the difference between the growth rate of income and
the growth rate of population
Trends of sectoral shares in GDP:

Sector 1951 1961 1971 1981 1991 2001 2013

Primary 53 48 42 36 30 24 14

Secondary 17 21 24 26 28 27 26

Manufacturing (part of secondary)     13.5   14.5   15.4

Tertiary 30 31 34 38 42 50 60



2. Into what broad phases can the Indian growth experience be divided? Mention salient features of each, along
with growth rate of GDP, and GFCF percentage.
See page 137-139 of the thin book


Measurement
How ?
• Takes 2 years
• Advanced Estimate
○ IIP Manufacturing

○ Services - Sales Tax growth, vehicles growth
○ Overall - 15 to 20 indicators
• After, 2 years, informal sector also included in to some extent such as by ASI which captures informal
manufacturing in parts

New IIP
• Base year raised to 11-12 from 04-05
○ Consistent with new GDP series
○ But, already 6 years old - Need to work on a new base soon
• Change in Basket
○ From 680 to 830
○ Consumption goods more weightage
• Will also lead to reduction in volatility
○ New category
• Infrastructural goods
• Renewable Energy
○ More weightage to Manufactured Goods, Decline in Electricity
• Work in Progress to be measured
○ Instead of Final completion
○ Will reduce the Volatility in the IIP by reducing the lumpines of data
• Led to surge in growth to 5% in FY 17 up from 1%
○ Only 2.7% in March though
○ Impact of demonetisation
• Impact on GDP
○ Since, IIP part of it, could lead to Upward revision of GDP

New WPI
• Base year 2011-12 now
• No of items in basket increased from 680 (both) to 697 ( almost 700) now
• New index for food
○ Seasonality factor will also be accounted
○ Manufacturing weightage reduced
• Indirect taxes to be not included
○ Will make it close to PPI

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Measuring Unemployment
• Currently 2 surveys
○ Labour Bureau
• Unrealiable
○ NSSO
• Takes 1 year
• Need for real time data
• Other issues - Unable to divide between Permanent, Temporary, contractual, disguised nemployment
• See DATA

GDP figures
• 2015-16
○ 7.6%
○ Criticism
• Inconsistent with IIP data which shows 2% growth, but GDP says manufacturing grew at
8.5%
• Similarly for exports
• 2.5% are accounted as DISCREPANCIES
○ Counter by Virmani
• Discrepancy= supply side estimate of GDP- demand side estimate
• Deflators for the 2 are different
• Supply side more WPI based which has been in red. Demand side has seen a steady inflation
o of 5%
• Hence problem more of cpi WPI divergence than the new GDP measurement technique
○ Challenge for next year
• International - Rate rise in USA, Brexit, Chinese economy
• Oil prices have begun to rise
• Private investment still muted - Balance sheet syndrome
• 2014-15
○ 7.2%
○ Revised from earlier estimates
○ Absolute value = 105 lakh crore
• Comes out to 1.5 trillion $
• Down because of exchange rate
• But, we know while converting to dollar, they take a base year figure
○ According to GVA = 7.1%

GDP revision
• The new data called NAS
○ National Account Statistics
• Base year now 2011-12
• Now calculation on market prices than factor cost
○ Market price method includes the effect of registration fees, property taxes and discounts the
effect of subsidies
○ Makes it in line with what the consumer pays
• Manufacturing and services data
○ MCA 21 from ministry of corporate affairs
• Total 5 lakh companies
• MCA project was launched in 2006 for e filling their financial results
○ MCA data also coupled with RBI studies and BSE and IIP
○ Earlier data from ASI (Annual Survey of Industries) which had sample size of 1 lakh
• "Enterprise based approach" for mining & manufacturing instead of "Establishment based approach"
○ Includes post manufacturing value added data
○ Like expenditure on advertisement, marketing etc
○ The differenence between the 2 significant for corporates
• Captures RBI, municipalities etc in the services sector
• Includes sales and service tax
• According to govt - makes it in line with world class
○ International Standard is SNA (System of National Accounting - UNO)
○ 90% compliant with it
• Elaboration required
Result
• Gross value added in manufacturing has gone up from 13% to 18%
○ 17 25 ( 13+12) 53
○ This 13 annd 18 difference has led to some confusion to you :P. But remember the 13 one
• Trade contribution has gone down

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3. GDP vs GVA  
○ GVA + Indirect Tax - Subsidy = GDP , since GVA measures production side. Is a better estimate of the
economy 
○ Plus, GDP is arrived by including Net indirect taxes adn reducing net subsidies. However, in Indian
economy, taxes are distortionary with varied rates  at varied products with exact values difficult to
measure. Hence, GVA which is free of tax should be preferably used 
○ http://www.insightsonindia.com/2015/09/02/7-differentiate-between-gdp-and-gva-gross-value-added-in-
the-light-of-recent-debate-over-indias-new-gdp-estimation-examine-why-gva-has-been-given-
importance/
○ Which is a better gauge to measure economy ?
○ Sir, if we are comparing across countries then GDP is a better estimate. SImilarly, if we want to
measure the economy from the consumer side, GDP is better as it takes Markket Prices into
account 
○ But, if we have to do a sectoral analysis, GVA is better since it measure value addition 

Criticism
• Not in line with IIP figures
○ 2% IIP , 8.5% manufacturing
○ Counter
• Base year different
• GVA measures value added, IIP only volume change
• Recently volumes have gone down
• But, profits (which is an indicator of GVA) has gone up due to lesser input prices
• The pessimism more because companies measure in terms of NOMINAL INCOOME which is
rising only slowly because of the inflation in red
• Nonetheless, skepticism remains if value added can indeed can continue to grow, with
volumes declining
• Especially due to Sticky Wage
• Also, capital goods part of IIP contracted 10% in the 3rd quarter
• Meaning , the firms are expecting lesser profits
• Nor with govt tax collections
• Nor with companies performance in share market
○ Counter
• Sensex average of only 30 companies
• That too, most of these companies have a part of their business abroad, that is slowing &
many are involved in petrochemicals which has been hard hit due to low prices
• Has overestimated manufacturing
○ GVA based on value addition between output
○ It is then deflated based on inflation index
○ But, right now same deflator being used for both input and output
○ But, er know about the divergence between CPI and WPI
○ Economists estimate overestimation in the manufacturing growth rate of upto 450 bps
○ Should moderate though as CPI WPI take up the same trend
• Elaboration required

What GDP lacks?


• Does not say anything about economic inequality
• Silent about social - health, education, technology, crime environmental progress
• Similarly silent about political , fundamental, other necessary rights as well as opportunities

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Employment    
 
Typically   the   process   of   economic   development   is   marked   by   three   distinct  
phases:    
• an  initial  phase  of  the  dominance  of  agriculture,    
• an  intermediate  phase  dominated  by  industry  and    
• a  final  phase  dominated  by  services.    
The  timing  of  the  different  phases  of  structural  change  and  the  duration  of  such  
changes   have,   however,   been   different   across   different   countries.   At   its   peak,  
industry   had   accounted   for   50   per   cent   of   the   total   output   in   many   of   the  
developed  countries.  In  most  of  these  countries,  it  declined  in  the  later  phase  to  
around  25  per  cent,  with  tertiary  sector  taking  over.    
 
India’s  experience  has  been  unique.  
• Leapfrogged  to  service  sector  
• Employment  distribution  didn’t  move  with  Production  distribution  

Areas  of  concern  


• Rate  of  growth  of  employment  declined  sharply  during  1993-­‐94  to  2004-­‐
05  as  compared  to  the  period  1983-­‐1993-­‐94.    
o Inadequate   increase   in   aggregate   employment   in   90s   is  
associated   with   a   sharp   drop   in   the   pace   of   creation   of   work  
opportunities   in   agriculture.   Along   with   this,   increase   in   non-­‐
agricultural  sectors  was  disappointing  
o Employment  elasticity  also  was  lower  –  jobless  growth  
o Organised  sector  employment  increased  at  1.2%  annual  during  1983-­‐
94,   it   declined   at   0.3%   during   1994-­‐2005.   This   decline   is   primarily   on  
account  of  decline  in  employment  in  public  sector  units.  Employment  
growth  in  the  private  sector  has  accelerated  in  the  second  period  but  
the   acceleration   is   insufficient   to   offset   the   decline   in   public   sector  
employment.  
o However,   there   was   also   an   improvement   in   real   earnings   across  
majority   of   rural   and   urban   occupational   groups.   Proportion   of   self  
employed   and   salaried   wage   class   also   increased   and   proportion   of  
casual   wage   workers   declined   –   rapid   economic   growth   had   greater  
impact  on  the  quality  dimension  rather  than  quantum  of  employment  
(Rangarajan,  2006).  
o Within  organized  sector,  the  entire  increase  in  employment  has  been  
largely  of  informal  nature,  i.e.  without  any  job  or  social  security  
o Explanation:   A   substantial   restructuring   of   employment   relations   is  
under   way   in   the   organized   sector.   This   trend   appears   to   be   part   of  
international   trend   towards   greater   flexibility   of   employment,  
unbundling   of   manufacturing   employment   (leading   to   outsourcing   of  
various   services,   i.e.   tertiarisation   of   employment   which   is   facilitated  
by   growth   of   telecommunication   and   IT   services).   This   has   led   to   a  
growth  in  the  share  of  employment  in  informal  sector  in  industry  and  

 
 

services   along   with   growth   in   informal   employment   in   organized  


sector  (NCEUS,  2009)  
o The  organized  industrial  sector  has  seen  overall  growth  in  gross  value  
added  and  worker  productivity  with  little  growth  in  employment.  This  
implies  that  the  growth  is  principally  due  to  rising  capital  intensity  of  
the   industrial   sector.   Work   carried   out   by   NCEUS   discusses   reasons  
for  this:  
o The   product   composition   of   exports   has   been   in   favour   of  
higher  capital  and  skill  intensity  
o Expansion  in  domestic  demand  has  been  in  favour  of  products  
demanded   by   high   income   groups   such   as   automobiles,   white  
goods   which   are   on   an   average   more   capital   intensive.   In  
addition  cost  of  capital  has  fallen  relative  to  labour  
• Task   Force   on   Employment   Opportunities   and   the   S.P.   Gupta   Committee  
identified  the  sectors,  which  would  require  focused  attention  agriculture,  
food  processing  and  small-­‐scale  units  in  various  sectors.  
• Comparing  55th  and  61st  NSSO  round  (Rangarajan)  
o There  was  a  distinct  upswing  in  employment  growth  from  an  
annual  0.98  per  cent  (1993-­‐94  to  1999-­‐00)  to  2.89  per  cent  (1999-­‐
2000  to  2004-­‐05),  signaling  a  reversal  of  the  previous  trend  of  
“jobless  growth”  during  the  1990s  (1993-­‐2000),  which  showed  an  
overall  employment  generation  at  around  only  1%  per  annum.  
o In   the   self-­‐employed   category   the   previous   trend   of   decline   has  
now  been  reversed.  Cutting  across  the  rural-­‐urban  divide  the  share  
of  self-­‐employed  workers  has  increased  sharply  with  an  offsetting  
decline  in  the  share  of  casual  labourers.  
o Regular   wage   workers   number   has   risen   during   2000-­‐05,   albeit  
marginal  but  higher  than  the  figures  for  1993-­‐2000.  
o This   rise   in   self-­‐employment   has   been   viewed   by   some   as   an  
indicator  of  the  deterioration  in  the  quality  of  employment  based  
on   the   argument   that   the   rise   in   jobs   in   this   category   has   been  
mainly  in  the  unorganised  sector  where  the  wage  rates  are  low.  
o Organised  sector  employment  fell  further  –  mostly  due  to  decrease  
in   employment   in   public   sector   (source:   Director   General   of  
Employment  and  Training)    
o The  analysis  of  the  data  thrown  up  by  the  Survey  and  projections  
indicate  that  bulk  of  the  increase  in  employment  has  happened  in  
the  informal  sector  and  agriculture  still  accounts  for  a  large  
percentage  of  the  workforce.  This  trend  is  a  cause  for  concern  as  
the  relatively  low  wages  and  lack  of  social  security  here  translate  
into  the  phenomenon  of  ‘working  poor’  i.e.  workers  in  the  BPL  
households.  In  other  words,  the  congruence  of  labour  force  and  
workforce  by  itself  dues  not  guarantee  elimination  of  poverty.  The  
new  challenge  is  one  of  improving  the  total  factor  productivity  in  
the  informal  sector  and  in  agriculture  so  that  there  is  a  significant  
improvement  in  the  emoluments  of  those  who  are  employed,  that  
is,  in  the  quality  of  employment.  
o Aggregate   elasticity   of   employment   (wrt   GDP   growth)   has   tripled  
from  a  low  of  0.15  to  a  figure  of  0.48  –  across  mostly  all  sectors.    

 
 

! Highest  for  agriculture  sector  


• 64th  round  (2007-­‐08)  Himanshu  
o Employment   growth   slowed   to   0.17%   per   annum   between   2004-­‐
05  and  2007-­‐08,  despite  9.4%  GDP  growth  –  jobless  growth  again?  
o These   trends   suggest   a   need   to   situate   the   growth   employment  
linkage   in   the   context   of   a   dualistic   labour   market   with   a   small  
minority   of   organised   regular   workers   and   a   majority   of   low  
paying  subsistence  workers.  
o The   trend   in   urban   areas   was   that   of   declining   unemployment  
rates   for   males,   but   a   secular   increasing   trend   in   the   1990s   and  
beyond.  
• General  observations  
o the   workforce   participation   rates   for   females   are   significantly  
lower  than  those  of  males  in  rural  areas  in  64th  round  as  compared  
to  61st  rounds.  
o As   far   as   the   status   of   employment   is   concerned,   the   trend   in   rural  
areas   is   clearly   that   of   a   decline   in   self-­‐employment   and   an  
increase  in  casual  workers  for  both  males  and  females,  except  for  
the   61st   round.   For   urban   males,   the   trend   suggests   a   secular  
decline   in   regular   workers   and   an   increase   in   the   self-­‐employed  
and   casual   workers.   For   urban   females,   however,   the   trend   is  
entirely   the   opposite   that   of   males   with   increasing   regular  
employment  and  declining  self-­‐employment  and  casual  labour.  
o As   far   as   industrial   distribution   is   concerned,   there   is   a   secular  
decline  in  agricultural  employment  for  both  males  and  females  in  
rural  areas.  For  urban  areas,  it  is  also  accompanied  by  a  decline  in  
secondary   sector   employment   for   urban   males,   although   this   is  
less   clear   in   the   case   of   females.   For   both   males   and   females   in  
urban   areas,   tertiary   sector   employment   has   increased   over   the  
years.  

Problems  
• Bulk  of  the  increase  in  employment  has  happened  in  the  informal  sector  
and  agriculture  still  accounts  for  a  large  percentage  of  the  workforce.  This  
trend  is  a  cause  for  concern  as  the  relatively  low  wages  and  lack  of  social  
security   here   translate   into   the   phenomenon   of   ‘working   poor’   i.e.  
workers   in   the   BPL   households.   Acc   to   EUS   2011,   for   the   first   time   13m  
left  agri  during  2005-­‐10  
• Taking   a   long-­‐term   view   of   the   trends,   it   is   obvious   that   employment  
trends   have   remained   stubborn   to   change.   The   change   in   overall  
employment   as   well   as   the   structure   of   workforce   shows   only   a   gradual  
change.  
  1983  and  2007-­‐08  
Growth  of  employment  (Usual  Status)   1.8%  
Population  growth  rate   1.98%  
GDP  growth  rate   6.12%  
Rural  employment  growth  rate   1.44%  
Rural  pop  growth   1.66%  
Urban  employment  growth  rate   3.08%  

 
 

Urban  pop  growth   2.88%  


 
• Structure   of   the   workforce   has   changed   much   more   slowly   compared   to  
the  changes  in  the  sectoral  composition  of  GDP.  

  1983   2007-­‐08  
Farm  sector  (share  in  GDP)   68.5%   55.4%  
Share  of  regular  employment   14%   16%  
 

2004-­‐05  to  2007-­‐08:  Jobless  Growth?  

The   slump   in   employment   creation   during   2005-­‐08   may   not   be   a   period   of  


jobless  growth.  

• During  this  period,  not  only  did  organised  sector  employment  grew  at  the  
fastest   pace   in   the   last   two   decades,   the   deceleration   in   aggregate  
employment  growth  would  also  be  consistent  with  improved  incomes  and  
wages.    
• In   particular,   the   rebound   of   the   agrarian   economy   and   the   consequent  
increase   in   wages   would   imply   that   females,   children   and   the   elderly  
would  have  withdrawn  from  the  labour  market.    
• Distress   was   also   lessened   by   the   introduction   of   safety   nets   such   as  
NREGA,   a   continuous   run   of   good   monsoons   and   better   access   to   credit  
during  the  same  period.  This,  in  fact,  is  what  is  happening  during  2005-­‐08  
with   the   largest   deceleration   in   employment   growth   seen   for   the   same  
population   groups   which   saw   the   largest   increase   during   the   previous  
period.   Interpreted   in   this   manner,   this   would   be   a   positive   sign   with   a  
lessening   of   distress   and   consequently   distress   movement   in  
employment.    
• The   improvement   in   the   employment   situation   is   also   confirmed   by   the  
unemployment  estimates  which  remain  high  for  males  in  the  rural  as  well  
as   in   urban   areas   but   decline   considerably   for   females   in   the   rural   and  
urban   areas.   As   a   result,   the   number   of   unemployed   persons   by   usual  
status  which  increased  from  8.97  million  in  1999-­‐2000  to  11.29  million  in  
2004-­‐05  declined  marginally  to  10.88  million  in  2007-­‐08.  
• The  slowdown  in  employment  growth  also  looks  magnified  because  of  the  
high  base  in  2004-­‐05  as  a  result  of  distress  employment.  It  is  then  better  
to   compare   the   employment   growth   rates,   ignoring   the   2004-­‐05   survey  
year.   Moreover,   since   1993-­‐94,   1999-­‐2000   and   2007-­‐08   were   all   good  
agricultural  years,  the  comparison  avoids  any  seasonal  factors.  
• Ignoring   the   2004-­‐05   period,   the   growth   rate   of   employment   during  
1999-­‐2000   to   2007-­‐08   is   a   respectable   1.84%   per   annum,   although  
marginally   lower   than   the   growth   of   employment   during   1983-­‐1993   at  
2.05%  per  annum.  

Two  phases:  

• The   period   up   to   1987-­‐88   was   one   of   relative   stability   in   employment  

 
 

trends.   This   seems   to   have   been   broken   subsequently   with   episodes   of  


large  fluctuations  in  employment  trends.  Starting  with  a  period  of  jobless  
growth  during  1993-­‐2000  to  the  employment  boom  during  2000-­‐05  and  
then   again   followed   by   jobless   growth   during   2005-­‐08,   each   of   these  
episodes   show   extreme   movements.   Considering   that   demographic   and  
educational  attainments  have  only  changed  gradually,  these  also  suggest  
an   extreme   sensitivity   to   economic   conditions,   particularly   for   a   large  
majority  of  the  population  that  is  at  the  margin  of  poverty.  
• Though  the  most  recent  period  after  2005  shows  the  lowest  ever  growth  
rate   of   employment   and   almost   no   non-­‐farm   diversification,   too   much  
should   not   be   made   of   this.   The   previous   period   (1999-­‐2005)   was   of  
extreme   distress   and   had   therefore   contributed   to   increasing  
participation  of  females,  children  and  elderly  –  with  a  large  employment  
growth  in  informal  employment,  decline  in  organised  sector  employment  
and  large  deceleration  in  wage  rates.  In  this  context  the  slow  employment  
growth   during   2005-­‐08,   due   mainly   to   a   return   to   more   normal  
participation   rates   especially   of   women,   may   not   be   too   worrisome.   But  
these   also   imply   that   the   process   of   labour   moving   from   the   farm   to   the  
non-­‐farm  sector  is  nowhere  as  fast  as  was  assessed  from  the  1999-­‐2005  
data.  For  1999-­‐2008,  the  rate  of  growth  of  non-­‐farm  employment  is  lower  
than  that  in  the  1980s  and  only  marginally  higher  than  what  was  seen  in  
the   first   half   of   the   1990s.   That   is,   the   perceived   non-­‐farm   transformation  
during   1999-­‐2005   was   not   a   result   of   pull   factors   due   to   higher   growth   in  
the   non-­‐farm   sector   but   was   essentially   distress   diversification   into   the  
nonfarm   sector   due   to   the   lower   growth   rate   of   output,   incomes   and  
wages  in  agriculture.  
• This   aspect   –   that   the   higher   growth   of   non-­‐farm   GDP   is   failing   to  
accelerate  the  rate  of  creation  of  decent  jobs  –  is  worrying  since  it  belies  a  
basic   expectation   of   “inclusive   growth”.   The   trends   emerging   from   the  
most   recent   round   confirm   the   apprehension   of   many   that   the   focus   of  
recent   economic   policy   is   only   on   the   organised   sector   to   the   neglect   of  
the   unorganised   sector   (latter   continues   to   be   around   85%   of   the   total  
emplyt);   and   that   although   there   is   some   employment   increase   in   the  
organised  sector,  this  is  by  a  small  number  and  is  increasingly  becoming  
more   informal.   It   also   raises   important   questions   on   the   various  
projections   made   by   the   official   agencies   including   the   Planning  
Commission   on   the   ability   of   the   economy   to   create   more   decent   jobs   and  
therefore  inclusive  growth.  
• However,  such  a  process  is  not  entirely  unexpected.  The  nature  of  growth  
in  recent  decades  has  been  such  that  it  has  actually  contributed  to  rising  
inequalities   which   have   further   contributed   to   creating   a   class   of   workers  
who   are   not   benefitting   from   growth.   The   divergence   in   productivity  
across   farm   and   nonfarm   sectors,   and   formal   and   informal   sectors   has  
only  grown  during  the  last  years.  The  evidence  on  increasing  inequality  is  
already   available   from   the   consumption   expenditure   surveys.   These   are  
also   confirmed   by   other   sources   such   as   the   ASI   and   national   accounts  
which   show   that   not   only   has   the   share   of   profit   in   value   added   increased  
sharply   over   time,   particularly   in   the   last   two   decades,   it   also   implies   that  
a  large  majority  of  the  workers  at  the  lower  strata  of  income  continue  to  

 
 

remain  vulnerable  and  poor.  


• It   is   this   segment   of   the   population   which,   since   it   is   perforce   “flexible”,  
contributes   to   increased   employment   fluctuations   observed   in   the   last  
decade.   It   appears   that   employment   is   not   responding   to   the   longer   run  
opportunities   that   ought   to   be   created   by   a   growing   economy   but   is  
responding   to   vulnerabilities   imposed   by   any   short-­‐run   shrinkage   of  
incomes.   It   is   obvious   that   the   nature   of   growth   is   not   inclusive   by   any  
means.   Rather,   it   has   contributed   to   the   creation   of   a   class   of   workers  
which  remains  vulnerable  to  economic  vagaries.  
• Employment  estimates  are  a  reflection  of  what  is  happening  to  the  larger  
economy   and   although   longer-­‐run   employment   growth   is   positive,   there  
are  large  fluctuations  in  more  recent  data  which  also  show  absolutely  no  
sign   of   any   employment   acceleration   in   response   to   higher   GDP   growth.  
What   is   required   is   a   better   understanding   of   the   way   employment  
markets  respond  to  economic  stimuli.  

 
Goldar  
• The   results   of   the   Annual   Survey   of   Industries   (ASI)   of   the   Central  
Statistical   Organisation,   Government   of   India   reveal   that   between   2003-­‐
04   and   2008-­‐09,   employment   in   the   organised   manufacturing   sector  
increased   at   a   very   high   rate   of   growth   of   7.5%   per   annum.   The   growth  
rate   of   employment   for   total   ASI   (coverage   slightly   greater   than  
manufacturing)  was  marginally  higher  at  about  7.6%  per  annum.    
• In   the   preceding   eight   years,   1995-­‐96   to   2003-­‐04,   employment   in   the  
organised  manufacturing  had  fallen  at  the  rate  of  about  1.5%  per  annum.  
Evidently,  the  recent  trends  in  the  organised  manufacturing  employment  
are   quite   different   from   those   in   the   period   1995-­‐2003,   and   the  
impression   of   jobless   industrial   growth   that   has   been   prevailing   for   some  
time   among   scholars   and   other   commentators   on   the   Indian   economy   is  
not  valid  any  more.  
 
  Value   add   in   organized   Growth   rate   of  
manufacturing  sector   employment  

2003-­‐04  to  2008-­‐09   12%   7.5%  

1992-­‐93  to  1996-­‐97   13%   2.8%  

 
• Increase  in  employment  due  to  growth  in  private  limited  companies.  The  
share  of  private  limited  companies  in  total  ASI  employment  has  increased  
from  25%  in  2003-­‐04  to  about  33%  in  2008-­‐09.  
 
Way  ahead:  
• Employment  elasticity  of  manufacturing  sector  has  not  been  particularly  
high.  A  greater  focus  is  required  on  export  oriented  industries.  

 
 

• The   experience   suggests   that   the   new   employment   opportunities   are  


likely   to   be   generated   in   the   unorganized   sector/   organized   sector   with  
informal   character   of   work.   Thus,   the   challenge   of   quality   of   work,   in  
terms   of   earnings   and   social   security   will   continue.   Provision   of   a  
minimum   social   protection   to   this   large   mass   of   workers   is,   therefore,  
likely   to   emerge   as   a   much   greater   challenge   than   that   of   expanding  
employment  opportunities  
• Generation   of   productive   and   gainful   employment,   with   decent   working  
conditions   must   form   a   critical   element   in   the   strategy   for   achieving  
inclusive  growth.    
• According   to   NCEUS,   we   need   to   reverse   the   priority   of   development  
agenda  from  growth  first  to  one  of  employment  first.  
 

Economic  Survey,  2012  


• For   growth   to   be   inclusive   it   must   create   adequate   livelihood  
opportunities   and   add   to   decent   employment   commensurate   with   the  
expectations  of  a  growing  labour  force.    
• The  Eleventh  Five  Year  Plan  (2007-­‐12)  aimed  at  generation  of  58  million  
work   opportunities.   The   NSSO   quinquennial   survey   has   reported   an  
increase  in  work  opportunities  to  the  tune  of  18  million  under  the  current  
daily   status   (CDS)   between   2004-­‐5   and   2009-­‐10.   However,   the   overall  
labour  force  expanded  by  only  11.7  million.  This  was  considerably  lower  
than   in   comparable   periods   earlier,   and   can   be   attributed   to   the   much  
larger   retention   of   youth   in   education   and   also   because   of   lower   labour  
force  participation  among  working-­‐age  women.    
• As   a   result,   unemployment   in   absolute   terms   came   down   by   6.3   million.  
The   lower   growth   in   the   labour   force   is   not   expected   to   continue   as  
educated   youth   are   expected   to   join   the   labour   force   in   increasing  
numbers  during  the  Twelfth  Plan  and  in  the  years  beyond.  
• This   will   push   the   production   possibility   frontier   outward   and   take   the  
economy   on   to   a   higher   growth   trajectory   and   can   also   be   viewed   as   a  
means  of  empowerment.  
• There   is   higher   unemployment   rates   acc   to   current   daily   status   (6.6%)  
compared   to   weekly   (3.6%)   and   usual   status   (2%)   –   high   degree   of  
intermittent  unemployment,  particularly  in  rural  areas  (role  of  NREGA)  
• Only  15.6%  of  the  total  workforce  had  regular  wage  employment  during  
2009-­‐10,  33.5%  -­‐  casual  labour  and  51%  self  employed.  
 
 

 
SPECIAL ARTICLE

Turnaround in India’s Employment Story


Silver Lining amidst Joblessness and Informalisation?

