Business Environment by Shaikh Saleem

Third Edition
Business Environment
Shaikh Saleem Director
Maulana Azad Educational Trust’s
Millennium Institute of Management
Aurangabad, Maharashtra, India
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Contents
foreword xii 3 Industrial Policy 83

Preface to the third Edition xiii
Preface xiv Historical Background 83
About the Author xvi Government’s Role 85
Meaning and Objectives of Industrial Policies 86
1 Business Environment 1 Industrial Policies 87
Evaluation of the New Industrial Policy 102
Introduction 1 New Trade Policy of 1991 104
Meaning and Definition 2 The New Small-Scale Sector Policy of 1991 105
Salient Features 3 Recent Policies for Micro and Small Enterprises
Why a Company Need to be an International (MSE) Sector 108
One? 4 Case 114
Importance of the Study 4 Summary 114
Environmental Factors 5 Key Words 115
Business Environment and Strategic Management: Questions 115
A Glocal Approach 8 References 115
Market Opportunities 14
Distribution of Household by Income between 2011
and 2012 15
4 Industrial Licensing 116
India’s Political Scenario 15 Industrial Licensing in India 116
Recent Economic and Financial Environment 18 Objectives of Industrial Licensing 117
Annual Growth Rate of Gdp in India 19 Industrial Licensing Act of 1951 117
Case 22 Industrial Licensing Policy 123
Summary 23 Policy Decisions 130
Key Words 23 Recent Industrial Licensing Policy 133
Questions 24 Annexure I 135
References 24 Annexure II 135
Annexure III 136
2 Planning in India 25 Summary 140
Key Words 141
The Emergence of Planning 25
Questions 141
The Planning Commission 26
References 141
The National Development Council 27
Objectives of Planning in India 27
Five-Year Plans 31 5 India’s Monetary and Fiscal
Distribution of Public Sector Outlay of Each Plan 40 Policy 142
Five-Year Plans—Achievements and Failures 45
Twelfth Five-Year Plan (2012–17) 49 I. Monetary Policy of India 142
Liberalization and Planning 76 Concept and Meaning of Monetary Policy 142
Case 77 Objectives of the Monetary Policy 143
Summary 79 Differences Between Monetary Policy and
Key Words 81 Fiscal Policy 143
Questions 81 Meaning of Monetary Policy Terms 144
References 82 Impact of the Monetary Policy 147
vi | Contents
Measures to Regulate Money Supply 148 Dematerialization 192

The Monetary Policy and IMF 149 Products Available in the Secondary Market 193
Rbi’s Monetary Policy Measures 149 Sebi and its Role in the Secondary Market 194
Rbi’s Monetary Policy, 2012–13 151 Powers of Security Exchange Board of India 196
Ii. Fiscal Policy of India 153 Regulatory Requirements Specified by Sebi for
Concept and Meaning of Fiscal Policy 153 Corporate Debt Securities 199
Objectives of the Fiscal Policy 153 Broker and Sub-Broker in the Secondary
Fiscal Policy and Economic Development 154 Market 200
Techniques of Fiscal Policy 154 Sebi Risk Management System 202
Merits of Fiscal Policy of India 157 Investor Protection Fund (Ipf)/Customer Protection
The Shortcomings of the Fiscal Policy of India 158 Fund (Cpf) at Stock Exchanges 203
Suggestions for Necessary Reforms in Fiscal Foreign Institutional Investors (FIIs) 205
Policy 159 Growth of Stock Market in India 207
Fiscal Policy Statement, 2012–13 160 Key Words 210
Fiscal Policy—An Assessment 161 Questions 210
Conclusions 163 References 210
Case 165
Summary 166 8 National Income 211
Key Words 166
Meaning and Definition of National Income 211
Questions 167
Concepts of National Income 212
References 167
National Income Estimates in India 214
Methodology of National Income Estimation in
6 Economic Trends 168 India 216
I. The Indian Financial Systems 168 Causes for the Slow Growth of National Income in
Indian Money Market 168 India 229
Indian Capital Market 170 Suggestions to Raise the Level and Growth Rate of
Call Money Market 171 National Income in India 230
Bill Market 171 Major Features of National Income in India 232
Financial System 171 Difficulties or Limitations in the Estimation of
Structure of the Financial System 172 National Income in India 233
Functions of the Indian Financial System: Key Words 234
Promotion of Capital Formation 172 Questions 234
II. The Price Policy 178 References 234
Price Movement Since Independence 178
Objectives of Price Policy 183 9 Industrialisation and Economic
Prices of Industrial Products 183
Control of Expenditure 183
Development 235
Key Words 186 Concept and Meaning of Industrialisation 235
Questions 186 The Pattern of Industrialisation 237
References 186 Relative Roles of Public and Private Sectors 240
Inadequacies of the Programme of
7 Stock Exchanges in India 187 Industrialisation 242
Role of Industries in the Economic Development 244
Concept and Meaning of Stock Exchange 187 Industries During the Plan Period 246
Functions of Stock Exchange 188 Recent Industrial Growth 248
List of Stock Exchanges in India 188 Micro and Small Enterprises (MSEs) 252
Types of Financial Markets 189 Challenges and Outlook 255
Participants in the Securities Market 191 Key Words 255
Listing of Security at Regulatory Stock Exchange 191 Questions 256
Depository Services 192 References 256
Contents | vii
10 Foreign Trade Policy and Balance of Government Policy Measures to Reduce

Unemployment 318
Payments 257 Overview of Unemployment and
Foreign Trade Policy and Balance of Payments 257 Underemployment 319
Main Features of India’s Trade Policy 257 McKinsey Report 324
Phases of India’s Trade Policy 258 Case 327
India’s Foreign Trade Policy, 1991 259 Key Words 329
Major Trade Reforms 260 Questions 329
Highlights of Foreign Trade Policy 2009–14 References 329
Annual Supplement 2013–14 261
Assessment of the New Trade Policy 264 13 Inflation 330
Balance of Payments 264
Meaning and Definition of Inflation 330
Current Account Deficit 266
Features of Inflationary Economy 331
Capital Account 268
Measures of Inflation 332
Other Non-debt Flows 270
Inflation and Developing Economies 345
Disequilibrium of Bop 271
Demand-Pull vs Cost-Push Inflation 348
Key Words 272
Causes of Inflation 350
Questions 273
Effects of Inflation 352
References 273
Global Inflation and India 358
Case 361
11 Poverty in India 274 Key Words 363
Concept, Meaning, and Definition of Poverty 274 Questions 363
People Living under Poverty Line 275 References 364
Causes of Poverty in India 276
Historical Trends in Poverty Statistics 277 14 Human Development 365
Poverty and Inclusive Growth 278
Concept of Human Development 365
Factors Responsible for Poverty 284
Meaning and Importance of Human Resource 366
Measures to Reduce Poverty 285
How to Attain Human Development 369
Poverty Alleviation Programmes 286
Human Development and Gender Situation 370
Poverty Alleviation Through Micro-credit 289
Growth of Human Development 386
Outlook for Poverty Alleviation 290
Human Development Report (2007–08) 389
Controversy Over the Extent of Poverty
Case 392
Reduction 291
Summary 394
McKinsey Global Institute (MGI) Report on
Key Words 394
Poverty in India 291
Questions 394
Four Critical Elements are Key to the Path of
References 394
Inclusive Reforms 300
Case 302
Key Words 304 15 Rural Development 395
Questions 305 Concept, Meaning, and Definition of Rural
References 305 Development 395
Integrated Rural Development 397
12 Unemployment in India 306 Important Features of Rural Economy and
Rural Society 398
Concept, Meaning, and Types of
Scope of Rural Development 400
Unemployment 306
Interdependence Between Rural and
Nature of Unemployment in India 307
Urban Sectors 403
Magnitude of Unemployment 308
Strategies for Rural Development 404
Factors Responsible for Unemployment 314
Rural Water Supply and Sanitation 405
Steps to Reduce Unemployment 316
viii | Contents
Women and Child Development 407 Case 514

Challenges and Outlook 412 Key Words 515
Rural Development: A Critical Analysis 413 Questions 515
McKinsey Report 414 References 516
Key Words 417
Questions 417 19 Business Ethics 517
References 417
Ethics and Values 517
Relevance of Ethics in Business 518
16 Problems of Growth 418 Benefits of Ethical Business 519
Parallel Economy 418 Importance of Business Ethics 520
Regional Imbalances 424 Values in Business 521
Social Injustice 433 Inculcating Values in Management 521
Case 434 Categories of Business Values 522
Key Words 435 Need for Ethics in Global Change 523
Questions 435 Managing Ethics 523
References 435 Impact of Globalisation on Business Ethics 530
Business Ethics as Competitive Advantage 531
17 Direct and Indirect Taxes 436 Business Ethics in India 532
Case 533
Introduction 436 Summary 533
Governing Authority 436 Key Words 534
Direct Tax 439 Questions 534
Income Tax 439 References 534
Wealth Tax 439
Corporation Tax: India and the World 439
Indirect Tax 441
20 Corporate Governance 535
Income Exempted Under Section 10 442 Definition 536
Assessee [Section 2(7)] 442 The Need and Importance of Corporate
Total Income 446 Governance 536
Excise Duties 461 Problems of Corporate Governance 537
Customs Tariff 467 Best Practices in Corporate Governance: An Indian
Central Sales Tax (Cst) 470 and International Position Review 537
Modified Value Added Tax (Modvat) 472 The Board—Key to Good Corporate
Central Value Added Tax 475 Governance 539
Value Added Tax (VAT) 480 Disclosure and Transparency: Partners of Good
Service Tax 483 Governance 540
Case 487 Executive and Non-executive Directors 541
Summary 488 Brief Review of Overseas Development on
Key Words 489 Governance Issues 542
Questions 489 The Search for a New Approach to Corporate
References 490 Governance 548
Code of Conduct for Corporate
18 MRTP, FERA, and FEMA Act 491 Governance 551
Measures to Improve Corporate Conduct 552
Monopolies and Restrictive Trade Practices Act Corporate Governance and India 552
(Mrtp), 1969 491 Challenges Before Managers 554
Foreign Exchange Regulation Act (Fera), 1973 493 Corporate Governance and Some Indian
Foreign Exchange Management Act (Fema), Organisations 555
1999 499 Regulatory Framework of Corporate Governance
New Competition Policy 504 in India 556
Contents | ix
Case 559 Disinvestment Strategies 615

