JAMIA MILLIA ISLAMIA

FACULTY OF LAW

NAME- SHANTANU AGNIHOTRI

COURSE- B.A. LLB (HONS.)

SEMESTER II (REGULAR)
SUBJECT- ECONOMICS II
STUDENT ID- 201903738
ROLL NO- 57
SUBMITTED TO: Mr. BILAL KHAN
UNIT-1

1. (a) Assume that Anantapur district in Andhra Pradesh has a population of 10, 000
people. Of this, let us suppose that 6500 people reside in cities and towns whereas the
remaining 3500 people live in village areas and are thus considered to be poor. Among this
rural population, suppose 1500 people are above the poverty line.
From the above information, answer the following questions:

(i) what is the headcount ratio of the Anantapur district? Also, give the interpretation of
the answer in the form of statement.
(ii) suppose that the poverty line is estimated to be Rs. 3000 and the average income of all
Below Poverty Line households is set at Rs. 1200, then calculate the Poverty Gap Index.
What does it indicate?

(b) Ms Nicole has spent her life working on writing algorithms in a particular computer
language. However, technology being a fast moving field, that language is now obsolete and
hence so is Ms. Nicole. Her current employer ABC Technologies limited has asked her to
leave. She is being offered new jobs. However, most of them pertain to training as she has
excellent soft skills. The job of an information technology expert that she enjoyed so
thoroughly is nowhere to be found. From the above information, answer the following:

(i) Identify the type of unemployment to be faced by Ms Nicole. How is it different from
other types of unemployment?
(ii) what are the root causes of the identified form of unemployment?

(c) Highlight the role of Health sector in contributing to economic development in India in
maximum of 1500 words i.e. 4 to 5 pages.
ANSWERS

1. (a) (i)
Headcount Ratio: It measures the proportion of poor in the total population.
Total Population= 10,000
Population in cities= 6500
Population in villages= 3500
Number of people below poverty line= 3500 ─ 1500=2000
Headcount ratio = number of people BPL/Total population
=2000/10000 i.e. 1/5
So, the total proportion of people who exist below the poverty line in Anantapur district of
Andhra Pradesh is 1/5. It means averagely there are 5 people above the line and 1 person BPL.

1. (a) (ii)
Poverty Gap Index: It is the difference between poverty line and the average income of all
households living below the poverty line (BPL) expressed as a percentage of poverty line.
Given,
Poverty line(z) =3000
Average income(t) =1200
Poverty gap index=(poverty line–average income)/poverty line
=(3000–1200)/3000
=3/5 or 60%
It shows the intensity of poverty and defines the average poverty gap in the population.

1. (b) (i)
Ms. Nicole was being faced with structural unemployment. It is the form of involuntary
unemployment caused by a mismatch between the skills that workers in the economy can offer.
It is different from other types of unemployment because it doesn’t occur seasonally, cyclically,
and temporarily between jobs.
1. (b) (ii)
The root causes of this unemployment are technology up-gradation and job outsourcing. Other
causes of this unemployment are:

Geographical Immobilities – This occurs when workers are unable to move from areas of high
unemployment to areas with labor shortages. This could occur due to the difficulties of
buying/renting a house. It could also be due to family attachments to their current area. For
example, often there are vacancies in London but unemployment in outlying regions. However, it
is difficult for the unemployed to leave the northeast and find a place to live in London.

Occupational Immobilities - This occurs after changes in the economy, which lead to shifting
demand for skilled labor. For example, if there is a closure of manufacturing firms, workers with
skills for these types of jobs may struggle to relocate to new industries where very different skills
are required (e.g. IT skills, teaching, accountancy). It takes time for people to retrain and older
workers may feel it is too difficult.

1. (c) Highlight the role of Health sector in contributing to economic development in India
in maximum of 1500 words i.e. 4 to 5 pages.

Importance of Health sector in contributing to economic development:

The maxim “Health is Wealth” remains, primarily, an intuitive proposition. To enjoy good
health and longevity is prime to the human experience. Healthy people are more vibrant,
energetic, and have a more positive outlook on life. These characteristics not only translate to a
positive influence on social infrastructure but also affect economic development. Decisions
regarding the allocation of public funds within the health sector and health-related areas must
consider their intrinsic and instrumental value of health. Health is an asset, a component of what
economists define as “human capital”. There’s a well-understood correlation that because
the economy of a country improves, so the health of its citizens improves. What could also
be less obvious is that the opposite is also true – improving the health of a nation’s citizens can
directly end in economic growth because there'll be more people able to conduct effective
activities within the workforce. Health presents a challenge for all nations; in a study by the
Pew research facility, a median of 85% of respondents believe it had been an issue in their
country. Effective public health systems are essential for providing care for the sick, and for
instituting measures that promote wellness and prevent disease. Tobacco, for example, is one
among the greatest scourges we face. In working to combat diseases like lung cancer and heart
disease, we've to fight the causes; there’s a transparent need for educational campaigns and other
mechanisms to discourage people from smoking within the first place. For developed economies,
aging populations place a significant strain on healthcare networks. In developing nations, an
absence of resources or inadequate infrastructure presents separate challenges. When you see the
devastation this disease has wrought upon the region, it’s clear that healthcare systems in
this part of the world were unprepared for the enormous challenge.

In many lower and middle-income countries, infectious diseases are our major focus. HIV/AIDS,
tuberculosis, and malaria take an enormous toll, both in loss of life and reducing the
workforce. The world Bank reports that 50 of the economic growth differentials between
developing and developed nations are attributed to poor health and low life expectancy. The
healthier the citizens of a country, the more effective the workforce; the better the health of their
children, the less births, and hence the less dependents. Vaccinations and preventative strategies
for childhood diseases are of key importance.

The health sector of India encompasses a major reputation and contribution to economic
development. The connection between health and economic growth is dynamic, complex, and
under-appreciated. As one of the components of human capital (along with education), health is
also viewed as an integral input to productivity, like other conventional inputs such as labor and
physical capital.

The government of India has started so many policies to push major public health issues as
well as non-public health issues in response to economic development and to boost health. The
govt of India has improved and still improving the nutrition of India developing health facilities,
developing doctors, clinics, hospitals the ways to decrease air pollution, etc.
Although the connection between longevity and economic growth could also be less clear-cut, an
element that influences these aspects and on which we've more evidence is the quality of
primary medical aid in India. In general, this quality is poor in that medical practitioners often
undertake the bare minimum in terms of effort (care and service). Moreover, there's evidence of
considerable resource waste in both urban settings where there's an over-prescription of
medicines that are not needed and in rural settings where subsidies to public health facilities do
not translate into better care. Furthermore, there's evidence that even providers with little to no
formal training have experience practicing in local areas for considerable periods, and also
the absence of medical infrastructure (including material and drugs) has less of a task to play in
explaining the low quality of health care as opposed to insufficient effort on the a part of medical
providers. Characteristics of the disease burden in India are also influenced by the shortage of
adequate sanitation and waste disposal facilities that promote the spread of germs which
importantly influence the incidence of health hazards like diarrhea.

The Gross national income per capita is seen to show an upward rising trend. The lifespan of the
population is additionally seen to be consistently rising through the late 1960s & 70s and
follows the same pattern till now. The infant mortality rate of the population is seen to be
consistently declining over the years. The Under-five Mortality and the Total Fertility rates also
follow the same pattern and are seen to be declining over the years. The population growth rates
however increase at first up to the mid-1970s then decrease up to 1979. Again, within the early
1980s it increases until 1983. Then it again starts declining over the years.

GNI per capita (constant 2010 US$):

GNI Per Capita may be a proxy for economic process. It's nothing but the gross value divided by
the midyear population. GNI (formerly GNP) is the sum of value added by all resident producers
plus any product taxes (fewer subsidies) not included within the valuation of output plus net
receipts of primary income (compensation of employees and property income) from abroad. Data
are in constant 2010 U.S. dollars.
Life expectancy at birth, total (years):
Life expectancy at birth indicates the number of years a infant would live if prevailing patterns of
mortality at the time of its birth were to stay the same throughout its life.

Mortality rate, infant (per 1,000 live births):

The infant mortality rate is the number of infants dying before reaching one year of age, per
1,000 live births in an exceedingly given year.

Mortality rate, under-5 (per 1,000 live births):

The under-five mortality rate is the probability per 1,000 that a newborn infant will die before
reaching age five, if subject to age-specific mortality rates of the specified year.

Fertility rate, total (births per woman):

The total fertility rate represents the number of children that would be born to a woman if she
were to live to the end of her childbearing years and bear children per age-specific fertility rates
of the specified year.