Santosh Mehrotra, Ankita Gandhi, Partha Saha, Bimal Kishore Sahoo

E
Creation of decent jobs outside agriculture is one of the mployment intensity of growth or elasticity of employ-
biggest challenges that confront policymakers trying to ment with respect to output is a numerical measure of
how employment varies with economic output – for in-
achieve “faster, sustainable and more inclusive growth”.
stance, how much employment growth is associated with 1
The Indian economy grew at unprecedented rates percentage point of economic growth. Employment elasticities
during the Tenth (2002-07) and Eleventh (2007-12) can provide important information about labour markets. Glo-
Five-Year Plan periods, but it has been characterised by bal employment elasticity figures (Kapsos 2005) reveal a de-
cline in employment intensity of growth between 1991 and
jobless growth and informalisation of jobs in the
2003. The sectoral employment elasticities recognise the
organised sector between 2004-05 and 2009-10. structural changes an economy is going through. Sector-wise
However, findings from the latest employment and data on employment intensity of growth indicates whether
unemployment survey of the National Sample Survey employment is growing or shrinking in a given sector, as well
as relative to other sectors.
Office (2011-12) seem to suggest a reversal of joblessness
An examination of sectoral elasticities at the global level by
with a significant increase in non-agricultural Kapsos (2005) showed that all the three sectors (primary, sec-
employment. The paper tries to assess the employment ondary and tertiary) have experienced employment growth
intensity of output growth through an examination of during 1991-2003, though the elasticity of services employ-
ment to gross domestic product (GDP) was nearly three times
employment elasticity, and potential for employment
as large as the corresponding figures for agriculture and
generation during the Twelfth Five-Year Plan (2012-17). industry. This implies that at the global level there is evidence
of structural change, as employment is being generated in
the service sector at a considerably faster rate than in the
other sectors.
This structural change has not been associated with a net
loss in jobs in manufacturing or agriculture. In terms of value-
added growth and value-added elasticities, the service sector
was both the fastest-growing sector and the sector with the
most job-intensive growth. Indeed, for every 1 percentage
point of growth in service sector value added, employment
increased by 0.57 percentage points, while the corresponding
figure for agriculture and industry stood at 0.41 and 0.28 per-
centage points, respectively. In agriculture and especially in
the industrial sector, value-added growth has been driven
more by gains in productivity than by gains in employment as
reflected by their elasticities (ibid).
One important phenomenon in the process of development
in an economy is the structural shift in the relative importance
of different sectors. As the economy modernises, secondary
and tertiary sectors gain importance, and these two sectors
are generally associated with higher productivity as compared
Santosh Mehrotra (santosh.mehrotra@nic.in) and Ankita Gandhi
(ankita.gandhi@nic.in) are with the Institute of Applied Manpower to the primary sector. In India, the share of services in output
Research, Planning Commission, New Delhi. Partha Saha (partha. has increased sharply within the last 20 years, resulting in
saha@nic.in) and Bimal Kishore Sahoo (bimal.sahoo@nic.in) are with their share in GDP rising from 43% of GDP in 1990-91 to 57% in
OP Jindal Global University, Sonepat and the Institute of Economic 2010-11. The share of the agricultural sector has declined from
Growth, Delhi, respectively.
33% of GDP in 1990-91 to 15% of GDP in 2009-10, while the
Economic & Political Weekly EPW august 31, 2013 vol xlviiI no 35 87
SPECIAL ARTICLE

industry sector’s share in GDP is hovering around 24%-26% the millennium is the non-manufacturing sector in general
between 1990-91 and 2009-10. and within this construction in particular. The 18 million
While the shift in share of output is one side of the story, increase in jobs in the construction sector were offset by the 5
changes in the pattern of employment, both quantitative million decline in manufacturing sector, resulting in industrial
and qualitative, signify better work conditions, and are impor- employment increasing by 13 million in the period 2005-10.
tant indicators of standard of living. The Indian economy has The 68th round data suggests that industrial employment has
been experiencing unprecedented rates of economic growth increased by 15.7 million during 2010-12. The disaggregated
since the last decade, which makes India one of the fastest data for 2011-12 brings good news for India’s manufacturing
growing large economies in the world, second only to China. sector. It suggests that employment in manufacturing rose by
However, its impact on employment has not always been 8.9 million in this two-year period, while non-manufacturing
too encouraging. (mostly accounted for by construction) rose by 6.8 million.
On the positive side, there has been a shift in employment in This clearly is a turnaround from the previous five-year period
favour of somewhat larger enterprises (by employment). Be- which brought forth concerns over an absolute decline in
tween 2004-05 and 2009-10, there has been an increase of 5 workers engaged in manufacturing sector.
percentage points in employment in enterprises employing 20 On the other hand, even though the present growth phe-
workers and more (from 11.8% of all non-agricultural workers nomenon is termed to be service-led growth, there has been a
in 2005 to 17.1% in 2010), along with a decline in employment rather meagre increase of 4 million jobs in this sector between
in smaller enterprises – those employing less than six workers 2005 and 2010 when services sector grew by about 10% per
from 75% to 65.6% (Mehrotra et al 2012). Further, there has annum. In contrast, employment in services had grown by 18
been a consistent increase since 1999-2000 onwards in regular million between 2000 and 2005. The data for 2011-12 shows
wage/salaried employment (from 58 million in 1999-2000 to that the services employment has increased by an overwhelm-
71.7 million in 2009-10), as opposed to casual employment or ing 11 million in this two-year period between 2009-10 and
self-employment. 2011-12 – a significant acceleration in job creation, compound
Among the causes of concern, agriculture still remains the to the latter half of the previous decade.
mainstay of livelihood for more than half of the workforce in In an ideal world, “productive employment” with “decent
the country. However, the share of agriculture in total employ- work” conditions is what India needs to achieve. One of the
ment has fallen from 57% in 2005 to 53% in 2010, which has objectives in the Twelfth Five-Year Plan, while creating em-
been accompanied by an absolute shift of 14 million workers ployment, needs to be that the work created should be (a) pro-
from agriculture to services and industry. This absolute de- ductive and (b) decent. In India we have clearly deviated
cline in the number of workers in agriculture occurred for the from the ideal of generating productive employment. The
first time in the history of independent India. Nevertheless, more productive sectors of the economy (manufacturing and
the process of structural change in employment that one services) have not generated enough employment, despite ex-
would expect with a period of very rapid, in fact, unprece- periencing the fastest GDP growth in post-Independence eco-
dented growth in output in the economy outside of agriculture nomic history. One of the objectives of this paper is to exam-
was not occurring. ine what has happened to formal employment during this
However, the pace of structural transformation accelerated period of high economic growth.
post-2010. The share of agriculture in total employment has Section 1 examines the nature of the structural change that
fallen by 4 percentage points (a decline comparable to that is taking place in employment during the past decade up to
achieved in the previous five-year period) in two years from 2009-10, for which disaggregated data is available. Section 2
53% in 2009-10 to 49% in 2011-12. During 2009-10 and 2011-12, analyses organised and unorganised employment across vari-
13 million workers withdrew out of agriculture. That is nearly ous sectors. Section 3 provides analysis of formal and informal
as large as the absolute decline in workers in agriculture (14 employment within the organised sector. The last section
million) that occurred between 2004-05 and 2009-10. There summarises the major findings.
was no absolute decline in agricultural employment between
Independence and 2004-05, which began after 2005 for the first 1 Structural Change in the Past Decade
time in Indian history. This decline has intensified since 2010. One of the most disturbing numbers that the 2009-10 employ-
Manufacturing sector employment remains a concern, ment and unemployment survey data shows is the addition of
despite rapid manufacturing-output growth. The increase by merely 2.76 million work opportunities during the period of
nearly 12 million in manufacturing sector employment in the fastest growth for the economy (Table 1, p 89). Compared to
first half of the decade (2000-05) was offset by a decline of this, there was an addition of 60 million to the workforce dur-
5 million in the second half of the decade (2005-10). Among ing 1999-2000 and 2004-05. Estimates of workforce have been
others, higher wages and more capital-intensive technology have obtained by applying the multiplier of census population esti-
been cited as possible explanation for declining employment mates to the projections by National Sample Survey (NSS) em-
in the manufacturing sector (World Bank 2012). ployment and unemployment survey. This section examines the
The only non-agricultural sector which has experienced nature of the structural change – defined as a shift in the structure
phenomenal growth in employment during the first decade of of output and of employment away from agriculture to industry
88 august 31, 2013 vol xlviiI no 35 EPW Economic & Political Weekly
SPECIAL ARTICLE

and services – that has taken place in employment during the allied activity in agriculture saw decline in employment
past decade using data for three points of time (Table 1). (though an increase in value added) even in the 1990s. Since
1997, there has been an absolute decline in cattle and goat
1.1 Agriculture population which suggests a reason for decline of employment
By 2010 the share of agriculture in GDP had fallen from about in the livestock sector. Similarly, fisheries saw a transforma-
23% in 1999-2000 to 15%. But 53% of the workforce of India tion, with marine fisheries losing its dominance to culture fish-
was producing 15% of the economy’s output. By contrast, in eries; the latter is less labour-intensive than marine fisheries. A
China the share of the workforce in agriculture had shrunk to decline in employment in forestry could be on account of a de-
about 39% in 2008 (contributing 11.3% to GDP) from about crease in forest area in the country. A final reason may have to
50% in 2000 (comparable ratio for India was 57%), which was do with the increasing pressure on women’s time. Male migra-
then contributing 15.1% to GDP (World Development Indica- tion out of rural areas has continued unabated, increasing the
tors 2012). feminisation of crop agriculture, leaving women with less time
In India, despite an absolute decline of 14 million in employ- to rear poultry or livestock (ibid).
ment (which is why the employment elasticity is negative) in
agriculture during the second half of the decade, the problem 1.2 Manufacturing
remains that total agricultural employment at the end of the There was an absolute increase in employment in the first half
decade was still higher than at the beginning of the decade. of the decade from 44 million to nearly 56 million in 2004-05.
One would have expected that at least in the allied activities in Out of this 12 million increase in employment, 7.5 million was
agriculture – horticulture, animal husbandry, forestry and accounted for by textiles, wearing apparel and leather and
fisheries – there would be an increase in employment. However, leather products. This increase of nearly 12 million in manufac-
it is intriguing that employment in these activities too declined turing in the first half of the decade was, however, offset by a
in absolute terms from 50.8 million in 2004-05 to 34.6 million decline by 5 million in the second half of the decade. Most of the
in 2009-10. Since income has been growing rapidly, and the manufacturing sub-sectors witnessed a decline in employment.1
income elasticity of demand for eggs, milk, fish, fruits and Within the manufacturing sector, the following sub-sectors
vegetables is high, the consumption of these products is experienced reasonable increase in total employment: textiles;
increasing. However, employment in these “allied agricultural” wearing apparel and leather products; paper and paper prod-
activities has declined. ucts, and publishing and reprinting of recorded media; basic
There may be several reasons for this apparently contradic- metals; motor vehicles and other transport equipment; furni-
tory phenomenon, with reasons varying by sub-sector of non- ture; and medical and optical instruments, watches and
crop agriculture. For instance, Jha (2006) points out that clocks. These sub-sectors where there was an increase in em-
Table 1: Employment and Change in Employment during the Decade ployment over the decade in manufacturing together account
Sectors Employment across Various Absolute Change in for a little over 50% of total employment in manufacturing in
Sectors (in million) Employment (million)
2009-10. These sub-sectors also experienced a robust growth
1999-2000 2004-05 2009-10 1999-2000 2004-05 to 1999-2000
to 2004-05 2009-10 to 2009-10 in gross value added (GVA) in the latter half of the decade.
Agriculture 237.67 258.93 244.85 21.26 -14.08 7.18 Several major sectors which account for about 10% of the
Manufacturing 44.05 55.77 50.74 11.72 -5.03 6.69 total employment in manufacturing saw no increase in em-
Mining and quarrying 2.17 2.64 2.95 0.47 0.31 0.78 ployment or an actual decline: food products and beverages,
Electricity, gas and tobacco products, non-metallic mineral products and fabri-
water supply 1.13 1.30 1.25 0.17 -0.05 0.12 cated metal products. It is critical, therefore, that both the
Construction 17.54 26.02 44.08 8.48 18.06 26.54
central government as well as the state governments where
Non-manufacturing 20.84 29.96 48.28 9.12 18.32 27.44
the production of these manufacturers is concentrated, should
Trade and repair 36.63 43.36 43.53 6.73 0.17 6.90
give due attention to support these sectors in terms of infra-
Hotels and restaurants 4.62 6.10 6.13 1.48 0.03 1.51
Transport, storage and structure, technology and credit so as to provide an enabling
communication 14.61 18.47 19.97 3.86 1.50 5.36 environment for creating more jobs in this sector.
Banking (and insurance) 2.25 3.10 3.82 0.85 0.72 1.57 In other words, the challenge before the country’s policy-
Real estate, renting and makers – especially in the New Manufacturing Plan 2012-22 – is
business activities 2.67 4.65 5.75 1.98 1.10 3.08
not only to increase the contribution of manufacturing to GVA
Public administration
and defence 10.48 8.84 9.46 -1.64 0.62 -1.02 in the economy, but also its contribution to employment. The
Education 8.47 11.43 11.85 2.96 0.42 3.38 New Manufacturing Plan speaks of the ambitious objective of
Health 2.62 3.34 3.59 0.72 0.25 0.97 increasing manufacturing employment from 50 million to 100
Other community, social million by 2025, and the contribution of industry to GDP should
and personal services 9.99 8.75 8.63 -1.24 -0.12 -1.36 increase from 15% in 2010 to 25% by 2022. In the context of the
Other services 1.86 4.76 3.62 2.90 -1.14 1.76 last decade of rapid economic growth, which has seen almost
Services 94.20 112.81 116.34 18.61 3.53 22.14
no increase in the contribution of manufacturing to either out-
Total 396.76 457.46 460.22 60.70 2.76 63.46
Source: Using usual principal and subsidiary status (UPSS) calculated from NSS 55th, 61st,
put or employment in relative terms, the manufacturing plan’s
and 66th Rounds, Employment and Unemployment Rounds. target seems to be overly ambitious. Given also the competition
Economic & Political Weekly EPW august 31, 2013 vol xlviiI no 35 89
SPECIAL ARTICLE

from manufacturing hubs like China, Thailand and Korea and 1.4.1 Education and Health
the opening up of free trade with Bangladesh – all of which Education is another important source of service sector em-
threaten Indian domestic manufacturers – there is a serious ployment and it accounted for 10% of the total services em-
need to review industrial policies to be able to achieve the am- ployment in 2009-10. Due to government investment in school
bitious targets of the New Manufacturing Plan. While the man- education, especially the Sarva Shiksha Abhiyan (or Pro-
ufacturing sector has been growing at an unprecedented rate in gramme to Universalise Elementary Education), there has
the 2000s, its growth rate has not been higher than that of GDP been an increase in the number of teachers hired by govern-
(8.4% per annum over 2003-04 and 2010-11). ment schools throughout the country. Private school enrol-
ment and hence teacher hiring has also increased. Therefore,
1.3 Non-Manufacturing it is not surprising that there was an increase in the number of
Non-manufacturing employment increased by 9 million be- those employed in education from 8.5 million in 1990-2000 to
tween 2000 and 2005, while during the second half (2005-10) 11.4 million in 2004-05. However, there was hardly any in-
the increase was by 18 million with a remarkable growth rate crease in employment in education in the latter half of the dec-
of nearly 132%. Construction was the prime mover in this ade. This seems slightly counter-intuitive, given that the edu-
rapid increase in employment, while electricity, gas and water cation sector’s growth has remained robust. The growth rate
supply witnessed a small increase. The increase in construc- of GVA between 1999-2000 and 2004-05 in education was
tion employment is guided by the increase in infrastructure 7.1% per annum, and it actually increased to nearly 8.4% per
investment during the Eleventh Five-Year Plan (2007-12) pe- annum in the latter half of the decade.
riod from 4% of GDP at the beginning of the Plan to 7.5% of the The health sector, which accounts for only a third of the em-
GDP in the terminal year of the Plan. The target of investment ployment generated by the education sector and around 3% of
of $500 billion in infrastructure during the Eleventh Plan was the total services sector, has witnessed a consistent increase in
actually achieved. The pull of construction growth in both ru- employment throughout the decade (an increase of about one
ral and urban areas led to workers moving out of agriculture million workers). It appears that while the growth rate of GVA in
(14 million moved out between 2005 and 2010). health was robust (10.1% per annum) in the first half of the dec-
ade, the GVA growth declined to 4.2% per annum in the second
1.4 Services half of the decade, which perhaps explains the rather small in-
The total contribution of services to employment in India is crease in employment in the health sector in the latter half of the
25.3% in 2009-10 (while that of industry is 21.5%, of which 11% decade. With persistent shortage of health workers even after the
is accounted for by manufacturing). The share of services in National Rural Health Mission (NRHM) started in 2005, there is a
total GDP (55% in 2009-10) is more than double its share of possibility that greater thrust by the government on the health
employment. Its share in non-agricultural employment has sector in the Twelfth Five-Year Plan will increase employment in
however consistently declined from 59% in 1999-2000 to 56% the sector. Health sector expenditure by the central and state gov-
in 2004-05, and further down to 54% in 2009-10. Given the ernments is expected to rise from 1% of GDP in the Eleventh Plan
fact that output growth in the Indian economy in the 2000s to 2.5% by the end of Twelfth Five-Year Plan.
has been led by both services and industry, we should be par-
ticularly interested in the outcomes in services in respect of 1.5 Employment Elasticity
employment. Table 1 shows that in the first half of the decade With increasing diversification and growing sophistication of
(2000-05), total employment in services increased from 94.2 the Indian economy, the ratio of public expenditure to GDP
million to 112.8 million (an increase of 18.6 million). However, must continue to rise, since it is well known that, on an aver-
in the latter half of the decade (2005-10) there was an increase age, public expenditure to GDP ratio tends to rise systemati-
of only 3.5 million in total employment in services. cally with per capita income. For instance, the share of govern-
If we look at sub-sectors within services, traditional sources ment in GDP in Organisation of Economic Co-operation and
like trade and repair are the most important contributor to em- Development (OECD) countries is well over 40%, and in Scan-
ployment (Table 1). It accounts for more than one-third of the dinavian countries over 50%, while in India it is still around
total services employment in the economy, both at the begin- 30% of GDP. Historical evidence from the now-industrialised
ning as well as at the end of the decade. Most of the increase in countries is that a rise in per capita income will be accompa-
employment for the sector was accounted for by retail trade. nied by a rise in the size of government, and hence a rise in
Of the 116 million in services, retail trade alone provided em- public-sector employment (Lindert 2004).
ployment to 35.7 million workers in 2009-10. However, like so The real issue is whether public employment will increase in
many other sectors in the second half of the decade, trade too the sectors where it is most required, especially for regulatory
saw a slowdown in the pace of increase in organised retail em- functions or to improve the quality of policing, filling vacant
ployment. Even the output growth slowed down for the sector posts in the judiciary, increasing the number of teachers in
in the wake of the global economic crisis (which led to contrac- schools, and that of doctors and paramedical staff in the public-
tion in consumer demand) and rising input costs, especially health system. These are the areas where public employment
real estate. Employment in the unorganised retail sector will need to expand as the economy becomes more complex and
declined in absolute terms. the functions required to be performed by the government must
90 august 31, 2013 vol xlviiI no 35 EPW Economic & Political Weekly
SPECIAL ARTICLE
Table 2: Employment Elasticity in India same even in the second half of the decade. This is probably
Sectors Employment Elasticity because many policies and programmes were introduced by the
1999-2000 to 2004-05 2004-05 to 2009-10
Government of India in order to invest in the areas of education
Agriculture 0.84 -0.37
Manufacturing 0.76 -0.21
and health, as compared to the traditional sectors.
Mining and quarrying 0.83 0.55 In other modern service sectors such as banking (and
Electricity, gas and water supply 0.56 -0.11 insurance), and real estate and business activities (information
Construction 0.78 1.19 technology (IT), information technology enabled services
Non-manufacturing 0.92 1.26 (ITES), consultancy, etc), the employment elasticity was higher
Trade 0.35 0.01 than other traditional services in both the time periods
Hotels and restaurants 0.53 0.01 (Table 2). This suggests that most of the growth in the work-
Transport, storage and communication 0.48 0.13
force absorbed in the service sector is in modern sectors, where
Banking (and insurance) 1.25 0.30
productivity is expected to be better, and in that sense we are
Real estate 1.09 0.48
Public administration and defence -0.91 0.16
seeing a trend observed in more advanced, OECD countries
Education 0.88 0.09 (Eichengreen and Gupta 2010). It is expected, therefore, that
Health 0.51 0.36 the kind of increase in employment that occurred in services in
Other community, social and personal services -0.10 0.02 the first half of the decade (from 94.2 to 112.8 million) is the
Other services 0.52 0.19 kind of growth that is likely to be experienced during the
Services 0.45 0.06 Twelfth Plan period as well. The second half of the 2000s, which
Non-agriculture 0.58 0.18 saw a relatively slower increase in employment in the services
Total 0.44 0.01 sector, is unlikely to be repeated over the next five years with
Employment elasticity is the midpoint elasticity.
Source: Computed from Employment data from NSS unit level data and gross value added expansion due to investments in services like education, health
from Central Statistical Office (CSO). and public administration.
respond to the needs of an emerging market economy. This is an
issue that policymakers must pay heed to, especially to improve 2 Trends in Organised and Unorganised Employment
the governance and administration of public services. In this section we discuss the trend in non-agricultural em-
Employment elasticity of output (defined as employment ployment – industry and services – by organised and unorgan-
growth for 1% growth in GVA) in India has declined over the ised sectors, and formal and informal employment. However,
last decade of the 2000s (it declined from 0.44 to 0.01), on ac- as was noted by National Commission for Enterprises in the
count of which, we can argue that the phenomenal growth Unorganised Sector (NCEUS 2008), in India there is not a uni-
rates India has achieved during the last five years or so was versally accepted definition of the unorganised sector. The
jobless growth. The decline in employment elasticity (EE) of organised-unorganised dichotomy is often used in a similar
non-agricultural sectors (in the first half of the decade it was context as formal-informal, registered-unregistered or modern-
0.58 and has declined to 0.18 in the second half) is a matter of traditional. The present paper has applied the NCEUS defini-
serious concern (see Table 2 for estimates of elasticity between tion of organised and unorganised sectors. NCEUS defined
2000 and 2005, and again for the latter half of the decade organised and unorganised based on enterprise type, number
2005-10). In the development process, workers should come of workers and social benefits. All enterprises under the
out of the low-productivity agricultural sector to higher pro- domain of government/public sector; public/private limited
ductivity non-agricultural sectors. company; cooperatives, trust, etc, are defined as organised.
This is happening in India at a slow pace, as is evident from The enterprise type is organised if it satisfies two criteria.
declining EE of the non-agriculture sector. By contrast, within First, it is proprietary (male and female); partnership with
the non-agricultural sectors, EE of non-manufacturing sector was members from same household or members from different
close to one in the first half of the decade and has crossed one in households; and employer’s households (i e, private house-
the second half of the decade. This has resulted in some unpro- holds employing maid servant, watchman, cook, etc). Second,
ductive employment generation in this sector, particularly in the number of workers is 10 or more.3 The remaining enter-
construction. Employment elasticity in case of construction in- prises are considered as unorganised.
creased from 0.78 during 2000-05 to 1.19 during 2005-10, Ghani et al (2013) observe that the unorganised sectors
which shows that employment growth in the sector was more share in employment has been extremely high and persistent
than the growth in value added by the sector implying low pro- in India, despite high growth rates and structural transforma-
ductivity jobs (EE is the midpoint elasticity of the period). tions. The persistence cannot be attributed to diverging trends
What is interesting is that, in the second half of the decade, with some states or industries becoming relatively more
manufacturing EE turned negative whereas service sector as a organised and others being less so. This persistence of the un-
whole and its components have registered a positive EE. In the organised sector, according to them, is more systemic and can
first half of the decade, within the service sector, education and be explained by the rising employment shares of those state-
health sectors had relatively higher EE as compared to other industries which are experiencing rising unorganised shares.
traditional sectors2 such as trade, hotels and restaurants, and The absolute size of employment in the organised sector
transport, storage and communication. The trend remained the increased throughout the period, while it declined in the
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SPECIAL ARTICLE

unorganised sector during the second half of the decade. unorganised employment in the agricultural sector (99% of
Therefore, the second half of the decade witnessed a relative agricultural employment is in the unorganised sector) that the
increase in the share of employment in the organised sector overall share of employment in the unorganised segment of
(Table 3). The increase in organised sector employment is a the economy is so high (84%) (Table 4). Organised enterprises
welcome sign, while slowing down of overall employment account for 33% of the total non-agricultural employment
growth in the economy is a matter of concern. (Table 5), which is over twice of its share in total employment.
Table 3: Employment in Organised and Unorganised Sector (in million) Therefore, the objective should be to generate employment in
Year Organised Unorganised Total the organised segment of the non-agricultural sectors.
1999-2000 54.1 (13.6) 342.6 (86.4) 396.8 (100)
2004-05 62.6 (13.7) 394.9 (86.3) 457.5 (100) 2.3 Manufacturing
2009-10 72.88 (15.8) 387.34 (84.2) 460.22 (100) The not so positive development during the 2000s (noted ear-
Bracketed figures are in %.
Source: Using usual principal and subsidiary status (UPSS) for 2009-10, computed from NSS
lier) is the fact that the number of those employed in manufac-
66th Round, for 2004-05 and 1999-2000, NCEUS (2008). turing that increased from 44 million at the beginning of the
decade by 11 million to 55.8 million in 2004-05 fell back to 50.7
2.1 Agricultural Sector million by the end of the decade. In the first half of the decade
The agricultural sector is almost entirely unorganised. The there was a very sharp rise of 30% in unorganised employment
phenomenal rise in unorganised sector employment during in manufacturing, but over 5 million workers in unorganised
the first half of the decade can be explained by the increase in employment in the manufacturing sector in 2004-05 had lost
agricultural employment (by 21 million). Similarly, the decline their jobs by the end of the decade; as a result, total unorganised
in unorganised sector employment during the second half of manufacturing employment had fallen to 34.7 million.
the decade can be largely explained by the steep decline in Organised manufacturing, which accounted for 30% of the total
agricultural employment (by 15 million). Moreover, the share manufacturing employment at the beginning of the decade,
of organised sector within agriculture has declined from 2.2% increased its share to only 31% by the end of the decade.
in 1999-2000 to 1.1% by 2009-10. We have noted earlier that organised sector employment
On the other hand, the consistent increase in organised- constitutes an improvement in the scale of relative decent
sector employment during the decade is driven by the non- work due to availability of various social security benefits over
manufacturing industry and services sectors. unorganised sector employment. However over the decade of
rapid economic growth there was not much improvement in
2.2 Non-agricultural Sectors this regard either because as will be seen in the next section,
Overall, the share of employment in the organised segment in most of the increase in organised sector employment has been
the economy in 2009-10 was 16%, which was an improvement in the nature of informal contracts.
of 2 percentage points as compared to 2004-05 and 1999-2000
(Table 3). The share of organised employment in each of man- 2.4 Construction
ufacturing, non-manufacturing, and services is roughly one- This was by far the most important non-manufacturing sector in
third (Table 4). It is due to the overwhelmingly large share of terms of employment generation. Table 6 (p 93) shows that there
Table 4: Organised and Unorganised Employment in Major Sectors, was a very sharp increase in employment in its unorganised seg-
by UPSS, 2009-10 (in million) ment throughout the decade. However, the organised segment
Major Sector Total Employment Unorganised Employment Organised Employment
of construction also witnessed an increase in employment, from
Agriculture 244.85 (100) 242.11 (99) 2.74 (1)
4.6 million to 6.35 million in the first half of the decade. But the
Manufacturing 50.74 (100) 34.71 (69) 16.03 (31)
most stunning increase is the doubling of employment of organ-
Non-manufacturing 48.28 (100) 30.38 (63) 17.90 (37)
ised construction that occurs in the latter half of the decade
Services 116.34 (100) 80.17 (69) 36.17 (31)
All sectors 460.22 (100) 387.38 (84) 72.84 (16)
within a matter of five years from 6.35 to 13 million.
Bracketed figures are in %. This latter increase in organised construction’s contribution
Source: Using usual principal and subsidiary status (UPSS) calculated from NSS 66th Round, to employment growth could only be explained by the fact
Employment and Unemployment Survey, 2009-10.
that there was a significant expansion of infrastructure invest-
Table 5: Formal and Informal Employment in Non-Agricultural Sector for
2009-10 (in million) ment during the Eleventh Five-Year Plan period. While most of
Workforce Total Unorganised Organised Share in Percentage the increase in unorganised sector employment in construc-
Total 460.22 387.34 72.87 100 tion would be that coming from private development of hous-
Formal 33 2.26 30.74 7.2 ing, it is probable that the large-scale projects involving the
Informal 427.22 385.08 42.13 92.8 construction of airports, metros, highways and expressways,
Share in percentage 100 84.2 15.8 urban flyovers, and private ports, housing are likely to have
Non-agriculture 215.37 145.23 70.13 100 involved such huge firms as L&T, Gammon India, GMR and so
Formal within non-agriculture 31.00 2.26 28.74 14.4 on – all of which are likely to have employed workers directly
Informal within non-agriculture 184.37 142.97 41.39 85.6
on terms usually applicable in the organised segment, even
Share in percentage 100 67.4 32.6
Source: Using usual principal and subsidiary status (UPSS) calculated from NSS 66th Round,
though their subcontractors would also generate significant
Employment and Unemployment Survey, 2009-10. employment in construction in the unorganised segment.
92 august 31, 2013 vol xlviiI no 35 EPW Economic & Political Weekly
SPECIAL ARTICLE