Summary 561 The Board for Reconstruction of Public Sector
Key Words 561 Enterprises (BRPSE) 624
Questions 561 The New Disinvestment Policy and Programme 625
References 561 Case 630
Summary 632
21 Social Responsibility of Business 563 Key Words 632
Questions 632
Origin and Growth of Concept 563 References 632
Meaning and Definition 564
Definition Through Various Dimensions 565
The Need for Social Responsibility of Business 566
24 Globalization 633
Social Responsibilities of Business Towards Background 633
Different Groups 567 Views of Scholars on Globalization 634
Barriers to Social Responsibility 573 Studies on Globalization 634
Corporate Accountability vis-à-vis Social Efforts of Anglo-Americans 635
Responsibility 574 Salient Aspects of Globalization 635
Challenges for Social Responsibility of Business 575 Role of Transnational Corporations (TNCs) 635
Emerging Perspectives for Corporate Social Popular and Successful Transnational
Responsibility 576 Corporations (TNCs) 636
Social Responsibility of Business in India 576 Concept and Meaning 637
Case 578 Definition 638
Summary 579 Features 638
Key Words 580 Globalization is Inevitable 639
Questions 580 Ten Rules of Global Reforms 640
References 580 India and Globalization 641
Government’s Measures Towards Globalization 641
22 Liberalization 581 Globalization and its Impact on the Indian
Industry 642
Background 581 Positive Effects of Globalization 648
Policy Changes 582 Negative Effects of Globalization 652
Economic Liberalizations 582 Pro-globalization 653
Meaning of Liberalization 582 Anti-globalization 654
The Path of Liberalization 583 Globalization—An Assessment 656
Reform Achievements 595 A Critical Appraisal of Globalization 658
Industrial Growth 598 Threats to Globalization 660
Liberalization—An Assessment 602 Case 662
Liberalization and Growth of Indian Economy 603 Summary 662
Issues and Challenges 604 Key Words 663
Case 608 Questions 663
Key Words 609 References 663
Questions 609
References 609
25 Foreign Investment 664
23 Privatization and Disinvestment of Meaning 664
Need for Foreign Investment 665
PSUs 610 Adverse Implications of Foreign Investment 666
Public Sector Enterprises (PSEs)—The Necessity 610 Determinants of Foreign Investment 666
A Decade of Performance 611 Government Policies 668
Concept, Meaning, and Objectives of Liberalization and Changing Sectoral
Privatization 613 Composition of FDI 672
x | Contents
Liberalization and Changing Sources of FDI in Annexure I 746

India 674 Annexure II 747
Impact of FDI Inflows: Some Issues 680 Annexure III 747
Rising Importance of FDI in Indian Economy 683 Exim Performance 748
R&D, Local Technological Capability, and Exim Policies 750
Diffusion 684 India’s Exim Performance 757
FDI and the Knowledge-based Economy in India: Regional Trade Agreements 760
Software and Global R&D Hub 686 Export Promotion Measures 760
Foreign Technology Transfers 689 Special Economic Zones 761
Policy Lessons 690 Agri-export Zones 763
New Policies 692 Highlights of Foreign Trade Policy, 2009–2014 764
A Comparative Statistical Outline of Fdi 693 Case 769
Case 710 Summary 770
Summary 710 Key Words 771
Key Words 711 Questions 771
Questions 712 References 771
References 712
28 Special Economic Zones in
26 Multinational Corporations 713 India 772
Origin 713 Concept and Meaning of Sez 772
Meaning 714 The History of Sez 772
Definition 714 Definition of Sez 773
Objectives 715 Who Can Set up Sez and its Requirements 774
Modes of Entry into Foreign Markets 715 Approval Mechanism 775
Global Sourcing 720 Sezs In India 776
Reasons for the Growth of Mncs 721 Advantages and Disadvantages of Sez 778
Favourable Impact of Mncs 722 Performance of Sez In India 779
Harmful Effects of the Operations of Mncs on Important Sezs in India 780
Indian Economy 723 Features and Facilities of Sezs in India 781
Domination of Mncs over Indian Economy 724 Sez and Export Promotion 786
Liberalization and Mncs 724 Sez Policy of India: Sez Act and Sez Rules 788
A Critique of Mncs 725 Salient Features/Provisions of Sez Rules 789
Multinational Companies and Production Sez Controversy 789
Linkages 726 Sezs—A Global Overview 791
Mncs Deal a Blow to Domestic Companies 727 Conclusion 792
Mncs and Global Imbalance 728 Case 792
Acquisition of Mncs by Indians 729 Key Words 794
Case 1 731 Questions 794
Case 2 733 References 795
Summary 734
Key Words 734 29 International Business
Questions 734
References 735 Environment 796
The Nature of International Business
27 India’s Import–Export Policies 736 Environment 798
Historical Perspective 736 Trends in the World Trade and Economic
Governing Authority 737 Growth 798
India: Pre- and Post-liberalization 740 General Agreement on Tariffs and Trade
Liberalization Policy of Exim 742 (GATT) 799
Contents | xi
General Agreement on Trade in Services Textiles—Back in the Mainstream Rules 840