Population growth (annual %):

The annual population growth rate for year t is the exponential rate of growth of the midyear
population from year t-1 to t, expressed as a percentage. The population is based on the de facto
definition of population, which counts all residents regardless of legal status or citizenship.
We can say that, fixing health care and fixing the economy are two sides of the same coin. As
healthy people are active enthusiastic in their work, they are more likely to be working hard due
to their activeness and willingness for giving more time at work. As a result, good health
increases the output of an economy because healthy people are highly productive than unhealthy
ones. Moreover, good health helps to forge improved levels of health education by increasing
levels of schooling and scholastic performance (Schultz, 1997). Health affects total factor
productivity; hence economic growth is enhanced through its impact on demographic factors.
This is also true for India. We have seen from the years 1961 to 2015 health status has had a
significant impact on economic growth in India.
In this light suggested policy initiatives should be aimed at improving the health sector in
India. Some of them could be the following:

1. Public health sector spending by the central and state governments is low in India. This should
considerably increase.
2. In India public health services are relatively more accessible in urban areas as compared to
their counterparts in rural areas, so there is a need to concentrate on health policies in rural areas.
3. Health indicators are significantly related to per capita public health expenditure. Hence, to
improve health status, the Indian government must raise its expenditure on the health sector.
UNIT – II
2. (a) Distinguish between Minimum Support Price(MSP) and Procurement Price?
Critically evaluate the Agriculture Price policy of the Indian Government in maximum
1500 words i.e. 5 to 6 pages?

(b) Write in brief about the following in around 1000 words each i.e. 2 to 3 pages:
(i) Problems faced by agricultural labourers.
(ii) Financing of agriculture.

ANSWER

2 (a).
MSP (Minimum Support Price) was introduced in 1966-67, by Government of India as a market
intervention to ensure and protect the farmers against any sharp fall in prices and in the backdrop
of food scarcity and price fluctuations as a result of drought, floods and international prices for
exports and imports.

MSP
MSP is that the price at which the govt. purchases crops from farmers to safeguard the interests
of crop producers and are announced at the start of the sowing season based on the advice of
CACP (Commission for Agricultural Costs and Prices). Once the announcement of minimum
price takes place, the govt. is under an obligation to buy the crop products from the farmers at the
decided price. There are several elements of the theoretical basis of the guaranteed minimum
price policy viz. price stabilization, improvement of agricultural terms of trade, and provision of
insurance to the agricultural producer.

Procurement Price
It is the price at which the govt. purchases the crop after harvesting. The main difference
between Procurement Price and MSP is that the latter is declared before sowing while the
previous is declared after harvesting. The procurement agencies procure the crop and support the
prices when the market price falls below the MSP and he procured farm products are kept in
govt. warehouses and distributed through PDS and various food security teams.

Evaluation of Agricultural Price Policy of the Indian Government

The basic objective of the agricultural price policy is to assure the farmers an affordable return.
And at the same time instill an element of certainty and confidence in them. The agricultural
price policy in India has succeeded in achieving its objective to a particular extent. But at a
certain time, it's also contributed to the inflationary trends within the economy and has had
another adverse effects also. We shall have a glance at some of the adverse effects below:

1) Injecting an element of certainty and confidence:

There were wide fluctuations in agricultural prices before the fixing of the Agricultural Price
Commission (Later renamed as Commission for Agricultural Costs and Prices). But after the
establishment of CACP, the position has visibly improved. The commission has announced two
prices, after an intensive study of costs of production, prices within the previous year, and other
relevant material – minimum support prices and procurement prices. The latter are the prices at
which the govt. purchases food-grains to fulfill the need of its Public Distribution System. the
previous is “support” prices at which the govt. is under obligation to buy the maximum
amount as food-grains offered by farmers. Briefly we are able to say minimum support prices are
like assurance to the farmers that price won't be allowed to fall below this level.

2) Adverse Impact on investment:

An additional expenditure by the govt. is born because of a hike in procurement prices. The
extra expenditure comes at the cost of a decline in fixed investments given the overall resource
constraint. While this extra expenditure on stocks favors only rice and wheat, the decline in fixed
investments adversely affects the demand for several non-agricultural sectors. This ends up in a
decline in non-agricultural GDP, which isn't adequately compensated by a rise in agricultural
GDP. Thus an overall GDP growth is affected adversely by a hike in procurement prices. For
example, a 10th increase in minimum support prices of wheat and rice results in a decline in
investments by 1.9% and in overall GDP by 0.33 %.
3) Contribution to an inflationary trend:
CACP has been recommending a hike in procurement prices year after year. A rise in
procurement price and minimum support price (MSP) has become sort of a ritual performed
twice a year. In recent years, large farmers’ lobby has become very powerful in political
decision-making processes. They have been able to force a rise in procurement prices
much beyond those recommended by CACP. The carrying cost of buffer stocks of FCI (Food
Corporation of India) has pushed up considerably due to the substantial increase in procurement
prices over the years. As a results of this, the food subsidy bill has been pushed up to a
really high level.

4) Flaws in public Distribution System:

The main drawbacks of this system are –
i) It's mainly restricted to wheat and rice only, and the inferior grains which are the most food of
the poor have been ignored.
ii) The PDS remained limited mostly to urban areas and the coverage of rural areas was very
insufficient for a period of planning.
iii) PDS supplies are inadequate in regions with a high proportion of population below
the poverty level.
iv) No efforts were made for ‘targeting’, i.e. limiting it to the vulnerable sections of the
population because the PDS has so far been expensive. Moreover, the log run sustainability of
PDS is threatening due to its high cost of running.

5) Bias in favour of large farmers:

Increase in MSP and procurement prices over the year has acted as an incentive for the
farmers to extend their output. But most of the advantages are dominated by the large farmers
who were able to implement the new agricultural strategy and procure credit and other inputs
easily. According to an estimate, whether for wheat or rice, in each State, the average income
transfer to large farmers is approximately 10 or more times greater than those received by
marginal farmers. Using the C2 benchmark, the total transfer per household in Punjab amounts
to an average of approximately Rs. 13000 annually, and ranges from approximately Rs. 3000 per
marginal farmer to Rs. 34,000 for the large farmers.

6) Impact on rural poor:

Hardships of landless labourers and small farmers, who constitute a significant portion of rural
population have increased considerably as a consequence of increase in food-grain prices
(following from increase in procurement prices). Benefits of high prices hardly accrue to
those sections because they do not supply much marketed surplus and depend totally
on the market for meeting their consumption requirements. In India, as per a study, the rise in
MSP results in a significant worsening of the welfare of the underside 80% of the
rural population and of all urban population. Only the highest 20% of the rural population
experience welfare increase within the third year.

The agricultural price policy in India has succeeded in establishing certainty and confidence in
respect of the prices and agricultural commodities. But because of the variations within
the degree of enforcement of procurement in different years, some degree of uncertainty and
instability in prices were experienced by the Indian farmers. As argued by several economists,
continuous increase within the procurement prices has resulted a spurt to inflationary
pressures in the economy. Moreover, the fixing of uniform purchase price for the country on the
basis of cost of production of huge cost states by the Commission for Agricultural Costs and
prices has benefitted the developed states having low average cost of production like Punjab,
Haryana etc. Thus the policy encompasses a bias in favour of the rich states at the cost of
consumers normally.

Inadequate coverage of procurement facility has rendered the price ineffective. The facility of
official procurement reaches only a small number of farmers. The overall food grains production,
procurement covers hardly 15%. The remunerative price and subsidized inputs have didn't keep
pace with the rate of increase in costs. The farmer is discouraged from producing the
maximum level of output and he tries to balance his output against the level of costs, and settles
for a lower level of output. There has been a crucial issue of wide difference between prices
received by the producers and prices paid by the consumers. Issues regarding the network of
regulations and costs related to it, increase in transportation costs, over fragmentation of the
distribution network etc. require careful study.

Land holding patterns, income distribution, general disparities and cropping pattern etc. are some
inherent factors in the system of agricultural operations on which the efficacy of the price policy
depends. But the price policy has not been accompanied by any effective policy for a total
development of agriculture. Price increases which over-compensate cost increases, can
discourage measures to raise agricultural productivity since such prices automatically lead to
higher profits for the farmers.

To increase the income of the farmers, the poor of the country have to pay more. This practice
will create the problem to allocate inefficiency in the country. Subsidizing farmers through
higher product prices is an inefficient method because it penalizes the consumer with higher
prices. Also it means large farmers will benefit the most from this. The big farmers have received
more than required but the small farmers are still struggling. Farmers use fertilizers in the huge
quantity to increase their production but it creates problems for those who do not get benefits
from this increment in the production.

2(b) (i).
PROBLEMS FACED BY AGRICULTURAL LABOURERS
All those persons who derive a major part of their income as payment for work performed on the
farms of others, can be designated as agricultural workers. For a major part of the year they
should work on the land of others on wages. The class of agricultural labourers is the most
exploited and oppressed class in rural hierarchy. Before Independence, their position was nothing
better than the slaves. They had to perform all sort of beggar on the master’s land and house,
work as domestic servants and do whatever the zamindars wanted. They were socially
discriminated and economically exploited. The situation has improved after the 65 years of
Independence. But even now, the class of agricultural workers are the poorest and resource less
class in rural areas. Though they are no longer a victim of extreme forms of oppression, but
economic exploitation continues. Their level of income is so low that they barely are able to
meet their both ends. Their consumption standards still remains low. Their supply is excessive in
relation to the demand for them forcing them to settle for extremely low wages.