2.5 Services 2005 and 2010 has still not prevented a rise in unorganised seg-
Despite significant improvement in the share of GVA during the ment of retail. In mid-2012 (at the time of writing this paper)
past decade (from 49% in 1999-2000 to 57% in 2009-10), ser- FDI in multi-brand retail trade was still not permitted in India,
vices account for only a quarter of overall employment in the and hence all the increase in employment in organised retail
economy. Employment creation however remains a major that took place was due to growing domestic demand for and
challenge in this sector which has witnessed barely a 4 million domestic investment in it. Thus, with the growth of the eco-
increase in employment during the second half of the decade. nomy, organised retail employment has grown, and it is likely
Therefore, despite a phenomenal increase in employment dur- to grow even further if FDI in organised retail is allowed by
ing the first half of the decade, employment in the services the Indian government as others (Jain and Ninan 2010) have
sector remained almost stagnant during the second half. We also suggested.
now discuss employment trends in some of the sub-sectors
within services sector. 2.7 Hotels and Restaurants
This sector saw an increase in employment overall, and the
2.6 Wholesale and Retail Trade contribution of the unorganised segment has remained over-
Together, these contributed nearly as much in employment as whelming throughout the decade. In fact, the contribution of
did all of manufacturing taken together. In fact, there was an the organised segment was barely 12% at the beginning of the
increase in total employment in wholesale and retail trade decade and had merely risen to nearly 13% at its end. As one
from 36.6 million at the beginning of the decade to 43.51 mil- would expect, the organised segment has risen in absolute and
lion at its end. The vast majority of those working in wholesale relative terms, but the rise in employment in the unorganised
and retail trade are in the unorganised segment. Most of the segment was much larger. This would suggest that the Eleventh
employment (90%) is generated in retail trade. Plan’s (Planning Commission 2008) expectation that tourism
Much controversy in India has been centred around allow- (which would consist of both hotels and restaurants, as well as
ing foreign direct investment (FDI) in retail trade, in particu- transport services for tourists) would be a growth sector dur-
lar, the possible growth of organised retail and the impact it ing the Eleventh Five-Year Plan period did prove to be correct.
might have on employment in “mom and pop” stores. The first One could argue in fact that employment in both organised as
half of the decade saw a decline in employment in organised well as unorganised segments of hotels and restaurants will
retail trade from 1.69 to 0.95 million. However, in the second continue to rise during the Twelfth Five-Year Plan period.
half of the decade employment in organised retail rose to 1.5
million, which is still less than that prevailing at its beginning 2.8 Banking and Insurance
(1.69 million). The employment has grown here, consistent with the growth
Despite the controversy, there was, in fact, an absolute dec- in modern services in an emerging market economy, even
line in employment in organised retail over the entire decade; while employment elasticity has fallen. This sector also saw a
unorganised retail trade, however, did see a rise in employment steady increase in employment in both organised and unor-
of nearly 4.8 million at the end of the decade as compared to its ganised segments throughout the decade. In fact, one can take
beginning. Despite its growth after 2005, organised retail still it for granted that this segment will go on increasing during
only accounts for not more than 5% of total retail trade employ- the Twelfth Plan period, given the very low rate of coverage of
ment. The growth in employment in organised retail between the population within the banking network, especially the
Table 6: Number of Workers by Sector, 1999-2000, 2000-05, 2009-10 (in million)
1999-2000 2000-05 2009-10
Total Unorganised Organised Total Unorganised Organised Total Unorganised Organised
Agriculture 237.67 232.2 5.47 258.93 252.8 6.09 244.85 242.11 2.74
Manufacturing 44.05 30.92 13.13 55.77 39.71 16.06 50.74 34.71 16.03
Mining and quarrying 2.17 0.88 1.29 2.64 0.89 1.75 2.95 1.09 1.86
Electricity, gas and water supply 1.13 0.09 1.04 1.30 0.09 1.21 1.25 0.12 1.13
Construction 17.54 12.92 4.62 26.02 19.66 6.35 44.08 31.1 13.0
Non-manufacturing 20.84 13.89 6.95 29.96 20.64 9.32 48.28 30.38 17.90
Wholesale and retail trade 36.63 34.30 2.33 43.36 41.43 1.93 43.53 40.55 2.98
Hotels and restaurants 4.62 4.08 0.54 6.10 5.29 0.81 6.13 5.22 0.91
Transport, storage and communication 14.61 10.44 4.18 18.47 14.02 4.45 19.97 15.09 4.88
Banking and insurance 2.25 0.49 1.76 3.10 0.80 2.30 3.82 0.89 2.93
Real estate, renting 2.67 2.02 0.65 4.65 3.29 1.36 5.75 3.35 2.40
Public administration and defence; compulsory social security 10.48 0.80 9.68 8.84 0.08 8.76 9.46 0.00 9.46
Education 8.47 2.29 6.18 11.43 3.07 8.36 11.85 2.68 9.17
Health 2.62 1.19 1.43 3.34 1.58 1.76 3.59 1.39 2.20
Other community, social and personal services 9.99 8.50 1.49 8.75 7.45 1.30 12.24 11.00 1.24
Total services 94.20 65.62 28.57 112.81 81.72 31.09 116.34 80.17 36.17
Total workforce 396.76 342.64 54.12 457.46 394.90 62.57 460.22 387.38 72.84
Source: Using usual principal and subsidiary status (UPSS) calculated from NSS 55th, 61st, and 66th Rounds, Employment and Unemployment Rounds.

Economic & Political Weekly EPW august 31, 2013 vol xlviiI no 35 93
SPECIAL ARTICLE

two-thirds of Indian population living in rural areas. With become an export industry). In fact, medical tourism to India
some 50% of the population which is still unbanked, the has already made good progress. Eichengreen and Gupta
growth of the branch network on the one hand and the phe- (2010) suggest that the experience of other countries indicates
nomenon of banking correspondents on the other should see a that a country becomes a net exporter of services like education
steady growth in employment in the banking sector during the and health only when its per capita income exceeds $5,000 (in
Twelfth Plan period. the year 2000 US had reached this threshold level of per capita
At the same time, with growing incomes there is a strong income, in terms of purchasing power parity dollars).
probability that insurance services of all kinds – death, disabil- The production conditions prevailing in Indian agriculture,
ity, health – will go on increasing, just as both private and pub- with its reserve army of labour, make it highly unlikely to
lic insurance companies deepen their penetration into the expect any significant movement towards organised employ-
smaller towns and rural areas. The expansion of banking and ment in agriculture. Therefore, for the economy as a whole, a
insurance services in line with the financial inclusion objective shift towards organised employment would require with-
of the government will increase employment in this sector. drawal of surplus labour force from agriculture to the non-
agricultural sector. This is precisely what has happened in the
2.9 Real Estate, Renting and Business Activities second half of the decade, when agricultural employment
Like construction, real estate, renting, and business activities declined by 14 million. Hence, in the direction towards ensur-
became a boom activity in the first half of the decade, raising ing productive employment with decent work conditions, the
employment from 2.67 to 4.65 million in the first half of the first stage of transition of the workforce from low productive
decade and yet again to 5.8 million by the end of the decade. agricultural sectors to higher productive non-agricultural
While the sharpest increase in these services was in the un- sector is being achieved, albeit at a slow pace.4 The surplus
organised segment, even organised segment saw tripling of labour force from agricultural sector has actually moved into
employment between the beginning and end of the decade. As the construction sector which has experienced a surge of 18
construction activity expands, with private developers expand- million employment opportunities during the second half of
ing the scope of large cities, and penetrating smaller towns, real the decade.
estate and renting services will grow hand in hand with the cor- Equipped with low educational level and extremely low skill
responding investment in infrastructure and the growth of the base, the surplus labour from agriculture is generally absorbed
construction industry, enabling the backward and forward link- in the unorganised segment of both industry and services.
ages between construction and real estate to flourish. The same So, the second stage of transition, viz, from unorganised to
is true in case of other business activities like IT, ITES, Consul- organised sector, will be achieved with a considerable time
tancy Services, and Media and Entertainment. lag, and that too will depend on (a) access to education for the
marginalised sections, (b) proper implementation of legal pro-
2.10 Education and Health visions, and (c) skill development initiatives undertaken by the
There was a massive increase in investment, public as well as government. Bulk of the employment will therefore be concen-
private, in the education sector during the 2000s. Surprisingly, trated within the unorganised sector, or informal employment
employment in education grew significantly only in the first half in the organised sector.
of the decade, and there is hardly any change in the second half. As discussed earlier, a shift in employment from agriculture
In the first half there was about a 3 million increase in education (which is almost entirely unorganised) to the organised seg-
sector employment whereas in the second half only a 0.3 mil- ment of non-agriculture will be most desirable from the per-
lion increase was registered. This reflects the shortage of skills, spective of productivity and decent work. However, organised
and the constraints on public education expenditure imposed by employment does not always ensure decent work. Despite an
the large fiscal deficit of the central and state governments. increase in organised employment over the years, a large
As one would expect there has been growth throughout the chunk of those employed in the organised sector are deprived
decade of employment in the health sector, a significant pro- of any form of social security benefit. In other words, a large
portion of which has been contributed by the organised seg- chunk of those employed in the organised sector are infor-
ment. There has been an increase in public-sector employment mally employed. We now turn to an analysis of formal and
in the health sector, mainly accounted for by the central gov- informal employment in the organised non-agricultural sector.
ernment’s NRHM. Private medical facilities have also grown at
a searing pace. The Twelfth Plan is expected to see a very 3 Formal vs Informal in Non-agricultural Sectors
sharp increase in public investment in health, from its current The shift in the share of output and employment from primary
level of 1.3% of GDP to 2.5% of GDP per annum by the end of the sectors to secondary and tertiary sectors is a phenomenon
Twelfth Plan period. Given the concentration of hospital bed which has been witnessed in most parts of the developing
facilities in urban India, the scope for expansion of health-sec- world, albeit with certain variations. India is not an exception.
tor infrastructure and employment in small towns and rural What makes India different is that the share of informal work-
India is enormous. ers in the total workforce is well above the other emerging
In time, one can expect that education and healthcare also market economies – 93% of workers are informal workers in
may become India’s net exports (just as IT services have India, compared to 55% in Brazil.
94 august 31, 2013 vol xlviiI no 35 EPW Economic & Political Weekly
SPECIAL ARTICLE

Since Independence, the relative importance of secondary and to the manufacturing sector. Except for trade, hotels and res-
tertiary sectors in terms of both output and employment has been taurants and community, social and other services, which are
growing. However, in India, when it comes to conditions of work largely in the nature of unorganised employment, the share of
in the wake of the structural shift that is taking place, the story formal employment in other organised services sub-sectors is
that emerges is not a very pleasant one. Conditions of work have higher than 55%.
different dimensions – duration of work, physical conditions of In respect of formal and informal nature of employment,
work, wages, nature-of-work contract, applicability of legislative construction deserves special mention as it saw phenomenal
protection, and occupational hazards. Broadly speaking, these increase in employment, particularly during the second half of
different dimensions of conditions of work can be categorised un- the decade. The increase in employment in construction was
der two main headings – formal and informal nature of employ- experienced by both organised as well as unorganised seg-
ment.5 While the informal nature of employment is predominant ments. In the year 2009-10, out of 44 million employed in the
in the unorganised sector of the economy, its prevalence is in- construction sector, 31 million were in unorganised and the
creasing even within the organised segment as well. This section, remaining 13 million were in organised enterprises. Unorgan-
using National Sample Survey Office data on employment and ised sector employment is almost entirely informal in nature.
unemployment, captures this phenomenon of informalisation of Out of the 15 million employed in organised construction,
workforce within the organised sector during the last decade that 14 million (96%) are informally employed. Therefore, out of
has witnessed the fastest output growth since Independence. Spe- 44 million total employed in construction, 43 million (29 mil-
cifically, we examined formal employment and informal employ- lion unorganised sector + 14 million informal employment in
ment within the organised sector. organised sector) hardly have any kind of social security ben-
As already observed, organised employment accounted for efits (Table 7). In other words, 98% of workers in the construc-
only 16% of the overall employment in the economy. Even tion sector hardly have any kind of social security coverage.
within this small segment, almost half of it is in the form of Undoubtedly, construction driven by significant expansion of
informal employment. Within the organised segment of non- infrastructure investment during the Eleventh Five-Year Plan
agricultural enterprises, informal employment is predominant has helped in absorbing surplus workers from agricultural sec-
in the manufacturing sector (67% of the organised manufac- tor. However, ensuring decent employment for those moving
turing employment is through informal contracts), and non- out of agriculture remains a big challenge for policymakers
manufacturing sector (86% of the organised non-manufactur- during the Twelfth Five-Year Plan period.
ing employment is through informal contracts). It is only in the Therefore, in addition to the overwhelming presence of the
services sector that majority (63%) of the organised employment unorganised sector, another daunting and complicated task con-
takes the form of formal job contract between the employer and fronting policymakers is the issue of informal employment
the employee (Table 7). Most of the formal service sector employ- within the organised sector. This issue of informalisation of em-
ment is in public administration and defence, where 86% of all ployment poses a serious challenge in achieving the objective of
employment is formal, followed by banking and insurance decent work for all and thereby achieving more inclusive growth
where 70% of the organised sector employment is formal. and sustainable development during the Twelfth Plan period.
It is interesting to note that the share of formal employment
within the organised sub-sectors of services is higher compared 4 Conclusion
Table 7: Formal and Informal Employment within Organised Sector, India has become one of the largest economies of the world –
by UPSS, 2009-10 (in million) second only to China – that have been growing faster than any
Sector Organised Organised Employment
other large economy. It is now the fourth largest economy of
Employment Formal Informal
the world in purchasing power parity terms. However, eco-
Agriculture 2.74 0.13 2.62
nomic growth to be more inclusive requires growth in jobs.
Manufacturing 16.09 5.36 10.73
After a period of jobless growth in the second half of the dec-
Mining and quarrying 1.86 0.92 0.94
Electricity, gas and water supply 1.14 0.89 0.24
ade, there seems to appear a silver lining that suggests that the
Construction 14.86 0.66 14.21 economy can recover from the phenomenon of joblessness,
Non-manufacturing 17.86 2.47 15.39 which was accompanied by informalisation.
Trade 2.98 0.49 2.49 Total employment in manufacturing in India increased from
Hotels and restaurants 0.91 0.15 0.76 44 million in 1999-2000 to 55 million in 2004-05, falling to 51
Transport, storage and communication 4.88 2.73 2.15 million by 2009-10. Most of the increase in the first half and
Banking (and insurance) 2.93 2.04 0.89 decrease in the second half of the decade was accounted for by
Real estate, renting and business activities 2.41 1.41 1.00 manufacturing employment in the unorganised segment of
Public administration and defence 9.45 8.15 1.30
the industry, although there was some increase in the organ-
Education 9.16 6.18 2.99
ised segment as well. Within the organised segment, the share
Health 2.20 1.43 0.77
of informal employment has been growing at the expense of
Other services 1.24 0.26 0.98
Services 36.18 22.84 13.33
the formal employment. The conclusion appears to be not only
All sectors 72.87 30.81 42.07 that the organised segment’s growth in employment has been
Source: Calculated from NSS 66th Round, Employment and Unemployment Survey, 2009-10. marginal, despite a growth rate of manufacturing in terms of
Economic & Political Weekly EPW august 31, 2013 vol xlviiI no 35 95
SPECIAL ARTICLE

GVA over the decade, but also that the distribution of employ- latest released data show that total employment in terms of
ment between formal and informal segments suggests that at usual status (principal + subsidiary) has increased by 13 mil-
least half of the employment in organised manufacturing lion in two years from 460.2 million in 2009-10 to 472.9 mil-
remained informal in nature. The reasons for this trend, con- lion in 2011-12. Also, the structural transformation has gained
tinuing from an earlier period, could lie in a number of factors pace with 13 million workers moving out of agriculture to join
(labour laws, technology upgradation being largely confined industry and services. Non-agricultural employment has
to the organised segment, tax laws, among others), but that is increased by 26 million in these two years compared to an
a subject for further research, which must be undertaken if an increase of 17 million in the previous five-year period. It is
appropriate policy response is to be drafted by the central and also noteworthy that during 2009-10 and 2011-12, regular
state governments during the Twelfth Five-Year Plan. wage and salaried workers increased by 13 million – an in-
Findings from the employment and unemployment survey crease comparable to the entire increase in regular workers
of 2011-12 however, suggest a reversal of jobless growth. The over the earlier decade.

Notes References www.ilo.org/wcmsp5/groups/public/---ed_


1 Among the sectors which balanced this ad- Eichengreen, B and P Gupta (2010): “The Service emp/---emp_elm/documents/publication/
verse pattern of an absolute decline were: Sector as India’s Road to Economic Growth?”, wcms_143163.pdf
manufacture of furniture, machinery and Working Paper No 249, Indian Council for Re- Lindert, P H (2004): Growing Public: Social Spend-
equipment, radio, television, communication search on International Economic Relations, ing and Economic Growth since the Eighteenth
and other transport equipment, and leather New Delhi. Century (Cambridge: Cambridge University
and leather products. The hardest hit manu- Ghani, Ejaz, Kerr, R William and S D O’Connell Press).
facturing sub-sector alone accounting for a (2013): “The Exceptional Persistence of India’s Mehrotra, Santosh, Ankita Gandhi, Bimal Kishore
decline of around 3.2 million workers was Sahoo and Partha Saha (2012): “Creating Em-
Unorganised Sector”, Policy Research Working
medical, precision and optical instruments, ployment during the 12th Plan”, Economic &
Paper 6454, The World Bank, Poverty Reduc-
watches and clocks. Political Weekly, 47(19), pp 63-73.
tion and Economic Management Network, Eco-
2 Modern and traditional sectors are as outlined/ National Commission for Enterprises in the Unor-
nomic Policy and Debt Department.
suggested by Eichengreen and Gupta (2010). ganised Sector (NCEUS) (2008): “Report on
Jain, Sunil and T N Ninan (2010): “Servicing India’s
3 If enterprise type is not known (missing or Definitional and Statistical Issues Relating to
other than mentioned above) and employs 10 GDP Growth” in Shankar Acharya and Rakesh
Mohan (ed.), India’s Economy Performance and Informal Economy”, viewed on 1 July, http://
or more workers, it is considered as organised. nceuis.nic.in/
When both organised type and number of Challenges, Essays in Honour of Montek Singh
workers are not known then if the enterprise Ahluwalia (New Delhi: Oxford University Planning Commission (2008): Towards Faster and
provides social benefits to its workers, it is or- Press), pp 328-65. more Inclusive Growth, 11th Five-Year Plan
ganised. Jha, Brajesh (2006): “Employment, Wages and Pro- (New Delhi: Oxford University Press).
4 For a detailed discussion on different stages of ductivity in Indian Agriculture”, IEG Working World Bank (2012): “More and Better Jobs in South
transition of workforce, refer to Mehrotra et al Paper Series No E/266/2006, Institute of Eco- Asia”, The International Bank for Reconstruc-
(2012). nomic Growth, New Delhi. tion and Development, The World Bank,
5 Informal employment is defined as that form of Kapsos, Steven (2005): “The Employment Intensity Washington DC.
employment where the employee is not eligible of Growth: Trends and Macroeconomic Deter- World Development Indicators (2012): The World
for any kind of social-security benefit like minants”, International Labour Office, Employ- Bank, http://data.worldbank.org/data-cata-
provident fund, gratuity, pension, healthcare, ment Trends Unit, Employment Strategy De- log/world-development-indicators accessed on
maternity benefit, etc. partment, ILO, viewed on 1 August 2013 http:// 20 August 2013.

The Adivasi Question


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This volume situates the issues concerning the adivasis in a historical context while discussing the challenges they face today.
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dependent on the landlord-moneylender-trader nexus for their survival.
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96 august 31, 2013 vol xlviiI no 35 EPW Economic & Political Weekly
12/8/2018 OneNote Online

Agriculture
11 March 2015 18:09

• Agriculture:
○ Land reforms and Land Tenure
○ Green Revolution and
○ capital formation in agriculture.

• New Economic Reform and Agriculture:


○ Agriculture and WTO,
○ Food processing,
○ Subsidies,
○ Agricultural prices and public distribution system,
○ Impact of public expenditure on agricultural growth.

Mahendra Dev ( agro economists) observes 3 goals for Indian agriculture. These are
• Efficiency -4% growth rate  and raising farmers’  income by raising productivity, diversification to HVCs
and promoting non farm rural sector
• Equity - Sharing growth with small and marginal farmers, lagging regions etc.
• Sustainability of agriculture.

Why agriculture important economically


• WB's WDR 2008
○ says that Agri Growth is TWICE as effective in reducing poverty than non-agri growth
• Huge population supported
○ 47% farmers
○ According to economic survey, growth currently is virtually domestic driven only
○ Raising agricultural income would have spurred demand
• subsidy will remain high- fiscal discipline will take hit
• No Trickle Down
○ Gap between rural & urban consumption has grown
○ Even with the high growth of agri between 05-12 & favourable terms of trade, NON FARM INCOME IS
THRICE (X 3 ) of the FARM INCOME
• Inflation control
○ 50% in CPI
• Rostow Take Off and all the reasons

AGRICULTURE

• Broad share

https://onedrive.live.com/redir?resid=5904275E260F976F%21199854&authkey=%21AF41zQ8byOrrLPg&page=View&wd=target%28Agriculture.one%7C3c7d5… 1/11
12/8/2018 OneNote Online

1951 1981 2014

○ Agriculture 53 36 14

Industries 17 26 26

Services 30 38 60

• Employment
○ 54.6% by 2011 census ( pnumonic - all 3 digits - 5, 4, and 6 )
• 72% during independence
○ Although for the first time, absolute levels declined
• Linkage between agri and manufacturing
○ According to RBI annual report 2009-10
• consumption of services by the manufacturing sector on the rise;similar linkages are yet to be
observed for the agriculture sector
• share of agro inputs in manufacturing has declined from 20%
in 1993-94 to 5% in 2006-07

Green revolution
• 2 Schemes
○ IADP - Intensive Agriculture Development Program in 1960
○ HYVP - HYV program in 1967

Gulati and Fan (2008) identify three phases of the Green Revolution
• The First Phase,
○ 1966-1972
○ Steps
• Introduction of MSP, FCI
• 18k tonnes of HYV seeds from Mexico
• Increase in foodgrain output from 75 MT in 1966-67 to 105 MT in 1971-72 and India became
self sufficient in food
• Agri growth rise from 0.8% to 3%
• Agri production also trickled down
• Datanet (2006) - Rural Poverty declined from 64% to 56% - 8% point decline in Poverty
• Income increased
• Second Phase
○ 1973-1980
○ Production declines
○ Growth down froom 3% to 2.2%
○ Go back to imports from USA
○ Reasons
• 2 consequtive droughts in 72-73
• Oil shocks raised the price of feriliser
• Decline in public and total GCF as well to 7% of Agri GDP down from 7% of the Agri GDP
○ Positives- HYV spread to rice
○ Increase in subsidies


0.5% of Agri GDP 4%

• Power Subsidies made up 45% of the total


• Fertiliser subsidy 2nd highest at 35% of the total
• Under Retention Price Scheme for Urea

• Third Phase 1981-1990


○ Steady rise in agri growth fro 2.2% to 3%
○ Rice production soared to 64 mt in 1986, up from 37mt in 1964.
○ Wheat output grew, too, from 12 MTto 48MT in 1986 (X4)
○ During this phase, the HYV technology spread eastward to states like West Bengal and Bihar where
yields of rice increased by 5% and 4% respectively
○ The impact of Public Investment since the mod 70s
○ Cons
1. But ran out of steam in rest of India
2. increase in input subsidies: With the slowdown in yields, input subsidies were further
increased to maintain the production.
1. From 4% of agriculture GDP in 1980s they rose to 7% in 1991 and has stayed there
since. This was 2% of total GDP in 1990.

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3. Although ToT worsened due to High Indirect Taxes
4. Investment in Agri R&D stagnated to 0.3% of Agri GDP ( 2-3% in west)

4. Impact of LPG (Also, refered to as the 4th phase )- By Gulati only


1. Diversification in consumption and increased demand - per capita incomes, growing at 4% per
annum in this phase as opposed to 3.% in the 80s,
2. led to the diversification of food demand ( Engels Law) into non-food grain cropssuch as fruits and
vegetables, as well as meat-mainly poultry-and dairy product
3. Improvement in the domestic ToT between agricultural and industrial rices, which rose from 0.9 to
1.2 between 1991 and 2000, as industrial prices reduced due to LPG and depreciation boosted
exports
4. Increased profitability led to increase in private investments which became double the public
investment in agriculture. Pvt investment directed to horticulture produce, but started declining
soon
5. Devaluation of rupee and trade liberalisation created a pro- export environment for agriculture. Agri-
exports doubled during 1991 to 1996-97.
6. Access to new technologies like bio technology
• A negative impact:
• Volatility in global process is higher than domestic prices.
• Little impact on poverty figures which increased from 35% to 45% ( Lakadwala and Tendular - 2
different data saet though)
• Result - developments, agriculture GDP growth went-up from 3% in the 1980s to 4.1% in the
aftermath of reforms between 1991 and 1996 but then Decceleration again in 1996 to 2004 period @
only 2%.
• Chand - Structural break in 1996 ( also in 2004 )
• OVERALL between 1990 to 2006, YIELD RISE Only to to 2%
○ Stagnation in Public Investment
• Fell to <2% of GDP
○ restriction on wheat and rice exports
○ Swaminathan
• Technology FATIGUE
○ Structural issues
• Smaller Landholding Size
• Environmental issues - Water and Soil Health
• Green revolution had lost its steam and no tec came which could compensate the productivity
decline

IMPACT of GREEN REVOLUTION

• POSITIVES
○ India became self sufficient in 1972 and dependence on PL 480 was done away with.
○ Food Grain Production has risen from 75 MTA in 1967 to about 250 MTA now
○ Share

Wheat- up from 13% in 1960s to 33% now


Production - 11 MT to 95 MT now

Rice picked up late and overall its share has fallen though production has jumped
from 35 MT to 100 MT

Coarse Static
Grains

Pulses Drop in Share and per person


• 61 gm in 1951 per person per day
• 42 gm now

○ Equity
• IN the early period, it did increase inequality
• Later phases have reduced Inequality ( Blyn, Bhalla )
• in 2001-02 in unirrigated land 53% of land small and marginal farmers used HYV seeds
while only 30% of land under large farmers used them. Similar for irrigated land and
technology
• decline of food grain prices and food Security accrues more benefits to lower
segment.
○ Increased commercialization of agriculture. Increased linkages with industry.
○ Import Depedency to Aexports worth 40 billion $ now
○ Need for post harvest management: The new seeds have shorter maturing period. Thus the farmers
can do multi cropping.

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• But they also need better storage and post harvest facilities.
• CONS
○ Cereal centricity
• Didn’t cover coarse cereals and pulses.
• Per capital productivity declined from 61 gm to 42 gm
○ But overall it led to the fall in employment elasticity of agriculture - Bhalla
• Due to increased Mechanisation
• Increaed Casulaiation of Labour - 25% to 40%
○ Initially Not Scale Neutral
• Benefited richer farmers more
• But, as Bhalla shows, the benefit gradually trickled down
○ Subsidy - EXIT Issues
• Risen from 0.5% of Agri GDP to about 7% now
• Crowding out and fiscal costs
○ Degradation of soil, environmental impacts- Water crisis ( 30cm a year drop), soil degradation , Soil
composition
• 3. Distortion in farm ecology: Require a technologically optimum mix of fertilisers, water. But
economic signals may be distorted and may not reflect the technological optimum.
• Counter
• 6. Environmental degradation and GR: In India more than the harm done by fertilizers and
pesticides it is the degradation and deforestation of marginal and common land which
causes environmental problem. GR has reduced the pressure on land and empirical
studies suggest that deforestation is higher in areas where penetration of new technology
is low
○ Decline in Public Investment
• Has Highest Externalities
• Only 16% share now
○ Wide regional disparity – Punjab, Haryana and Western UP benefitted.
• Counter - Despite wide differnences, the Benefits of Green Revolution have permitted to
most states now ( Bhalla), a process which started esp since the 1990s
○ Didn’t benefit dryland farming.