(GATS) 801 Agriculture: Fairer Markets for all 841
International Organizations 804 Trade Remedies 841
International Monetary Fund (IMF) 805 Standards and Procedures 842
World Bank (WB) 813 Administrative Procedures 844
An Evaluation of IMF–WB 815 Investment Measures 845
World Trade Organization (WTO) 817 Disputes Settlement Mechanisms 845
International Finance Corporation (IFC) 820 Ministerial Meetings 847
Asian Development Bank (ADB) 822 Trade-related Aspects of Intellectual Property
United Nations Conference on Trade and Rights (TRIPs) 847
Development (UNCTAD) 822 Trade-related Investment Measures (TRIMs) 849
United Nations Industrial Development Non-tariff Barriers (NTBs) and Dispute Settlement
Organization (UNIDO) 824 Mechanism 850
International Trade Centre (ITC) 824 Anti-Dumping Measures 850
Generalized System of Preferences (GSP) 825 Subsidies 851
Global System of Trade Preferences (GSTP) 826 Singapore Ministerial Meeting, 1996 851
Case 827 Geneva Ministerial Meeting, 1998 852
Key Words 828 Seattle Ministerial Meeting, 1999 853
Questions 828 Doha Ministerial Meeting, 2001 853
References 829 Cancun Ministerial Meeting, 2003 854
Trade and Development: Recent Trends and the
30 World Trade Organization 830 Role of the WTO 858
Conclusion 873
Background 830 Summary 874
Meaning and Agreements 832 Key Words 875
Functions 834 Questions 875
Principles of Trading 835 References 875
Provisions for Developing Countries 836
Other Provisions 837 GLOSSARY 877
The WTO Agreement 838 BIBLIOGRAPHY 883
Liberalizing Trade in Goods 839 INDEX 887
Foreword
The business environment in India is undergoing a dynamic change; what was looked upon
as an underdeveloped nation is now regarded as a potential economic power, struggling to
take strides in the service industry, providing multinational companies with unparalleled
opportunities. Already, India is moving to tune in to the requirements of global markets and
taking concrete steps to generate more employment.
“Brain drain”, which had been the subject of extensive talk in corporate circles, has now
been replaced by “brain gain”. The Murthys and Premjis are gaining international recognition;
the Tatas are entering into several collaborations abroad.
However, the development process is still evolving. There has, no doubt, been an acceler-
ated shift from the traditional and inward-looking policy to a much more forward-looking
framework. With liberalization and privatization taking place in almost all major sectors
of the economy, the nature and extent of the role of the state is undergoing fundamental
changes; these are excellent portents.
Reforms in all sectors are on the anvil, especially for the much neglected agriculture
sector, which is receiving special attention from the government. It is hoped that with the
new measures introduced it will transform rural India. In this changing environment of
such gigantic dimensions, this book by Dr Shaikh Saleem, detailing the various factors of
what exists and what promises to change is a most welcome effort. Dr Saleem is a scholar
of repute and an administrator of high standing. He has had a varied and rich educational
background as well as industrial experience. His approach is analytical and comprehensive.
His book captures major areas of Indian economic development in recent years, and attempts
to analyze them and their impact on corporate adjustments and industrial management.
This book will provide a broad review of the various steps taken by successive govern-
ments since independence. What had been done right? What has gone wrong? This book
goes into all aspects of economic development and presents an overall picture in all its hues.
It contains a wealth of information and I am sure the book will prove to be a valuable addition
to the study of the complex new challenges facing India today.
Rafiq Zakaria
Preface to the Third Edition
Recently, the business environment has undergone momentous changes and the world has
altered significantly since the publication of our first edition in 2006. The recent economic
recession of 2008, which had its origin in the US, brought the entire world economy in turmoil,
having both direct and indirect impact on economic development. It has also compelled us to
re-think capitalism and gratuitous privatization without regulation even in those countries
which are traditionally committed to free trade.
In India, political developments, besides economy, have a direct bearing on the shaping
of our economic policy and are gradually becoming a matter of concern. Events like the
assassination of Benazir Bhutto and subsequent turmoil in Pakistan, the change of guard in
Nepal and Bangladesh and the conflicts in Sri Lanka have had major impacts on the Indian
policies. Recently a change in the Government of India, will definitely present the economic
policies in a different light. The present government is more active in initiating policies
related to privatization, globalization and foreign investments. The present government also
has a capitalistic frame of mind and it is quite evident from the steps it has taken so far. Also,
the situation in the neighbourhood has not improved to any extent. Growing clashes with
Pakistan and China, our influential neighbours, are also posing a threat to India’s economic
policies. Moreover, the world economy has still not recovered fully from the recession of 2008.
The above developments, along with the overwhelming response and encouraging feed-
back from the users of this book have prompted us to go for the revision of the second edition.
The revised edition presents a thorough overhaul of the earlier edition and is updated
with the latest information and developments and also new aspects have been added to keep
pace with the rapidly changing economic and political scenario of the world.
The previous editions were profusely endorsed by various reputed institutions like
Indian Institute of Management (IIM) Indore, IIM Lucknow, Osmania University, Gauhati
University, Uttar Pradesh Technical University and various other B-schools and colleges
for their MBA, M.COM, B.COM, BBA and other management and economic courses. I am
very much hopeful that the revised edition will prove even more rewarding for the students,
academicians and researchers alike.
Acknowledgements
I am indebted to all those who have helped, encouraged and supported me in preparing the
third edition of this book. My special thanks and gratitude go to Padmashree Fatma Rafiq
Zakaria, Chairperson, Maulana Azad Educational Trust and Society, for her motivations and
support for writing this book. Thanks are also due to my son, Mohammed Ibad who has
helped me a great deal in updating the information in this book and bringing this book up
to date.
I would like to thank Pearson Education India, especially Vipin Kumar, Varun Goenka
and the entire team for their co-operation and encouragement.
I am also thankful to my family members, especially my wife for her invaluable support.
I solicit critical observation and suggestions from professionals and students.
Shaikh Saleem
Preface
India’s economic policies during the pre-liberalization era were characterised by strong
centralised planning, government ownership of basic and key industries, excessive regulation
and control of private enterprise, trade protectionism through tariff and non-tariff barriers,
and a cautious and selective approach towards foreign investment and MNCs, dependent on
regime-guided and bureaucracy-controlled quotas, permits and licenses.
During early 1980s, these inward looking economic policies began to be widely
questioned. Policy makers started realizing the drawbacks of this strategy, which curbed
competitiveness and efficiency, produced a much lower rate of growth than expected and led
to inferior-quality, high-cost domestic production.
During the 1990s, the economy was virtually on the verge of financial disaster, threatened
by the precarious balance between payment and current account deficit, as well as a huge
budget deficit. Insufficient foreign exchange to meet import needs had resulted in gold being
mortgaged to the Bank of England to save the country from defaulting on international debt
repayments. Restructuring the economy was the only alternative available to stem this drift.
Consequently, economic reforms were introduced. The new industrial policy announced by
the Government of India on 24 July 1991 proved to be a watershed in the post-independence
history of India.
In the newly liberalised industrial and trade environment, the government allowed com-
petition and market forces to guide investment decisions. It progressively assumed the roles
of promoter, facilitator and catalytic agent instead of a controller and licenser of private eco-
nomic activities. With progressive liberalization, privatization and globalisation, the business
environment in India has become increasingly international.
It is with this environment in mind that the University Grants Commission introduced
Business Environment as a subject for B.Com, B.B.A., M.Com and M.B.A. courses. This book
has been written in accordance with those B.B.A., B. Com, M.Com and M.B.A. courses out-
lined in the UGC model curriculum.
The book has a number of distinguishing features, including thorough discussions on the
conceptual framework of each chapter, comprehensive coverage of government policies, and
detailed, student-friendly discussions on liberalization, privatization, globalisation and the
WTO.
In each chapter, boxes containing brief information have been provided. The objec-
tive is to enable students to test and affirm the knowledge acquired by them in a particular
chapter. A large number of tables containing statistical data are provided with an aim to sup-
port the conceptual input provided in the text. At the end of each chapter, a case study has
been discussed to help students analyse the complex issues encountered in real-life business
situations. Keywords, provided at the end of each chapter, will help students understand the
subject faster and enhance their vocabulary. A consolidated list of all the resources referred
to in each chapter is given next to the key words for ready reference.
xv | Preface
This book has been designed to keep in view the standard requirements of students of
business management, commerce and economics at graduate and post graduate levels. It can,
however, equally serve the purpose of a business manager who needs to understand the busi-
ness environment configuration to make corporate decisions. Candidates aspiring to com-
pete for professional courses and jobs will also find it a valuable source.
I express my thanks and gratitude to all those who have helped, encouraged and support-
ed me through this project. My special thanks and gratitude to Dr. Rafiq Zakaria, founder
of the Maulana Azad Educational Trust and Society, an intellectual and educationist, who
encouraged and supported me in this endeavor and wrote the foreword to this book. His
sudden death on 9 July 2005 has deprived us of a visionary, a scholar and a statesman who
rendered a yeoman’s service to the nation. I dedicate this book to him for his immense efforts
toward the cause of education.
My thanks also go out to Mrs Fatma Rafiq Zakaria, Chairperson of the Maulana
Azad Educational Trust and Society, for her support of the project. Thanks are due to my
institutions—the Millennium Institute of Management and the Tom Patrick Institute of
Computer and Information Technology—and their staff. Thanks are due to my staff, specially
Mrs Vidya Gawli, Mr Imran Khan, Ms Afsha Dokadia, Mr Asrar Ahmed and my family.
I alone am responsible for any mistakes and oversights that might have remained, and
suggestions for further improvement are always welcome.
Shaikh Saleem
About the Author
Shaikh Saleem, (M.com, LLB, MBA and Ph.D.), is the director of Maulana Azad educational
Trust’s Millennium Institute of Management since 2003. He has 30 years of academic and
professional experience. His areas of expertise are business law, business economics and
management. He has been awarded the ‘Innovative B-School Leadership Award’ and also
‘Asia’s Best B-School Finance Professor Award’ by DNA and Star of the Industry group in
2009 and 2012, respectively. He has published numerous research papers and articles in
various national and international journals and dailies.
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C hapter
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C h apte r O u t l i n e
• Introduction 1 • India’s Political Scenario 15
• Meaning and Definition 2 • Recent Economic and Financial
• Salient Features 3 Environment 18
• Why a Company Need to be an • Annual Growth Rate of GDP in India 19
International One? 4 • Case 22
• Importance of the Study 4 • Summary 23
• Environmental Factors 5 • Key Words 23
• Business Environment and Strategic • Questions 24
Management: The Glocal Approach 8
• References 24
• Market Opportunities 14
• Distribution of Household by Income between
2011 and 2012 15
Introduction
Every business organization has to interact and transact with its environment. Hence, the
business environment has a direct relation with the business organization. Obviously then,
the effectiveness of interaction of an enterprise with its environment primarily determines
the success or failure of a business.
The environment imposes several constraints on an enterprise and has a con-
siderable impact and influence on the scope and direction of its activities. The enter-
prise, on the other hand, has a very little control over its environment. The basic job
A low standard of living, backed
of the enterprise, therefore, is to identify with the environment in which it operates and by a vicious cycle of poverty, for
to formulate its policies in accordance with the forces which operate in its environ- a considerable section of popu-
ment. Every business organization has to tackle its internal and external environment. lation and about 250 million
For example, a committed labour force provides an internal environment of any busi- people under the poverty line,
coupled with a considerable
ness, whereas the ecological factors determine the external environment. While the concentration of economic
internal environment reveals an organization’s strengths and weaknesses, the external envi- power in few hands, character-
ronment reflects the opportunities available to the organization and the threats it faces. ise the Indian economy.
India has a developing economy with abundant natural resources, large population,
and a low level of per capita national income. Although a substantial liberalization has been
envisaged for the country, the economic activities are still considerably controlled by the
government. A low standard of living, backed by a vicious cycle of poverty, for a consider-
able section of population and about 250 million people under the poverty line, coupled
with a considerable concentration of economic power in few hands, characterise the Indian
economy.
2 | Business Environment
Meaning and Definition

‘Environment’ literally means ‘Environment’ literally means the surroundings, external objects, influences, or circum-
the surroundings, external stances under which someone or something exists. Keith Davis defines the environment of
objects, influences, or circum- business as ‘the aggregate of all conditions, events, and influences that surround and affect it’
stances under which someone
or something exists. (Davis and Blomstrom 1971).
The actual environment of any organization is ‘the aggregate of all conditions, events and
influences that surround and affect it.’
Characteristics of Business Environment are listed hereunder.
• Complex
• Dynamic
• Multifaceted
• Far-reaching impact
Business policies of an organi- There are two sets of factors—internal and external—which influence the business policy
sation are influenced by its envi- of an organization. The internal factors are known as controllable factors because the organi-
ronment, which is the aggregate zation has a control over these factors. It can modify or alter such factors to suit the envi-
of all conditions, events, and
influences that surround and ronment. The external factors are known as uncontrollable factors because they are largely
affect it. beyond the control of an individual enterprise.
The internal environment consists of a large number of factors which contribute to the
success or failure of an organization. It refers to all the factors within an organization, which
impart strength or create weakness of a strategic nature. Strength is the inherent capacity of
an organization which can be used to gain strategic advantage over its competitors. On the
other hand, the weakness of an organization refers to its inherent limitation or constraint
which creates a strategic disadvantage.
The important internal factors include the following:
1. Organizational resources,
2. Research and development, and technological capabilities,
3. Financial capability,
4. Marketing capability and resources
5. Operations capability,
6. Human resources,
7. Company image and brand equity and
8. Physical assets and facilities.
The term ‘business environment’ generally refers to the external environment and includes
factors outside the firm which can lead to opportunities for or threats to the firm. Although
there are many external factors it is divided into micro and macro environments. The most
important factors of macro environment are economic, governmental, legal, technological,
geographical, and social.
Business Environment | 3
Internal External
Organizational R&D Financial Marketing

Resources Facilities Capabilit Capability Micro Macro
Human Physical
Resources Assets
Suppliers Customers Market Competitors Government