Some major problems faced by the agricultural labourers are:

1) Marginalization of agricultural workers:

The workforce in agriculture (cultivators plus agricultural labourers) rose to 263.0 million in
2011 as compared to 97.2 million in 1951. As against this, the number of agricultural labourers
rose from 27.5 million in 1951 to 144.3 million in 2011. This implies that the number of
agricultural labourers increased by more than five times over the period 1951 to 2011; and as a
proportion of workforce in agriculture, agricultural labourers increased from 28% in 1951 to
55% in 2011. The fast pace of workforce in agriculture in India is indicated by these facts. Also,
the share of agriculture and allied activities in GDP at factor cost has consistently declined over
years. The share of agriculture and allied activities in GVA (gross value added) at basic prices
was 16.5% in 2014-15 and 15.4% in 2015-16. The implication is that after post-independence
decades, gap per worker GDP in agriculture and that in non-agriculture widened markedly. The
widening gap appears to provide a clear indication of the marginalization process operating in
agriculture.

2) Wages and Income:

In India, family incomes and agricultural wages of agricultural workers. Per capita annual
income of the agricultural labour families was Rs. 104 in 1950-51, the average annual income of
the household being Rs. 447, as reported by First Agricultural Labour Enquiry. In the report of
Second Agricultural Labour Inquiry, the per capita income further deteriorated to Rs. 99.4 in
1956-57 and average annual income of the agricultural labour households to Rs. 437. The
emergence of green revolution gradually led to increasing money wages. However, as prices also
increased considerably, the real wages rates did not increase much.
3) Feminization of agricultural labour with low wages:
Female agricultural workers are generally paid less than their male counterparts and are forced to
work harder. Such bias against female workers exists in most of the dry land areas. At many
places, wages paid to female workers are much lesser than the minimum wages.

4) Increase in migrant labour:

Past the green revolution, remunerative wage employment opportunities in pockets of assured
irrigation has significantly increased but the employment opportunities in the vast rainfed semi-
arid areas remained stagnated. As a result, there has been a huge flow of migrant labour from the
latter to the former areas. The inter-state rural migrant workers stand at a number of 10 million.
Rural migrant workers are preferred even in areas of abundant labour supply because of the
greater control that can be exercised on such labour without regard to any social responsibility.

5) Indebtedness:
Agricultural labourers often have to seek debts off and on because of the low level of their
incomes. But they are unable to provide any security because of their extreme poverty. Therefore
they are reluctantly denied loans by the institutional agencies. With no option left they seek loans
from non-institutional sources like private moneylenders who charge a high rate of interest and
exploit them in many ways. Unfortunately the debt of agricultural labourers passes from
generation to generation and is never fully paid up.

6) High incidence of child labour:

Estimated number of child labour in India varies from 17.5 million to 44 million. One-third of
the child labour of Asia are in India itself. And agriculture consists of the largest number of child
labours. Child employment adversely affects the poor as a class but it may supplement the
income of the household supplying child labour. At the same time child employment benefits the
employer. The employment of children brings down the wage levels and as a result poor are
made worse-off. The children employed as workers are education deprived and have low future
potential.
7) Employment and working conditions:
The agricultural labourers face the problems of unemployment and underemployment. They have
to remain unemployed for a substantial part of the year, because there is no work on the farms
and alternative sources of employment. They cannot fight for minimum wages as they are not
organized. There is no provision for fixation of hours of work. The agricultural workers work
from dawn to dusk at the sowing and harvesting. They do not have any leave or any other
benefits as they work on daily basis. The bonded-labour system has abolished in India yet news
surfaces about the same practiced in some parts of rural India.

2 (b) (ii).
FINANCING OF AGRICULTURE
Similar to development of technologies, finance in agriculture is also important. Purchase of
technical inputs by farmers is possible only if sufficient money (fund) is available with them.
Most farmers suffer from the problem of inadequate financial state. This situation compels them
to borrow from an easy and comfortable source. Till 1935, the only source of credit to agriculture
were the professional money lenders, and they used to charge exorbitant rates of interest and
follow serious practices while giving loans and recovering them. This resulted in farmers
suppressed under heavy debts. With the establishment of the Reserve Bank of India in 1935,
large scale credit was available with reasonable rates of interest at easy terms, both in terms of
granting loans and recovery of them.

Agriculture finance is the study of financing and liquidity services credit provided to farm
borrowers. It can also be said as a study of those financial intermediaries who provide loan funds
to agriculture and the financial markets in which these intermediaries obtain their loanable funds.
Agricultural production in this country is dependent upon millions of small farmers. And to
continue this, the farming community must be aware of the various sources of agriculture
finance.
CLASSIFICATION OF FINANCE
(A) On the basis of time

a) Short-Term – The “short-term” loans are generally advanced for meeting annual recurring
purchases such as seed, fertilizers, hired labour expenses, pesticides, weedicides and hired
machinery which are termed as seasonal loans. After the harvest these are expected to be repaid.
It is believed that the loan plus interest would be repaid from the income received through the
enterprise invested, and the loans are to be paid in a year.

b) Medium-Term – These loans are provided for comparatively longer lived assets i.e.
machinery, diesel engine, wells, irrigation structure, threshers, shelters, crushers, draught and
animals etc. The return is spread over more than one production period from these farm assets.
Usually the loan repayment period for these type of loans is 15 months to 5 years.

c) Long-Term – Loans repayable over a longer period (5 years) are included in this category.
These loans are advanced for long life assets such as heavy machinery, land and its reclamation,
erection of farm buildings, construction of permanent-drainage of irrigation system etc.
Requiring large sums of money for initial investment. The repayment period for these loans
ranges from five to fifteen years or even upto 20 years.

(B) SECURITY CLASSIFICATION

Security offered/obtained is another basis for classifying the loans. Security of some tangible
personal property such as land, livestock and other capital assets is required for the advancement
of the secured loans i.e. medium and long terms loans. The secured loans are further classified on
the basis of security e.g. mortgage loans, where legal mortgage of some property such as land is
offered to the lender, i.e. loans for intangible property such as land improvement, irrigation,
infrastructures etc.
(C) LENDER CLASSSIFICATION
On the basis of lender, credit can be classified as:
a) Institutional Credit – e.g. cooperative loans, commercial bank loans and government loans etc.
b) Non-institutional Credit – e.g. professional and agricultural money lenders, traders and
commission agents, relatives and friends etc.

(D) BORROWER CLASSIFICATION

The credit can also be classified on the basis of type of borrower such as crop farmers, dairy
farmers, poultry farmers, fisherman, rural artisan etc. or agricultural labourers,
marginal/small/medium/large farmers, hill farmers or tribal farmers etc.

SOURCES OF AGRICULTURE FINANCE

1. Non-Institutional Credit Agencies

a) Traders and Commission Agents – They provide loans to agriculturists for productive
purposes against their crop without completing legal formalities. It is often the case that it is
obligatory for farmers to buy inputs and sell outputs through them. A hefty rate of interest and
amount of commission is charged by them from the borrowers.
b) Money Lenders – Village money lenders still dominate the credit system in rural areas
despite the rapid development happening in rural branches of different institutional credit
agencies.

2. Institutional Credit Agencies

a) Commercial Banks – Commercial banks help both industry and agriculture in term of short
term and medium term credits. It also helps them to finance developmental plans by investing
funds in the government securities. Banks have been continuously favouring indirect finance
over direct finance to agriculture.
b) National Bank for Agriculture and Rural Development (NABARD) – Established in the
year 1982, by an Act of Parliament, is entrusted with all matters concerning policy, planning and
operation in the field of credit for agriculture and other economic activities in rural areas.
The functions of NABARD includes:
i) Extends refinance to commercial banks for term loans in relation to agriculture and rural
development.
ii) Provides short term credit to state cooperative banks, RRB’s and other financial institution
notified by RBI for a period not exceeding 18 months.
iii) Offers direct loan by way or refinance to all eligible institutions for a period not exceeding 25
years.
iv) Provides finance for production and marketing activities of rural artisans, cottage industries,
small-scale industries, handicrafts etc. in the rural areas.

c) Micro Credit – This is the extension of small loans to entrepreneurs too poor to qualify for
traditional bank loans. It enables very poor people to engage in self-employment projects that
generate income.

d) Agriculture (Direct and Indirect Finance) – Direct finance to agriculture includes short,
medium and long terms loans given for agriculture and allied activities directly to individual
farmers.

e) Kisan Credit Card (KCC) – It aims at adequate and timely support from banking system to
farmer for crop production and ancillary activities. The credit limit is generally provided in
proportion to the size of the owned land but some flexibility is provided for leased-in land in
addition to owned land. The nature of credit extended under KCC is revolving cash credit i.e. it
provides for any number of withdrawals and repayments within the limit.

f) Primary Agricultural Credit Society (PACs) – The PACs are associated with following:
i) Borrow adequate and timely funds from DCCBs and help the members in financial matters;
ii) Attract local savings in the form of share capital and deposits from the villagers, thereby
developing the habit of thrift.
iii) Supervise the end use of credit
iv) Make available fertilizers and insecticides to the needy farmers
v) Provide machinery on hire basis to the farmers
g) Regional Rural Banks – Every RRB undertakes the following types of functions:
i) Granting of loans and advances particularly to small and marginal farmers individually
ii) Granting of loans to artisans, small entrepreneurs, small traders, businessman etc.

h) Cooperative Credit Organization – Plays a very important role in disbursement of

agricultural credit. Both the distributional channel as well as the farmers need credit. Credit
needed by the farmers for purchase of fertilizers and other inputs is called ‘short-term’ credit.
Credit needed by the distribution channel is called ‘distribution credit’. In India 78% of the
farmers belong to the category of small and marginal farmers and depend heavily on credit for
their agricultural operations.
i) Other sources of agricultural finance includes – District Central Cooperative Banks (DCCBs),
State Cooperative Banks (SCBs) etc.
UNIT – III

3. (a) State your arguments in about 1600 words i.e. 5-6 pages as to how the industrial
policy of 1991 was more effective than the earlier industrial policies?