11th FYP 2007-12 - CHAND et al - All positive things


• Period of high growth
• 4% agsinst 2.1% in the 10th FYP
• Real income greaw @ 7% pa
• And diversification of crops - Horticulture increased by 2.5%in 1995-2005 but 6% in this period
• Export earnings: 3 to 6 billion during 1991-91 to 2001-02. Then reached $40 billion in 2011-12
• Growth much higher in the states with low irrigation cover - Gujarat, Jharkhand, Raj - Consistent with
the fdact the period gave greater emphasis on filling the gaps rather than new technology
• Reasons
• Role of NFSM
• High Input Growth - Mahendra Dev
• Boost in Investment - Planning Commission
•Both public and Private
•Rose from 16% of GDP to 21% of Agri GDP
•Esp in Irrigation
•Schemes like BHARAT NIRMAN
•Private rose because of improvements in ToT ( MSP and international prices) and due to
complementarity benefits associated with the growth induced demand
• Augmentation of Agri Extension services , Tech
• Major reason behind the reduction in poverty

Second green revolution: 


Case

Focus on following
• 80% farms belong to small and marginal. Yields need to be increased here. 
• Precision agriculture for effective use of resources
• Mobile apps for providing timely information
• Post harvest losses need to be addresses through marketing reforms
• Contract Farming
• Future Trading
• Credit, Insurance
• Land Leasing
• Technology Fatigue
• Biotechnology for raising yield.
• Externalities
• Soil Health

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• Micro Irrigation

CAPITAL FORMATION IN AGRICULTURE


• What ?
○ Net addition to assets
○ Examples of public sector capital formation would be investments in major and medium irrigation,
power, roads, markets etc., whereas private capital formation would include minor irrigation,
agricultural implements, machinery, tools, transportation etc.
○ It helps in improving stock of tools, productivity of resources which leads to better utilisation of
existing resources such as Land and Labour.
○ That is why there is a direct correlation between Capital Formation, Agricultural Growth and Decline
in Poverty

History of GCF to GDP

1. Both started moving up after Green Revolution - 66


2. TREND public capital formation in GDP

70s Increased From 2% to 4%

1. 80s Static At about 4%

Late 80s Falling Fell to < 2% by late 90s

11th FYP Rose To about 4% again

3. Private Investment
1. As with public investment, private investment also experienced a dip in the early 1990s. Both
declined not only in terms of share in GDP but also in absolute terms during this period. 
i. This led to a perceptible slowdown in agricultural growth in the 1996- 2006 t also
supports the assumption that a part of the deficit in public investment was translated into
reduced availability/use of inputs and thereby contributed to a deceleration in output growth. 
4. In the 11th FYP, GCFA rose to 21% from 16% in 2004 and growth also picked up to 4%
5. FY 18 budget
1. Only 40k crore in investment - PMGSY, PMKSY and R&D. The total agri support though is 3.25 lakh
crore - bul to food subsidy - 1.4 lakh crore. 75k crore fertiliser. 2.25 lakh crore subsidies

Changing Private Public Mix

• In Early 80s Public - 50% - Each about 4%

Now Public - 16%

• The divergence especially came between Mid 1980s and Mid 1990s
○ Private Invetsment jumped fro 4% of GDP to 10 %
• Reasons for Lower Public Investment since Late 80s
○ Urban Bias - Share of GCFA to total GCF was 6-7% in spite of Agri contributing about 25% of GDP
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○ Subsidy rise from 4% to 7% diverted funds
○ Fiscal Crisis
○ Opposition to Big dams
• Reasons for higher Private Investment from the 80s
○ ToT better due to higher MSP and Higher International Commodity Prices
○ Growth of Institutional Credit - Savings > 20%

Relation between GCF and GDP growth


• Operates after a time lag
• Thus High GCFA in 70s led to a higher growth in the 80s
• Similarly, declining GCFA in 90s led to a lower growth in the 96-2006 period
• 1 anomaly
○ GCFA declined in 80s ( Public ). Should have led to lower growth in the early 90s
○ Reasons
• Private Investment increased, increasing the total GCFA
• Foodgrain did decline, but Horticulture Production increased
• Higher per capita growth (4.5%) . Favourable export shock, etc

• Some economists suggest that Private Investment and Public Investment are supplementary to each other
and Private Investment can fill in the gap, as seen by the 80s Divergence. However, there does exist a
strong degree of Complementraity
• Need for Higher Public Investment ( SYLLABUS)
○ Gulati - Public Investment has a strong Inducement on Private investment, but operates after a time
lag due to the high Gestation Period of Public Investment
• May be the reason why Private investment also fell in the 90s
○ As Sawant (pneumonic - doosra Abhijeet) et al ( 2002) show that Private Investment can never fill
the gap of Large scal public investment like in Dams , Rural Infrastructure due to capital contraints,
etc
○ Other Benefits
• Public Investment have large Externalities
• Complementarity may have disappeared in some states where Private Capacities have rise,
but especially in rain fed areas, it is necessary to undertake massive investment projects
• To reduce over exploitation of groundwater
• Since, Private Investment is mostly on groundwater irrigation
• And reduce Inequality

• Public Investment Instruments


○ RIDF - Rural Infra Development Fund (1995)
○ NABARD
○ Bharat Nirman - Rural Roads
○ PMGSY
• Others
○ Irrigation - Below
○ Agri R&D -below
○ Credit - Below

• Investment vs Subsidies
○ Note that returns to investments are 3 times greater than subsidies (Gulati and Fan).
○ Also subsidies lead to inefficiencies, Distortion and cause environmental degradation.
○ IFPRI research has shown that marginal returns in terms of agri- GDP from a unit of public expenditure
are highest in R&D > rural roads > education > irrigation > fertiliser subsidies.
○ FY 18 - Gulati
○ 40k Crore- Investment
○ 2.25 lakh crore - Subsidies

• Irrigation
○ Monsoon erratic
• RBI report (2015)
• The Positive monsoon shock less intense than negative monsoon shock
• 75% rains in monsoon

Trends & Composition


• Positive
• 90% of GCFA in Irrigation. As a result the cropping intensity has gone up from 120 in 1971 to
140
• Thus GCA irrigated has increased from 15 % in 1950-51 to 45% - TRIPLED
• Equity
• Inter state disparities in area under surface irrigation are considerably lower than
disparities in the area under ground water irrigation
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• But, proportion of area under surface irrigation has progressively declined increasing
inequality.
• Cons
• India's existing stoage capacity is 13% of the annual availability
• Ratio of irrigation potential utilised to potential created is declining.
• Down from 0.8 in 80s to 0.3 now
• Large no of Pending projects in spite of AIBP - Almost 50%
• Further groundwater is a major source of irrigation which has been over-exploited. Thus there
is a need for institutional reforms, developing smaller irrigation projects and right incentive
structures - Eg Feeder separation
• Parthsarthy shome recommendations for Dryland farming
• Swaminathan Committee -
• Launch Million Wells Recharge Program

• Research ( Part of Public Investment )


• Agri R&D @ 0.3% of agri GDP against 2-3% in developed
○ Increased post green revolution
○ Stagnated in the 80s and has fallen since
○ (Including all industries India's R&D expenditure is 0.9% of GDP vs 2-3% of developed world )
• ICAR
○ Deterioration seen in Proliferation of Private colleges without adequate facility, Normal - funds, skill ,
lack of Coordination between colleges
○ Need for greater autonomy to ICAR

• Need for Pull System of Research for Private


○ Advanced Marketing Commitment (AMC) (Like the Old Gurantee system )
• Suggested by Harvard economist Michael Kremer for health funding
• Since, private companies are unlikely to fund for health benefits with low returns especially in
LDCs
• Install a mechanism where the 1st to develop a vaccine is awarded a large bounty
○ Winner is rewarded with a a very high return
○ Yet, IP lies with the govt
• Extension services to take the reaeach to the farmer
○ ATMA
• Agriculture Technology Management Agency
• Elaboration Required
○ Krishi Vigyan kendra
○ M- Kisan
○ Kisan Call Centre

• Credit ( Necessary for Private Investment )

• Schemes
○ All for Financial Inclusion - Nationalisation, PSL, NABARD, Land Banks

• share of credit to agri GDP
○ risen to 40% from 10% in 2000

• Decile in Long term credit


○ But, share of long term credit has fallen from 55% to 40% in the period

• RBI report on credit


○ Credit flow not commensurate with production
• 8.5 lakh crore credit in 2014-15
• Roughly 15% of all credit
• Reasons
• Leakage
• Farmers used it for working capital rather than capital formation
• Tenant farmers still mostly rely on moneylenders
• Only 6% to farmers, rest to agriculture industry
○ Other issues
• Regional inequlaity -
• South India makes up 18% of GCA but takes 40% of credit
• Informal
• NSS 70th round, 40% farmers still depend on informal sources for lending
○ Pneumonic
• 4 times 40% here

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AGRI LABOUR
• Casualisation of agriculture labor force: The proportion of labor in the agriculture labor force has been
constantly rising (from about 25% @ independence to 40% in 1991 and has stayed there since). This
becomes even worse if we consider the dropping share of agriculture in GDP.
• However India Labour and Employment Report 2016 of the Institute for Human Development study shows
that casualisation is reversing in India of late
• Cultivation data shows us that labour makes up 40% of the variable cost

• Rural WAGE TREND ( Syllabus )


• Data - GULATI et al
○ Before 80s real wages almost constant below Minimum Wages
○ 90s - Real Grew @ 3.5%
○ 2000s -
• 2%
• V shaped curve
• 2001 -2006 - Declined by -1.8%
• 2006-2011 - Rose by 6.8%
○ During the period 2007-10, the average cumulative real farm wage rates increased by 16.0% at the
all India level and since the launch of the scheme in 2006-07 . The growth was the fastest in Andhra
Pradesh (42%) and Odisha (33%), Bihar (19%) and Uttar Pradesh (20%).
○ and has now decreased to 4 %
• Reasons for Growth
○ RBI report - MGNREGA
• Push Factor
• Pushes out Labour from the agriculture and raises wages
○ But, Gualti points out that impact of other variables such as GDP, agri GDP and construction GDP
is 4-6 times more powerful than the effect of MNREGA
• Pull Factors
• LEWIS model
• consistent with the Employment data

Agri Construction

1993 65% 3%

2013 47% 10%

• Also consistent with the Agricultural growth data


• Growth dipped to 2% in the 9th and 10th FYP
• And rose to about 4.5% in 11th FYP
• Thus Gulati recommendation for MGNREGA
• Link to farm works
• Should aim for more employment during lean season of agriculture
○ Impact of Higher MSP ( Dasgupta et al)
○ Other possible reasons
• Greater demand for education
• Women participation reduced because of income effect and education effect
• Labour supply states like Bihar - highest growth rates
• Impact of Rising Wages
○ Fall in Poverty which was prevalant in the 2nd half of the 2000s
○ Fuelled the Inflationary Spiral ( RBI report)
• Goyal and Baikar report an opposite that rising inflation is the cause of rising wages
• Nonetheless, correlation between CPI and rural wages is very high pegged at 0.9
○ Mechanisation
• Slowdown now possibly because
○ Construction sector down.
○ MNREGA has seen drop in real investments
○ Price glut of agri produce

• EQUITY IN Wages
1. SInce mid 1970s inter regional agriculture wage disparities have been declining
a. Reasons
i. relative decline in the food grain prices has had a greater impact on the purchasing power of
wage earners in lower wage areas.
ii. agriculture labor migration,
iii. mechanization of agriculture in high wage areas,
iv. MGNREGA
2. Due to the above factors the disparity between male and female wage rates is also declining. This is
because the adoption of farm mechanization technologies in operations traditionally done by women has
been low (because their demand was highly seasonal and intense over a few days only).
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Factors affecting growth potential


• Lack of long term strategy for agricultural development
○ Right from 2nd FYP, sectorial policies have favoured industries or services. Reforms of 8th FYP
bypassed agriculture
○ Depressed agricultural prices: Indian  farmers received lower than international prices.
○ Anti export environment for protection and growth of industries.
○ Unfavourable ToT due to tariff protection to industries.
○ Price based focus  and non price factors like water, infrastructure, R&D, extension services etc. are
ignored.
○ Anti agriculture bias stems from Lewis model. It can be seen through post independence policies.

• Problem
• Irrigation
• Credit
• Monsoon
• Capital Formation - Investment, R&D
• Land Reforms
• Small size of land holding prevent economies of scale benefit
○ Economics perspective
• Opposite
• Amartya Sen (1964) showed smaller farms are more productive per hectare (Using Indian data)
which balance the more capital intensive argument of larger farms
• Reason being Family Labour which works more intensively
• China's farm size average is half that of India but productivity is double

• Environmental
○ Water export, Fertiliser overuse, Climate change, 90% water
• Dumping
○ Talks ongoing for developing countries to use SSM
• Special Safeguard Mechanism
• To be used when, agri import prices go down

• Demand side
○ Paradox of plenty
• Calories demand failing down (NSSO). Reason- lives more automated and lesser incidences of
acute diseases ( Deaton, Dreze )
• Also, because of switch to non veg especially chicken which is more efficient meat
• Thus Price falling

○ Elasticity to price and income are low
• Engle's law
• Elasticity to price factors lesser than non price factors
• Hence, more than MSP, infrastructure required
• Cereal centric - Broader Issue MSP
○ Because of Green Revolution
○ Need to change this through Rainbow Revolution

• Land under agriculture decreasing


○ Around 2.25 lakh hectare of agriculture land is being diverted to non agro uses
○ Area under cultivation has gone down to 1830 hectares in 2012 from 1850 hectares in 1980
○ Per capital land has thus fallen to 0.18 hectare from 0.27 hectares

• Market segmentation
○ APMC, lack of transport, storage capacity impedes creation of a national market
○ Maximum Price dispersion for prices received by farmers (highest rate to lowest rate) in US is less
than the minimum price dispersion for any crop in India
○ Regional variation in dispersion
○ Variation for crops too with higher markup for perishables
○ Wastage is 15% (Eco survey)
• Upto 40% for fruits, vegetables
○ Requirement for logistics

• Others
○ Farmers tend to be risk averse as they live near subsistence level
○ Diminishing returns
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○ Urban Bias
• Most schemes, subsidies, tax benefits, infra benefits to urban area
• Also attempts to keep food prices low (Inflation targeting -CPI) to keep industry and middle
class better
○ Share cropping - reduced incentive to invest
○ Employment only for a few months
○ Niti Aayog points to the necessity of Digitalisation of Land records for better access and to reduce
leakage

• Effects
• Low Yield
○ Indian wheat yield at 3k kg/ ha less than the world average of 3.25k kg
○ Pulse yield in MP the largest producer has 60% of the yield of China
○ Wheat, rice, pulses in particular stagnated in productivity
○ Regional variation
• Yields generally highest in Punjab, Haryana
• Domestic convergence required
○ Yield of pulses would rise by 40% if all states were to converge to even Bihar's
productivity

• Translates into a low income


• NSS data - Average annual income of median farmer in 17 states < 20k
• Non farm income thrice as farm
• Low growth rate in agriculture
○ 3.2% in 11th FYP vs 7.8% overall - Growth graph required
○ 12th FYP target is only 4%
○ Also agri growth becoming more volatile
• Coeffecient of variation in agri growth is 6X GDP growth
○ Gujarat, Nagaland 2 states that have grown by over 10%
○ Perhaps catching up effect
• Farmer suicide
○ @ 3 lakh in the last 20 years - given this no need to learn the figure
○ Majority by Marginal and Small Farmers
○ More for cash crops as their prices are more volatile
○ Highest in Maha, MP, AP - Monsoon dependent
○ In the drought years, farm riots increasesd by 4 fold as per NCRB data
• Inflation
○ Rapidly increasing prices while price declining in the West
• Changing Sectoral Composition: Declining relative incomes and smaller OHLs have forced diversification
into livestock, horticulture and fisheries. The relative share of livestock in total agriculture production has
gone up from 20% in 1991 to 25% in 2009-10, horticulture from 6% in1991 to 33% in now . Rising
fisheries too (5% of agri GDP)
• Growing role of private sector: Share of public investment in total agricultural investment has gone down
from 50% in 1980s to 20% now. The Green revolution of 1960s was driven by public sector but this time the
Bt Cotton and hybrid Maize have come from private sector.
• Change in land holding size
○ Explained below
• TRADE: The reforms in 1991 led to liberalization of trade and devaluation of
exchange rate. As a result, agriculture got more integrated with the world. Trade in agriculture to GDP
agriculture has gone up from 5% in 1990-91 to 13% in 2010-11.
Cotton, marine products, oil meals, basmati rice and sugar are main exports.
○ 40 billion $ exports

Farmer Crisis
• Reasons
• All for Price Volatility
• All Structural reasons
• Political Reasons - New Farmers Movement
• Reasons According to Swaminathan Committee - 2006
• Incomplete Land Reforms
• Technology Fatigue
○ No new Tech - No longer applicable now - GM
• Other normal factors - Credit, Pricing, Land Holding, Weather

Land Holding
• Average size 2.2 ha in 1971 to 1.2 hectare now
• According to 70th round of NSSO (2014)
• 42% of rural households are landless
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• Do not get most benefit
• Land leasaing being wored out (see land reforms)
• Those with land less than 0.02 ha
• Among the agriculture households (AHHs)
• Marginal Farmers
• Those with land less than 1 hectares
• Comprise 70%
• Average landholding size is 0.7 hectares
• Small Farmers
• Between 1 and 2 hectares
• 17% of the AHHs
• Average - 1.4 ha
• Total S&M - 70% <2ha
• The rest the richer
• In such small lands and the landless, share of income from agriculture is < 50% (NSSO)
• 17 states - Median income - < 20k
• And, hence Swaminathan MSP ( MSP= cost +50% ) is of little help
• Need for Horticulture, livestock support

• SEE Land Leasing and Land redorms

Pulses
• See FOOD SECURITY
• Pulse yield in MP the largest producer has 60% of the yield of China
• >50% of pulse production is on unirrigated land jn
• Ie very little production in well irrigated states
• Need to shift priority in these regions through artificial measures
• Good news - Higher prices has attracted 33%more croppage area in Kharif crop in 2016-17 as compared a
year before
• Although, recent reports show production 6 year low

Fertiliser

Seeds
• Seed quality alone explains 20-25% of productivity
Trends & Institutional Framework
1. The introduction of Bt seeds in maize and cotton have increased their productivity tremendously.
The difference between Green revolution of 60s and now is that while earlier, introduction of
seeds was from public sector, this time it is private sector companies which are developing and
selling seeds.
2. The organized sector (public + private) accounts for 15% of seed distribution, rest is
unorganized. Thus there is a need to protect farmers' rights as well as to incentivize seed
development.

54% of land under cultivation in India as compared to 10-15% in world

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Agri Pricing
08 June 2017 17:26

Doubling farmers income


• DFI
• In real terms by 2022
• Require a growth rate of 10%
• 3 times of current growth of 3.5%
• Although not impossible, China managed to do it in 6 years between 78-84
• India
• Between 2006-07 to 2013-14, agricultural income doubled in Gujarat, Jharkhand, MP, Raj.
• 7 years
• Ashok Dalwai (pneumonic - Halwai with a D :D) committee recommendations on it
• Says would require additional investment of 6.5 lakh crore

MSP

• Currently on A2+FL
• A2 is all actual exenses in cash and kind
• FL is the opportunity cost of family labour
• Demand is C2
• Comprehensive costs
• Opportunity costs of rent and interest on capital
• Price Policy
• Main price intervention from the government comes in the form of MSPs and CIPs
• CIP is the Central Issue Price at which the central govt provides foodgrains to the STATES
• Hence, the difference in MSP and CIP is the central subsidy
• Initially, after the MSP was introduced in late 1960s, the focus was always on maintaining a balance
between the interests of consumers and producers; however, the government realized the importance of
public investments in non-price interventions as well, and the regime was of low cost of production,
and low MSPs (low input and low output costs)
• Greater focus on Public Investment in the 70s
• In the late 80s , the trend began to move in the direction of higher MSPs, to the relative exclusion of
non-price interventions (high input and high output costs); consequently, public investments in
irrigation, research and extension, and other infrastructure went down
• Due to this excessive reliance on price policy, yields kept on going down, and production costs kept
going up

Importance
1. There is price volatility in agriculture due to - Model - Cobweb Model
a. volatility of supply,
b. Backward looking supply price
c. International effects
d. information asymmetry (a very good harvest in any year results in a sharp fall in the price of that commodity during
that year which in turn will have an adverse impact on the future supply as farmers withdraw from sowing that crop
in the next / following years) and
e. lack of market integration. 
2. This induces greater investments and production. Gulati and Bathla have shown I depends upon ToT.
3. It meets the objective of food security through complementary programme of PDS.
4. It is used to induce inter crop shift according to comparative advantage and availability of superior
technology in different crops.
5. Protection against global shocks.
a. Abhijit Sen - international price variation greater than domestic
6. Protecting farmers from middlemen exploitation and distress sales
7. Assurance of minimum returns, hence it acts as a price insurance
8. It ensures adequate income transfer to farmers.
9. Positively correlated to Rural Wage ( Dasgupta et al )

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• Challengs
• Lack of awareness
• According to Shanta Committee, only 6% of farmers benefit from MSP
• NSS survey- only 20-30% farmers were aware about the existence of MSP for some crops
• Although, the study shoes they were about agriculture
• Much loer for Pulses even in states like Punjab, Haryana (NSSO)
• Only 10% farmers aware about MSP before sowing
• Other observations by NITI Aayog about Procurement centers
• Procurment centers far
• Do not open timely
• Insist on revenue records
• Lack of storage facilities
• Payment Delays
• Solutions
• Announce it well in advance
• Increase awareness through state , FCI and agri- department officials for increasing bargaining power of
farmers
• On spot payments will encourage farmers to take MSP route.
• PCs should be within villages
• More storage facilities should be provided at PCs along with electronic weighing machines 
• PCs within villages

• Cons
• Cereal Centric
• Has triggered Pulses, Oilseeds and Protein Inflation
• Equity
• Major beneficiaries are the rich farmers
• See DATA below about landlessness and size, income from agri
• Inter-regional - In states like Punjab, Haryana which don't depend on monsoon rains
• Whereas in poorer states where Costs of Production ( COP ) is higher, farmers do not get adequate
returns put of MSP
• Inflation
• As food is sucked from the market, prices rise
• Plus, Downward rigidity in real MSP prices is seen due to political reasons
• Parikh et al (2003)
• 10% rise in MSP rise in overall price index by 1 to 1.5%
• bottom 80 percent of rural and urban population has been worse off by intervention of higher
support prices due to inflation which hurts the poor more
• SBI
• Insignificant contribution to inflation
• Distortion of market
• Market becomes a Monopoly and competitive prices are not seen
• Political Populism further distorts the trend
• Deadweight loss, as different crops are planted rather than the ones ideally required market wise

• Environment -
• Export of water
• International Pressure
• WTO food subsidy issue
• Amber box subsidy. AMS under the de minimum provision would exceed 10%
• Complementary issues
• Rotting of food in stocks
• High level committee report show buffer with FCI have been on an average double the norms
leading to inflation
• The Open Market Sales Scheme found to be ad hoc and slow
• Under TPDS, NSSO survey finds a diversion of 46 %
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Other Side
• MSP is linked to cost of production
• thus, there isn’t adequate incentive for the farmers to switch to cost saving technologies.
• Use of labor saving farm implements needs to be promoted. Similarly, current price policy favors
cereals, this distorting production
• CACP report shows India's MSP is one of the lowest in Asia pacific - indicating Urban Bias
• given that cost of production has escalated sharply for most crops during the last three years, the
rise in MSPs isn’t surprising. As an example, it can be seen that cost of production for paddy in
2012 was about 50% higher than in 2008, while the MSPs have only risen by 20%. Critics of
MSPs often fail to highlight the production impact of a delay in such hikes

• Some recommendations
1. NITI AAYOG RECOMMENDATION
a. Price deficiency Payment Mechanism
b. Fix a floor price based on last 3 years average
c. Compensate the difference between this floor price and price realised (based on APMC mandi )
d. Through DBT
e. Bhavantar Bhugtan Yojana
f. Also
i. Setting up of procurment centres at village level
ii. Announcing MSP much before sowing
iii. Tech at procurment centres- weighing machines,
iv. Increase awareness
v. Criterion of fixing MSP based on current year instead of past year data
2. Swaminathan committee report
a. MSP that is 50% over the cost of production
b. Con
i. Fiscal cost, distortion, etc
3. Economic Survey - MSP Policy that makes price signal based on SOCIAL rather than Private returns of
production
a. Thus Social returns to Pulses higher because of externalities like uses less water, fixes nitrogen,
keeps soil well aerated because of deep rooted suystem
4. Public Investments and other non price interventions to bring CoP down. This will lead to farm
profitability and food security
a. Focus on Public Investement
b. 3 times more effective than Price Subsidies ( GULATI)
5. MSP for pulses and oilseeds rationalisation
6. State and centre governments cooperation for fixing prices based on updated data
7. System of variable tariffs (linked with global prices) should be used to insulate domestic prices from
global volatility (S Mahendra Dev and Chandrashekhar Rao)

• Future market
• Helps in price discovery
• And crops can be sown based on forward rather than backward looking prices
• This brings in stability and the fluctuations of Agri prices subside ( cobweb model - supply no longer
dependent on past prices )
• India issue
○ Started late
○ And a comprehensive future market was started only in 2003
○ Even now there is an element of as hocism, suspicion and commodity markets get suspended
○ Way out
• China model
• Started in 1990s
• But now 69% of world's future trade occurs in China
• Learnings
• Focus on the non food crops, so that food security is not compromised
• State participation in future trade
• No abrupt suspension

Pricing policy also involves ideas like e-NAM that reduce price dispersion

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Food Security
05 June 2017 18:45

Food Security: It is the food availability, accessibility and affordability. Affordability has been the main
challenge that every government has tried to address. - NEED TO FOCUS ON AVAILABAILITY AND
ACCESSIBILITY
Food inflation disproportionately hurts the poor and their food security. Parikh et al.

 National Food Security Act, 2013:


Salient features:
• Right To Food
• Can purchase 5 kilograms per eligible person per month of cereals
○ Rice at 3 Rupees per kg
○ Wheat at 2 Rupees per kg
○ Coarse grains (millet) at 1 rupee per kg.
• Total 66 % -
○ 75% rural and
○ 50% of the urban population
○ are entitled for three years from enactment
• The states are responsible for determining eligibility.
• It follows a life cycle approach,
○ It targets people at different stages of their life.
• Merges 4 programs

TPDS Largest - Out of 60 mT of grains required for NFSA, 55mT is


required for TPDS

MDM

Matritwa Sahiyog Yojana

Wheat Based Nutrition Under ICDS - For children under 6


Program

• Pregnant women and lactating mothers are entitled to a nutritious “take home ration” of 600
KiloCalories and a maternity benefit of at least Rs 6,000 for six months.
• Children 6 to 14 years of age are to receive free hot meals or “take home rations”.
• The central government will provide funds to states in case of short supplies of food grains.
• The state government will provide a food security allowance to the beneficiaries in case of non-supply of
food grains.
• The eldest woman in the household, 18 years or above, is the head of the household for the issuance of
the ration card.
• There will be state- and district-level grievance redress mechanisms and State Food Commissions will be
formed for implementation and monitoring of the provisions of the Act.
○ District Grievance Redressal officer (DGRO)
○ Concerned authority can be fined upto 5k if DGRO orders are not followed
• The poorest who are covered under the Antodaya yojana will remain entitled to the 35 kg of grains
allotted to them separately
• The Act specifies that the legal liability to provide food is not there in case of calamities like
earthquake, droughts etc.
○ This cannot be justified on humanitarian grounds.