Intermediarie Agencies
Economic Governmental Legal Technological Geographical Social
Salient Features
The nature of the environment is likely to determine, to a great extent, the role of the enter-
prise and hence, the nature of the task and the role of the top management, in general, and
that of the chief executive, in particular. The salient and distinct features of the environment
in which the enterprise operates determine the nature of its business policy.
Public policies must be consistent with and conducive to creating confidence among
business enterprises, in particular, and people at large, in general. Obviously, government
regulations need to motivate the business community to make use of opportunities to actively
participate in the task of developing the economy, on the one hand, and increasing the living
standards of the people, on the other.
Rapid social change leading to a transformation of the society has become the order of Industrialization and the resul-
the day. Industrialization and the resultant urbanization have given birth to a certain level of tant urbanization have led to
social disorganization, while an industrial society has emerged in the place of a traditional a transformation in the social
setup. It has given birth to an
social setup. Now, the industrial workforce in India represents the most organized segment industrial workforce, which is
of our society. They are, perhaps, most aware of their rights and are fighting for the same. The very organized and more con-
struggle for protecting their interests is likely to be a continuing feature, particularly in the scious of its rights.
face of threats posed by the adoption of newer technologies.
Every company’s policy is, in many ways, affected by its environment because the ac-
complishment of its objectives depends largely on the degree of interaction of the enterprise
with its environment. The environment imposes several constraints on the enterprise and has
a considerable impact and influence on the scope and direction of its activities. The nature
of business environment in India is dominated by the government regulations with a view to
ensure a certain level of economic life to the people. Not only government regulations, but
also any fluctuation in the environment has an impact on the existing business canvas.
Taking care of the nature of business environment enables the corporate policy-maker to
1. Perform the critical function of matching the needs of the society and the capacity of
the goods and services to satisfy the needs of the people,
2. Adapt the organization itself to the dynamic conditions of the society,
3. Match the organizational policies and resources with the social needs, and
4. Contribute to the social responsibility of business.
Thus, a business policy should be matched with the specific needs of the customer, produces,
and the society at large. It means that the organization has to focus itself on its environment.
A constant focus of the business organization on critical aspects, such as customer
Any business organization
should keep its focus on critical
satisfaction, product development to satisfy specific needs of the society, how the products
aspects, such as product de- and services offered by the organization are capable of meeting the social and environmental
velopment and customer satis- needs, and so on, would enable the organizational policies to identify with its business envi-
faction, with a view to meeting ronment. Actually, environmental changes strongly influence the organization, through its
social and environmental
needs. customers, its market or channels of distribution banking community, suppliers, and so on.
WHY A COMPANY NEED TO BE AN

INTERNATIONAL ONE?
• To optimise the utilisation of previously untapped market
• To effectively increase economies of sale
• To take maximum advantage of product/business life cycle
• To utilise natural resources and cheap manpower available within the host country
• When domestic sales is below the break-even point
• To transfer inferior goods to other developing countries.
Importance of the Study

Before analysing the various external environmental factors, let us consider the importance
of the study of the business environment:
1. It helps an organization to develop its broad strategies and long-term policies.
2. It enables an organization to analyse its competitor’s strategies and, thereby, formulate
effective counter strategies.
3. Knowledge about the changing environment will keep the organization dynamic in
its approach.
4. Such a study enables the organization to foresee the impact of socio-economic
changes at the national and international level on its stability.
5. Executives are able to adjust to the prevailing conditions and, thus, influence the
environment in order to make it congenial for business.
6. Development of effective strategies to ensure sustainability.
7. To foresee the impact of socio-economic changes both at the national and interna-
tional levels on a firm’s ability.
8. Analysis of competitors’ strategies and formulation of effective counter measures.
9. To keep the organization dynamic.
Environmental Factors
Many factors can be included in the category of environmental factors—social, econom-
ic, cultural, geographical, technological, political, legal, and ecological factors; in addition
to government policies, labour factors, competitive market conditions, locational factors,
emerging globalization, and so on. According to writers like W.F. Glueck and I.R. Jauch, the
environment includes the factors outside the firm which can lead to opportunities or threats
to the firm. Although there are many factors, the most important of the factors are socio-
economic, technological, suppliers, competitors, and government. We may examine some of
these environmental factors briefly here.
Social Factors
Every business organization operates within the norms of the society and exists primarily
Every business organization
to satisfy its needs. Hence, a business organization has an important position in the social has a social responsibility. It
system. It has a social responsibility. While the social factors influence the policy and strategy operates within the norms of
of business, the organization strives to satisfy the needs and wants of the society. the society and strives to sat-
isfy the needs and wants of the
There are many social factors which affect the policy and strategy of corporate manage-
society.
ment. Culture, values, tastes and preferences, social integration and disintegration, and so
on must be a part of the agenda of every business organization. While social institutions are
closely linked with business organizations, business itself is a social institution. As observed
by Keith Davis and Robert Blomstrom, business is a ‘social institution performing a social
mission and having a broad influence on the way people live and work together’ (Davis and
Blomstrom 1971).
Economic Factors
Economic factors, such as per capita income, national income, resource mobilisation, The economic factors that
exploitation of natural resources, infrastructure development, capital formation, employ- influence a business environ-
ment generation, propensity to consume, industrial development, and so on, influence the ment are per capita income,
national income, infrastructure
business environment. Besides all these, the economic performance of a country also deter- development, capital formation,
mines the business environment. resources mobilisation, exploi-
India’s economic performance has been erratic in the 1980s. Although planned econom- tation of natural resources, etc.
ic development has resulted in a considerable economic growth over the years, political insta-
bility has resulted in a slow industrial progress, price instability, high inflation rates, foreign
exchange crises, and so on. Above all, a country’s progress is determined by its economic
system too. The three types of ‘Economic Systems’ are given in Box 1.1.
Cultural Factors
The cultural factors of a business environment should also be taken into consideration while
scanning the environment and during the policy formulation. Managers and policymakers
in a global business cannot disregard cultural variables like social and religious practices,
Box 1.1 Economic Systems

There are three types of economic systems—capitalism, an example of the last remaining predominantly
communism, and mixed. communist country.
1. Capitalism believes in private ownership of produc- 3. Mixed economic system is one where the major fac-
tion and distribution facilities. The United States, tors of production and distribution are owned, man-
Japan, and the United Kingdom are examples of aged, and controlled by the state. France, Holland,
capitalist countries. and India are examples of mixed economies.
2. Communism is a system where the state owns all
the factors of production and distribution. Cuba is
education, knowledge, rural community norms and beliefs, and so on, which are predomi-
nant in India, especially in the rural society. Sociological and cultural factors are also very
significant in the rural communities in India. Social stratification plays a vital role in rural
societies while cultural differences are unthinkable for any international manager or even an
urban Indian manager.
Geographical Factors
Geographical locations, sea-
In a global business environment, geographical locations, seasonal variations, climatic conditions,
sonal variations, climatic con- and so on, considerably affect the tastes and preferences of customers, and also prospects
ditions, and such other factors and the labour force. The policies of the government regarding industrial locations are con-
considerably affect the tastes siderably influenced by the pace of development in various geographical locations. Business
and preferences of customers.
Hence, business policymakers policymakers, particularly managers in a global business environment must, therefore, con-
must consider geographical fac- sider such geographical factors analytically.
tors analytically.
Technological Factors
Technology is considered to be one of the most important factors of any business environ-
ment. That is why the government, in its industrial policy resolutions, industrial licensing
policies, MRTP and FERA regulations, and even in liberalization policies, has assigned a
great importance to sophisticated technology and technology transfer. Foreign investment
upto 100 per cent is allowed in industries with sophisticated technology. The late Prime
Minister Rajiv Gandhi’s vision of a modern India was of a technology-based nation. Technol-
ogy imports and foreign technical collaboration were allowed for this purpose. Since tech-
nology develops rapidly, technological factors must be taken into consideration by managers
and policymakers.
Political Factors
The philosophy and approach of the political party in power substantially influences the busi-
ness environment. For example, the Communist-ruled state of West Bengal had the largest
number of industrial disputes and lost through agitation. Similarly, during the Janata party
rule at the Centre, IBM and Coca Cola had to wind up their business. At the time of the
Congress rule, the stock prices went up, whereas the stock market crashed during the unsta-
ble minority government of the National Front. In the Kingdom of Saudi Arabia, the business
environment and the social system are regulated largely by Shariat (Islamic religious law).
Thus, the management of business enterprises and their policies are considerably influenced
by the existing political systems.
Legal Factors
Every aspect of business is regulated by a law in India. Hence, the legal environment plays a
very vital role in business. Laws relating to industrial licensing, company formation, factory
administration, industrial disputes, payment of wages, trade unionism, monopoly control,
foreign exchange regulation, shops and establishments, and so on are examples of what forms
the legal business environment in India. Some of these legislations are examined in other
chapters.
Ecological Factors
Ecology deals with the study of the environment, biotic factors (plants, animals, and micro-
organisms), abiotic factors (water, air, sunlight, soil), and their interactions with one anoth- Protection of the environment
and preservation of ecological
er. Man is expected to preserve the ecological factors for achieving a sustainable growth. balance is the responsibility of
A change in any biotic or abiotic factor causes ecological imbalance. Industrial activities, every business organization.
automobiles, emission of fumes or smoke and effluents, and so on, result in environmental
degradation. Hence, environmental protection and preservation must be the responsibility of
every organization or an individual. Pollution-free industrial activity is, therefore, considered
to be a necessary condition of industrial organizations. The Government of India is commit-
ted to the preservation of ecological balance.
Pollution-free technology and recycling of industrial wastes and effluents have become a cor-
porate concern now. Legislative measures have also been adopted for this purpose. Important
legislations in this connection are as follows:
1. The Water (Prevention and Control of Pollution) Act, 1974 provides for the preven-
tion and control of water pollution;
2. The Air (Prevention and Control of Pollution) Act, 1981 aims at preventing, control-
ling, and reducing air pollution; and
3. The Environment (Protection) Act, 1986 ensures the protection and improvement in
the quality of the environment.
The government’s concern for protecting the ecological environment and preventing it from
degradation and pollution is very evident in these Acts.
The Government Policies

The government policies provide the basic environment for business. For instance, the gov-
ernment’s policy to open up the Indian economy to integrate it with the global economy has
resulted in liberalization. Industrial policy resolutions and licensing policies, trade policies,
labour policies, location policies, export–import policies, foreign exchange policies, monetary
and fiscal policies, taxation policies, and so on, pave the way for business environment.
Labour Factors
Although labour within the organ is at ion constitutes its internal environment, general
labour policies and climate may form a part of the external environment. If militant trade
unionism is widespread in a particular industrial location, such militancy would become
the labour climate there and would make an external element. At the same time, a specific
organization may have a committed labour force, which could be the strength of the internal
environment of that organization.
Competitive Market Condition