ANSWER
India’s Industrial Policy includes government action to influence the ownership and structure of
the industry and its performance. It includes procedures, principles, policies, rules and
regulations, incentives and punishments, the tariff policy, the labour policy etc.
The main objectives of the Industrial Policy of the Government in India are:
i) To maintain a sustained growth in productivity
ii) To enhance gainful employment
iii) To achieve optimal utilization of human resources
iv) To attain international competitiveness
v) To transform India into a major partner and player in the global arena

Industrial Policy Resolution, 1948

The first ever resolution accepted that both private and public sectors are important within
the industrial economy of India. Industries where state had a monopoly included three fields of
activity i.e. arms and ammunition, atomic energy and rail transport. The mixed sector included 6
specified industries i.e. coal, iron and steel, aircraft manufacture, shipbuilding, manufacture of
telephone, telegraph and wireless apparatus and mineral oils. 18 industries of national
importance were included within the field of government control. All other industries not
included in the above three categories were left open to private sectors. This resolution also
accepted the importance of small and cottage industries.

Industrial Policy Resolution, 1956

The objectives of this policy were to accelerate the rate of growth and to speed up
industrialization, to develop heavy industries and machine making industries, to expand public
sector, to cut back disparities in income and wealth, to create up an oversized and growing
cooperative sector, to stop monopolies and also the concentration of wealth and income within
the hands of a small number of people. 17 categories were formed under the monopoly of state
whose future development was to be the exclusive responsibility of the state. Of the 17
industries, 4 industries – arms and ammunition, nuclear energy, railway and air transportation
were to be government monopolies. Mixed sector of public and private enterprise included 12
industries in their list. In these industries, State would increasingly establish new units and
increase its participation but wouldn't deny the private sector opportunities to line up units or
expand existing units. All other industries left out within the above two categories were left for
the private sectors. This resolution emphasized the mutual dependence of public and private
sectors. It also demanded the reduction in regional imbalances and inequalities. This resolution
however reduced the scope for the expansion of the private sector significantly because the
sector was kept under state control through a system of licenses.

Industrial Policy Statement, 1977

The main objective of this policy included promotion of cottage and small industries widely
dispersed in rural areas and small towns. It pronounced for reducing the occurrence of labour
unrest. However, there was absence of effective measures to curb the dominant position of
enormous scale units and the policy didn't envisage any socio-economic transformation of the
economy for curbing the role of massive business houses and multinationals.
The concept of economic federation was promoted by the economic Policy of 1980, to boost the
efficiency of public sector and to reverse the trend of industrial production of the past three years
and reaffirmed its faith within the MRTP Act and the FERA.

New Industrial Policy, 1991

This new policy deregulates the industrial economy during a substantial manner. The
foremost objectives include building on gains already made, correction of the distortions or
weaknesses which may have crept in, maintenance of a sustained growth in productivity and
gainful employment and attainment of international competitiveness.

As a part of the policy, the role of public sector has been redefined. A dedicated reform policy
for the general public sector including the disinvestment programme was launched under the NIP
1991. Private sector has given welcome in major industries that were previously reserved for the
public sector.

Similarly, foreign investment has given welcome under the policy. But the foremost important
reform measure of the new industrial policy was that it ended the practice of industrial licensing
in India. Industrial licensing represented red-tapism.

Because of the large scale changes, the industrial Policy of 1991 or the new industrial policy
represents a significant change from the first policy of 1956.

The new policy contained policy directions for reforms and thus for LPG (Liberalisation,
Privatisation and Globalisation). It enlarged the scope of private sector participation to the
majority industrial sectors except three (modified). Simultaneously, the policy has given
welcome to foreign investment and foreign technology. Since 1991, the country’s policy on
foreign investment is gradually evolving through the introduction of liberalization measures in a
very phase wise manner.

Perhaps, the foremost welcome change under the new industrial policy was the abolition of the
practice of industrial licensing. The1991 policy has limited industrial licensing to less
than fifteen sectors. It implies that to start an industry, one should opt for license and waiting
only in the case of those few selected industries. This has ended the era of license raj or red
tapism within the country. The 1991 industrial policy contained the foundation of the
liberalization, privatization and globalization drive made within the country in the later period.
The policy has brought changes in the following aspects of commercial regulation:

1. Industrial delicensing
2. Deregulation of the industrial sector
3. Public sector policy (de-reservation and reform of PSEs)
4. Abolition of MRTP Act
5. Foreign investment and foreign technology policy.
1. Industrial delicensing policy:
The foremost important part of the new industrial policy of 1991 was the end of the
industrial licensing or the license raj or red tapism. Under the industrial licensing policies,
private sector firms need to secure licenses to start out an industry. This has created long
delays within the start up of industries. The industrial policy of 1991 has almost abandoned the
industrial licensing system. It's reduced industrial licensing to fifteen sectors. Now only 13 sector
need license for starting an industrial operation.

2. Dereservation of the industrial sector:

Previously, the general public sector has given reservation especially within the capital goods
and key industries. Under industrial deregulation, most of the commercial sectors was opened to
the private sector also. Previously, most of the industrial sectors were reserved to the general
public sector. Under the new industrial policy, only three sectors- nuclear energy, mining and
railways will continue as reserved for public sector. All other sectors are opened for
private sector participation.

3. Reforms associated with the public sector enterprises:

Reforms within the public sector were aimed toward enhancing efficiency and competitiveness
of the sector. The govt. identified strategic and priority areas for the general public sector to
concentrate. Similarly, loss making PSUs were sold to the private sector. The govt. has adopted
disinvestment policy for the restructuring of the general public sector within the country. at the
same time autonomy has been given to PSU boards for efficient functioning.

4. Foreign investment policy:

Another major feature of the economic reform measure was it's given welcome to foreign
investment and foreign technology. This measure has enhanced the industrial competition and
improved business environment within the country. Foreign investment including FDI and FPI
were allowed. Similarly, loan capital has also introduced in the country to attract foreign capital.
5. Abolition of MRTP Act:
The New Industrial Policy of 1991 has abolished the Monopoly and Restricted Trade Practice
Act. In 2010, the Competition Commission has emerged because the watchdog in monitoring
competitive practices within the economy.

The industrial policy of 1991 is the big reform introduced in Indian economy since
independence. The policy caused big changes including emergence of a strong and competitive
private sector and a large number of foreign companies in India.

Earlier the industrial licensing was governed by the Industries (Development and Regulation)
Act, 1951. The 1999 Industrial Policy abolished industrial licensing for all except 18 countries so
as to liberalize the economy. The 18 industries for which licensing was kept necessary were as
under – coal and lignite, petroleum (other than crude) and its distillation and brewing of
alcoholic drinks; sugar; animal fats, white goods (domestic refrigerators, washing machines, air-
conditioners etc. The 1991 industrial policy have reduced the public sector reserved industries to
8 as compared to the 1956 resolution. The 8 industries are – arms and ammunition, nuclear
energy, coal and lignite, mineral oils, mining of iron ore, manganese ore, gypsum, Sulphur, gold
and diamond, mining of copper, lead, zinc, tin, molybdenum and wolfram, minerals laid out
in the schedule to the nuclear energy, and rail transport.

The new industrial policy also as long as the govt. will undertake review of the present public
enterprises in low technology, small-scale and non-strategic areas as also when there's low or nil
social consideration or public purpose. The new industrial policy advises government to invite a
greater degree of participation by the private sector in important areas of the economy. License,
Permit and Quota Raj were made a thing of past by the new 1991 policy. By removing the
bureaucratic hurdles in industrial growth, it attempted to liberalize the economy. The new policy
reduced the burden of the govt. by limiting the role of public sector. Easier entry of multinational
companies, privatization, removal of asset limit on MRTP companies, liberal licensing are all
provided by the new policy. As a result of of these, there was increased competition, leading
to lower prices in many goods like electronic prices. Also, this brought domestic and the foreign
investments in almost every sector opened to private sector.
The new industrial policy has scrapped the threshold limit of assets in respect of MRTP and
dominant undertakings. Phase Manufacturing Programmes have been effective in number of
engineering and electronic industries. To extend the pace of indigenization in manufacturing.
The new industrial policy has provided that henceforth financial institutions won't be required to
impose the mandatory convertibility clause. In the mainstream accounts of Indian economic
development the change away from India’s traditional policy in 1991 towards liberalization,
deregulation, market orientation has been hailed as ushering in a new era of freedom form
government controls and one which promises greater prosperity for the Indian people.