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Pros
• Dreze and Khera
• Himanshu
• School children - Incetive to education
• Mothers - Social Empowerment and check against poverty shock
• My reduce Buffer Stocks
Cons
Issues: Will it deliver on eradicating hunger? What are fiscal costs due to market distortions?
○ Distortion

• Charan Singh (2016)


• Cropping pattern has already begun changing

• Cereals increasing
• Onion, vegetables declining - Inflationary cycle

○ Procurement
○ It will be challenge especially during years of low production.
• During 2002-03 drought, food grain production fell by 40 MT . If India enters global
markets for purchase, the prices will go up due to the size of its demand.
○ FCI is dependent on procurement machineries of states like Haryana, Punjab, MP,
Chhattisgarh. The states charge high fee and taxes on procurement by centre. With NFSA in
place, the tax demands can go up.

○ Coverage has been over- expanded.


○ Due to a fixed share of beneficiaries, with rise in population, beneficiaries will increase.
○ High food subsidy bill: It is estimated to be around Rs. 1.25 lakh crore or 1.5% of GDP.
○ Grandfather clauses like the one related to tide over allocations usually gets continued in the
future also.
○ RESULT - ES - Food Subsidy actually declined in FY 17 to about 1 lakh crore ( should be
other reasons though)

○ PDS issues
○ Leakages
○ MSP Issues
○ WTO

○ De Minimis and NFSA

• Estimated govt procurment of 60 million tonnes or 30% of the output


• Since, MSP > Market Price. Hence, AMS is present
• The AMS would exceed the 10% de minimis support
• The ERP is fixed at 1986-87 prices

• At 3.5k Rs per metric tonne for both rice and wheat

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• But, the base year in general had an exceptionally lower price


• It fails to count in the high inflation in developing countries

• Although AoA has a provision to consider inflation


• US says members can't get away easily and that a committee will decide
what is "due consideration"
• Although fixing price in rupees has meant that it has failed to account for
inflation changes which can be measured had dollar been there (depreciation,
real exchane rate )

• Narayanan (2014) With dollar based exchange rate even with NFSA, AMS
would be within the de minimis limit

○ CAG Report ( 2016) - Delays
○ Identification
• Only 51% of the the eligible beneficiaries are identified.
• Moreover, state governments have not carried out fresh identification, rather have re
 stamped old ration cards.
○ Inadequate storage and transport facilities
• 95% of food grains are moved through railways. With implementation of NFSA,
requirement of freight wagons will increase.
• Delays in construction of additional godowns in Maharashtra, unfit conditions due to
damp or remote locations

REVIEW
• Maternal benefit Program for 6k started
• 67% beneficiaries- Based on SECC : Socio Economic Caste Census- not yet completed
○ Only a draft census done, and not for all districts
○ Some states relying on BPL data of 2000 - very old and thus leakage to rich
○ Bihar- Successful implementation- because has effectively used the SECC data
• Progress
○ Half the no of states not implemented in spite of the deadline
○ Even though, centre had warned that it'll stop PDS payment
• Still reports of exclusion error and rich grabbing- Hence, need for universalisation
• Shanta Kumar committee- calls for reduction to 40% of population
○ Causes greater uncertainty

Way forward
• Conditional cash transfers based on Aadhar card.The option to choose cash or gains can be given
○ Leakages are eliminated
○ logistics cost are reduced. 
○ Distortions in the grain market are corrected
○ More choice regarding dietary pattern
○ Diversification towards HVCs
○ Encourage financial inclusion
• Challenge of malnutrition requires
○ Better hygiene and sanitation
○ Better female education
○ Quality health care for children and pregnant/ lactating mothers.
○ Not just calories but micro-nutrients.

• Shanta ram Committee recommendation


a. Procurment
i. Limit procurement only to poorer states .
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1. As MSP benefits only 6% of farmers according to NSSO survey
ii. let state govts do procurment
b. Buffer
i. Halve the buffer stock - well above the threshold currently
c. DBT
i. Direct cash transfer to Farmer in place of procuring (with corruption & causing rotten grains
in storage)
ii. Direct cash transfer to Consumer
d. NFSA
i. Curtail National Food security Act (NFSA) to 40% of population
e. Use technology to store (modern silos), transport (robotic arms in silos, containers) and inland
waterways
f. VRS to workers
• Other recommendations
○ Task of identification be give to PRIs from bureaucracy which can be then verified by NGOs
○ Decentralised procurment Procurment from local areas and distribute it locally. Then when
shortage use national Pool. Will reduce inefficiency and inequitable benefit of some farmers (
punjabi)

Counter Critics
○ Jean Dreze plugs the wastage to around 40% only
○ Indian human development survey at around 30% only
○ Bihar saw a dramatic turnaround from 80% leakage to around 20% only, showing revamp in the
current version of PDS itself is possible - Bihar did it via a coupon system
○ NFSA was more holistic and covered pregnant women to young children
○ Lowering wages and pink slips will deteriorate workers conditions
○ Lowering MSP/less buying - more Vidarbha like situation
○ Lowering FSA - leaves many poor out, opens room for leakage

• Technology based reforms undertaken by states, studied by Wadhwa Committee.


• Digitisation of ration cards for online verification of the beneficiary and the entry of  off takes.
Chhattisgarh, TN, AP
• Computerised allocation to FPS
• Use of GPS technology to track trucks from state depots to FPS to reduce pilferage. Chhattisgarh, TN.
• SMS based monitoring by citizens regarding dispatch and arrival of grains at FPS. Chhattisgarh, TN.
• Web based citizens portal: Grievance Redressal through call centres. Chhattisgarh

• Other steps to reform


• BAPU
• Get rid of Private Dealers
• Successfully done in Chhattisgarh
• Instead - Cooperatives, SHG, Panchayat
• Dreze - Reduction in corruption and leakage
• Awareness about entitlements
• Dreze -West Beng - When people are not clear about entitlements, it is easy to cheat them
• Bihar model
• Leakage reduced from 97% in 2004 to 20% now
• Checking hoarding by stringent regualtion of ECA, APMC
• Boosting prodction
• More commission to Fair price shop owners before DBT/BAPU to appease them
• Village Grain Banks to deal with drought like condition
• Regularity and predictability in opening hours of the FPS helps in prevention of diversion of quotas.
• Social monitoring of the FPS can improve the system.

Buffer Stock
• Norms - Maximum 41 million tons of Rice+ Wheat in January, 30 million in October
• Reality - 60 million tons
• History
○ The Buffer started happening since 1989, when procurement exceeded PDS sales every year

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○ Was the time, when India started exporting food grains
• Cons-
○ Fiscal - FCI buys almost 1/3rd of rice and wheat produced at MSP
• The subsidy due to combined effect of MSP and PDS runs at 1.15% of GDP or 1.3 lakh crore
○ Rotting of extra grains
○ Hunger to the rest
○ WTO dumping worries
• Green Shoots
○ Buffer stock comin g down from peak of 80 million tons in 2012
○ In 2015, decision was taken to allow Food Ministry to offload stock from FCI godown without
cabinet approval - Open Market Sale
• Found to be ad hoc and slow though
• Way Out
○ Expediting Open Market Sale
○ DBT
○ Decentralised Procurement
○ Reducing the threshold Limit - Shanta Ram
○ Shanta Ram recommendations on logistics like air tight silos, covered wagons

National Food Security Mission


• Focus was on districts where productivity of wheat, rice, pulses, millets and fodder was lower than
national average. The aim was to increase production there.
• National level aim was to increase production of rice by 10 MT (achieved), wheat by 8 MT (13 MT
achieved), pulses by 2 MT (3 MT achieved) (total 20 MT) by 2012. It has been successful.
• It stressed on increased farm mechanization, better inputs, seed development, technology
demonstration and deployment and marketing access.
• Dedicated Project Management Teams (PMTs) have been provided at district, state and national levels
for implementation.
• Publicity campaigns are organized at the national, state and district level through advertisements in
print media, video clips on mass media etc
• Pulses: Out of 171 districts a majority consistently showed enhanced yields despite drought conditions.

NFSM Part 2 in 12th FYP


1. It will also cover coarse crops and aim to increase production by 25 MT - 10 MT of rice, 8 MT of
wheat, 4 MT of pulses and 3 MT of coarse cereals.
2. In addition to enhancing the productivity in low productivity areas, stabilizing the productivity
gains in high producing areas is equally important. Accordingly, in the 12th Plan it will follow
location specific, target oriented strategies.
3. It will also promote cropping systems in place of promoting individual crop. Major cropping
systems such as rice-wheat, rice-pulses, maize/millets-pulses. Crop rotation, inter-cropping will
be promoted.
4. Post harvest management and R&D will receive attention.

TPDS
• It aims to provide subsidised food and fuel to the poor through the network of fair price shops.
• NFSA depends upon TPDS for delivering food grains as legal entitlements.
• Its objective is food security and moderation of prices in open market.
Functioning
• TPDS is administered under the Public Distribution System (Control) Order 
notified under the Essential Commodities Act, 1955 (ECA). Now NFSA provides legal backing to TPDS. 
• Identification of beneficiaries: PC has state wise estimates of BPL beneficiaries based on NSSO
household expenditure methods. State governments are responsible for identifying BPL households on
the basis of inclusion and exclusion criteria developed by MRD.

• Objectives
○ Meet the prescribed minimum buffer stock norms for food security
○ Release food grains under TPDS on a monthly basis
○ Meet emergency situations arising out of unexpected crop failures, natural disasters, etc.
○ Sell through the Open Market Sale Scheme (OMSS): To sell food grains in the open market
to moderate or stabilise open market prices.

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• Procurement of food grains:


○ The food grains provided to beneficiaries under TPDS are procured from farmers at MSP.
○ Currently procurement is carried out in two ways: 
• (i) centralised procurement, - By FCI
•  (ii) decentralised procurement.  - By states on behalf of centre

• Allocation of food grains to states on the basis of their BPL, AAY population at CIP - Central Issue Price
○ MSP + Transportation + Storage costs - CIP = Central subsidy
• The centre, specifically FCI, is responsible for the inter-state transport of food grain to consumers
states
. Once FCI transports grains to the state depots, distribution of food grains to end consumers is the resp
onsibility of state governments.
• Final distribution to the consumers by the Fair Price Shops ( About 5 Lakh )
• Food Subsidy is the difference in the economic cost (MSP+ transpiration and storage costs) and the
central issue price is reimbursed to
FCI. Wheat and rice are sold by the central government at uniform central issues prices (CIP) to states an
d union territories for distribution under TPDS. While the MSP has raised over the years, the CIP has
remained constant since 2002

• TREND

• Procurement operations of government were < 5% of agriculture output before the GR. In 80s they rose
to 10% and now they have risen to about 30% after NFSA
• Targeting - 1997 onwards - TPDS and BPL families were given stock @ ~ 67% of APL. Antodaya Anna
Yojana (AAY) families were given ~ 50% of BPL prices. Between 1997 to 2002, APL prices were quite
close to market prices. Hence APL offtake declined and many FPS became unviable. Now nearly 60% of
supply goes to BPL and 20% to Antodaya.
• lower APL offtake surplus food stocks accrued (reaching 80 MT against 40 MT norm of buffer stocks in
2012) . This increased cost of carrying as well as food subsidy. Then prices for BPL were reduced further
and their ration increased and also exports permitted so that food stocks declined again to below 20 MT
level
• Southern states with lower poverty consume around 50% of PDS. Hence, shouted more against NFSA
• In 2014-15 which was a a high inflation year, PDS offtake reduced suggesting that the dependence on
PDS is decreasing, which may be because of issues of availability and quality

Benefits
PDS and Poverty
• Dreze and Khera: India‟s PDS 
has a significant impact on rural poverty. The impact is particularly large in states with a well
functioning PDS,  The bad news is that the PDS still has very little impact on rural poverty in a num
ber of large states such as Bihar, Jharkhand, Uttar Pradesh and West Bengal where PDS reforms a
re long overdue. 

• Himanshu 2012: Poverty reduction during 2005 and 2010


○ Contribution of growth was less as 2009-10 was a drought year and this was period of
global financial crisis
○ Increase in the transfers of PDS and MDM. During this time, PDS saw a revival driven by
state governments in particular some of the poorest states - Bihar
 has also meant that it is now delivering to the poor where it matters. 
○ Moreover
while consumers benefitted from lower prices of cereals in the PDS, the producers also

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benefited by the significant increase in MSP and increase in procurement.
○ The states that expanded the coverage beyond the officially mandated poverty estimates saw
greater improvements in consumption and lower leakages.
○ MNREGA provided additional incomes to the poor households.
○ Similar to 1983 to 1988 period.
• Drought years
• Growth in agricultural output
• Rise in wages
• Increase in public investment, particularly public employment creation. MNREGA also
drove wages up.
• Gain in ToT in favour of agriculture.
• Positive impact on food security
• Inclusive and Progressive
• Emergency
• Positive out of the complementary MSP

Issues
• SEE NFSA below
• Identification
○ Is still based on 1993-94 poverty estimates. Hence though poverty has declined according to
NSSO surveys, no. of BPL beneficiaries have remained the same
○ Inclusion and Exclusion errors. Misclassification of poor as non poor and vice versa.
○ Presence of ghost beneficiaries point to diversion to open markets. 
• Procurement
○ Government procures nearly one-third of the cereals production. With NFSA, procurement will be
even greater. 
○ During poor harvest, there will be greater import dependence.
○ Being a large player, government’s demand pushes prices up and leads to food inflation.
○ Extra transportation costs due to centralised procurement by FCI
○ Maximum buffer norms are not specified. Hence procurements is much greater than the norms. This
also increases open market prices.
• Storage
○ Inadequate storage facilities with FCI for central stock pool. In 2012, stock was around 80mT and
whereas storage capacity is around 40mT.
○ Uneven distribution of storage capacity across states
○ Reliance of Covered and Plinth CAP storage for long duration.
• Last mile Leakages
○ It is estimated to be around 47% at all India level. ( Shanta Ram committee )
• HAS FALLEN TO 35%
○ These are along the distribution chains as well as at FPS through ghost beneficiaries.
• Food Subsidy
○ Estimated fical costs is about 1.25 lakh crore
○ Under NFSA,
the proportion of the population covered is constant, the number of eligible beneficiaries will increa
se with the population growth.
• It can ensure high calorie intake but not a balanced diet.

Reforms
• Accurate biometric identification through Aadhar card for eliminating ghost beneficiaries.
• Technology based reforms undertaken by states, studied by Wadhwa Committee.

• Alternatives: Universal PDS, Food Coupons and Cash transfer.


○ With cash transfers, MSP regime can be replaced by cash subsidy through deficiency payments.
This will allow greater coverage of farmers for same subsidy cost.

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Decentralised Procurement Scheme ( DCP )


The DCP, introduced in 1997-98, 
is operationalised through food grains 
procurement and distribution by the State 
Governments themselves. Under this 
scheme, the designated DCP States procure, 
store and issue foodgrains under TPDS and 
other welfare schemes of the Government of 
India. The Central Government undertakes 
to meet the entire expenditure incurred by 
the State Governments on the procurement 
operations as per the approved costing. 
While the Central Government monitors the 
quality of foodgrains procured under the 
scheme and reviews the arrangements made 
to ensure that the procurement operations 
are carried on smoothly, there have been 
instances of diversion of stocks  
 
Issue - Done only by a few states  

GS Focussed

APMC act

• DRAFT MODEL LAW on AGRI MRAKETING - APLM ACT, 2017 - Would replace the Model APMC
Act,2003
○ Traders can sell Perishables outside the APMC markets
○ Cap on
• Commission paid by a Farmer
• 4% for perishables, 2% for non-perishables
• Market Fees
• 2% for fruits and vegetables
• 1% for food grains
○ Single license for agriculture trade
• Covers both Agriculture as well as Livestock trade
○ Farmers can directly sell to bulk markets
○ All regulatory power will lie with the office of Director of Agriculture Marketing
• Currently the APMC board decides
○ Promotion of
• Inter state Trade
• E - Market

• e-National Agriculture Market


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○ Online Market to integrate 600 wholesale markets on the online platform


○ Why needed ? - general Points
• Intermediaries
• Studies show on an average 5-6 intermediaries between farmer and consumer
• Famer only gets about 25- 30%
• Food Wastage
• Price assymetry
• Greater demand

○ Review

• 400 Mandis linked


• But only 30% active
• Only 1% of trade took place through it
• States like Rajasthan - Limited NAM to 1 crop per Mandi
• Bihar, Kerala have been amongst the worst performers - NITI
• Haryana alone does 50% of the trade through e-NAM
○ Way forward
• Can be made more effective by routing purchase through MSP mechanism via NAM
• Benefits
• Buy directly from farmers
• Chattisgarh successful PDS - base - direct purchase from farmers that heped
to keep prices low and minimise leakage and rent racheting
• Presence of Arhatiyas (middlemen) in punjab, haryana
• No trials are maintained of the actual payment to farmers

• NITI Aayog - 4 reforms - Not Imp - Instead focus on that of the Model Act, 2003

Single Point payment of market fees Proposed via the Model Agri Marketing Act

○ E - trade Done via e- NAM

Uniform Trade Licensing Needs to be taken up

Land Leasing Some states like Rajasthan have taken up

• NITI aayog started Index for that to leverage the benefits out of Competitive Federalism
○ Bihar, Kerala - 2 major states yet to implement Model APMC act
○ For the rest
• Maharashtra ranked top
• Delhi at bottom

• Grant by govt to the states implementing Model Act


• Model APMC Act, 2003

APMC Act Reforms

Erstwhile APMC Act Framework


• 1. Each state created controlled market and trade in notified agriculture commodities could happen only
in the market. The market was managed by APMC.
• 2. Commodity coverage: The manner of notifying the commodities for regulation varies from State to
State. Some States like AP and HP have included all the commodities while others regulate only a few.
• Agricultural marketing boards were established for expeditious execution of the market development
work. In some States like AP, Odisha and TN they are advisory in nature while in Punjab, Haryana,
Rajasthan, W.B., Karnataka and Maharashtra are statutory in nature and have powerful role.

Performance Review of Existing APMC Acts


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1. Functioning of APMCs: The marketing committees do not allow the traders to buy from the farmers
outside the specified market yards which adds to the costs. In most states regular elections to APMCs
don't take place and they are superseded by the government. In many others the bureaucrats manage
them. Their role has increasingly come about to be limited to collection of market dues.
2. Lack of geographical coverage: Despite expansion in the number of regulated markets, the area served
per market yard is quite high. The national average is 500sq. km. The farmers are, therefore, required
to travel long distances to reach a market place.
3. Lack of amenities in the market: Though the Acts stipulate for the provision of some prescribed facilities
and amenities in each market yard, in several markets, the facilities/ amenities actually created are far
from the prescribed norms. Cold storage is available only for 9% of fruits and vegetables.
4. Role of rent seeking traders, commission agents etc.: They have organized themselves into strong
associations and don't let new traders enter the market thus limiting competition.
5. High taxes: Market fee was initially envisaged to be reinvested in the development of the market. But
nothing was reinvested and total charges became close to 15% in many states and a source of
revenue for the government. The taxes are levied @ multiple points adding to the transaction costs.
6. Exploitation of the peasant and high wastage: All the above factors mean that farmer gets only 20 -25%
of the end price and the wastage rate is high (40%)

Review of Implementation of Market Reforms


• Market
○ Adoption of provision related to Private markets: The Model Act suggests allows private markets
by persons other than APMCs. Only 17 states (AP, NE, Gujarat, Goa, HP, Karnataka, MP ( only direct
purchase), Maharashtra, Odisha (excluding paddy), Rajasthan, Jharkhand and Uttarakhand have
enabled it but rules have not been notified by all.
○ Establishment of Farmers markets (Direct Sale by the Farmers): However, long before the
circulation of Model Act, several States had promoted Farmers’ Market. These include Punjab and
Haryana These markets have benefitted both farmers and consumers; but it has been noted that
with lapse of time, small traders have taken over the place of farmers in many of these markets. 17
states have made provisions in their Act.
○ Provision for Direct marketing: The Model Act provides for granting licenses to processors,
exporters etc. for purchase of agricultural produce directly from farmers. Only 15 states
• Provisions for Contract Farming: The Model Act provides for permitting contract farming by
registration of contracts with APMCs and exemption of market fee on such purchases. 20 states ave
allowed it without exempting from market fee. One of the biggest concerns is that APMC, who is the
major market player, is also a registering authority for contract farming and the arbitration process is not
time bound.
• Commission Agents: The Model Act stipulates prohibition of commission agents . MP, Chattisgarh,
Mizoram, Nagaland and Sikkhim have amended the Act and made the provision, it is doubtful whether
this provision will be implemented in letter and spirit.
• Market fees
○ Single Point levy of Market Fee: Only 13 States
○ Mandatory utilization of market committee fund for market development: The Model Act
provides for application of market committee fund for promotion and modernization of market only.

Alternative Marketing Models


• Successful example of ReMS - Rashtriya Electronic Market Scheme to unite markets in e-platform
○ Karnataka
○ NAMS should be modelled on this
○ Experience also shows
• Middlemen can’t be outrightly rejected - source for loans to the farmers- Hence, should only
be progressively phased out aand formal banking channels be deepened
• Outright reliance on technology is unhealthy
• Maharastra
○ Allow Legislative premises directly for farmer's market
○ Use schools, colleges during holiday
• SHGs:
○ SHG based collective marketing. -
○ Kudumbashree
• Contract farming: T
○ he Model Act allowed the contract farming sponsor to also provide input and technology support
to the farmer.

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○ It mandated the registration of sponsoring companies, recording of the contract farming agreement,
indemnity for securing farmers’ land and laid down a time bound dispute resolution mechanism.
Contract farming has been prevalent in various parts of the country for commercial crops like
sugarcane, cotton, tea and coffee, etc.
• 4. ITC e-Choupal:
○ . ITC has set up small internet kiosks at the village level to provide farmers real time market
information related to prices, availability of inputs, weather data and other matters related the
farmers. Local level farmers, called ‘Sanchalak’ run these kiosks.
• Virtual Markets:
○ e- NAM
○ Spot exchanges and negotiable warehouse receipt system effect physical delivery of the goods and
may therefore be recognized as more effective marketing instruments for the primary producers.
facilities to enable farmers to sell their products directly to consumers.

Essential Commodities Act, 1955


• Some goods like certain foodstuffs designated essential for the public
• Aim- to check adequate production, check inflation and ensure equitable distribution
• To do so steps taken like,
○ Licensing of products
○ Checking hoarding, by introducing cap on the total storage
○ Govt. Can fix the price

Onion price rise


• Mostly grown as Rabi and partly as Kharif
○ Hence, inflation's most effect in the June - September season
• Reasons for Price rise
○ Erratic monsoon
○ Hoarding
• Steps
○ Onion now in ECA
○ Price stabilisation fund
• 10k tonnes bought, but total production 10 lakh tonnes
○ States asked to annul APMC
○ Provision for national market
• Other steps required
○ Steps to identify hoarding
○ Incentivise onion farming
• Entire Indian geography suitable to sow onion
○ Cold storage
• Requires back end investment, FDI in retail could have been 1 medium

Pulse (Pulses) production

• Now opposite problem


○ Nearly 20% increase in domestic production and a big rise in imports has led to a glut and
prices have crashed
• ES - Largest increase in area under Pulses of all the crops
○ Issue more because of low awareness of MSP

• India largest producer


○ -22% of production
○ Maharashtra, MP, Rajasthan,UP, Karnataka, Andhra
○ But, also the largest consumer
• Price escalation

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○ What?
• Per capita availability has reduced from 61 gram in 1950 to 42 grams now

○ Why?
• Supply
• Share of cultivation
• Cereals has increased from 84% in 1950 to 94% now
• Pulses down from 16% in 1950 to 6%
• Shift Particularly seen in Punjab, Haryana who were imp pulse producer
before Green revolution
• Area under production remains same as during the 1960s
• MSP
• Awareness about MSP is very low for pulses
• Eco Survey
• Even in states like Punjab where awareness about MSP for paddy, wheat
is high
• Open Procurment policy is not followed for pulses
• Need for rationalisation of MSP
• Based on Social costs like health impact, soil, wter table
• Pulses should have a high MSP because protein, nitrogen fixation,
less water consumption
• Rain fed crop
• Seasonal disturbances in rain
• Taken up by the smaller farmers
• Focus on self consumption

• Green revolution not directed to pulses


• Need for Rainbow revolution
• Chances of Pest Attack is more because of Protein content in Pulses

• Demand
• Elasticity to income is around 2.
• Thus as economy progresses, demand increases even more
• Paradox of Plenty- dreze, Sen

• State measures
○ MSP increased to incentivise production
• But not helping a lot
○ National Food Security Mission
• Increase food production by 4 MT
• Can be successful - In phase 1, target of rise by 2, actual rise by 3
• Although, this year production lowest in 6 years
○ Buffer stock for pulses
• On line of Subramanium committee recommendations
○ Price Stabilisation Fund
• On line of Subramanium committee recommendations
○ Accelerated Pulses Production Program in 2007
○ Ministry of commerce decision to sell pulses through mobile vans
○ More imports
• Difficulty because production in world is less
• Entering into long term contract with other countries
• Eg Mozambique recently
○ PUSA ARHAR - 16 has been designed
○ Urged States to reform APMC
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○ Other steps taken by new policy
• Chana to be delisted from future market (to reduce speculation)
• Direct States to rationalise VAT on pulses
• Private agencies to monitor pulses price

• Subramanium panel report


○ More focus on domestic supply than imports for long term welfare
• Higher MSP
• Should act as floor price
• GM
○ Create a buffer stock of 2 MT of pulse
• Use it for price stabilisation
• Budgetary support would have to increase from 500 crore currently under PSF to 10k
crore ( Gulati
○ Create a public private PPP agency to procure pulses
○ Production subsidy via DBT
○ Revoke pulses from APMC
○ Export ban and limits on hoarding (Repeal ECA) work counter to market principles and
should be annulled
• Steps required
○ R&D for pulses
○ GM pulses
• Develop short maturity cycle pulses to reduce the risk
○ Linking pulses to better procurement and marketing facilities like done for paddy and wheat
○ Assure minimum returns to farmers
○ Sign long term procurment contract with other nations
○ Dryland farming research - Shome Committee
○ General improvements in agriculture- irrigation, power, college, awareness

Why has cropping pattern not responded to inflation in proteins?


1. Pulses are fundamentally different from cereals and require different set of techniques
altogether. They require more irrigation, more fertilizers etc. As such they are more vulnerable to
vagaries of climate and hence riskier.
2. While the price support in cereals has been backed by procurement operations by the
government, pulses see no such large scale procurement. Hence government MSPs remain
ineffective.
3. As a result of above to factors farmers continue to grow them on marginal lands only and
refrain from investing in high yielding (but expensive) varieties and techniques. So the yields have
remained stagnant from 590 kgpha in 90s to 600 kgpha in 2000s and 700 kgpha in 2011-12.
4. Post harvest waste in pulses as well as fruits and vegetables remains high. Food processing
industry covers only 2-3% of fruit and vegetable production in India

Hidden Hunger
• The current practise of providing "free" cereals is only replenishing the carbohydrate deficiency
○ Hunger, due to a lack of nutrients and micronutrients still prevails
• Nearly a third of the world's population suffer as a result
• Solution -
○ Iodised Salt, Food Fortification, bio-fortification of crops (nutritional quality of crops is
increased by plant breeding or biotech) , , PDS reform, education
• Steps
○ Iodised salt programme very effective, more needs to be done for others on similar lines
○ FSSAI has come up with Draft Regulations of Food Fortification
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○ States like Rajasthan have started Fortified food in MDM
○ Can use Ready to Use Terapeutic Food ( RUTF)
• Issues with Fortification
○ Not mandatory
○ No Fortification standards
○ General points - 3 Fs - FSSAI , Awareness

Data
• NFHS report
○ 40% children stunted
○ India 100th rank in World Hunger Index ( 2017)

Food and agriculture organization (FAO) says Food security is made up of four pillars viz.
• Availability,
• Affordability,
• Nutrition,
• Stability.