Competitive market condition is an important environmental factor, especially in a global
business environment. In a socialistic economic environment, the market is controlled by
a centralised authority—the government—whereas the competitive forces determine the
market in a fully capitalist economy. India, which has accepted a middle path, had been fos-
tering both the conditions. As a result of liberalization, some characteristics integrating the
Indian economy with the global economy have emerged. As a result, a competitive market
condition has emerged in India, creating a competitive business environment. A situation
of perfect competition now exists in respect of various products, for example, automobiles,
consumer durables, and so on. In a competitive situation, the market forces of demand and
supply must interact with each other, providing a business environment. As a part of globali-
zation, a competitive market has come to stay.
Locational Factors
Locational policies are adopted by many countries for attaining an economic balance. The
establishment of the Tennesse Valley Authority (TVA) for a regional planning in the United
States is an example. In India, the metropolitan cities and their suburbs have been active with
business and industrial activities, while many areas have continued to remain backward. In
order to develop the backward areas and to attain economic balance, an industrial disper-
sal policy has been adopted by the government to boost business in India. The government
policy in India is, therefore, to achieve a dispersal of industrial activities to underdeveloped
locations and to avoid industrial concentration in developed areas. Government policies,
viz., industrial policy, industrial licensing policy, incentive policy, taxation policy, and even
credit facilities ensure the meeting of these objectives.
Business Environment and Strategic

Management: A glocal approach
The process of globalization has progressed fast, hailing the end of communism and social-
ism. Glocalization serves as a means of combining the idea of globalization with that of local
The process of globalization has considerations. Thus, initially developing an understanding of globalization offers a great
led the business corporations
and conglomerates to project deal of assistance in understanding the function and meaning of globalization process at the
themselves as global corporate outset. Business corporations and conglomerates are projecting themselves as global corpo-
citizens. With increased par- rate citizens. They formulate their perspectives and strategic planning for the global market,
ticipation in global economy,
while operational strategies are drawn for the local markets. In this context, an important
corporate managers need to
account for the nature and en- point to be considered in their corporate policy and strategy would be the economic blocs.
vironment of the economic bloc The European Economic Community (EEC), North Atlantic Treaty Organization
where they propose to operate. (NATO), ‘Third World’ neutralist bloc, the Organization of American States (OSA), Arab
bloc, Organization of African Unity, Organization of Petroleum Exporting Countries
(OPEC), Non-Aligned Movement (NAM), Association of Southeast Asian Nations (ASEAN),
Commonwealth countries bloc, South Asian Regional Cooperation (SAARC) bloc, European
Free Trade Association (EFTA), Latin American Free Trade Association (LAFTA), Central
American Common Market, and so on are important associations in the global perspective.
Any new bloc can come into existence at any time, which should be reviewed by the global
manager today.
Corporate managers, who make policies and strategies, must account for the nature
and environment of the bloc, where they propose to operate. For example, the EEC coun-
tries made a common economic bloc with a common market and a common currency by
1999. A company might operate in a global market, but it must have a specific strategy op-
tion for the EEC common market. The EEC market accounts for about one-fifth of India’s
total exports. Upgrading the quality of goods exported to EEC became necessary because
of high-quality specifications. All the 12 member countries laid emphasis on the improve-
ment in quality standards. Hence, the Bureau of Indian Standards (BIS) had a monumen-
tal task in laying down high standards for Indian goods exported to EEC countries. The
BIS collaborated with the European Commission in the programmes relating to industrial
standards, quality assurance, conformance testing, information technology (IT), electronics,
and telecommunication for standardization and certification on a mutual basis.
The concept of a single market has already gained ground. Since the EEC bloc has special
standard specifications, all the countries in the community follow the same standards. On ac-
count of stringent measures of quality standards in the EEC, it is possible for EEC standards
to be accepted as international standards. Thus an economic bloc substantially influences the
business policy of every player in the market. In the meanwhile, the NAM is getting stronger
and more globally acceptable.
In a globalized business environment, business policymakers and strategic managers In a globalised business environ-
must formulate strategies and policies not only globally but locally, with an emphasis on ment, business policymakers
individual economic blocs. In the changed environment in which communist-socialism has and strategic managers must
formulate strategies and poli-
become irrelevant, economic blocs may gain greater importance. cies not only globally but locally,
The globalization of business may imply a one world with a free market where there would with an emphasis on individual
be a closer cooperation among different states with greater mutual trade regime under trade economic blocs.
agreements. Greater closer cooperation can also be expected among the member countries
of different economic blocs. Every economic bloc may have its own common agenda of pro-
gramme and common purpose, which should be tackled by the corporate strategic planner.
Preserving sustainable environment, especially ecological environment, and answering the
call for social responsibility of business would become a part of the global corporate strategy.
The managers must take into consideration the following factors while designing the policies.
Risk Overview
Overall assessment. India’s main security concern is its relationship with Pakistan. India’s
political system is well entrenched, though states are gradually taking on more powers. Corruption is a serious concern
Corruption is a serious concern and bureaucracy and vested interests have hindered reforms. and bureaucracy and vested
interests have hindered reforms.
The legal system is relatively impartial, but suffers from delay in meting out justice. The main The legal system is relatively
imbalance in the economy stems from large fiscal deficits. Although efforts are under way impartial, but suffers from delay
to clarify the tax system, it is still quite complex and remains heavily dependent on customs in meting out justice. The main
duties. Although the labour market is highly regulated, poor transport infrastructure is likely imbalance in the economy
stems from large fiscal deficits.
to be a significant deterrent to investment.
Security risk. India has several geographically discrete security concerns. A number
of anti-Indian, Islamic, Chinese and Kashmiri militant groups operate in the disputed state
of Arunachal Pradesh and Kashmir and India has fought two wars with Pakistan over the
territory. Tensions with Pakistan have eased of late as the Indian Prime Minister has made
peace overtures to Pakistan; confidence-building measures—mainly sports and transport
links—have been introduced. Possession of nuclear weapons by both nations perpetuates
concerns about a large-scale war, though cold war is always going on in the form of frequent
attacks from both sides. Militant groups operate in north-east India, which is an important
area for the production of both tea and oil. The communal clashes between Hindus and
India’s large Muslim minority are not infrequent.
Political stability risk. In the general elections of 2009, the Congress party emerged
triumphant. The party achieved the best result in the past decade wherein annual GDP growth
rate reached the pinnacle at 9.7 per cent in 2008 and 9.4 per cent in 2010. However, the UPA
had its setback in late 2013 when annual GDP rate was a mere 4.8 per cent. Subsequently,
the UPA was jolted by scams and kickbacks by its own party members. Currently the coun-
try has got the best combination of politicians sitting on ministerial positions; we have
Dr. Manmohan Singh as the Prime Minister (PM) and P. Chidambaram as the Finance
Minister (FM) but inspite of this the economic growth rate is still sluggish. The Indian econ-
omy is currently portraying an unjust growth. What the country currently needs is a political
leadership with vision, but the political instability is hampering India’s growth. India can
become a superpower provided we get the right kind of leaders with a stable political tenure.
Government effectiveness risk. This risk is high. The divergent interests of the members
of India’s coalition government have hindered the introduction of rapid reforms and have
led to concessions to groups affected by reforms, which have negated their intended impact.
Although senior civil servants are generally professional, those further down the line are
often resistant to change. The privatization programme is continually hindered by vested
interests, not wishing to lose their power over state-owned companies. The Supreme Court
has ruled that the sale of two major oil refineries requires parliamentary approval, delaying
further the privatization. Significant red tape is one of the main reasons behind the lack of
foreign investment and the mass of regulations relating to workplaces provide inspectors
with opportunities to demand payment for overlooking the numerous and outmoded regula-
tions. Corruption is a major problem.
Indian legal system is relatively
Legal and regulatory risk. Indian legal system is relatively impartial, free, and fair. It is
impartial, free, and fair. However, also notoriously slow. Disputes often take years to resolve and, as a result, many foreign
the regulatory system is not companies build in clauses allowing for international arbitration of disputes. The regula-
immune from policy reversals tory system is not immune from policy reversals due to pressure from vested interests and
due to pressure from vested
interests.
inter-ministry rivalries. However, more transparent regulatory systems are being introduced
in the previously unregulated sectors. For instance, as the power sector is broken up, new
regulatory bodies are being established. The risk of outright nationalization is very small, but
creeping nationalization, in companies to withdraw from India. This has been particularly
true in the power sector, which has seen an exodus of foreign investors.
Macro-economic risk. The macro-economic risks to the economy have increased over
the past year, with specific reference to the parameters of domestic growth, external sector,
and the performance of the corporate sector. The high current account deficit (CAD), which
hit an all-time high of 4.8 per cent of GDP in the FY13 – a key concern on the external front –
is a ‘stress point’ for the economy as evident from the recent rupee depreciation on global
cues.
Further, corporate sector performance has been ‘subdued’ leading to increasing external
borrowing and unparalleled exposures. However, risks to the banks – in terms of both the
asset quality and profitability – have increased, but sounded confident about the stability of
the sector.
In 2002, India took several steps Foreign trade and payments risk. India’s merchandise exports reached a level of US$
to ease agricultural exports and, 251.14 billion during 2010–11, thereby registering a growth of 40.49 per cent as compared
thereby, increase exports as a to a negative growth of 3.53 per cent during the previous year. However, India’s export sector
share of GDP. In 2003–04, it
announced steps to further lib-
has exhibited remarkable resilience and dynamism in the recent years. Despite the recent
eralise capital account transac- setback faced by India’s export sector due to global slowdown, merchandise exports recorded
tions; these will, among other a compound annual growth rate (CAGR) of 20.0 per cent from 2004–05 to 2010–11.
things, allow greater outward Tax policy risk. This risk is a moderate one. Indian tax system is heavily reliant on excise
investment and make hedging
easier.
and customs duties. The tax system is complex, with numerous allowances and surcharges.
The government has consolidated all the states’ sales taxes into a single value-added tax (VAT).
India’s tax system is susceptible to tax evasion, and the underground economy is To address anomalies in the tax
estimated to be around half the size of the official economy. The highest rate of tax on profits system, a government panel in
for foreign companies is 41 per cent, including a surcharge. Locally incorporated companies November 2002 recommended
that India’s tax system be mas-
are taxed at just under 36 per cent and are entitled to incentives available to Indian compa-
sively overhauled to encourage
nies. To address anomalies in the tax system, a government panel in November 2002 recom- voluntary compliance.
mended that India’s tax system be massively overhauled to encourage voluntary compliance
and penalise non-compliance, but these recommendations have been ignored.
Labour market risk. Indian labour market is restricted by a number of laws and regulations,
of which the most important are those concerning the retrenchment of employees. Companies
employing more than 100 workers need government permission to lay off workers and this
permission is often withheld. Such restrictions have hindered foreign investment in India.
Labour relations in India are relatively poor, but the incidence of strike action in the pri-
vate sector has declined in recent years. However, strikes in protest at proposed privatization In India, infrastructure risk is
high. Although the government
have been relatively common. Unions are generally company- rather than industry-based has increased funds for upgra-
and are linked to national labour groups, many of which are affiliated to political parties. dation of infrastructural facili-
Infrastructure risk. India’s infrastructure risk is high. Port facilities are overstretched. ties, like rail network, air trans-
Both road and rail links are run down. Although the government has increased funding to port, power generation, etc.,
progress is likely to be slow.
both, progress is likely to be slow. The rail network is not funded adequately and a rapid
improvement is highly unlikely. The power system is a significant hindrance to business.
Politically motivated, free provision of power to some sectors of the population has placed the
electricity-supply companies in a poor financial position. This, in turn, has affected electricity
generation, so that power supplies are erratic and companies, offices, and some private houses
use their own back-up generating facilities. Despite India’s successes in IT, computer and
Internet access is not widespread. Air transport facilities are being upgraded, particularly at
the international airports. The retail system is developing rapidly but remains generally back-
ward. Shopping malls are being established, particularly in metro and cosmopolitan cities.
Country risk. Country risk is exposure to a loss in cross-border lending, caused by
events in a particular country. These events must be, at least to some extent, under the con-
trol of the government of that country and not under the control of a private enterprise or an
individual. Major sources of country risk are contained in frequent swings in content, objec-
tives, or implementation design of macro-policies, including monetary policy, fiscal policy, All cross-border lending in a
country, whether to the gov-
anti-inflationary policy, exchange-rate policy, foreign trade policy, policy towards foreign in- ernment, a bank, a private
vestments and multinational corporations, industrial policy, agriculture policy, income pol- enterprise, or an individual, is
icy, and policy towards major social sectors. All cross-border lending in a country, whether exposed to country risk. Country
to the government, a bank, a private enterprise, or an individual, is exposed to country risk. risk is, thus, a border concept
rather than a sovereign risk.
Country risk is, thus, a border concept rather than a sovereign risk, which is the risk of lend-
ing to the government of a sovereign nation.
Further, only events that are, at least to some extent, under the control of the govern-
ment can lead to the materialization of a country risk. The various country risk factors affect An organization’s reaction or
individual corporate organizations in a number of ways. The effect varies from organization response to any kind of risk
to organization, depending upon its vulnerability to such factors. Many of these factors are to the business environment
interrelated and exert a joint impact. A fiscal deficit, for example, may be followed by an in- depends on its own percep-
tion of assessment of risk. To
crease in taxes and money supply, further leading to a rise in the rate of inflation. Table 1.1 assess and analyse the risks,
shows the above risks with their ratings too, as an overview. companies may follow certain
methods like taking an expert
opinion or having checklists
Methods of Assessing Environment Risk and rating systems.
All types of risks keep changing and a firm’s reaction or response depends mainly on its own
perception of assessment of risk. Therefore, large domestic firms and multinational enterpris-
es are more aware of the risk factors and are making efforts to reduce them. Some of the fol-
lowing environment-risk assessment methods are useful for both domestic and foreign firms.
Table 1.1
Risk Overview
> Risk Category Current Rating Current Score Previous Rating Previous Score
Overall assessment C 54 C 54
Security risk C 54 C 54
Political stability
risk B 40 B 40
Government
effectiveness risk D 68 D 68
Legal and
regulatory risk C 60 C 60
Macro-economic
risk B 30 B 30
Foreign trade and
payments risk C 54 C 54
Tax policy risk C 56 C 56
Labour market risk D 61 D 61
Financial risk C 42 C 42
Infrastructure risk D 72 D 72
Source: National Council of Applied Economic Research, India Market Demographics Report 2002.
Note: E = most risky; 100 = most risky.
The risk-rating model is run once a month.
Expert Opinion
The traditional method of analysing environmental changes relies on an expert’s opinion.
The firm seeks the subjective judgement of people who are well-informed about the current
state of the environment and its reading determinants. In this method, the questionnaires
designed to assess environment risks are sent to acknowledged experts, and their opinions,
observations, and comments are obtained. A variant of this method is the Delphi Technique
in which a panel of experts is constituted and they are asked to give an assessment or predic-
tion of risk, individually and separately. The process may be repeated and the final response
is recorded as ‘risk assessment’.
Checklists
These consist of a number of economic, social, and political variables which affect the business
environment and point to some risk element in it. The risk, in turn, contains elements relat-
ing to the various issues that the country is facing. This method gives a rough approximation
of the business environment risk and the future outlook. Checklists, as shown in Table 1.2,
are used to assist in the interpretation of the political system and co-national change.
Rating and Ranking Systems