However, there are certain limitations of Industrial Policies in India:

i) Industrial policies in India have failed to push manufacturing sector whose contribution to
GDP is stagnated at about 16% since 1991.
ii) There is a concern over the slow pace of investments in many basic and strategic industries
such as engineering, power, machine tools etc.
iii) Restructuring and modernization of industries as sequel to the new industrial policy led to
displacement of labour.
iv) Consumption-led growth rather than investment or export-led growth has resulted on
focusing attention on internal liberalization without adequate emphasis on trade policy reforms.
v) The new industrial policy failed to define a proper industrial location policy, which could
ensure a pollution free development of industrial climate.

3. (b) Write a note on sources of Industrial Finance in maximum about 1200 words or 4-5
pages?

ANSWER

The financial institutions set by the government of India in post-independence era has continued
their efforts to reorient their business strategies. They have undergone a significant structural
change in the area of venture capital, technology finance and infrastructure finance to lead to the
industrial development.
The sources of Industrial Finance can be classified into the following categories of institutions.
1) Risk Capital and Technology Finance Corporation Ltd. (RCTC)
2) Technology Development and Information Company of India Ltd. (TDICI)
3) Tourism Finance Corporation of India Ltd. (TFCI)
4) North Eastern Development Finance Corporation Ltd. (NEDFI)
5) Investment Institutions of India
6) Commercial Banks
7) Post-liberalization Policy reforms in Industrial Finance since 1991
8) Internal Self-finance – Saving of the unit itself is one source which is of quantitatively big
importance. The household invests out of its own saving and also has surplus which it lends to
other units via financial institutions like banks, capital market etc. Due to the savings of the
business comprised of depreciation and retained earnings being short of its investments, it
borrows from financial institutions. A part of their investment from internally generated funds is
financed by government too. Excess of tax and other income over consumption gives rise to
these. It also borrows from the financial system for the shortfall and roughly half of all the
investment is self-financed. Investment through internally generated funds has an advantage that
it combines the acts of saving and investment. Certain costs pertaining to collection of
information in respect of borrowers, transactions with them, monitoring the use of funds, and
enforcement of the conditions of borrowing are internalized and reduced. Self-financing reduced
the risk of lending as it does not involve preparation of documents in respect of contract,
collateral or security etc. The shortcomings of this source include that it may fall short of
investment opportunities or its use may be inefficient and the funds may not be wholly or
partially invested in the most productive lines.

9) Equity, Debentures and Bonds – Different types of equity or shares such as ordinary,
cumulative and non-cumulative preference shares provides with a large part of finance for fixed
investments [building, machines etc.]. These shares are tailored to suit the temperament of
different investors and bear risks of different degrees. To issue shares in small denominations of
ten rupees so as to enable the largest number of people to participate in providing long-term
finance is the latest trend. The extent to which the savers invest their money in shares is
determined by the credit-worthiness of promoters of industries and profitability on industries.
The industries are not burdened with interest, and therefore do not get involved in complications
on this account during recession or depression in this way. Industrial companies also get long-
term finance through the issue of debentures and bonds. These are debt (loans), instruments. The
buyers of those debentures and bonds are the creditors of companies. Debentures are safer
investments as the investor gets a fixed rate of interest on the money invested in these securities.
10) Public Deposits – Public deposits are a debt-instrument, mostly for short-term finance.
People keep their money as deposit with these companies or managing authorities for a period of
six months, a year, two years, three years or so under this system. Depositors receive a fixed
interest. Refund of the money can be asked by them anytime. Companies use this money to meet
their needs of working capital. This source is however unreliable because if the depositor asks
for the refund when the company needs the fund most, then the matter gets complicated.

11) Loans from Banks – Commercial banks do provide with funds for meeting short-term needs
or for working capital. Government securities and stocks with companies are kept as a guarantee
before giving loans. Loans are provided in the form of credit limit and overdraft. Commercial
banks generally show reluctancy in putting their money in purchase of shares. The reason behind
this being that the deposits they receive form the public are generally for a short-term and
therefore, banks can ill-afford to take any risk in investing public money in shares.

12) The Managing Agency System – An individual or a group of individuals finance the initial
stage of the establishment of industries, and manage many activities of the company thus
established very often, one managing agent controls more than one concern and uses fund of one
concern to meet the needs of others under him under this system. Managing agents did render a
valuable service in the promotion of industries within the country during the past when there was
a great shortage of industrial finance and almost complete lack of financial institutions. These
funds were mostly used for the establishment of consumer goods industries. However over a
certain period of time management of so many units, good and bad, and producing a variety of
products led to certain evils.
13) Indigenous Bankers – Indigenous Bankers also advance financial help to a few large-scale
industries, particularly during the time or stress, both for fixed capital and working capital inspite
of the establishment of new financial institutions. They have provided finance to small scale
industries. These industries have been forced to depend upon indigenous bankers in the absence
of adequate institutional finance. These bankers charge a very heavy rate of interest and makes
finance a costly affair.

14) Development Finance Institutions – Established to fill-in the gap in industrial finance and to
promote the objective of planning, these institutions cater to the needs of large and small
industries. The new institutions supplying industrial finance are Industrial Development Bank of
India, Industrial Finance Corporation of India, Unit trust of India, and General Insurance
Corporation of India, Industrial Reconstruction Bank of India, State Financial Corporations, and
State Industrial Development Corporations. Huge quantity of finances for setting up of new
industries, for meeting their several needs and in several forms are provided by these institutions.
They ensure and monitor the use of finance in pre-planned directions and fit well in the modern
scenario of industrial development.

15) Foreign Capital – External capital too has been made use of in meeting the needs of
industrial finance, mostly for long-term needs as a supplement to domestic finance. There are
several forms of these, foreign aid (i.e. loans on concessional term) from foreign governments
and foreign institutions (like the World Bank) extended to the government. Private sector has
also received a part of this assistance. A part of foreign funds has come through foreign
companies which have Indian subsidiaries in our country or through Multinational Corporations
which have branches in India. As a part of collaboration with Indian companies, some foreign
companies have given funds as a part of direct investment. Non-resident Indians have also
collaborated with Indians. Indian companies have also raised loans from foreign markets.
UNIT – IV
4. (a) Discuss the impact of Covid-19 on Global Trade and Commerce in about 2000 words
or 6-7 pages?

ANSWER
It is unavoidable that the novel coronavirus epidemic will have a considerable impact on the
economy and society. The spread of the coronavirus is a public health crisis that poses a serious
risk to the macro economy through the halt in production activities, interruption of people’s
movement and cut-off of supply chains. The novel strain of coronavirus (COVID-19) has a
potential to significantly slowdown in the global economy. In an unprecedented global health
crisis, trade is essential to save lives and livelihoods.

Underutilization of capacity takes place due to factory closures (workers stay home, leaving
capital and natural resources idle) as well as social distancing forcing workers to stay at home.
Due to higher rates of contagion, immediate unemployment consequences of COVID-related
business closures and negative demand shock, we conservatively assume the underutilization of
the labor force to be 3% on average over the whole year across all sectors of the economy. There
is a lot of uncertainty surrounding these assumptions, and the country-specific employment
effects will depend on the duration and intensity of the pandemic and containment measures, the
sectoral composition of employment, and the flexibility of the labor market.

The assumed increase in transport and transactions costs in foreign trade is driven by additional
inspections, reduced hours of operation, road closures, border closures, increases in transport
costs, etc. Evans et al. (2015) estimate that the outbreak of Ebola could lead to an increase in
trade costs of 10%. Since COVID-19 is affecting more countries and the containment measures
seem more severe due to the efforts to contain the virus, we amplified the shock increasing
international trade costs of imports and exports to 25%.The effects of COVID-19 in the tourism,
hospitality and recreation sectors have been unprecedented. In the accommodation and lodging
sectors, quarterly revenues are down 75%. Travel agents saw a slowdown in bookings of 50% in
March of 2020. Airlines worldwide are expected to lose $113 billion in revenues for 2020. In the
peak of the outbreak, 70% of scheduled flights in China have been cancelled. As of mid-March
2020, international travel has ground to a halt, with the World Travel and Tourism Council
(WTTC) estimating that global travel would decline at least 25 percent in 2020. To capture the
effects of the drop in tourism, hospitality and recreation services, we implemented a 50% tax on
the export of trade-related services, resulting in a drop in exports of tourism services at a global
level of 20-32%.

The global pandemic scenario assumes that the pandemic hits China the hardest, but also hurts
other countries, so we use it as an example to explain the impacts on other countries. The global
pandemic is expected to reduce Chinese GDP by 3.7% (all percentage changes are reported in
relation to the baseline). The impact on China becomes progressively more negative as impacts
of the shocks accumulate. First, the supply shock reduces GDP through reduction in employment
(and capital) leading to lower production and exports, as well as lower imports due to lower
income of households and shrinking production.