UN report said India could lose 50 billion dollars in GDP due to food price volatility

Food Adulteration
• Step - FSSAI Act, 2006
• Law Commission suggestion for Life imprisonment to those indilging
• Need for testing facilities at local level, simple tests to people, Active survellance

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Subsidies
06 August 2017 15:11

SUBSIDY
• Cons
○ Regressive and Urban Bias
• LPG
• Eco Survey 2015-16 - 97% consumed by the richest 30%
• Small Savings
• Eco Survey 2015-16
• Actual Small Saving scehemes (savings scheme for old and women) operate under TTT (
Tax Tax Tax) and have a net interest rate of 4%
• Not so small like - EEE (Exempt *3) - effective interest rate after counting exempt at 16
%
• Emplirical analysis Says most of the subsidy on savings at 12k crore benefits the SUPER
Rich who make up the top 1-2%
• Gold
• Eco survey 2015-16
• Taxed at 1- 1.5% (centre +states) in contrast to 26% for nomal goods
• 80% consumed by the rich
• Similarly, Railways and Electricity
• Economic Survey - Largest bounty for the rich is in subsidies of Railways (because subsidy
very high), LPG and Gold

• Total subsidy accrued by well off - 1 lakh crore (Eco Survey 2015-16 ) and revenue foregone = 5lakh
crore
• Still underestimation bias
• Because the consumption of the rich is under captured in NSS surveys

• However, distribution pattern can't be changed outright because


• States in US and Europe first provided essential services like infrastructure, health and
education before taking the redistribution role
• As Hirshman says, stae predominantly taking redistribution role will lead to middle class
"exiting from the state"
• Will try avoiding taxes, using private schools, hospitals delegitimising the state and
then a vicious circle
○ Leakage
• NSS data shows only 46% of subsidised kerosene consumed by BPL or Antyodaya Anna Yojana (AAY)
holders
• For Kerosene, JHARKHAND has stRted DBT
• Needs to be reciprocated on an all India basis
• 46% wheat reach intended target
• Fertiliser
• Only 35% consumed by small and medium farmers
○ Distortion
• Charan Singh shows subsidies dstort food pattern
• Raises the relative price of non MSP crops such as pulses
• Misallocation due to forecast errors
○ Fiscal costs
• 1.25 lakh crore annual expenditure on food subsidy
• Total figures of 2.5 lakh crore at 1.6% of the GDP
• Was as much as 4% in 2013
• Diverts resources from Investment - Subsidy Investment connection
○ Externalities
• Water Export
• Fertilser overuse

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○ Ineffeciency
• Wastage of FCI
• Railways
• From 1993 onwards, price has doubled by 4 times
• Railway ticket prices have increased by <2
• Ill effects
• Is regressive
• Hurts investment program of railways
• Increasing share of roadways (railways freight =36% as against 50% in US, China, down
from 65% in 70s in India ) leading to
• Traffic Congestion,
• Environmental Pollution,
• Accidents
• Freight tariff highest in the world leading to reduction of the competitiveness
• DISCOMS
○ Vimrani (2008) - Subsidies have a negative impact on growth because of these distrtions
• Empirical studies show that marginal reduction in poverty and output elasticity from subsidy is less
than that from investmen
○ Inflation - in some cases
• Parikh et al - 10% MSP, 1% pp inflation
○ Populism and Downward Rigidity

DBT (DIRECT BENEFIT TRANSFER )


• Inspired from Brazil - Bolsa familia -
○ Increased income for 80% of the bolsa households
• 20% of population receives payment through DBT
• Total DBT of 60k crore annuallly - max for MNREGA - 35k crore of 60k crore annuallly - max for MNREGA - 25k
crore

Benefits
1. Reduction of LEAKAGE
a. 10 billion $ of savings - WB
b. Violation of One Product One Price creates a strong incentive to create ghost accounts
c. Eco Survey 15-16
i. 27% reduction in sales of subsidised cylinder after PAHAL
ii. Savings 15k crore annually
iii. Black Market prices went up by 30% (Barnwal)
iv. Although,
1. Sale of non subidised cylinders went up at the cost of commercial cylinders as there is
another violation of One Product One Price here
d. Will help poorer state more, which witnessed leakages more earlier
e. See economic survey 2014-15
2. Fiscal savings
a. WB - 10 billion $ if used in all programs
b. Savings due to Pahal at 15k crore annually
c. 10k crore saved in PDS
3. Other benefits
a. Oil companies can get their due prices quickly, improving their financial wealth
b. DBT helps banks also
i. Govt provides margin on DBT transfers (Data required)
ii. Banks inventivised
1. will increase rural banking
c. DBT platform is based on open architecture-state govt can also use it ,
d. IT & Financial literacy spread can be increased
e. Increases the choice available to the household to spend
f. Very fast transfer possible @ click of a button
g. Will incentivise Financial Inclusion
h. Door step delivery via Banking correspondents against the earlier system of people ringing the bells
4. Other evidence

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a. Muralidharan (2014) in a pilot study on DBT use in MNREGA show
i. Payment received 10 days faster
ii. Leakages reduced by 10 % point
iii. Fiscal savings were 8 times the cost of implementing the programme

Challenges
• Last mile challenge
○ No of BCs in India per population at 3% of Kenya where M- Pesa turned revolutionary
○ Only 25% of villages have a bank with in 5 km radius
○ Way out
• Need for mobile banking - 80 connection / 100 citizens in Jan, 2016
• Payment bank
• Another JAM model: BAPU Biometrically Authenticated Physical Uptake of subsidised goods.
Krishna district in AP successfully reduced leakages through this model.
• Strengthen BC networks by raising commission rates
• Linking bank accounts wil Aadhar card will help in meeting technical requirements for opening a
bank account.
• Awareness campaigns regarding DBT and importance of bank counts not only for the public but also
for bank staff.

• First mile
○ Inclusion / Exclusion error in universal schemes
○ Household individual connection- NFSA wors at household levels while maternity payment to eldest
lady of the house
○ Beneficiary database - linking data like Adhaar, SECC data, Mobile, data from OMCs
• Middle mile
○ Resistance from middlemen to adapt
• As seen by limited adaptation of Point of Sale (POS) machines for biometric identification
• Need to share rent with them
○ Coordination with states
• States be incentiviesed in first mile and last mile investing by revenue sharing
• Centre should prioritise the areas where it hasd the greatest control over first and last mile factors
like in Fertilisers

• Others
○ Income effect more than substitution effect -
○ can possibly reduce work efforts
○ Farmers in particular are shown to have backward bending supply curve
○ Corruption in the banking system and BC can limit it
○ Identity frauds are already reduced. Main is quantity fraud- which POS cannot solve.
○ Technological
• Finger Print based Adhaar system has been found to have faulty hardware
• Problem of mobile connectivity to micro atm
• Jharkhand - 50% of POS machines worked - Economic Survey
○ Legal
○ SC ruling against making Adhaar compulsory
○ Adhaar penetration low
○ Choice
• Can't be used to influence choice
• Amartya Sen capabilities
• With same structure, people will still have no option except for the crumpled schools, hospitals,
exploiting market
• Having conditions attached will be more efficient
• Food distribution targets children women equally if not more , DBT can lead to alcoholism
○ Dreze and Himanshu on PDS role in Poverty reduction
○ Agri
• Will be exposed to oligopostic market forces if govt withdraws from food procurment
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• Can hamper food security
Issues in implementing DBT in Kerosene
• Targeting is household based whereas Aadhar is individual based.
• Robust Database in standardised digital format is lacking
• Inter government coordination including with states
• Vested interests of FPSs
• Unsubsidised kerosene is cheaper than diesel. Hence adulteration will continue
• Beneficiary financial inclusion is low
• Environmental concerns: Time is ripe to shift towards renewable energy and LPG

BAPU
• Biometrically Authenticated Physical Uptake
• Take physically stock say from PDS after biometric authentification
• Benefits
○ Mitigates the BC/ bank problem faced by DBT
○ Eco Survey 15-16 = preparedness level at 12% unlike 3% of DBT (vs Kenya)
○ Can be used as a short term cover before DBT makes inroads
• Cons
○ Has its own pre- requisites eg POS Point of Sale machines
○ Eco - Survey - Preparedness level 0 in Bihar, Up, Punjab, Haryana
○ Very high in AP, Chattisgarh and MP

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Trade
21 October 2016 16:10

TRADE

Bhagwati desscribes 5 phases in the trade exchage control regime


• Phase 1
• Quantitative Restrictions on trade
• In response to BoP deficit
• Phase 2
• Phase 1 hurts exports
• Hence additional measures like rebate for exports, heightened import duty
• Plus, QR
• Phase 3
• Some improvement
• Some liberalisation in exchange rate mechanism
• Import surcharges are reduced
• Now depending on the result, a nation may go to phase 4 or to phase 2 again
• Phase 4
• Liberalisation though not complete
• Phase 5
• Full liberalisation
• Current account convertibility

India's performance - BHAGWATI


• India starts from phase 4
• 1951-1956
• BoP is in equilibrium
• 2% of world trade

• Then moves to Phase 1


• 1956- 1962
• Mahanlobis plan leads to severe BoP crisis in 1957
• Import Substitution Model
• CAD worsened from 0 to -2% in 3rd FYP
• Quantitative restrictions imposed
• Reliance on foreign aid
• Self sufficiency vs Self reliance
• Ideology was to have a self reliance where enough export earnings to cover imports
• But, in reality it was a self sufficiency state which closed the doors to trade
• Then phase 2
• 1962-1966
• Indo - Pak war and the consequent suspension of foreign aid (~3% of GDP) made exports difficult
• Increasing use of import duties and export subsidies
• But, BoP crisis worsened. IMF conditioned liberalisation on continuation of foreign aid
• Phase 3
• 1966-68
• IMF imposed austerity
• Devaluation by 57% in 1966
• Although, net devaluation was lesser since import duties were decreases and export subsidies
reduced
• Yet, the phase was not fruitful because of
• Twin droughts of 1966-68
• Political taboo of devaluation
• J curve effect
• Goes to phase 2 again
• 1968-1975
• Export subsidies were reinstated and augmented
• Import duty went up form 20% to 30%
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• Exogenous shocks
• Droughts of 72-74
• Oil crisis
• Bretton woods suspension
• Initially pegged to Pound
• Then to a basket of currencies
• Pegging to a basket of currencies led to inadequate devaluation, which would have occured
had rupees been pegged only to pound or was free floating
• Till 1975 pegged to Pound
• Phase 3
• 1975- 1981
• From a positives trade list to a negative list
• Channges in FERA that relaxed imports
• Relaxations were induced as BoP problem diminished because of
• Increased remittance flow
• Self sufficiency in agri
• In the early 1980s was of little help because of slowdown in west and strengthening of exchange
rate
• However, as delicensing trickled down and rupees depreciated, export picked up in the 2nd half

1978 Report of the Committee on PC • Simplification of the import


Import Export Policies and Alexander licensing of procedure and provided
Procedures framework for shifting from
‘controls’ to ‘development’
• Led to selective import
liberalization measures to make
import of capital good easier
a.
1984 Abid Hussain Committee on Abid • Growth led exports rather than
Trade Policies Hussain export led growth. Phased reduction
of effective protection
• Recommended phased reduction of
effective protection
• Long term trade policy was
introduced to boost exports and
encourage efficient import
substitution


• Phase 4
• 1991
• Lpg reforms
• Dual exchange rate system
• 40% at official rate
• 60% market
• Phase 5
○ 1993 onwards
○ Full convertibilty on trade account in 93 and current account in 94
○ See the full changes here

• Trends after 1991

Share in world trade Up 0.5% to 2%

Export % of GDP Growing 6% to 24% in 2008 ( 20% now) - Pneumonic - X4


(Includes services)

Import ( includes Growing 8% to 32% in 2008 ( 20% now) Pneumonic - X4


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services) faster

Primary Dropping From 24% in 1991 to 16% now

Capital intensive Risng 24% to 64%

Services Growing 15% to 25% CAGR in 90s and 00s respectively as


fastest compared to 10% for manufacturing
Grew @ 35% during 2003-08 period
Share of invisisbles rose from 0.6% to 6% of GDP

• o Software services (41.7%)


• o Business services (18.1%)
• o Travel (11.5%)
• o Also - Highest growth rate observed in software
sector, business and financial
• services,

Diversification Increasing H index down fro 0.04 to 0.03

Region Diversifying Europe down from 23% in 2004 to 18% now


Similar for USA
Africa up from 6% to 10%
Asia: 50%

Connection with world Rising ○ Eco Survey 15-16
economy
• Correlation between Indian growth and world
economy growth
• 0.4 now as compared to 0.2 in the 90s
○ 2 way trade at 32% of the GDP from 20% in 2000
• Higher than US but owner than Europe
○ Financial integration even more
• 2 way current account trade + capital flows =
110%
• 40% in 2000

FDI and portfolio flows Rising Made up small part of overall capital flows in 1991 which
has risen to about 60% now
In contrast Debt Flows have declined

Forex Rising Makes up 75% of the External Debt. Was 11% during
the crisis
The quality of the debt hass improved - 83% - Long
Term debt

FDI

Describe the composition of India’s commodity export basket.


Answer:

Primary products (agri, ores and minerals): 16%



Manufactured goods (engineering goods, chemicals, gems and jewellery, textile): 64% ( x4 )

Petroleum, crude, and products POL : 20%


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1.  

• Current Data
• Exports
○ 300 billion $
• 280 in FY 17
○ Top 5 exports - POL (Petro, Oil , Lubricants ) (18%) , Gems & jewellery (13%) jm , textiles, chemicals,
agri
• Imports
○ 400 billion $
• 380 in FY 17
• Deficit
○ Both exports, imports falling
○ Have moderated from a high of 190 billion $ in 2013 to 130 billion $ now
○ Main reason halving of POL deficit from 100 bill to 40 bili
○ Trade deficit @7.2 % lowest since 2006
○ Balanced by invisibles 6% surplus which is at 75 billion
○ CAD of 1.4% in Dec 16 quarter
• Rise from 0.6% in Sep Quarter
• But showing High volatility
• Also reached 0 in a few quarters recently
• Share - 2 %of worlds trade
○ 1.7% of world exports
○ 2.4% of imports
○ Plans to raise to 3.5% by 2020 by FTP
• India more connected with the world economy now
• Trade Partners - FY 15
○ China ( 70 billion) > USA ( 60) > UAE ( 50) > Saudi ( 25) > Switzerland > Germany ( Huge Deficit - about
90% > Korea > Singapore
• Average imports duty is 12% in India according to WTO
○ Earlier, it was 11 %
○ It is high in particular, because of the high duty on agricultural imports which stand at 35%
○ Eco Survey - India one of the most protected countries

Import Substitution
Reasons
• Heavily influenced by Soviet planning
• Origins of such trade policy in British colonial policy of laissez faire. Viewed economic trade as
‘whirlpool of economic imperialism’

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• Nehru believed a powerful state with a centralised planned economy to be essential if the
country was to industrialise rapidly.
• Bombay plan also emphasized on greater role of government and trade protection.
• Fact that during world wars the economic growth of the country was stronger reinforced belief
on trade protectionism.

• The so-called “License Raj” was marked by a


• maze of import controls,
• an overvalued exchange rate to facilitate the importation of necessary capital goods,
• the promotion of heavy industry, selective financial incentives to the private sector, and a large state
sector.
• Exports were imp. only to generate foreign exchange and export basket was concentrated on
primary products
○ Exports were not considered engine of growth
o QRs imposed and continued till 2001 in varying intensity

China.
In 1950 , India 2%, China 1%

1991 2013

India- 0.5% 1.7%

China 1.7% pnemonic - 91 same as India of now ) 12%

Export Promotion vs Import Substitution

For Export Promotion


1. SEE INTERNATION ECO NOTES
2. 1. Induced demand argument: Import substitution can be of 2 types - (a) Substitution of consumer goods
imports by capital goods imports. (b) Substitution of imports by domestic production. In India (a) was
negligible. But to do (b), we must produce internally. And to produce internally, we need capital goods and
technology for which we need forex which requires exports
3. 2. Economic independence s India will always suffer from an oil shock. Also experience tells us that during
recessions companies ncrease IT outsourcing as a part of their cost cutting exercise.
4. 3. Domestic savings argument: Consumers have to pay higher. Also protection is not done to protect
profits, but just to cover costs and earn normal profits. So capital generation is absent here as well. Can be
shown better by producer and consumer surplus using partial equilibrium analysis
5. 4. As an economy grows although balanced growth is desirable but it is generally not possible. Growth
generates imbalances because income elasticities of demand for different sectors varies.These imbalances
get reflected through price signals. Here foreign trade can come and help as the economy may not be
able to produce everything efficiently by itself. Typically import substitution strategies are associated
with high levels of protection and state imposed capacity limits. Often the government fails and resource
allocation becomes inefficient. But such a thing is not possible in an export oriented strategy as it responds
to global demands and supply factors as well. - Show the general equilibrium analysis of trade benefits
6. 5. Export orientation can help exploit economies of scale, can generate learning by doing economies
and also economies of scope Economies of scope means that th average costs less in increasing the
variety of production wrt one in which the will be produced by different companies- same rationale as
economies of scale )
7. 6. Export orientation leads to adoption of new technologies because the producers are always under
competition to innovate and produce cheaper and of higher quality. To be successful a producer has to
meet quality criteria and also produce lower than a ceiling. Only then he can differentiate himself by
superior quality. Undervalued currency can't help in LR.
8. Tiger economies

Bhagwati & Kreuger (of crony capitalism . WB)


1. Export promotion strategies were better for allocation efficiency because IS involves distortions in effective
rates of protection and investment incentives.
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2. IS goes hand in hand with overvalued fx rate, license raj and fx rationing. This leads to rent seeking
behavior by incumbents rather than promoting competition and efficiency.

For Import Substitution


1. 1. Trade gap argument: Comparative advantage of LDCs lies in primary products. Except for a few oil
countries, studies show that both the volume and ToT of LDCs are deteriorating. - Prebisch singer
hypothesis)
2. 2. Economic efficiency argument: Autarky promotes economic independence and frees the country from
foreign interference.
3. 3. Domestic savings argument: Producers are shielded. So they can charge higher and earn higher profits
and hence higher investment
4. Infant industry hypothesis, Strategic Trade theory
5. Market for ISI already exists
6. Tariff factories can be set up
7. Easier to apply restrictions on foreign imports than coax other countries to accept our exports



2. What are some of the domestic factors that continue to hamper exports?
Answer:

• Aluhwalia (2011) - Factor market constraints - That;s why FDI has not matured into Ecport
oriented industies as it took place in China (Kumar, Gupta)
• Infrastructure constraints
• High transaction costs
• SSI reservations
• Labour inflexibility
• Quality problems
• Quantitative ceilings on agri exports


3. What is the current composition of India’s commodity import basket?
Answer:
i. Fuel: 40% (2013; in 2000, was only 33%, shows increased domestic production)
ii. Capital goods: 12%
iii. Gold and Silver: 12%
iv. Edible oils: 2% (!!)

GS

Schemes
• Foreign Trade Policy
○ And all the related schemes - MEIS, SEIS, Niryat Bandhu Scheme, EPCG
• TIES
○ Trade Infrastructure for Export Scheme
• Simplified IEC
○ Importer Export Code
• Reduction in no of documents to be filled before exports
○ Only 3 documents required now
○ Puts India on par with US, Singapore, Japan
○ In lives with TFA initiatives
○ Benefits
• Saves time and energy for efforts
• Eases load on govt
• Documents down corruption down
• Estimates- push exports by 3% as transaction costs reduced
• TIR convention
○ India acceded recently
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○ Will aid International moevement of goods and movement along Transport Corridors
○ Is a UN led Global Custom Transit system that facilitates smooth flow - Helps in INSTC
○ Also INSTC and Ashbagat
• SWIFT - Single Window for Export and Import Procedures
○ See Economy 1 365 - 32
Need for TFA in Services

13. Why is India’s Balance of Trade consistently worsening since 1951?


Answer:
High imports: larges increases in imports of capital goods, petroleum and oils, fertilizers, and gold.
Modest growth of exports due to low world demand. GoI has been trying to improve exports by
measures such as devaluation, cash assistance, income tax concessions, concessional credit, exim
scrips, convertibility of rupee on current account, EXIM bank, export processing zones etc.

14. Outline some of the major issues in India’s merchandise trade sector.
Answer:
• Product diversification
• Export infrastructure
• Focus on useful trading blocks
• Inverted duty structure (finished goods are taxed at lower rates than raw materials or intermediate
products; this discourages domestic value addition)
• Export promotion schemes
• Trade facilitation
• Intertwining of domestic and external sector policy

On ‘trading across borders’, India is ranked 109 with Singapore at first


rank and China at 60th.
o India requires 8 export documents to be cleared and China 5 with good
practice economies like France at 2.
o Time to export is 16 days for India, 21 for China, and 5 for Denmark.
o Cost to export is $1095 per container for India, compared to $500 in
China and $450 in Malaysia. Number of import documents that need
clearance are 9 in India, 5 in China, and 2 in France.
o Time to import is 20 days in India, 24 in China, and 4 in Singapore. Cost
to import is $1070 per container in India, $545 in China, and $439 in
Singapore.
o As per the World Bank and International Finance Corporation (IFC)
publication Doing Business 2012, India is ranked 132 on ‘ease of doing
business’

Internal Trade
• SEE Eco Survey - 231
• Inter State trade in India very high
○ 54% of GDP
○ In US- 40% of GDP
• Reasons
○ Peverse Tax Incentoves - Role of Input Tax Credit on CST
○ Special states and exemptions to Excise Duties
○ Pharma sector development in Himachala Pradesh, Daman region
○ India a large country
• Challenges
○ Octroi
○ APMC Act, Essential Commodities Act (ECA) which regulates and prohibit free inter state trade
○ Infrastructure missing
○ Different culture
• Benefits
○ All the benefits of international trade - ho model
○ Expands market and reach
○ Customers- cheaper products

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○ Dynamic advantages of trade - competition, vertical integration, comparative advantage, economies of
scale
○ Political and cultural unity
○ In fact, India has greater inter state trade potential because of vast diversity and resulting
comparative advantage of each state
• Green shoots
○ GST
○ Agriculture Produce Inter- state trade and commerce bill, 2012
• Although, the bill has lapsed now
• Decision to revamp the APMC mosel, to allow for a national market
○ E commerce

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Foreign Trade Policy


03 April 2015 12:33

See Mid FTP review

FOREIGN TRADE POLICY 2015-20


1. Target of
a. 900 billion $ exports of goods and services by 2019-20
i. Dificult in wake of Secular stagnation - pegged by IMF at 3-3.5%
ii. In 2014-15, Exports declined by 1.2%
b. Share in trade up from 2% to 3.5%
2. consolidate all previous export incentive schemes under two: Merchandise Exports From India Scheme
(MEIS) and Services Exports From India Scheme (SEIS).
3. MEIS
a. The Merchandise Exports From India Scheme
b. has replaced 6 existing schemes
i. FMS, FPS, Market Linked FPS, Agriculture Infrastructure Investment scrip...)
c. Goods listed under it are granted freely transferable scrips as a % of realised FOB value of
exports
d. scrips will be fully transferable. This means that scrips issued under export from India schemes can
now be used for payment of customs duty for import of goods, payment of excise duty and service
tax y on domestic procurement of inputs or goods, and payment of service tax
e. Export with higher domestic content & value addition have been provided more incentives - boost
to productivity enhancement
f. Countries divided into 3 categories
i. A- traditional market, B- emerging market, C- others
4. SEIS
a. Services Exports From India Scheme
b. has replaced the existing Served From India Scheme (SFIS).
c. Applies to all service providers located in India from the earlier Indian service providers

5. MEIS, SEIS extended to SEZ as well

6. Diversification

Destination 7 new markets  have been added to the FMS, 7 new markets to the Special FMS
a. - FMS - like Honduras, gautemala, Algeria, Angola

Commodity 100 new items to the FPS list.
Basket

7. Rationalisation of EPCG
a. Export Promotion Capital Goods Scheme
b. Export requireent reduced from 90% to 75%
c. Under the scheme, duty free imports of capital goods are allowed

8. EODB
a. No of documents reduced to 3 from 10 for exports and 7 for imports
b. E governance
i. Online filling of documents

9. New institutions and schemes


a. Niryat Bandhu Scheme
i. Skill training and mentorship to budding exporters
b. Centre for Research in International Trade to be set up

10. Special Preference


a. Status holders - Those who have contributed to trade will be given special preference
b. North East exporters to be provided soecial inventives

11. Facilitation
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a. Online inter ministerial consultation
b. Export promotion mission to coordinate with state governments to prepare their own export
strategies based on the new FTP.
c. National committee on trade facilitation to be set to implement WTO's trade facilitation
agreement
d. Board of Trade to be set to have regular intra-govt and other stakeholders interaction

12. Review
a. The FTP also introduced a concept of import appraisal mechanism which will be done on a quarterly
basis by the commerce department.

Challenges/ Issues
1. Dificult in wake of Secular stagnation - pegged by IMF at 3-3.5%
a. In 2014-15, Exports declined by 1.2%
• Rate of incentives has declined from 2.7% to 2.5%
• Under GST, will have to pay the import custom duty upfront which will then be refunded - Issue of
comatibility with FTP
• Silent about how other ministries/dept would be coordinated in support of trade
• Scrips instead of cash - time lost
• Silent about MSME Small and Medium Enterprises - 45% of Industrial production
• Structural issues like Labour, other issues with trade - comppettition, infra , crony , etc

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INDIA & WTO


Tuesday, February 16, 2016 11:49 PM

New Issues
• E- commerce inclusion

○ Positive - one market, greater trade, trickle down effect on Poor counties , is beomng the new norm of Global Chain
○ Negative - As India is saying, it may be a way to circumvent original issues around Doha Development Rounds
• Investor- state Dispute settlement system

○ Developed - Treat differences at international forum


○ India - BIT does the counter
• Investment Facilitation - Being Mooted by China and others - India has blocked it - 2 reasons - Service facilitation first, as said
in Marrakesh in 1994, Investment Facilitation is not a part of WTO
• International Telecom Agreement
• JUDGES In WTO

○ Logjam
○ Believed that this will continue and the necessary quorum on disputes may not be available , further aggravating the
problem

See about TFA


• Came into force on 22nd Feb
• 1 trillion $ boost to world economy

○ Has little or no empirical backing


○ Is also seen as a way to expad western propaganda
• How ?

○ Streamline export- import by reducing procedural requirements, standardisation anad uniformity of rules and regulations
○ Other benefits

• Reduces cost by about 10%


• Reduction in time
• Reduction in corruption
○ Challenges

• Infastructure, Training, Transparency vs Speed , BoP deficit


• Passes in Bali summit ( Bali Package)
• India is also mooting for TFA in Services

○ See somewhere below - About Indian draft act

NAIROBI PACKAGE
1. There was a commitment to completely eliminate subsidies for farm exports
a. developed members have committed to remove export subsidies immediately

b. developing countries will do so by 2018.


i. Developing members will keep the flexibility to cover marketing and transport costs for agriculture exports until the
end of 2023
c. No time limit for poorest and food dependent ones
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2. SSM
a. Special safeguard mechanism
b. On agriculture imports
c. Raise tariffs if price falls
d. India's argument- Developed countries have used it in some form or other.
e. India actively pursuing allowing developing countries to use it
f. Has been approved in principle during Nairobi declaration
3. Public Stockholding for food security purposes by some developing countries ( India ) allowed
4. ‘Made in LDC’ products will get unrestricted access to markets of non-LDCs.
a. India already provides duti and quota free access
5. affirmation that Regional Trade Agreements (RTAs) remain complementary to, not a substituteto WTO
6. Ministers acknowledged that members “have different views” on how to address the future of the Doha Round negotiations but
noted the “strong commitment of all Members to advance negotiations on the remaining Doha issues.
7. Decision to prevent "evergreening" of pharmaceutical patents
8. Creation of timeline to eliminate duty on 201 IT products
a. ITA 2

Introduction

• established in 1995.
• It replaced General Agreement on Trade and Tariffs (GATT) which was in place since 1946.

○ In pursuance of World War II, western countries came out with promotion of free trade and homogenization of world
economy on western lines.
○ Washington Consensus - This version claims that development will take place only if there is seamless trade among all
the countries and there are minimal tariff and non- tariff barriers.
○ That time along with two Bretton wood institutions – IMF and World Bank, an International Trade Organization (ITO) was
conceived.