This system is similar to the scoring system, whereby the country rating is done on the basis
of a number of economic, financial, political, and social parameters. Each of these parameters
is weighed according to its importance in the total environmental risk. The weighted param-
eters are assigned scores according to the preset guidelines, and different sectors within a
country are rated and ranked on a scale.
Political Environment Foreign Pressures Economic Pressures < Table 1.2

Checklist of Political
■ Form of government ■ Threat of war ■ Economic crisis Risk Indicators
■ Government crisis ■ Military-related violence ■ Balance of payments
History of government
■ Diplomatic crisis, party
■ ■ Inflation rate
stability political platforms
■ Legal system ■ Alliances ■ Exchange-rate volatility
■ Party fractionalisation ■ Role of military ■ Income distribution
■ Religious or ethnic splits
■ Trade-dispute volatility of
electorate
■ Support of ruling party
■ Tax reforms
Economic Methods
These methods are complex and sophisticated and are used to quantify economic risk and
related aspects. They are used for both estimation and forecasting. In such methods, we first
identify the factors (called independent variables) which affect environment risk (called
dependent variables), and establish a model of their cause–effect relationship. The relation-
ship is specified in a functional form that is usually stated as a mathematical equation (in a
linear or a non-linear form), which involves certain parameters whose values are estimated.
In this approach, it is possible to state, quantitatively, the strength of each variable (or causa-
tive factor) that affects or determines business environment risk.
Managing Environment Risk

Developing the Local Economy
A business organization should
In order to develop good public relations around the area of location and to avoid any pos- contribute to the development
sible local confrontation and criticism, it is a beneficial policy for a firm to contribute to of local economy. Participa-
the development of the local economy. The firm may form joint ventures (Jvs) with local tion of local shareholders and
employment of local people in
shareholders. Participation of local shareholders will also help to build links with the local unskilled or semi-skilled activi-
community and provide the benefit of local management’s advice and knowledge. The firm ties are strategies that help an
may make local purchases and employ local people in unskilled or semi-skilled activities. organization to gain acceptance
This strategy is helpful for the firm to gain acceptance by the people. Box 1.2 shows the risk by people.
assumption for different economic systems.
Box 1.2 Risk Assumption for Different Economic Systems

1. Capitalism: Losses assumed by owners. Many 3. Communism: Economic production owned by the
transfer business risks to other businesses through state. Risk assumed by the state. Losses reduce
insurance. the standard of living.
2. Socialism: People assume risks of state-owned
industries. Losses recovered from taxes.
Good Corporate Citizenship

The corporate behaviour, conforming to what is usually referred to as a good citizen policy, is
one of the most popular prescriptions for avoiding adverse political initiative. This is among
the best strategies to deal with political risk. Firms follow this policy by responding promptly
to government requests, contributing to national goals, and developing a corporate image.
With such an image, a firm may find it easy to obtain licences, permits, power connections,
government land, and other facilities from the government.
Tie-up and Collaboration with Other Firms

The firms can manage risks not by standing alone but by collaborating with other firms. This
strategy helps a firm to share its risk with other firms.
Private Insurance
Even after committing its resources, the firm can resort to private insurance schemes to hedge
against any future loss. The insurance premium will be proportional to the threat of asset
loss.
Avoiding Politically Sensitive Products

The firms can reduce risk by avoiding product lines that affect exchange rates, national
security, and public health, or are contrary to the general beliefs and moral values of people,
for example, alcohol, cigarettes, and explosives.
Avoiding Sensitive Regions

The firms can avoid politically sensitive regions and choose safer or more peaceful locations.
Multiplant and multi-product firms are able to avoid risk to a considerable extent.
Maintaining Good Political Relations