Second, with higher trade costs, the price of a unit of imports and exports increases and the
competitiveness of Chinese production declines due to higher costs of exporting and higher costs
of inputs; final goods’ prices also increase. The rising trade costs represent a productivity loss,
since additional inputs are needed to bring goods to their consumers, instead of being available
for consumption and investment. Further, inbound and outbound tourism decreases significantly,
resulting in further decline of Chinese GDP and exports. Finally, with the composition of
expenditures changing with lower demand for sectors hit by social distancing (transport,
hospitality) and relatively higher demand for goods, the composition of output tilts towards
manufacturing. Loss of competitiveness and lower income result in a decline of total exports by
3.5%, while imports decline by 3.2 %. China’s exports of tourist-related activities decline by
29%, while imports of tourist-related activities decline by 37%. Real consumption by households
declines by 7.2%.

Global GDP is expected to degrade by 2.1%, while developing countries’ GDP is expected to
decline by 2.5% and high-income countries by 1.9%. The biggest GDP losses under the global
pandemic scenario are expected in East Asia and Pacific (EAP) countries due to deep integration
through trade and direct impact on tourism, e.g. Cambodia (3.2 %), Singapore (2.1 %), Hong
Kong SAR, China (2.3 %), Thailand (3 %), Vietnam (2.7 %), and Malaysia (2.1 %). Exports at
the global level are expected to decrease by 2.5%. China, considered to be the “world’s factory”,
suffers a decline in production across all sectors and goods, due to an underutilization of labor
and capital, and, together with an increase of its trade costs, increases the import costs for the rest
of the world, which translates into a decline in global exports. China sees a contraction in exports
of 3.7%. Vietnam sees a decline in its total exports by only 1%, because it benefits to an extent
from the gap left by the decrease in Chinese exports. Some countries in the East Asia and Pacific
region are the most affected in terms of export declines, with Hong Kong SAR, China, suffering
the biggest losses (5.2 %), followed by the Lao People’s Democratic Republic (3.6%), Cambodia
(3.9%) and Singapore (4.4%). Selected countries see an increased demand for their tourism
exports due to diversion of tourism from the EAP region, with some flows increasing by 2%-3%
between countries outside the EAP region, but in all countries total tourism flows decline across
the board, with exports from the EAP region declining by about 30%. These small bilateral
tourism export gains disappear, as the shock spreads from China and East Asia to other parts of
the world.

The economic situation remains highly fluid. Uncertainty about the length and depth of the
health crisis-related economic effects are fuelling perceptions of risk and volatility in financial
markets and corporate decision-making. In addition, uncertainties concerning the global
pandemic and the effectiveness of public policies intended to curtail its spread are adding to
market volatility. Compounding the economic situation is a historic drop in the price of crude oil
that reflects the global decline in economic activity, prospects for disinflation, and contributes to
the decline of the global economy through various channels. On April 29, 2020, Federal Reserve
Chairman Jay Powell stated that the Federal Reserve would use its “full range of tools” to
support economic activity as the Commerce Department reported a 4.8% drop in U.S. GDP in
the first quarter of 2020. In assessing the state of the U.S. economy, the Federal Open Market
Committee released a statement indicating that, “The ongoing public health crisis will weigh
heavily on economic activity, employment, and inflation in the near term, and poses considerable
risks to the economic outlook over the medium term.”
The Organization for Economic Cooperation and Development (OECD) on March 2, 2020,
lowered its forecast of global economic growth by 0.5% for 2020 from 2.9% to 2.4%, based on
the assumption that the economic effects of the virus would peak in the first quarter of 2020.
However, the OECD estimated that if the economic effects of the virus did not peak in the first
quarter, which is now apparent that it did not, global economic growth would increase by 1.5%
in 2020. That forecast now seems to have been highly optimistic.

Before the COVID-19 outbreak, the global economy was struggling to regain a broad-based
recovery as a result of the lingering impact of growing trade protectionism, trade disputes among
major trading partners, falling commodity and energy prices, and economic uncertainties in
Europe over the impact of the UK withdrawal from the European Union. Individually, each of
these issues presented a solvable challenge for the global economy. Collectively, however, the
issues weakened the global economy and reduced the available policy flexibility of many
national leaders, especially among the leading developed economies. In this environment,
COVID-19 could have an outsized impact. While the level of economic effects will eventually
become clearer, the response to the pandemic could have a significant and enduring impact on
the way businesses organize their work forces, global supply chains, and how governments
respond to a global health crisis.

According to an April 8, 2020, forecast by the World Trade Organization (WTO), global trade
volumes are projected to decline between 13% and 32% in 2020 as a result of the economic
impact of COVID-19. The WTO argues that the wide range in the forecast represents the high
degree of uncertainty concerning the length and economic impact of the pandemic and that the
actual economic outcome could be outside this range, either higher or lower. The WTO’s more
optimistic scenario assumes that trade volumes recover quickly in the second half of 2020 to
their pre-pandemic trend, or that the global economy experiences a V-shaped recovery. The more
pessimistic scenario assumes a partial recovery that lasts into 2021, or that global economic
activity experiences more of a U-shaped recovery. The WTO concludes, however, that the
impact on global trade volumes could exceed the drop in global trade during the height of the
2008-2009 financial crisis.
The coronavirus outbreak led the governments of many countries to impose restrictions on non-
essential travel to countries affected by COVID-19, indefinitely suspending tourism travel, work
visas and immigrant visas. Some countries placed a complete travel ban on all forms of inward
or outward travel, shutting down all airports in the country. At the height of the coronavirus
pandemic, most airplanes flew almost empty due to mass passenger cancellations. The travel
restrictions imposed by governments subsequently led to the reduction in the demand for all
forms of travel which forced some airlines to temporarily suspend operations such as Air Baltic,
LOT Polish Airlines, La Compagnie, and Scandinavian Airlines. Such travel restrictions cost the
tourism industry alone a loss of over $200 billion globally, excluding other loss of revenue for
tourism travel, and were forecast to cost the aviation industry a total loss of $113billion
according to IATA. US airlines sought a $50bn bailout fund for the US Airline industry alone.

The GTBA reported that the business travel sector would lose $820 billion in revenue due to the
coronavirus pandemic. Many import-dependent countries were severely affected during the
coronavirus pandemic. Many countries imported their essential commodities from major
exporting countries like China, India and Japan, and depend largely on these countries for the
consumption of essential commodities. The reduction in goods flowing through the global supply
chain, and substantial reliance on China for imported goods, led to shortages of supplies to
import-dependent countries as China shut down many of its export factories. This led to
increases in the price of the remaining stock of imported supplies already in import-dependent
country, which also triggered inflationary pressures on the price of basic commodities despite the
general low demand for imports due to the coronavirus pandemic. It was difficult to find
alternative imports after China’s shut-down because many countries had partially or fully closed
their borders which stifled international trade at the time.

The macroeconomic slowdown led to a rise in nonperforming loans in the banking sector by 250
basis points. Private sector banks had the highest exposure to credit risk during the outbreak.
Nonperforming loans arose from loans issued to small and medium scale enterprises (SMEs),
airlines, hotels, tour operators, restaurants, retail, construction and real estate businesses. During
the pandemic, there was a general decline in the volume of bank transactions, a decline in card
payments and a fall in the use of ATM cash machines worldwide. This led to fewer fees
collected by banks which negatively affected banks’ profit. FinTech businesses were also
affected. Some FinTech businesses witnessed very low patronage by consumers leading to loss
of revenue and profits, which negatively affected the equity investment of venture capitalists that
funded existing and new FinTech firms. This made many venture capitalists begin to hoard new
equity which led to the drying up of financing for some FinTech businesses. On the other hand,
the lockdowns due to the coronavirus outbreak resulted in higher demand for some sorts of
online services such as online shopping.

4(b) Suggest some measures as part of export policy of India as to how India can explore to
boost its exports which are hit hard by Covid-19 pandemic in about 1500 words or 5-6
pages?

ANSWER
The Covid-19 pandemic has sent the world into perilous, uncharted territory from which no
country will emerge unscathed. Over half of the global population is under some form of
lockdown. All economies, rich and poor, are falling into recession and can limit the fallout only
by working together.

Global supply chains tell a similar story. Even before the pandemic, supply chains were
absorbing the impact of two years of trade disputes between China and the US. Now, they are
dealing with a combination of production stoppages, transportation disruptions, and plummeting
global demand. The World Trade Organization estimates that global trade may fall by as much as
32% this year. Meanwhile, unemployment is skyrocketing in many economies: in the last four
weeks, a record 22 million unemployment claims have been filed in the US alone.
It is high time we recognised how irrevocably connected and interdependent the world has
become. No country can win on its own, despite what some may think. As the world confronts a
severe recession and humanitarian catastrophe, nationalist political posturing is the last thing
anyone needs.
A strong, shared, transparent information base is critical in underpinning sound national policy
responses and the international co-operation to keep trade flowing. It will be critical that
countries honour their commitments to notify trade-related measures taken in response to
COVID-19 to the World Trade Organisation (WTO). The OECD is sharing information on trade-
related country actions on COVID-19 with WTO colleagues, and assessing the likely impact of
these actions to help support policymakers dealing with the crisis.