• ITO was successfully negotiated and agreed upon by almost all countries. It was supposed to work as a specialized
arm of United Nation, towards promotion of free trade. However, United States along with many other major
countries failed to get this treaty ratified in their respective legislatures and hence it became a dead letter.
○ Consequently, GATT became de-facto platform . It has to its credit some major successes in reduction of tariffs (custom
duty) among the member countries. Measures against dumping of goods like imposition of Anti-Dumping Duty in victim
countries, had also been agreed upon.
○ It was signed in Geneva by only 23 countries and by 1986, when Uruguay round started (which was concluded in 1995
and led to creation of WTO in Marrakesh, Morocco), 123 countries were already its member.
○ India has been member of GATT since 1948; hence it was party to Uruguay Round and a founding member of WTO. China
joined WTO only in 2001 and Russia had to wait till 2012.
Why WTO replaced GATT?
While WTO came in existence in 1995, GATT didn’t cease to exist. It continues as WTO’s umbrella treaty for trade in goods.
There were certain limitations of GATT. Like –
1. It lacked institutional structure. GATT by itself was only the set of rules and multilateral agreements.
2. It didn’t cover trade in services, Intellectual Property Rights etc. It’s main focus was on Textiles and agriculture sector.
3. A strong Dispute Resolution Mechanism was absent.
4. By developing countries it was seen as a body meant for promoting western interest.
5. Under GATT countries failed to curb Non-Tariff barriers
Here, creation of TRIPS, GATS and TRIMS
Uruguay Round and its Outcomes
• begun in 1986 and went on till 1994.
• Prescription-

○ Creation of WTO by replacing GATT


○ tariffs reduction from an average of 5% to 3% , to be completed by 2005

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○ Replace quotas
○ Health and safety regulations only after proper scientific evidence
○ Subsidised Agricultural export to be reduced by 20% over 6 years
○ that trade in agricultural goods be progressively liberalized
• What was the actual experience? 

○ Result - Reduced NAMA tariff rates from 6.3% to 3.8%

Principle of the Trading System – WTO


1) Non Discrimination
a) Most Favored Nation
countries cannot normally discriminate between their trading partners. If they grant some country a special favor (such as a
lower customs duty rate for one of their products), then they’ll have to do the same for all other WTO members.
Some exceptions are allowed. For example,
○ Countries can set up a FTA that applies only to goods traded within the group
○ Or they can give developing countries special access to their markets.
○ Or a country can raise barriers against products that are considered to be traded unfairly from specific countries.

b) National Treatment :
Treating foreigners and locals equally
National treatment only applies once a product, service or item of intellectual property has entered the market. Therefore,
charging customs duty on an import is not a violation of national treatment

2) Freer Trade :
Lowering trade barriers like cutom duries and quotas or othernon tariff barriers like

3) Predictability and Stability  :
With stability and predictability, investment is encouraged, jobs are created and consumers can fully enjoy the benefits of
competition — choice and lower price

4) Promoting fair competition


• RULES BASED TRADE
The rules on non-discrimination — MFN and national treatment — are designed to secure fair conditions of trade. So too are those on
dumping (exporting at below cost to gain market share) and subsidies. The issues are complex, and the rules try to establish what is
fair or unfair, and how governments can respond, in particular by charging additional import duties calculated to compensate for
damage caused by unfair trade.
Counter to MFN is Generalised System of Preferences (GSP) under which nations can have a preference order. Each nations
has separate one. But generally, more prefernce to LDC, FTA, etc

5) Encouraging Development and Economic Reforms


special assistance and trade concessions for developing countries. Over three quarters of WTO members are developing countries
and countries in transition to market economies

Major agreements of WTO


New proposals after URUGUAY round (8 - SCM, AoA, TRIMS, TRIPS, GATS, SPS, Agreement on Textiles + GATT) )

1. Agreement on subsidies and countervailing measures – SCM

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• The WTO SCM Agreement contains a definition of the term “subsidy”. The definition contains three basic elements: (i) a
financial contribution (ii) by a government or any public body within the territory of a Member (iii) which confers a benefit. All
three of these elements must be satisfied in order for a subsidy to exist.
• Thus, the SCM Agreement applies also to measures of sub-national governments and of such public bodies as state-owned
companies.

Hence there are two types of a. Subsidies contingent upon export performance.
b. Subsidies contingent upon use of domestic content over imported goods. - DCR -
prohibited subsidies – 1 crore per MW in solar

Further, there is separate category of • Types


‘Actionable subsidies
• Countervailing Duty – It is imposed on imported goods to counterbalance


subsidy provided by the exporter country.
These are not prohibited but countries
• Anti-Dumping Duty – At times countries resort to subsidize production or
can take ‘Countervailing measures’
exports so heavily that exporters are able to sell goods below domestic price
against these subsidies or they can be
or even cost of production in foreign markets. It is aimed at wiping out target
challenged in ‘dispute resolution body’
country’s industry (Predatory Pricing ) . Anti-Dumping Duty is aimed at
of WTO.’.
counterbalancing such subsidization.    
• done in a transparent manner and a sunset period should be specified.

2. General Agreement on Trade in Services – GATS

• While services currently account for over 60 percent of global production and employment, they represent no more than
20 per cent of total trade (BOP basis). Many services, which have long been considered genuine domestic activities, have
increasingly become internationally mobile. This trend is likely to continue, owing to the introduction of new transmission
technologies, the opening up in many countries of long-entrenched monopolies
• Obligations under GATS

○ General Obligations

• MFN to all
• Transparency
○ Conditional Obligations

• Has Strings attached, as decided by a country to a particular service - Unlike in Trade


• Market Access
• National Treatment
• Service covered - Positive list

○ W/120 list - Negotiation list

• List of service sub -sectors which can be negotiated under GATS - ie positive list
○ States take up the services which they want to cover

• In Doha round, India took up 47 Services sub sectors (Pneumonic - 1947)


○ NO Obligation to a country
○ West is pushing hard to move from positive list approach to negative list approach. In negative list approach, services
where GATS is not applicable will have to be negotiated, agreed upon and specified. India is against this negative list
concept as it will throw open almost whole Indian services sector to western multinational giants.
• Negotiations is services under GATS are classified in 4 modes, interests of different countries depend upon this classification

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○ Mode 1 

• It includes cross border supply of services without movement of natural persons (either consumer or provider).
• For eg

• . BPO
• Distance learning
• Here, it’s in India’s interest to push for liberalization given its large human resource pool and competitive IT
industry.
○ Mode 2 -  

• Service consumer moves to another country

• Students travelling abroad

• US is the largest education exporter followed by UK


• Tourism
○ Mode 3 

• Commercial presence – which covers services provided by a service provider of one country in the territory of any
other country. This opens door of relevant sector in one country to investments from another country.
• Accordingly, it is in west’s interest to push for liberalization here. There has been sustained pressure to open up
• higher education sector, insurance sector, Medical sector , McDonalds , through this mode.
• Although, India may also have some interest since more Indian MNCs mocing abroad
○ Mode 4 

• Presence of natural persons who are service providers– which covers services provided by a service supplier of
one country through the presence of natural persons in the territory of any other country.
• E.g. Infosys or TCS sending its engineers for onsite work in US/Europe or Australia. Here again it’s in India’s
interest to push for liberalization.
• In 2012, India dragged the US to the World Trade Organization’s (WTO’s) dispute settlement body (DSB) over an
increase in the professional visa fee (H1B/L1). 
• Other relates issues- Totalisation agreement, Brain Drain, Remittance
• India wants TFS TFA extended to services sector especially for Mode 1, 2 and Mode 4

○ In particular, India has an OFFENSIVE INTEREST wrt Mode 1 and Mode 4


○ India recently submitted a draft TFS in this regard

• Basic idea - Facilitate Trade in services by Single window clearance , Provisions for transparency, Streamlining
Procedures
• Specific Points - Portability of social Security contribution ( Totalisation agreement), facilitating movement of skilled
workers ( Mode 4) , Boosting Insurance coverage to medical tourism
• Also provides room for S&D treatement to LDCs
○ Opposition - West opposed especially to immigration issue - Mode 4 ; Africa not enthusiastic ( Service deficit) ; PAKISTAN
opposed ( again highlights Pak is only a state of mind)

• Another - similar pact Trade In Services- TISA in negotiation led by US - Multilateral - India not a part

• Ratchet effect applies

○ Commitments can't be rolled back


○ Subsequent must be at least as good
○ As in Paris

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Steps for Services export


○ SEIS
○ GST on Sevices Export - 0

• Many services like Health and Education have 0 GST rates


○ FTA with ASEAN has been extended to Services
○ RCEP push

3. TRIPS
• Trade-Related Aspects of Intellectual Property Rights 
• sets down minimum standards for many forms of intellectual property (IP) regulation as applied to nationals of other WTO
Members.
• Replaced the Previous Paris Convention
• It remains an issue between Developed and developing countries.
(a) Why is IPR becoming more important?
1. Increasing dominance of new knowledge economy
2. exponential growth of scientific knowledge - medicines, high tech products
3. Incentivising long term investment in R&D which leads to innovation
4. Increasing demand for protection of various kinds of innovations, and counter demand for access to already protected one
5. address complexities linked to IP in traditional knowledge, community knowledge and animate objects
Why do we need TRIPS
• Developed Countries complain of Shortening Product Cycle That is hurting the desire to engage in new R&D
• Non discriminations, and all 5principles of WTO
(e) What are these principles ?
1. Balance -
1. Balance between private rights (incentives to create) & public interest (ability to use or access the creation)
1. Public - Compulsory licensing allowed , can refuse to give patents in order to meet health emergencies
2. Balance between short and long term
1. long-term - society benefits (due to incentives from IPR) from creation & innovation
2. Short-term - imposes social costs,
2. Technology transfer - contribute to technical innovation & transfer of technology
3. Equal treatment -
1. National treatment
2. Most-favoured-nation treatment
4. Respects diversity - different legal system of different countries & their ways of implementation of IPR but they should
meet agreement's minimum standards
5. Same minimum standards to every one

• Provisions

Coverage • Copyrights, Trademarks, Industrial Designs, Patents (including new varieties of plants),
Geographical Indications etc. -
• generally, these can just be covered under the ambit of ‘patents for innovations’
• both products and processes

minimum 20 years
duration of

Pharmaceutical to be protected against unfair commercial use ( Doesn't talk about C


test data

Protection to ○ Doha

Developing

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Countries • Compulsory Licensing


• Protection against Evergreening
○ Bolar provision

• Allows firms to get marketing approval of a patented product of another firm, before the
expiry of the patent. This allows, these firms to make the Generic Equivalents as soon as the
Patent Expires
○ Encourages transfer of tech and financial assistance from developed to developing in case of
health emergency - Section 7 and 8
○ Differential time period to comply with the law

• Countries given time till 2000 to reform laws. However, since India did not provide
patents to pharmaceuticals and to processes, India provided a leeway till 2005

• Indian

○ Indian Patents Act , 1970 did not allow patents in pharma


○ Was modified under Indian Patents (Amendment) Act, 2005
○ 20 years of licensing

• Earlier 14 years that too for Process Patent


○ Patent extended to food, mediicnes, agro chemicals , etc

• Almost all sectors now covered except for Plant Varieties


○ patent on life forms (microorganisms)

• but conditions attached


○ IPAB set ups
○ rationalised & reduced timelines for processing of patent applications
○ Sui Generis ( One of a kind) system granting both farmers and Breeder the right for seeds under Protection of Plant
Varieties and Farmers Rights Act \, 2001
○ Limited Compusory licensing only under conditions of extreme nationa lurgency ( Section 84)
○ provisions introduced like Section 3(d) which check against evergreening - Need reaffirmed in Nairobi
○ Other Acts

• GI Act , 1999
• Semiconductor Design Act , 2000
• Competition Act, 2002
• Sui Generis Seeds Act
• TKDL - To ensure that Traditional Knowledges are not patented by other firms

TRIPS, biodiversity, traditional knowledge, plants & life forms


○ They form a three merged agenda issues and come under Doha Development Agenda
• Animal & Plants - patentability/non-patentability of plant & animal inventions & protection of plant varieties
• TRIPS & CBD - relationship between TRIPS & CBD
• Traditional Knowledge - protection of trad. knowledge & folklore
○ So what are the points of agreements?
• need to avoid inappropriate patenting - patent claim where invention is not new or does not involve inventive step
• avoid loosely called biopiracy - unauthorised use of genetic resources or traditional knowledge
○ Well, then what is disagreement is on?
          ways to achieve these objectives
i. [IND & BRA] amend the TRIPS agreement so that patent applicants are required to disclose the origin of the genetic
resources or traditional knowledge usedand should provide 
1. evidence of 'prior informed consent' 
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2. evidence of fair & equitable benefit distribution 
ii. contracts with whoever is considerd to be rightful owner through creating a national legislation & contractual
arrangement & databases that patent examiners can use to avoid bad patenting
iii. some countries oppose patenting all life forms outright
○ Different stand on disclosures of diff. countries - 
i. Disclosures through TRIPS amendment - BRA, IND 
ii. Disclosure through WIPO & not TRIPS - SUI
iii. Disclosure but outside patent law - EU 
iv. Use of national legislation, including contracts rather than a obligatory disclosure 
Current situation in India - acess to genetic resources & subsequent benefit sharing is regulated by Biological Diversity Act,
2000 and it provides for conservation of biological diversity, sustainable use of its component, fair & equitable benefit
sharing

a. Non-Violation complaints 
• WTO agreement allow countries to bring cases if another country's action or specific situation have deprived them of
an expected benefit even if no violation of agreement 
i. Different opinion on whether non-violation cases are feasible in intellectual property. 
Current situation - temporary restraint on bringing non-violation complaints. 


Despite enforcement and judicial hurdles, the outcomes of stronger IPRs in India have mostly been beneficial:

• Positves

○ The amount of R&D activity in India has increased since TRIPS. Stronger IPR has spurred Indian companies to invest in
R&D and encouraged multinational corporations to outsource more R&D work to India
○ Growth - ISB paper
• Patent 10% since 1995, and by about 12% from 2005 onwards-
• number of trademark applications increased from 10% growth to 17% as compared to 2005 onwards
○ It looks like under TRIPS, getting a patent issued has got tougher, but once granted, the patent is seen as a mark of
quality and is valued higher as compared to before
• (Several commentators seem to be saying that patent applications grew ‘dramatically’; see what line to take here)
○ Pharma  
• Direction of pHarma trade has changed
• India now focussing more on the western markets
• For the first time in years, the industry was challenged, and consequently had to make investments in Drug
Discovery Programmes, greater capacity addition in production of generic drugs, organized efforts to
manufacture patented drugs under license, and efforts to get deals for marketing patented drugs to the Indian
market

• All of this has led to greater dynamism in the industry

• Due to India’s considered stance, it’s pharmaceutical industry is still growing at a strong 15% p.a. rate same as
between 1970- 1995

• At same time, as denial of evergreening licensing to Gilivec ( 2013) shows, India has also used the exemptions
provided under the act to fullest extent and is acting as a role model ( Section 3(d) of Indian Patents Act -
need to show an incrementla change in efficacuy to obtain patent protection ). Similalry, India allowed for
compulsory licensing of medicine by Bayer

• Pre-TRIPS, Indian firms has started exporting large amounts of drugs to LDCs; post-TRIPS, the orientation is changing
towards developed countries

• Criticism of TRIPS
○ Patent litigations have increased three-fold since 1995
• The courts are also grappling with how to balance the pro-innovation and anti-competitive effects of IPR
• Patent cases pending = 50k in 2005 has risen to 2.5 lakh now
○ Panagariya -
• IP protection not in the core mandate of WTO which is instead of Trade liberaliation
• Leads to larger Patent protection timelines and escalating costs
○ Studies also shpw that the Price Effect is not limited to the patented products but extends to other products as well
○ Wealth concentration effect - to developed countries
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○ Public Health
• Out of Pocket Expenditures
• Counter
• Bibek Debroy - only 10% of WHO essential drugs covered under it
• Leeways like against Evrgreening, compulsory licensing exist
○ Limited Tech Transfer
○ Farmers age old practise
• Counter - Sui Generis
1. GI - Geographical Indicators -
○ Two issues discussed under Doha mandate - called GI EXTENSION
i. creation of a multilateral GI register for wines & spirits 
1. India wants this register to be extended for all products 
ii. extending higher level of protection beyond wines & spirits (protection of names from misuse) - to remove disparity
between two types of GI - 
1. India is suppporting this through a group called Friends of GI which contains EU, SUI, BUL, Hun, SL  
• Counter - India has TKDL
○ UN - Human rights bigger than IP rights

• However, now U.S. and Europe remain unhappy about current strict terms of patent allowed by TRIPS. Hence, TRIPS Plus
• Trips Plus (TRIPS + )

○ Extra IP protection
○ Since, can't be enforced. Hence, being done through individual FTAs that US, EU signing
○ Provisions like

• Patents for > 20 years


• Restricting compulsory licensing and Evergreenign restrictions
• Limit generic medicines
• DATA Exclusivity

• Information concerning a drug's efficacy is kept confidential for say 5 or 10 years


• If a generic manufacturer wants to register a drug in that country, it is not allowed simply to show that
their product is therapeutically equivalent to the originator product.
•   Instead,
○ it must either sit out the exclusivity period,
○ or take the route of repeating lengthy clinical trials to demonstrate the safety and efficacy of the
drug –
• trials that have already been undertaken. 
• TRIPS only protects from commercial use
○ Even S Korea, Japan are pushing for TRIPS+ in RCEP

4. TRIMS
• Trade-Related Investment Measures (TRIMS)
• What

○ These are rules that applies to the domestic regulations which a country applies o foreign firms investing in the country
• 7 Issues checked under TRIMS

○ such as Domestic content requirements


○ Forced Transfer of Technology
○ Domestic sales requirement
○ Restrictions on use of Forex
○ Employment restrictions

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○ Restrictions on import of Inputs, Intermediaries


○ Discrimination against foreign firms
• Developing countries view

○ Infant Industry Argument, BoP argument


○ And how the provision checks against their industrialisation
○ Want to EXPAND the NEGATIVE LIST OF TRIMS
• Exemptions

○ Negative List
○ Govt Prourement exempted
• India

○ Modified its laws well before the end of the Transition Period and made itself in Conformity with the TRIMS
○ But

• Solar Mission DCR


India’s Solar Mission offers a subsidy of up to Rs 1 crore per MW to solar developers sourcing components from
local manufacturers. It also stipulates that 10% of the solar capacity target of 100,000 MW by 2022 should be
built with domestically manufactured solar modules.

How India defends its move?

• India principally relies on the ‘government procurement’ justification, which permits countries to
deviate from their national treatment obligation provided that the measure was related to “the
procurement by governmental agencies of products purchased for governmental purposes and not with a
view to commercial resale
• India also argued that the measure was justified under the general exceptions since it was necessary to
secure compliance with its domestic and international law obligations relating to ecologically sustainable
development and climate change.
• Besides, it is also being said that only a small portion of demand can be met by India, leaving still a
substantial market for foreign component makers.
○ India has a manufacturing capacity of solar cells worth only 1500 MW
• At least 9 US states have a similar type of measure
• Cheap imported make up 90% of the solar cells & are being Dumped
○ 70% from China
• Hurts sustainable fight agianst climate change
○ Greater damage to environment in building solar cells in one place and then transporting all the way
to another
• KPMG report says India could save 40 billion dollars by 2030 by manufacturing at home

• National Procurement Policy, 2017


• In some sectors, FDI is contingent upon Domestic Procurement from MSMEs ( eg Retai; Trade), although such
restrictions are declining
• In 2002, India was dragged to WTO regarding the Domestic Procurement in Autonomiles sector
• Pro / Con

○ Write that of FDI and MNC


○ Also focus on the Ancilliary Industries and the Multiplier Effect

5. AOA - AGRiCULTURE and WTO - Direct Part of Syllabus

• Agreement on agriculture was concluded in 1994, and


• Aim- to remove trade barriers and to promote transparent market access and integration of global markets.

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• Criticism

○ Agreement is highly complicated and controversial


○ it is often criticized as a tool in hands of developed countries to exploit weak countries
• . Negotiations are still going on for some of its aspects.

○ TBT, SPS
• Agreement on agriculture stands on 3 pillars viz

○ Providing Market Access


○ Reducing Domestic Support
○ Containing Export Subsidies.

Domestic Support 
It refers to subsidies such guaranteed Minimum Price or Input subsidies which are direct and product specific. Under this,
Subsidies are categorized into 3 boxes –
a) Green Box –
• Subsidies which are no or least market distorting includes measures  such as income-support payments (decoupled income
support), safety – net programs, payments under environmental programs, and agricultural R&D subsidies. It is applied to
farminng in general & not to any particular crop, hence not distorting
• US has exploited this opportunity to fullest by decoupling subsidies from outputs and as of now green box subsidies are about
90% of its total subsidies. It was easy for USA because it doesn’t have concern for food security. Further, it has prosperous agro
economy, and farmers can better respond to markets and shift to other crops.
• But in India, domestic support regime provides livelihood guarantee to farmers and also ensures food security and sufficiency.
For this MSP regime tries to promote production of particular crop in demand. And this makes decoupling Support with
output very complicated. 
• Regressive

○ US - Green Box subsidy = 13% of its Agri GDP in 1995


○ India = 2.5%

b) Blue Box –
• Only ‘Production limiting Subsidies’ under this are allowed.
• They cover payments based on acreage, yield, or number of livestock in a base year.
•  ‘Targets price’ are allowed to be fixed by government and if ‘market prices’ are lower, then farmer will be compensated
with difference between target prices and market prices in cash. This cash shall not be invested by farmer in expansion of
production.

○ Price deficiency mechanism


• Loophole

○ no limit on target prices that can be set


○ and those are often set far above the market prices deliberately.
○ EU is active in this

c) Amber Box –
• Those subsidies which are trade distorting and need to be curbed.
• based on a formula called the “Aggregate Measure of Support” (AMS).

○ AMS= Diffeence betwenn aquisition price and the ERP (External Reference Price or local mandi price )
○ The more, teh more the state support and more the distortion

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• It required member countries to report their total AMS for the period between 1986 and 1988, bind it, and reduce it according
to an agreed upon schedule.

○ Developed countries agreed to reduce these figures by 20% over 6 years


○ Developing countries agreed to make 13% cuts over 10 years.
○ Least – developed countries do not need to make any cuts.
• Loophole

○ bind to levels of 1996-1998,


○ . At that time subsidies which latter came under ‘Amber Box’ were historically high in western countries.
○ In developing countries, including India prices were very limited during this time - Biswajit Dhar
○ It is only now under pressure of Inflation in prices of agricultural Inputs, and wide differences between market prices and
Minimum support Price, subsidies have grown to this level.
• De-Minimis provision

○ developed countries are allowed to maintain trade distorting subsidies or ‘Amber box’ subsidies (AMS) to level of 5% of
total value of agricultural output.
○ For developing countries this figure was 10%.
○ So far India’s subsidies are below this limit, but it is growing consistently.

• This is because MSP are always revised upward whereas Market Prices have fluctuating trends.
• In recent times when crash in international market prices of many crops is seen, government doesn’t have much
option to reduce MSP drastically. By this analogy India’s amber box subsidies are likely to cross 10% level allowed
by de Minimis provision.
○ De Minimis and NFSA

• Estimated govt procurment of 60 million tonnes or 30% of the output


• Since, MSP > Market Price. Hence, AMS is present
• The AMS would exceed the 10% de minimis support
• The ERP is fixed at 1986-87 prices

• At 3.5k Rs per metric tonne for both rice and wheat


• But, the base year in general had an exceptionally lower price
• It fails to count in the high inflation in developing countries

• Although AoA has a provision to consider inflation


• US says members can't get away easily and that a committee will decide what is "due consideration"
• Although fixing price in rupees has meant that it has failed to account for inflation changes which can be
measured had dollar been there (depreciation, real exchane rate )

• Narayanan (2014) With dollar based exchange rate even with NFSA, AMS would be within the de minimis
limit

S&D Box
• Special and differential treatment
• To LDCs
• Duty free and quota free access

Bali Summit, Trade facilitation and Peace Clause


 (See Bali Ministerial Meet in next section)

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2. Market Access ( We are studying about agriculture )


• Includes
1. tariffs reduction (like custom duties) by individual countries be cut progressively to allow free trade.
2. Tarrification
i. Or reduction of NTTBs like Quotas
ii.  It also required countries to remove non-tariff barriers and convert them to Tariff duties.
3. Single Approach Every country except the LDCs have to contribute by opening their market

• Exempptions
○ Every country allowed to maintain a list of SPECIAL products ( SP)
• But, improvements should be seen in this sensitive list as well
○ Exemptions to LDC
○ SSM
• India has agreed to this agreement and substantially reduced tariffs. Only goods which are exempted by the agreement
are kept under control.
• Also, India managed to secure the exceptions under SSM
• If India is able to diversify its production and add value by food processing, then this is a win-win deal for India. A number of
commodities are exported to West and low tariffs in west will benefit Indian suppliers.
• Impact for India

○ Positive -

• India 20 billion $ of agri exports and thus can possibly help India more in future
○ Negative

• Abhiji Sen et al - The international Price variations are higher than the domestic variation in price and can lend
greater instability to the Indian agriculture
• General issues wrt Imp[ort and Competition
• Hence, SSM mechanism becomes crucial
Special Safeguard Mechanism
A Special Safeguard Mechanism (SSM) would allow developing countries to impose additional (temporary)
safeguard duties in the event of an abnormal surge in imports or the entry of unusually cheap imports. 
 G33 bloc of developing countries, a major SSM proponent, has argued that SSM is quite important in a scenario
in which west has significant powers to subsidize their production and in turn, exports. 

1. Nairobi -Special safeguard mechanism


1. On agriculture imports
2. Raise tariffs if price falls
3. India's argument- Developed countries have used it in some form or other.
4. India actively pursuing allowing developing countries to use it
5. Has been approved in principle during Nairobi declaration

3. Export Subsidy:
• These can be in form of subsidy on inputs of agriculture, making export cheaper or can be other incentives for exports such as
import duty remission etc. These can result in dumping of
• These subsidies are also aligned to 1986-1990 levels, when export subsidies by developed countries was substantially higher
and Developing countries almost had no export subsidies that time.
• Export subsidies: Total export subsidies were to be cut by 36% in 6 years by DCs and 24% in 10 years by DingCs.
• But USA is dodging this provision by its Export credit guarantee program. In this, USA gov. gives subsidized credit to purchaser
of US agricultural products, which are to be paid back in long periods. This is generally done for Food Aid programs, such as
(Public Law-480) under which food aid is send massively to under developed countries. This results in perpetual dependence
on foreign grain in recipient countries and destroys their domestic agriculture. So this is equally trade distorting subsidy,
which is not currently under ambit of WTO’s AOA.

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• INDIA
○ Zero export subsidies in 1986-90 and it was counted as the base- period 
○ So India was unable to resort to export subsidies in future on the other hand US & EU who supplies huge export subsidies will be
able to provide huge export subsidies even after meeting reduction commitments. 
○ India benefited from S&D measure allowed under AoA - internal transport, freight charges on export shipments, handling,
upgrading and processing costs related to export - which were exempted from reduction commitments 

Other agreements related to Agri


• TBT
• SPS
○ Both of the above are still under negotiation
• TRIPS
○ IPR protection for Plant Varieities
○ India adopted the concept and passed the Protection of Plant Varieties and Farmers Rights Act, 2001
○ However to safeguard the interest of farmers, India opted for Sui Generis System
• Of its own kind
• And allows the farmers to improve and adapt their seeds and make it more successful according to the local
conditions . Similarly, can use, reuse seeds
• But, farmer can’t sell such seeds

Way out for India


• Press for redifinition of AMS = Total subsidies and not just Trade Distorting subsidies
• Press for a DEVELOPMENT BOX outside of Amber Box
• Use SSM
• Need to convert Fiscal Expenditure from Subsidy to Investment
○ Benefit
• Green Box
• Gulati and Fan - 3 times more effective
• Use India's Offensive Interests as a bargaining tool for Defensive Interests

Some issue s
Current Status 
• US & EU - re-orienting the farm support programmes by relying mainly on 'green box' subsidies 
• US - SP designation should be limited to no more than 5 tariff lines 
• G-20 - Seek parallelism between subsidies and tariffs progress on tariff-reduction possible only if subsidy-granting countries rein
in their subsidies
• India
• Green Box Subsidies
• Development Box

6) Multifibre Arrangement and Agreement on Textiles and Clothing


The MFA was introduced in 1974 as a short-term measure intended to allow developed countries to adjust to imports from the
developing world. Developing countries and countries without a welfare state] have an absolute advantage in textile production
because it is labor-intensive and they have low labor costs.