Many business firms find it wise to maintain politically neutral postures, but it is commonly
believed that they must have normal to cordial relations with the political parties in power to
have a say in the government.
Market Opportunities
The global economy continued to grow at a slow pace in 2012. In 2013, the world economy is
expected to perform better. However, the recovery is expected to be slow and uncertain. In-
flation did ease in 2012–13 vis-à-vis higher levels prevailing in 2011–12. However, the pace of
decline has been slow, denying equisite flexibility to the RBI to undertake sufficient reduction
in the policy rates. The Indian economy is expected to register a growth rate of 5.0 per cent in
2012–13 as against 6.2 per cent in 2011–12. However, with the reform measures undertaken
recently to improve investment sentiments in the economy as well as to improve the fiscal
situation, along with the expectation of improvement in the global economic scenario, there
is a possibility of revival of growth in 2013–14. The overall growth rate is expected to be in
the range of 6.1 to 6.7 per cent in 2013–14.
Distribution of Household by Income

between 2011 and 2012
Households in India have earned a total income of Rs. 37.7 trillion in 2011–12. That trans-
lates into a total revenue of US$ 786 billion among the households of India.
The total household income in India is almost equally divided between rural and urban
households. Each of the household hence earned Rs. 18.9 trillion although rural households
at about 174 million are more than twice the 81 million urban households as of 2011–12. As a
result, the average income of an urban household is much higher at Rs. 233,830 compared to
the rural household’s average income of Rs. 108,618. The overall average income per house-
hold was hence estimated to be Rs. 148,365.
The median income works out to Rs. 90,800. i.e., half the Indian households earned more
than Rs. 90,800 and the remaining half earned less than this value, which is just a shade less
than US$ 2000. The bottom quartile works out to Rs. 59,600 and the upper quartile is estimat-
ed to be Rs. 154,400. The top 1 per cent of the households by income earned Rs. 744,000 per
household or more and the top half a per cent of the households earned Rs. 957,000 or more.
Roughly this implies that there were about 1.27 million households that earned roughly more
than a million rupees each in 2011–12.
India’s Political scenario

Although the world’s attention has been focused on leadership elections and selections in
countries like China, Israel, Japan, and the United States, recent political developments in the All these political parties have
their own constituencies and
world’s largest democracy also warrant attention. Although national elections will take place
respective agendas, which they
in India possibly in May 2014, recently there have been crucial state elections and party lead- apply from time to time to pres-
ership changes, and elections in 10 states are due over the next year. Rahul Gandhi has been surise the government. But the
elevated to the position of vice president of the Congress party, further stoking discussions greatest pressure group that
the Manmohan Singh govern-
about his role both in the party and government. The potential impact of the recent Bharatiya ment has to face is the Left
Janata Party (BJP) presidential elections on the party’s direction over the next few years is Front, which supports the gov-
still being debated. Gujarat Chief Minister Narendra Modi’s third electoral victory in the ernment from outside too.
state elections has once again sparked questions about his prime ministerial aspirations and
chances. Speculation also continues about the national political prospects of others like Bihar
Chief Minister Nitish Kumar and Madhya Pradesh Chief Minister Shivraj Singh Chauhan.
The Rise of Aam Aadmi Party

Of late, thrilling new energies are coursing through Indian democracy. A rude jolt was
delivered both to the governing party in the capital, Delhi, and to the very nature of political
power as commonly understood and often cynically exercised.
Assembly elections in Delhi, India’s only city-state resulted in the ruling Congress
party—which has headed India’s coalition government since 2004—being voted out of power
after three consecutive terms in office. It won only 8 of the 70 seats on offer. Ordinarily,
such an unambiguous expression of voter discontent would have meant a huge swing toward
some other long-established party: in this case, the BJP, the main opposition group both in
Delhi and on the national level. But while this was the case in three other states that also had
elections—Madhya Pradesh, Rajasthan and Chhattisgarh, all of which voted or returned the
BJP to power—in Delhi, the story was far more surprising.
An astonishing 27 per cent of the voters (out of the 65 per cent turnout of the 12 million
eligible voters in the city) gave their endorsement to the jhaadu, or the humble broom of the
Aam Aadmi Party (AAP).
By the end of December 2012, the broom symbol was virtually unknown. As the scale of
the new wave became apparent when counting began on 8 December 2013, television cam-
eras zoomed in on a mass of people triumphantly waving brooms outside the office of the
AAP, which arose last year from the ashes of a frustrated civil movement to get Parliament to
pass a stringent anti-corruption Bill in 2011. By afternoon, it was clear the party had made a
spectacular debut, winning 28 seats and restricting the BJP to 32.
It’s unclear whether in the long run this would be good for Indian democracy—the par-
ty’s campaign will, after all, be fronted by Narendra Modi, an arch-centraliser whose ‘Yes, I
can’ rhetoric is reassuring to voters but disguises a cavalier disregard for due process. But to
its credit, the BJP has run a number of well managed state governments across north and
central India, its main electoral base. No one could say it doesn’t deserve a chance to scale up
its operations. And a change of government certainly seems to be what the markets want.
However, whether the Congress-led coalition manages to hold on to power next year or
the BJP seizes it, that would still represent the inevitable victory of a giant party machine,
probably involving some level of manipulation of India’s many pliant media companies in the
form of paid news campaigns.
In recent years, any attempt at a new politics had always been derided by the established
politicians as hopelessly naive, doomed to flap away ineffectually on the fringes of Indian
politics. What hopes hence remained for change in the big parties, and new ideas for a fast-
changing India, were fruitlessly invested in an apparent ‘new wave’ of young politicians. That
is, people like the Indian National Congress’s likely prime ministerial candidate Rahul Gandhi.
Surely, then, the most warming story—not only at the emotional level of an underdog
winning the day, but also at the substantive level of a political rhetoric stressing ideas and not
personalities, crowd-sourced political funding and voter mobilisation not rooted primarily
in the politics of identity—is the rise of the AAP in Delhi and the potential ripple effects of
the movement around India.
There’s much to admire about the party’s ability to mobilise (and indeed enthuse) many
disenchanted voters among the middle class and first-time voters among the youth, its
ground-level approach to selecting candidates and its transparent system of fund raising.
For all these reasons, there’s some truth to Kejriwal’s contention this week that the AAP’s
success in Delhi wasn’t the victory of a party, but certainly of a movement.
Critics have argued that the AAP’s manifesto for governance in Delhi (including the
promise of major cuts in electricity rates) is too populist and too naive. But it’s not as if the
more business-friendly dispensations of its competitors are representative of a genuine com-
mitment to free markets—no major Indian political party has committed to anything more
than piecemeal economic reform. Meanwhile, the result of the spread of cynicism and the
play of special interests in Indian politics is that governance has ceased to be thought of as an
art and a discipline in its own right, but merely the delivery of a set of minimal expectations
and sops.
However, regardless of what results ensue from the AAP project, for thousands of citi-
zens of Delhi, there’s something very warming about a party manifesto that says: Govern-
ment schools to be made as good as private schools. More than subsidised food and fuel, and
the reservation of government jobs for disadvantaged groups—two favourite gimmicks of the
big parties to draw in the poor—this is the kind of thinking required to move India on from
its dysfunction and stasis.
Now, almost all the political parties are trying to emulate AAP for its populist issues like
cutting down power tariff, water supply, officials’ accountability, etc.
Performance of UPA-2 (2009–2014)

Although the popularity of the UPA in general and Congress party in particular has plum-
meted to an all-time low with the Congress losing the Assembly elections for the 4 states in the
elections held recently, it should still be conceded that the UPA-2 has made several bold initia-
tives for improving the overall welfare of the common man. The dip in the support for the UPA
and the Congress is more due to other reasons like scams, corruption at high places, deteriorat-
ing law and order situation particularly in the capital New Delhi, and rising prices of essential
commodities like onions and other vegetables and constant increase in the prices of petroleum
products—these are beyond the control of the relevant authority (UPA or otherwise).
The rise in the popularity of Arvind Kejriwal and AAP has further damaged the Congress
party whereby the electorates have found an alternative to both BJP and Congress with the
populist schemes. In addition, the Modi mania created by the media has further weakened
the position of the Congress party.
Many developmental works and progressive bills were passed by the UPA-2 government
during 2009–14. However, some of the essential bills like the Anti-corruption Bill and Pre-
vention of Communal Violence Bill are still pending due lack of consensus among other
major political parties.
Since the Lok Sabha elections are scheduled for May 2014, the UPA would like to enter
the fray on a positive note. The last session provides an opportunity for the government to
push through its agenda ahead of the elections. The government now appears to be desper-
ate to get through a few of the politically crucial bills in the last session, like the Prevention India remains the leader among
of Corruption Act and Public Procurement Bill. However, whether the opposition allows the SAARC nations—not only
the Congress to take the high moral ground on corruption is undoubtedly the big question. because of its imposing size and
population, which, of course,
Apart from this, the Congress would like to build its campaign for the Lok Sabha elections for provides a lucrative market
a few other legislations too which include the bill providing 33 per cent reservation to women for industrialised countries,
in Parliament and State Assemblies and bills pertaining to minorities like the Communal but also because of its mature
political leadership and rapidly
Violence Bill and Waqf Properties (Eviction of Unauthorized Occupants) Bill.
growing economy which makes
But here, particularly in case of Communal Violence Bill, the BJP will go all out to it a safe place for the investors
stall the Bill. Another challenge before the government will be to pass the Telangana State to deal with.
Reorganization Bill as only recently the Andhra Pradesh Assembly sent back the legislation
to President Pranab Mukherjee with a resolution rejecting the proposal.
Relations with China

Besides India, the other Asian giant China, which is larger than India both in terms of size
and population, has also progressed remarkably in the last two decades, inspite of adhering
to Communism. China’s rapid progress is a cause for concern, not only to other developed
countries of Asia—like Japan, Korea, and Malaysia, but it has also raised an alarm in the
Western countries. According to a recent survey, within a decade, most of the Chinese prod-
ucts including automobiles will be seen dominating throughout the world.
The Chinese economic development is more pronounced and widespread than India, as The Chinese economic devel-
China has emphasised on an all-round development and focused more on the manufacturing opment is more pronounced
and widespread than India, as
sector (thanks mainly to its cheap labour), rather than the service sector. One strong point, China has emphasised on an
however, in India’s favour is its growing educational population, especially in higher and techni- all-round development and
cal education like the IT sector, which is in a great demand worldwide, which has enabled and focused more on the manufac-
attracted many leading IT companies to have trade and technological cooperation with India. turing sector (thanks mainly to
its cheap labour), rather than
The outsourcing carried out by the US and the European countries have, in fact, benefitted the service sector.
India’s personnel to a great extent, thereby, boosting the trade in the service sector, particu-
larly. However, the growing influence of China as an economic power and its trade relations
with other countries have restrained India from condemning China on the recent Tibet issue;
and because of its geographical and political proximity with Pakistan, India is compelled to
have better relations with China.
Other Developments
The political developments all over the world are having a significant effect on the Indian
economy, as new political equations are being developed. The receding Russian influence on
India’s foreign policy has given way for India to adopt a more liberal trade policy and has also
given rise to market economy and privatization of many industries, which were hitherto the
domain of PSEs alone. The post–Cold War period and also the fall of the Communist regime
of the erstwhile Soviet Union left the world with only one unchallenged super power—the
United States, thus, leaving most of the countries to reconcile with the situation. This has
boosted the trade and other relations between India and the United States.
Domestic Developments in Trade