Building on our annual Monitoring and Evaluation of Agricultural Policies we are tracking and
assessing the impact of country measures concerning agrifood production and trade in response
to COVID-19. We are bringing this information to AMIS (Agricultural Market Information
System), where we work with other international organizations and governments to ensure
accurate, up-to-date information on market developments and country policies in critical
commodities for the global food system.

SOME STEPS THAT SHOULD BE TAKEN BY INDIA TO BOOST ITS TRADE AFTER
COVID-19

(1) To facilitate access to essential COVID-19 related medical goods and supplies by:
• reducing to zero import tariffs on COVID-19 related medical goods.
• exempting from VAT imports of COVID-19 related medical services and goods.
• waiving withholding taxes (advance income taxes) on imports of COVID-19 related goods.
• committing to refrain from imposing export bans or taxes on COVID-19 medical goods or
services.

(2) Support the consumption of essential items and limit negative impact on the poorest by:
• reducing to zero import tariffs on all food products.
• waiving withholding taxes on imports of food products for the duration of the crisis. Enhancing
the nutritional intake of the poor will boost immune systems and contribute to the ability to resist
the virus. • refraining from imposing export bans or taxes on critical food staples.
(3) Do support exporters to maintain jobs and foreign exchange earnings by:
• removing all bans, quantitative restrictions, and taxes on exports.
• waiving withholding taxes on exports.
• review all export applications, licenses, and permits and remove those that not required to
maintain market access or to protect the health, safety, and security.
• reimburse exporters that have lost overseas sales VAT that was paid on inputs in the
expectation that it would be refunded on export for the duration of the crisis.

(4) To contribute to macroeconomic policy efforts to shield the economy from COVID
related downturn by:
• reducing to zero import tariffs on all goods and streamlining regulations affecting trade in
services.
• waiving withholding taxes on imports of all goods and services.
• Allowing importers to defer VAT payments for an initial period of 12 weeks.

(5) Do streamline regulatory and border procedures to facilitate access to COVID-19

related medical goods and essential food products by:
• Removing the need for applications, permits, and licenses for products that pose minimal risk
to human health, environmental safety or consumer protection; streamlining the procedures for
those that are required, utilizing web-based or automated options for requesting and obtaining the
documents; prioritizing the issuance and regulatory approval of imports of all covid-19 related
medical goods, essential food items and perishables; and suspending fees and charges associated
with the issuance of any licenses, permits and certificates required for these products.
• Recognizing certificates or systems of conformity for medical equipment, essential food items
and farming inputs from accredited agencies in countries with similar or higher standards.
• Implementing risk management to allow low-risk critical supplies to quickly pass clearance
controls.
• Enhancing border management coordination mechanisms, both at the policy level (such as the
National Committee on Trade Facilitation) and at the operational level (ports, airports and border
posts); and supporting increased internal and external border agency collaboration. For example,
customs and agencies responsible for Sanitary and Phytosanitary (SPS) standards should work
together to design special regimes for expedited clearance for essential medical goods, food
products and farming inputs.
• Improving business continuity through greater use of ICT, flexible working schedules, longer
border opening hours, expanded access to telephone and online enquiry points; all of which can
increase efficiency and limit the physical presence and interaction of logistics workers and
officials at facilities and border crossing points.
• Supporting cooperative arrangements among small-scale cross-border traders to organize their
supply chains, reducing movement and interaction of people but enabling business continuity,
particularly in cases where borders are closed to the movement of people.

The global macroeconomic outlook for the current financial year 2020-21 has been adversely
affected by COVID-19 pandemic which has impacted the majority of countries in the world
across continents. The pandemic has cast its shadow across various economic activities with
dislocation in global production, supply chains and trade. The spread of COVID-19 in India and
its mitigation plan of 40 days nationwide lockdown from 25 March 2020 to 3 May 2020 and a
possibility of further extension of lockdown by several State Governments, there is likely to be a
significant impact across various sectors of the economy.

To address these adverse times, the Government of India has been preparing strategies and action
plans not only for business continuity and sectoral revival but also to improve Ease of Doing
Business in the country by releasing notifications/amendments/circulars highlighting measures to
improve the business environment in India. Below are some of the special measures by Central
government, Reserve Bank of India, Securities & Exchange Board of India (SEBI), Insurance
Regulatory and Development Authority (IRDAI) and the sectoral ministries to boost businesses
in India.
SOME MEASURES TAKEN BY GOVERNMENT

1) Helpdesk operationalized by DGFT for COVID-19 related export or import issue.

2) Advisory on non-charging of container detention charges on import and export.
3) Temporary relaxation in processing of documents pertaining to Foreign Portfolio Investors.
4) Foreign Trade Policy 2015-2020 extended for one year, other immediate relief measures also
announced.
5) Validity of registration cum membership certificate of members of Export Promotion Councils
expiring in March 2020 to be extended upto September 2020.
6) Scanned copies of pre-registration and other documents for registration under European Union
Generalized System of Preferences to be accepted.
7) Deadline for certain requests such as one-time condonation under the Export Promotion
Capital Goods (EPCG) scheme extended till March 31, 2021.
8) Exemption granted from Basic Customs Duty and Health Cess (till September 2020) on
import of ventilators, masks, PPEs, test kits, and inputs used to manufacture these.
9) Relaxation in provision for submission of physical copy of application for availing Transport
and Market Assistance for specified agricultural products.
10) FDI Policy amended to curb opportunistic acquisition or takeover of Indian companies,
restrictions on entities of countries sharing border with India.
11) Extension in deadline for application for initiating an Anti-dumping Sunset Review
investigation.
12) All-India Agri Transport Call Centre set up to facilitate inter-state movement of perishables
(crops and inputs) during lockdown.

SOME OTHER MEASURES TO BOOST TRADE INCLUDES:

1) Increasing the availability of credit. The availability of short and (especially) long-term
credit is crucial to exporters. This is decisive for small and medium enterprises (SMEs), for
which the credit constraints are more binding than for large firms. Since SMEs make up the large
majority of firms in developing countries, improvements in this domain are necessary to favour
export growth.
2) Improving cooperation among economic actors. Besides traditional policy instruments,
export growth could be favoured by improving cooperation among exporters and between the
government and business actors. For instance, there is nowadays increasing awareness about the
possibility of using export consortia to help SMEs access the international markets. This may be
seen as a complement to other forms of government intervention.
3) Simplifying regulation. The government should simplify regulation related to exports; long
bureaucracy procedures negatively affect especially new exporters. At the same time,
governments should improve information collection and dissemination about foreign markets
and requirements for exporting. Actions in this category should also consider product standards
and other technical requirements imposed for exporting to developed country markets.

4) Creation of duty drawback schemes. Among the traditional measures, the duty drawback
scheme is, as surveys of entrepreneurs’ opinions suggest, one measure that has proven to be
successful in the past. Standard duty drawback schemes can be improved by: (a) making them
accessible also to indirect exporters and extending them to imported inputs used in production of
exported final products; (b) eliminating duty pre-payment for exporting firms in order to reduce
credit requirements.

5) Combining short-term and long-term export growth policies. The stimulation of export
growth requires the combination of short- and long-term policies. In this context, it is important
to also exploit the complementarily between EPPs and other domestic policies (aimed, for
instance, at enhancing productivity and technological content of domestic products).
UNIT – V

5. The Covid-19 pandemic is affecting most of the key sectors of the Indian economy badly.
The different sections of the population are also hardly hit. Suggest some fiscal and
monetary measures as a component of economic reforms drive which the government
should take to help those affected in about 2100 words or 6-7 pages?

ANSWER
The world, as we all know it, is fairly uncertain right now; we had an economy which was
slowing before any of this corona virus crisis started, but the uncertainty of an unknown,
something we haven’t witnessed since past 100 years, has thrown all forecasts into the wind.

We witnessed the Spanish flu outbreak within the year 1918, but for most of us, we don’t tend to
carry on to anything that may have happened over two generations ago. In a country as densely
populated as us, the vulnerability is exacerbated. Economies around the world are in a state of
panic, the German chancellor estimated that 60 per cent of their country might get infected, the
magnitude of this pandemic can not be taken lightly. We need to safeguard the lower strata of
our ecosystems, people with no medical insurance, the daily wage workers, cab driver,
your domestic help, our farmers. The top-down method of helping corporates who might pay
their employees who in turn will make this ecosystem function is one solution, but
something must be done to assist this populous directly as well.

Additionally, the best-case scenario for an investor today is the example of China, a country with
eighty thousand cases that managed to contain the spread of this virus and bring some air to
normalcy. Closer to home, in India, an optimistic prediction is that we'll contain the spread of
Covid-19 within the following 3-4 months.

However, this in itself could mean a 15 to 20 percent drop in corporate earnings over the
following year. In addition to that, the markets are already down 35 per cent as estimated by
economists. The market correction we are witnessing worldwide will translate into real-world
problems. The impact of which while unprecedented, there's a large number of steps the
govt can take in the form of fiscal action to mitigate these risks.