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The Arrangement was not negative for all developing countries. For example, the European Union (EU) imposed no restrictions or
duties on imports from the emerging countries, such as Bangladesh, leading to a massive expansion of the industry there.

7. Sanitary and Phyto- Sanitary Measures SPS


The Agreement sets out the basic rules for food safety and animal and plant health standards. It allows countries to set their own
standards. But it also says regulations must be based on science. They should be applied only to the extent necessary to protect
human, animal or plant life or health. And they should not arbitrarily or unjustifiably discriminate between countries where identical
or similar conditions prevail. Was imposed on Indian Alphonso exports to Europe

Main Ministerial Meets


1. Singapore ministerial meet and ‘Singapore issues’ – 1996
The ‘Singapore issues’ term refers to areas of - Pnemonic- C FIT ( u know of what ;) )

trade and investment; at having a multilateral agreement would be a serious impingement on the sovereign rights of
countries.

trade and competition there is no clarity on whether these would include export cartels. The Organisation of Petroleum
1. policy; Exporting Countries (OPEC) i

trade facilitation; and e idea is unexceptionable, developing countries may not have the resources — by way of
technology, or otherwise — to bring their procedures in line

transparency in principle is entirely acceptable, there cannot be a universal determination of what constitutes
government procurement, transparent procedures

These four issues have collectively come to be known as the Singapore issues in the context of the WTO,

2. Doha Ministerial meet and ‘Doha Development Agenda’ – 2001 - DDA


• WRITE all the issues currently being deliberated - Because in a way all you coume under DDA

a. Agriculture –
• The United States is being asked for reducing trade-distorting domestic support for agriculture.
• The United States is insisting that the EU and the developing countries agree to make more substantial reductions in tariffs and
to limit the number of import-sensitive and ‘special products’ (aoa) that would be exempt from cuts.

○  Import-sensitive products are of most concern to developed countries like the European Union, while developing countries
are concerned with special products – those exempt from both tariff cuts and subsidy reductions because of development,
food security, or livelihood considerations.

b. TRIPS
• Medicines - Evergreening , Compulsory Licensing, Imports during crises
• GI - Wines and Spirits
• Biotech and Traditional Knowledge
• Issue related to Trade TRIPS proved a major debating issued
• The issue involves the balance of interests between the pharmaceutical companies in developed countries that held patents on
medicines and the public health needs in developing countries.

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• member governments approved a decision that offered an interim waiver under the TRIPS Agreement allowing a member
country to export pharmaceutical products made under compulsory licenses to least-developed and certain other members. It
also allows members to not to allow evergreening of Patents.
• Also developing nations can export to other countries in case of health crisis

c. NAMA

d. Also write about Singapore Issues vs July package

e.  Special and differential treatment (SDT) 


• members agreed that Developing and Least developed countries will continue to be eligible for a favorable treatment.
• However, of late developed countries are dragging their feet here too. They now claim that big developing countries like India,
China, Brazil and South Africa are unreasonable in their demand and only least developed countries are rightful claimant of
differential treatment.

f. . Implementation issue: 
• Developing countries claim that they have had problems with the implementation of the agreements reached in the
earlier Uruguay Round because of limited capacity or lack of technical assistance.
• They also claim that they have not realized certain benefits that they expected from the Round, such as increased access for
their textiles and apparel in developed-country markets. They seek a clarification of language relating to their interests in
existing agreements.

g. West wants to do away with Doha round and move to new issues. India & G33 is against any new inception s without
delivering the developing countries their due

3. Cancun Ministerial Meet – Abandonment of Singapore issues – 2003


Cancun was aimed at forging agreements on the Doha round. The G20 developing nations (led by India,
China, Brazil, ASEAN led by the Philippines) resisted demands for agreements on the ‘Singapore issues’, and called for an
end to agricultural subsidies (most important contention) within the EU and the US.

The talks broke down without progress, and the collapse of the talks was seen to be a major victory for the developing
countries, who were now seen to have the confidence and cohesion to reject a deal that they viewed as unfavorable. This
was reflected in the new G20 trade block, led by the G4 (India, China, Brazil, South Africa)

4. Geneva Talks – 2004 – Here Singapore issues were dropped from Doha Agenda. Further it was agree to proceed in areas of
agriculture, Non- Agricultural market access, Services and Trade facilitation. - July Package
a. JULY PACKAGE
i. After the spectacular failure of the Cancun ministerial, In Geneva in 2004, EU accepted the elimination of
agricultural subsidies by a ‘date certain’
ii. Singapore issues were moved off the Doha agenda
iii. Developing countries accepted trade facilitation (custom duties etc.) as a subject to be negotiated
iv. After intense negotiations, members reached what has come to be known as the ‘Framework Agreement’ or
the ‘July Package’, which covers
a. agriculture,
b. non-agricultural market access - NAMA ,
c. services, and
d. trade facilitation

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NAMA
○ Market Access for all Non Agricultural Product
○ Negotiations

• Working on a formula for Tariff reduction


• Binding coverage - % of total products, on which Ceiling limit of Tariff would be applied
○ Difference from Uruguay

• Uruguay focussed on Average Tariff reductions , NAMA focusses on reductions for all product lines covered under it
• Led to reduction in average tariff in developed countries from about 6% to 4%
○ Covers 90% of the Merchandise rade today
○ India' Stance

• Formula - India desired a Simple Percentage Cut Formula that would have led to lesser Tariff reductions. However,
under Pressure, SWISS Formula was accepted that led to higher cuts in tariff
• India has Defensive Interest ( vs Offensive Interest in GATS) in NAMA in general

• Given that it would expose our indigenous sector, most of which are in the informal sector
• Also, since India provides a considerable protection now, India would have to undergo substantial tariff cuts
• But sectos like Footwear, Textiles are of interest to India as we enjoy comparative advantage in these sectors
• India has emphasised removal of NTTBs . But, progress has been weak
• Gains of India

• Certain Sensitive Products have been kept out of the list


○ Doha Declaration on NAMA

• Tariff reduction
• Comprehensive Product coverage
• Special needs and considerations of LDCs to be taken into account
• Less than full reciprocity by the LDCs and Developing countries

5. the Hong Kong 2005 ministerial?


Answer:
This was considered vital if the four-year-old Doha Development Round negotiations were to move forward sufficiently.
Key achievements:
○ Countries agreed to phase out all their agricultural export subsidies by the end of 2013, and terminate any
cotton export subsidies by the end of 2006 - Not followed- Nairobi - 2017
○ Further concessions to developing countries included an agreement to introduce duty-free, tariff-free access for
goods from the Least Developed Countries, following the ‘Everything but Arms’ initiative of the European Union 
○ That is, industrialized countries agreed, in principle, to open up their markets for developing countries

6. Bali Ministerial Meet and ‘Bali Package – Trade Facilitation and Peace Clause’ – 2013
• In Bali Trade facilitation Agreement (TFA) was agreed to
• for adjustments to limits under Agreement on Agriculture (de minimis provisions);

○ a ‘Peace clause’ was agreed at.


○ Peace clause gave countries 4 year times to adjust to the limit and avoid sanctions.
○ But, India had very less backing from developing world, because they were lured by a Special Package
○ After this, in November, India – US reached understanding in which time limit of 4 years was removed and in return Trade
Facilitation was agreed to by India.

7. Latest – Nairobi Ministerial Meet – 2015

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a. See above

Is WTO a friend or foe of India?


• India is one of the prominent members of WTO
• largely seen as leader of developing and under developed world.
• At WTO, decisions are taken by consensus.

○ So there is bleak possibility that anything severely unfavorable to India’s interest can be unilaterally imposed.
• India remains committed to various developmental issues such as Doha Development Agenda, Special Safeguard Mechanism,
Permanent solution of issue of public stock holding etc. 
• Apart from this, Dispute Resolution Mechanism of WTO is highly efficient
• " Big but Poor" dilemma

○ Eco Survey
○ Now that Indian market has become very significant, world expects a reciprocal treatment from India in trade

What is Indo – US’s WTO problem?


• U.S. has severe disliking for India’s position in atleast two spheres – Agriculture and Intellectual Property.
• Agriculture

○ AoA is heavily tilted in favor of developed world.


○ For balancing this India as part of Group of developing and least developed nations (G-33) proposed amendment to AOA
in 2008.
○ Current quest of G-33, toward achieving permanent solution is follow up story of this proposal only.
• Intellectual Property

○ Further, as part of Doha Development Agenda, developing countries managed to tweak ‘Agreement on Trade related
aspects of Intellectual Property’ (TRIPS) in favor of developing countries by allowing compulsory licensing in certain
circumstances.
○ First compulsory license was granted by Indian Patent Office to NATCO for ‘nexavar’ drug produced originally by German
firm Bayer AG.
○ US not only want this concept to be done away with, it also wants a liberal IPR regime which allows evergreening of
patents.
○ Indian Patent Act as amended in 2005 allows protection of both product and process, but it allows patent only when
there is enhanced efficacy of the substance.
○ . Since India’s course is not violative of TRIPS, question of India being challenged in WTO doesn’t arise
• Domestic Content Requirement in Solar Panel

○ India has prescribed ‘domestic content requirement’ for procurement of Solar cells/panels for its target of installing 100
GW of solar power by 2022.
○ Under this some (about 5%) procurement was reserved to be bought from Indian vendors, to promote indigenous industry.
○ US alleged that this is against principles of Non Discrimination and National Treatment.

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• Earlier this year, WTO had ruled against the Indian ban on import of poultry meat, eggs and live pigs from the US, stating that it
was not consistent with international norms.
• Visa problem

○ Recently, U.S. has double the fees for certain categories of H1B and L1 visas to $4,000 and $4,500 respectively. H1B and
L1 visas are temporary work visas for skilled professionals. India is the largest user of H1B visas (67.4 per cent of the total
161,369 H1B visas issued in FY14 went to Indians) and is also among the largest users of L1 visas (Indians received 28.2
per cent of the 71,513 L1 visas issued in FY14). India is likely to pursue bilateral discussions over the issue, but as last
resort it may head to WTO if nothing comes out. 
○ Under Mode 4 of GATS

Why India stayed out of Information Technology Agreement-II in Nairobi?                 


• As many as 53 WTO members agreed in Nairobi to a seven-year time frame to scrap all tariffs on 201 IT products
• touted to drive down prices of items ranging from video cameras to semi-conductors
• Indian opposition

○ deal would benefit only those countries (notably the US, China, Japan and Korea) and not India.
○ This Information Technology Agreement is being called ITA-II.
○ History

• Original ITA was signed in 1996.


• Current dismal state of Indian electronic industry is often attributed to ITA of 1996.
• This compelled India to keep certain electronic items tariff free which gave us infamous ‘inverted duty structure’.
○ It is expected that by 2020 India will consume electronic items worth $ 400 billion. As per current situation, out of this it is
likely to import atleast goods worth $300 billion. Electronic hardware manufacturing is one of the main components of
‘Make in India’ and ‘Digital India’ program

How India’s stand differs when it comes to services?


• India has Offensive iterest in Mode 1, Mode 2 and Mode 4 , essp in Mode 1 and Mode 4
• India demandin more liberal commitments on the part of its trading partners for cross-border supply of services, including the
movement of ‘natural persons’ (human beings) to developed countries, or what is termed as Mode 4 for the supply of services.
• With respect to Mode 2, which requires consumption of services abroad, India has an offensive interest.
• In sharp contrast, the interest of the EU and the US is more in Mode 3 of supply, which requires the establishment of a
commercial presence in developing countries. Accordingly, requests for more liberal policies on foreign direct investment in
sectors like insurance have been received. These developed countries are lukewarm to demands for a more liberal regime for
the movement of natural persons.
• As far as delivery of services through commercial presence (Mode 3) is concerned, there is an increasing trend of Indian
companies acquiring assets and opening businesses in foreign markets in sectors such as pharmaceuticals, IT, non-conventional
energy, etc. This is further evidenced by the increase in Outward Foreign Direct Investment. India may, therefore, have some
interest in seeking liberalisation in Mode 3, although it may need to strike a balance
• An important issue relating to the delivery of services and liberalisation is domestic regulatory reforms. Appropriate domestic
regulations are necessary to prevent market failure as well as to address issues like quality control, accreditation and
equivalence, effective registration and certification systems, revenue sharing, etc, for protecting and informing consumers. In
addition, regulatory frameworks can also advance transparency.

 Should India provide market access in Higher Education?

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• In GATS, Mode 3 classification covers services provided by a foreign commercial establishment through physical presence in
relevant country. Accordingly, western countries are pushing hard to get unrestricted access to Indian education sector under
this mode and again India is defensive.
• Coverage of higher education in GATS will encourage treatment of education as a tradeable commodity. Not for Profit
currently
• It is possible that any agreement will curb power of Indian government to provide subsidy and support to the sector. Further, it
is likely to affect reservation policy of India.
• Further, foreign university will consume scarce educational human resource available in India, leaving less competitive
domestic and public institution starved of good teachers.
• It is also feared that this will speed up process brain drain from India as foreign universities are likely to design courses under
ambit of their parent institution.   
• Pro

○ Gross enrolment in higher education is just 23% while government aims to increase it to 30%
○ . Overtime due to competition, students will get better educational alternatives and at cheaper costs.
• However, for this to happen, government has to draw certain redlines while negotiating on the issues of support to public
institutions, scholarship to weaker sections and on its reservation policy.

Conclusion

India needs to upscale its diplomatic capability. In recent Nairobi meet, it was seen that while developed countries spoke in unison,
there was no such unity in developing countries. Brazil, a prominent member of WTO, has already broken away from G-20/33 group
and has aligned itself close to position held by developed countries; thanks to its globally competitive agricultural sector. India made
a serious effort last year at India- Africa summit to arrive at common agenda for WTO and was largely successful. However, there
needs to be larger combined effort in bringing on the common platform of developing nations in all continents. U.S. has been already
doing it for several years and that’s partly why it remains most assertive and subtle power in any negotiation.           

From <http://www.insightsonindia.com/2016/01/20/india-and-wto-detailed-analysis-of-all-related-issues-and-concepts/>

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FTA, RTAs and MONETARY UNION


03 June 2017 21:48

FTA
• Free trade agreement
• India has signed 11 FTAs as with Asean and as safta
○ Negotiating 17 more eg EU
○ And 5 limited preferential trade agreement (PTA) signed as with Mercosur
○ Only 2 have been outside Asia - Chile and Mercosur
• Spaghetti bowl situation
○ Degree of integration and product coverage is different for different FTAs creating a distortion

• Impact on India
○ Economic Survey 2015-16
• Region wise
• ASEAN
• most beneficial - 33% rise in exports and 80% in imports
• On a whole worsened trade balance though
• Korea - Insignificant impact of FTA
• Japan -Negative impact on exports while 0 impact on imports
• Net rate rose
• 10% tarriff reduction via FTA causes trade to rise by 3% on average
• Most impact on ASEAN trade
• Commodities maximum impact
• Import - Metals
• Export - Apparels
• A general worsening of trade balance because India traditionally has a very high custom
duty

RCEP
• 19th Round of Talks were held in India - Accusations of negotiations going too slow

Advantages
• 40% of World's Economy, 50% of population
• It is going to be world’s largest trading bloc accounting for one third of the world’s GDP.
Moreover it will include Asia’s top three economies- China, Japan and India. Hence it
was great potential for trade and investments.
• Benefits of Trade , Reduces Trade Diversion due to TPP
• Since India is not a part of the two of the three major regional trade agreements- TPP and
Trans Atlantic Trade and Investment Partnership TTIP. This will reduce the potential
negative effects of such exclusion.
• Benefits of ASEAN FTA
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• Economic Survey
• Reduces the intensity of Spaghetti Bowl Situation
• ‘Spaghetti bowl’ situation due to multiple FTAs and trade deals with members of RCEP.
This will streamline the rules and will allow effective utilisation of trade agreements.
• Issues in WTO
• Stalled
• Other interests of India are- removal of technical barriers like sanitary and phytosanitary
measures, and trade in pharmaceuticals and textiles.
• Juggernaut Effect
• Services:
• India MAY get market access to the products in which it enjoys comparative advantage
like IT, IT-enabled services, professional services, healthcare, and education services etc.
• Geopolitical
• Complements Act east Policy of India. It will impact economic and strategic relations with
East Asia.

Challenges / Disadvantages
• All the Spaghetti Bowl
• points of Bhagwati
• Trade Imbalance
• India’s tariff barriers are much higher than the other members. Hence India can end up
giving up a lot for nothing substantial in return.
• Already our Trade Deficit with RCEP nations is 97 billion $ ( 2015)
• Trade balance will China may become more unfavourable.India- China trade deficit is
around $50 billion.
• India may face dumping of Chinese products especially steel sector
• Issues created due to ASEAN FTA
• The RCEP countries especially ASEAN countries are Export Oriented Economies and have
highh comparative advatage
• Offensive Interests of Australia and New Zealand in sectirs like Dairy, Wines,
and will increase in imports of agricultural products into India.
• Lack of Convergence on Product Coverage
• RCEP countries are insisting for 92% product line coverage
• India does not want to extent beyond 80%
• Similarly, India had to give up a 3 tiered formula for rate of duties after opposition from RCEP
• Poor progress on services-
• India’s main interest. There is no agreement
that trade deal will be signed as a single undertaking (that includes goods, services and in
vestment) which India has insisted on
• TRIPS + Issues
• IPR: Japan and South Kprea are pushing for stronger IPR standards , Labour, Environemnt
like such as patent term extension,
data exclusivity and lowering of patentability criteria.
• It may undermine Make in India
• Doctors without Borders has warned that these proposals are threat to India’s status of
‘pharmacy of world'
• Geopolitical
• India and China
• China and ASEAN

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• As economic dependencies on China will raise, China may resort to arm twisting tricks
which may hurt India’ s strategic interests

Preferential trade agreements PTAs


It is a trading bloc that facilitates preferential access (lower tariffs) for certain products from
participating countries
• Proliferation of PTAs since formation of WTO in 1995
• WTO classification of FTAs: The tariff elimination criteria reflected in GATT for FTA compliance is that
FTAs must eliminate tariffs on at least 85% of tariff lines within ten years. The criteria for services
liberalization relies on the coverage of sectors included in the GATS. FTAs that covered five key
sectors of the GATS are considered comprehensive. Those with less than five sectors were
categorized as partial, and those without any coverage as “no provision”. FTAs that covered three or
four Singapore issues were regarded as comprehensive, and the remainder as partial or no provision.
• In the mid-1990s, about 75 percent of PTAs were regional; by 2003, this share had
dropped to about 50 percent
• India’s FTAs are a major component of its foreign policy, especially with Asian countries: Sri Lanka,
Afghanistan,Bhutan, Nepal, Thailand , Singapore, Korea, Malaysia and Japan, Chile, MERCOSUR.
Regional trade agreements: South Asian Free Trade Agreement and India-
Association of Southeast Asian Nations ASEAN Agreement.
• India has concluded more FTAs in goods vis a vis in services.

Impacts

Positive Negative

Gains from trade • Loss from trade


• Survey 2015-16 applies difference in • Trade balance: Impact of FTAs on imports
difference technique to isolate the impact of has been higher than exports. This may be
FTA on trade and used non FTA countries as due to India’s higher tariffs than member
control group. It founds positive impact on countries and hence greater reduction. Rupa
trade especially with ASEAN since it saw Chanda suggests structural and regulatory
greater tariff reduction. barriers to export growth.
○ Gains are more if reduction in tariffs • Free movement of goods and people leads
is greater and demand and supply is to trans boundary smuggling and trafficking
price responsive and terrorism.
• Competition may harm domestic infant
• Gains due to specialisation industry
• Other cons of competition
• Economies of scale due to enlarged market • Brazil
size.
• Vent for surplus
• Bhagwati & Krueger
○ Promotes Optimal Allocation of
Resources
○ Reduces Rent seeking behaviour
• Encourage economic reforms leading to
economic prosperity
• Generates needed Forex
• Greater consumer choice and competition
among producers. This empowers consumers

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and provides them with more choices at less


prices, increasing their welfare
• Countries develop interdependency and
higher stakes in each other’s economy, which
reduces chances of conflict. In fact greater
trade relations are suggested as a means to
dis-incentivise state sponsored terrorism.
• Encourage transparency and
accountability in policy making, thereby
leading to political stability and
strengthening of democracy

Benefits if PTA is trade creating Disadvantages if trade diverting


• Trade creation i.e. importing previously non • Where trade is diverted from a more efficient
traded items due to high tariff. This leads to country to a less efficient country
specialisation gains by producing commodity • Theories of Second Best
of comparative advantage. • Net Welfare could be negative since it leads to
• Net welfare improvement due to trade trade diversion also from non member states to
creating PTAs. This will lead to increase in member countries. In case of India, empirically
real incomes and in turn greater imports there was no trade diversion from non FTA
from the rest of the world. Hence countries countries.
not part of PTAs also indirectly benefit. • It is discriminatory to non members. Japan’s
• May help to set up Tariff factories automobile industry lost competitiveness to
Mexico in USA due to NAFTA which included
Mexico.
• Non members may retaliate as members gains
at their expenses

• Other
• More bargaining Power Other
• Lesser Administrative Costs • Bhagwati - Termite in Trading System -
Countries less likely to agree to international
trade regime since, it will undermine the little
gains made via RTA
• Administrative complications due to differential
treatment for different countries

Conclusion: Since PTAs lead to greater and not inefficient (trade diversion) trade and WTO negotiations are
not moving towards any conclusion, India should pursue PTAs along with WTO consistent measures like
anti dumping and countervailing duties to respond to circumvention of trade rules.

Free Trade Agreements


FTAs vs WTO: Which one is better?
(a) FTA
1. Easier: Teasy to negotiate things. A small group of countries can sign FTAs easily and independently
of WTO. This also helps as a policy tool, to lock-in trade policy reforms and reduce the chances of
reversal by successive governments. FTAs can have politico-strategic motives as well.
a. In contrast to DDA of WTO
2. They are customized,
3. Juggernaut Effect - FTAs set the right tones for formulation of a world agreement. As the resistance
to openness gradually declines, World Trade agreements can then be taken over
4. More effective in Regional Stability - EU
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5. Gerneral Benefits of Trade

(b) WTO
1. SPHAGETTI BOWL effect - BHAGWATI
a. Due to Proliferation of numerous FTA with varied Degree of integration and product coverage is
different for different FTAs creating a distortion
b. Reasons
i. It leads to the violation of the MFN clause of the WTO, where nations are expected to
extent equitable treatment to all countries
ii. termites in the trading system”. He argues that regional deals make countries less likely
to agree to global tariff cuts, since freer global trade would erode the narrow gains they
have won.
iii. Trade Diversion
1. Theory of Second Best - Viner
2. Loss to the World
iv. Raise costs for both govt and firms
1. Firms - Have to undergo administrative tasks to comply with the Rules of Origin
norms
2. This way it is alos regressive to small firms
3. Govt
a. Difficult to enforce
v. Also Non Equitable
1. In general signed between a developed and a developing nation or a less developing
nations
2. And developed nations end up enjoying greater benefits

Recognizing the rise of PTAs, the WTO has finally taken a step towards rationalizing its approach towards
them. A start has been made with the setting up of the ‘transparency mechanism’, whereby member
countries are bound to disclose details of their PTAs for the WTO’s scrutiny. However, while a step in the
right direction, this mechanism for now simply remains an information disclosure mechanism, and nothing
else.

TPP (WTO+ framework): It accounts for 40% of GDP and 60% of merchandise trade. 
Benefits of joining
• Banga and Sahu - Just note the name and say significant impacts on Indian trade
○  exports would rise by around US$5 billion annually
○ mports into India would rise by US$10 billion,
○ net deficit in balance of trade of US$5 billion.
• Reduction of trade barriers in services among TPP members will result in growth in India’s
services exports
• Not joining
○ Trade diversion:
• World Bank study

• Member countries GDP to rise by 1-10% due to trade creation by 2030


• India's loss to GDP @ 0.2%

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○ Particularly in sectors like Textiles where countries like Vietnam are our competitors
○ Investment diversion as countries like Vietnam would offer more robust investor protectio
Concerns  (Kumar and Das)- MAKE TABLE
1. Openness of market: TPP economies on average are more open than the Indian economy. The avera
ge applied most favoured nation (MFN) tariff ate in TPP economies is 4.5 per cent.
The service trade restriction index of the World Bank for  India is about 65 in 2008-10, while
TPP economies’ average score is 25.
2. Import competition due to tariff elimination. Indian industries are already facing infrastructural
deficiency and implementation of stringent measures may raise the cost of production
3. SoEs (State owned enterprises): TPP stresses on non-
discriminatory, fair and transparent procurement procedures. Would hurt National Procurement
Policy 2017 It would prevent the government from using SoEs and government procurement
s vehicles for achieving social and economic objectives, including employment generation. It will be a
compromise on the Make in India policy 
4. IPRs: Prices of pharmaceutical products can be expected to rise due to implementation of stringent
IPR agreements and
may lead substantially to elimination of generic drugs from the market. Nobel laureate Joseph Stiglit
z has expressed concern about its worse impact on heath. Implementation of patent
term adjustment rules significantly delays entry of generic medicines and restricts access to afforda
ble medicines. Doctor without Borders
5. Food security: Agreement curtails the flexibility to impose export restrictions
on food, it will jeopardize India’s  food security
6. Labour Laws : It binds the members to laws  related
to minimum wages, hours of work, and occupational health and safety. This will
increase the labour cost in the developing countries.
7. Environment standard in TPP agreement: Provisions address issues of
wildlife trafficking, illegal logging and illegal fishing practices. It puts restrictions on
fisheries subsidies that contribute to overfishing. This is in contradiction
to India’s current policy of subsidizing the fishery industry.
8. Benchmark set by TPP for WTO for future trade pacts is going to impact India whether it joins or
not.

Trans pacific Partnership (TPP)

• 12 nations led by United States.


• Treaty includes both developed and developing nations (like Vietnam, Peru, and Chile).
• Provisions

○ stringent provisions for Labor Standards, and Intellectual Property.


○ Environment Standards (provisions to ckeck against overfishing ) introduced for the 1st time
○ Transparency in govt procurement
○ Further, it gives power to private corporations, to sue member countries for violation of terms of
treaty.
• 40% of GDP and 33% of trade
• Negotiations led by US are underway for a similar treaty with European countries, dubbed as Trans-
Atlantic partnership (TTIP )

○ 50% of the GDP

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On the other hand India and China are participating in and leading negotiations of Regional
Comprehensive Economic partnership (RCEP) Agreement.

Trends in International Trade


1. Increasing share of developing countries: In 1995, when the WTO was created, developing countries
represented less than 30% of the demand for imports of goods while developed economies absorbed
almost 70%. Today, demand from developing economies is 45% of world trade, while developed
economies is 57% (20% is intra-EU).
2. Slower growth in developed countries' trade: While demand for imports from Europe grew by less
than 3% in volume last year, the CIS grew by 17%, followed by Latam at 10% and Asia at 6%. WTO
forecasts for 2012 and 2013 do not modify this picture: imports from developed economies will grow
by less than 2 per cent in volume, while developing and CIS countries’ imports will triple this number
and increase by 6 per cent.
3. Increasing integration of supply chains: This leaves the gross trade figures misleading and hence we
should look at net value added figures. When measured in value-added, China’s trade surplus with
the United States is 40% less than the gross figures. WTO has launched World Input Output Database
(WIOD) project for value added statistics. Value added approach will also help reduce the
protectionist measures.
Raghuram Rajan
Several other reasons, apart from the exchange rate and the weak global economy, that could be
leading to the decline in global trade-
○ First, as countries get more developed, they begin to consume services more (tertiarisation),
which are not generally traded.
○ The second reason was that the trade in capital goods has seen a decline.
○ Third reason was that countries are increasingly pulling inwards. That is, their supply chains are
increasingly being geared towards their own needs rather than the needs of other countries.

Things become more complicated when the global economy includes a small number of economies of
similar size, larger than the small economies from the previous example, but not large enough to dominate
the system alone. That is the scenario the Nobel laureate economist Paul Krugman considered in a 1989
paper on bilateralism, in which he reported that a world consisting of three major trading blocs
constitutes the worst constellation for trade ( USA, EU, China) as a lack of explicit cooperation among
all three would lead to increasing trade barriers.

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• Duty Free Quota Free


• Access to LDCs
• India 1st developing country tod provide it under DFTP (Duty Free trade Preference )

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