So what can the government do to create some kind of an artificial floor under these
circumstances?
Targeted fiscal, monetary, and financial market measures will be key to mitigate the economic
impact of the virus.
Governments should use cash transfers, wage subsidies and tax relief to help affected households
and businesses to confront this temporary and sudden stop in production.

INHERITANCE TAX

The disparity in wealth around the world is burgeoning, to a point where the top ten richest
people have as much wealth as the bottom fifty percent of the world, history has taught us that
such disproportionate wealth is unsustainable. Five hundred years ago, when the king and his
court accumulated ninety percent of the resources of the state; this resulted in coups, the current
ecosystem is driving people towards populists leaders.

We must remember populism is generally a precursor to socialism, we have been down this path
before and know it doesn’t work. The wealth disparity has to be contained, for the good of the
rich and the poor. A 10 percent inheritance tax right now can go a long way in aiding the
undeserved of our society today. Also, this has precedent in our western counterparts, where
economies have been using this as a tool, and it seems to be working for them.

Financial Stimulus: We had issues with our economy slowing down much before all the
carnage this virus has created began, financial markets and a robust secondary market are
cardinal to the well-being of an economy. Let’s explore some of the ways by which the
government can attract foreign capital quickly

Long Term Capital Gain tax: This recently introduced tax is not earning the government any
money, and with the 35 per cent correction we have just witnessed, it doesn’t look like it’ll earn
money for a substantial amount of time in the future either. It deters foreign capital it would be
prudent to scrap the tax.

Dividend distribution tax: It causes companies to hoard cash, especially in this environment of
uncertainty with slowing demand and zero CAPEX outlooks. To allow for dividends to be paid
more freely the government could aid consumer sentiment and indirectly aid multiple industries.

FPI (foreign portfolio investment): Reduction in the change in rules around how FPIs are taxed
and make it easier for foreigners to allocate money into India, things like indirect transfer tax,etc
are a huge operational deterrent for investors exploring the FPI route.

Especially when they have peer emerging economies with favorable tax laws to allocate their
capital to at hand, it’s the time to welcome investor capital and not shun them with bureaucratic
policy changes and red tape.

CAT 3 AIF taxation (Alternate investment funds): Cat 3 funds have brought a whole host of
sophisticated investors and large amounts of capital to our financial ecosystem, allow pass-
through taxation, not taxing at the fund level but allowing for people to pay tax at their tax
bracket. Taxing AIFS at a fund level is making an entire industry fight for its survival, making it
harder for sophisticated investors to access the financial ecosystem in India with a great product
where they can also hedge effectively during downturns.

Buyback tax: If a company or promoters of a listed company want to buy back more of their
stock, this aids sentiment significantly and goes a long way during downturns, as promoters can
step in to show confidence in their companies by allocating more of their own capital to their
companies. This tax creates an additional obstacle and leads to more harm than good could be
done away with especially with the circumstances we have at hand.

Monetary policy, unlike in a business cycle, is less effective in dealing with a pandemic. The
problem is not liquidity alone, but also confidence in the future and disruption in economic
activity. Supply chains are also disrupted. For India, one silver lining is the sharp drop in global
oil and gas prices with positive effects on the current account deficit (CAD).
Life by a Thousand Cuts Nevertheless, given that inflation is coming down, and will decline
further, RBI should start with at least a 50-basis-points (bps) cut in the repo rate in its April
meeting, or even earlier. The US Fed cut rates dramatically by 150 bps. But as also in the US and
EU, a rate cut alone will not help too much, especially for industries linked to external supply
chains.

RBI should also target certain sectors — pharma, auto, construction, tourism, etc — for further
regulatory forbearance to cut back the cost of doing business. These might be time-bound actions
for 3-6 months. More funding for MSMEs could even be considered by increasing the assets of
Mudra Bank and other MSME-focused banks.

The bulk of action has got to be on the fiscal side. The disinvestment program will go out of the
window. Try selling Air India when the worldwide airline industry takes an enormous hit, or
BPCL when oil prices are crashing.

Tax revenues also will fall with a slowdown. Fiscal receipts could come by a minimum of 2% of
GDP. On the positive side, the drop in oil prices could give India a trade windfall, amounting
to the maximum amount as 1-1.5% of GDP, reckoning on how long low oil prices persist. To
handle fiscal pressures, while not optimal, GoI is also forced to keep the bulk of the decline, and
not reduce pump prices, because it did in the past. It's already raised petrol excise by `3 a litre.
With falling oil and gas prices, India should also take it as a golden opportunity to
create strategic oil reserves, whether or not it has to borrow cheaply externally for this by ONGC
and other major PSUs. That India wasn't a part of global supply chains — except for some
industries — will mean less damage and, maybe, a chance to accelerate ‘Make in India’.

On the fiscal side, the measures should be:

Huge increases in public health spend to confirm supplies — masks, gloves, medical kits for
the medical experts, medicine, health centres, more hospitals — to handle coronavirus on an
oversized scale are available. Clean water and sanitation must be given critical attention.
Enhance cash transfer programmes for farmers, and introduce it also for poor consumers.
These might be done through below poverty line (BPL) ration cards to start out.

Ensure greater supplies of basic food items through fair price shops. Plan for closure of schools,
colleges, government offices — while ensuring essential services — and enhance capacity for
remote learning and diagnostics.

Identify, along with industry, major sectors stricken by links to global supply chains, especially
auto, telecom and pharma, and help build alternate options with support to relevant sectors.

Wait for Green Shoots: Further tax simplification, especially of GST for MSMEs and
exporters, might be accelerated. Tourism will need special attention. On the positive side,
Indians spending on outbound tourism will fall sharply, as will spending on education and health
abroad. No need to panic. One should hope for the best-case scenario, but prepare for the worst-
case one during this Year of Living Dangerously.

But decisive and anticipatory actions are needed. Lockdowns in China, and rapid testing and
quarantine in South Korea, show that the disease will be controlled. Many of the actions
proposed here will help India’s struggling economy whether or not Covid-19 somehow passes us
by without a serious hit.

A combination of monetary as well as fiscal policy measures are concerned to salvage the
economy from the collateral damage from the fallout of the spread of coronavirus disease-
COVID-19, according to a groundwork report by the state bank of India.

On the monetary side, besides maintaining a proactive liquidity regime as well as facilitating
stability in financial markets through unconventional measures, the research report makes a case
for a rate cut by the central bank to accommodate the possible surge in liquidity demand and
shock-related price increases.
The RBI might also need to consider a degree of prudential forbearance in specific sectors like
the hotel, aviation, transport, metal, auto components, and textiles, it said. The central
bank should make use of the present situation to incentivize digital payments given the risk of
using currency notes in times of pandemic.

The output in the economy is predicted to weigh down on account of both demand-side and
supply-side factors. On the demand side, inoperability analysis for three sectors namely
Transport, Tourism, and Hotels shows a significant impact on demand and hence output. The
SBI research team estimates that the impact of a 5% inoperability shock might be 90 basis point
on GDP from Trade, Hotel and Transport and Transport, Storage and Communication segment
that would be spread over FY20 and FY21, with a bigger impact in FY21.

On the supply side China is a crucial source of critical inputs for several sectors. A supply shock
is equivalent to a higher price of inputs which successively affects the price of all the
commodities up the supply chain. A simultaneous demand and supply shock to the economy also
will have implications for the banking sector.

On the fiscal side the nearly 30% fall in crude oil prices could lower the petrol prices by
Rs12/litre and diesel prices by Rs10/litre in India from their present prices. the extra revenue
accruing to Centre from increasing the excise duty (Rs 35,000-Rs 40,000 crores) might be spent
on providing relief to people at the lower strata who will lose income due to the shutdown of
commercial activity in states.

In summary, while the priority is staying safe at this juncture and doing all we can with
isolation to assist the govt, we've got to bear in mind we live in a fragile economy where
everything is interconnected. We need to pay heed to the economic uncertainty, attracting new
capital, and nurturing a thriving economy might go a long way in aiding our fight against the
crisis at hand.
Conclusion

Many Indian key-sectors affected by Covid-19 lockdown are in need of urgent relief. A bulk of
the job losses have been reported from critically affected sectors. The overall impact of Covid-19
is now being felt by most sectors in the country. The Covid-19 pandemic has impacted
economies around the world like no other event that experts can recollect since the Great
Depression. Some of the strongest economies around the globe are struggling to cope with the
situation in the wake of an unprecedented demand shock and a shutdown of all key economic
activities that drive growth. Like US, India, too, has been hit hard. Global rating agency today
slashed India’s GDP projection for FY21 to 0.8 per cent. The Covid-19 pandemic has been a
huge blow to India, especially since many sectors were already facing a crisis when the virus
storm hit.

The virus not only accelerated the crisis but also ended the good run that some sectors were
enjoying. Adding to the worries in a steep demand shock that experts say classified as a long-
term worry, citing uncertainty in the post-pandemic landscape. Some fiscal and monetary
measures as a component of economic reforms drive which the government should take to help
those affected and revive the sectors in a better position. Governments should use cash transfers,
wage subsidies and tax relief to help affected households and businesses to confront this
temporary and sudden stop in production. Targeted fiscal, monetary, and financial market
measures will be key to mitigate the economic impact of the virus.