Another significant development in the last few years is the growing importance of a large
Indian consumer market,
Indian consumer market, which has encouraged many foreign brands to enter into trade
which has encouraged many
foreign brands to enter into pacts with the Indian companies or to establish companies on their own. Retail has got par-
trade pacts with the Indian ticular attention, as it is the second-largest sector in India after agriculture. This has given rise
companies or to establish to organized retail sector or corporate retail, resulting in the setting up of large retail chains
companies on their own.
and shopping malls across major cities, which has now started to penetrate into medium and
smaller towns as well. These chains are being developed by major corporates from both India
Although these organized retail- and abroad. Although these organized retailers are at a nascent stage, they are bound to have
ers are at a nascent stage, they a profound effect on the small retailers as the UPA government has allowed foreign direct
are bound to have a profound investment (FDI) in the retail sector. Though the consumers will hopefully be benefitted but
effect on the small retailers, the traditional retailers will get a set of with the entry of big giants.
even though the consumers will
hopefully be benefitted.
Recent Economic and Financial

Environment
India’s FDI
The FDI in India increased to 1821 US$ million in November of 2013 from 1755 US$ million
India has undergone a pro- in October of 2013. The FDI in India is reported by the Reserve Bank of India. The FDI in
found shift in the economic
India averaged 953.08 US$ million from 1995 until 2013, reaching an all-time high of 5670
management. Since the mid-
1980s, successive reforms US$ million in February of 2008 and a record low of 58 US$ million in April of 2003.
have progressively moved the India’s Foreign Direct Investment
Indian economy towards a
market-based system. State 5000 5000
intervention and control over 4111
economic activity have been re- 4000 4000
duced significantly and the role 3290
of private sector entrepreneur- 3122
3010
ship has increased. 3000 2802 3000
2577
2129
1917
2000 16961661 1755 1821 2000
1542 1570
1424 1344
1285
1133 1220
1000 780 871 685 1000
484
219
0 0
Jan/12 Jul/12 Jan/13 Jul/13
Source: www.tradingeconomics.com | Reserve Bank of India.
India’s Gross Fixed Capital Formation

Gross fixed capital formation in India increased to 4806.43 INR billion in the third quarter of
2013 from 4574.59 INR billion in the second quarter of 2013. Gross fixed capital formation
in India is reported by the Ministry of Statistics and Programme Implementation (MOSPI).
Gross fixed capital formation in India averaged 3497.11 INR billion from 2001 until 2013,
reaching an all-time high of 5170.39 INR billion in the first quarter of 2013 and a record low
of 2021.90 INR billion in the first quarter of 2002.
India Gross Fixed Capital Formation

5500 5500
5170.39
4998.74
5000 4871.11 5000
4816.38 4806.43
4735.01
4686.66
4632.17 4629.29
4574.59
4683.81
4500 4432.23 4462.42 4607.17 4500
4155.66
3971.9 3972.66
4000 4000
3806.47 3933.09
3709.61 3713.71
3637.41 3606.77
3500 3579.65
3500
Jan/08 Jan/10 Jan/12
Source: www.tradingeconomics.com | Ministry of Statistics and Programme Implementation (Mospi).
ANNUAL GROWTH RATE OF GDP in India

The gross domestic product (GDP) in India expanded to 4.80 per cent in the third quarter of
2013 over the same quarter of the previous year. The GDP annual growth rate in India is report-
ed by the MOSPI. From 1951 until 2013, India’s annual growth rate of GDP averaged 5.8 per
cent reaching an all-time high of 10.2 per cent in December of 1988 and a record low of -5.2 per
cent in December of 1979. In India, the annual growth rate in GDP at factor cost measures the
change in the value of the goods and services produced in India, without counting government’s
involvement. Simply put, the GDP value excludes indirect taxes (VAT) paid to the government
and includes the original value of products without accounting for government subsidies.
India GDP Annual Growth Rate

Percent Change in Gross Domestic Product
10 9.7 10
9.4 9.3
8.9
8.5 8.6
8.3
8 7.8 7.8 7.7 8
7.5
7.3
6.9
6.3
6.1 6.1
6 5.8 6
5.3 5.4 5.2
4.7 4.8 4.8

4.4
4 4
2008 2010 2012
Source: www.tradingeconomics.com | Ministry of Statistics and Programme Implementation (mospi).
Despite the slowdown in sales India Consumer Spending

growth, India still ranks second
in BMI’s Business Environment Consumer spending in India increased to 8552.20 INR billion in the third quarter of 2013
Ranking for the automotive indus- from 8507.67 INR billion in the second quarter of 2013. Consumer spending in India is re-
try in the Asia-Pacific region.
Vehicle ownership is low, creat-
ported by the MOSPI. Consumer spending in India averaged 6802.94 INR billion from 2004
ing potential for further sales until 2013, reaching an all-time high of 9255.44 INR billion in the fourth quarter of 2012 and
growth, though with so many a record low of 4469.88 INR billion in the third quarter of 2004.
manufacturers already estab-
lishing production operations
and the industry running at a
India Consumer Spending
high level of capacity utilisa-
tion, the opportunities for en- 9500 9255.44
9500
tering the market as a producer
could be limited. 9000 9000
8681.36 8668.54
8507.67
8500 8247.34 8552.2 8500
8157.55
7984.93 8153.19
8000 7841.13 8000
7601.77 7477.41 7523.95 7907.38
7500 7562.24
7500
7093.73 7149.02
6965.69
7000 6709.2
7000
6651.09 6856.47
6500 6293.1 6309.79 6500

6410.01
6000 6000
Jan/08 Jan/10 Jan/12
India’s Industrial Production

Industrial production in India decreased 2.10 per cent in November of 2013 over the same
month in the previous year. Industrial production in India is reported by the MOSPI. Indus-
trial production in India averaged 6.85 per cent from 1994 until 2013, reaching an all-time
high of 20 per cent in November of 2006 and a record low of -7.20 per cent in February of
2009. In India, industrial production measures the output of businesses integrated in indus-
trial sector of the economy such as manufacturing, mining, and utilities.
India Industrial Production

Percentage change year-over-year
10 10
8.3
8 8
6 6
4.2
4 3.51 4
2.7 2.5 2.7 2.57
2.4
1.96
2 1
1.46 2
0.63 0.42
0 0
−0.2 −0.1 −0.5
−0.7
−2 −1.3
−1.8 −1.85 −1.8 −2.1 −2
−2.8 −2.52
−4 −4
Jan/12 Jul/12 Jan/13 Jul/13
Global Economic Environment The emerging and developing

economies have, so far, been
Global economic recovery from the recent recession continued throughout 2011. The in- less affected by financial mar-
ternational monetary fund (IMF) estimates that most major economies had positive GDP ket developments and have
growth in 2011. However, global economic uncertainty persisted throughout the year due to continued to grow at a rapid
pace, led by China and India,
even though growth is begin-
GDP Growth (%) ning to slow in some countries.
2011e 2012f
World 3.8 3.3
Canada 2.5 2.2
United States 1.7 2.3
Brazil 2.9 3.0
China 9.2 8.2
India 7.4 7.0
Japan –0.9 1.7
United Kingdom 0.9 0.6
Euro Area 1.6 –0.5
France 1.6 0.2
Germany 3.0 0.3
Italy 0.4 –2.2
Spain 0.7 –1.7
Russia 4.1 3.3
e: estimate f: forecast
Source: Canada – Statistics Canada (2011) and average forecast of major Canadian banks (2012);
U.S. – Bureau of Economic Analysis (201) and Survey of Professional Forecasters, U.S. Federal Reserve
Bank of Philadelphia (2012); all other jurisdictions – International Monetary Fund, January 2012.
sovereign debt troubles in Europe, unrest in the Middle East and slowing economic growth
in China. However, commodity prices fared well last year, supported by solid demand from
China and India. The Bank of Canada commodity price index grew by 11.6 per cent in 2011,
with the most significant gain coming in agricultural commodities (+34.8 per cent). Energy
and minerals have also showed strong growth. Brent crude oil rose from US$79.61/barrel in
2010 to US$111.26/barrel last year.
Globally, the IMF estimates that GDP growth was 3.8 per cent in 2011 and is forecasting
3.3 per cent growth in 2012. Broadly based efforts to deal
with global challenges have
become indispensable. In the
Multilateral Initiatives and Policies event of a severe global down-
turn, there would be a case for
Broadly based efforts to deal with global challenges have become indispensable. In the event providing temporary fiscal sup-
port, in a range of countries
of a severe global downturn, there would be a case for providing temporary fiscal support, that have made good progress
in a range of countries that have made good progress in recent years in securing sound fiscal in recent years in securing
positions. Providing fiscal stimulus across a broad group of countries, which would benefit sound fiscal positions.
from stronger aggregate demand, could prove much more effective than isolated efforts, giv-
en the inevitable cross-border leakages from added spending in the open economies. It is still
early to launch such an approach, but it would be prudent for countries to start contingency
planning to ensure a timely response in the event that such support becomes necessary. Re-
ducing risks associated with global current account imbalances remains an important task.
It is encouraging that some progress is being made in implementing the strategy endorsed
by the International Monetary and Financial Committee and the more detailed policy plans
laid out by participants in the IMF-sponsored Multilateral Consultation on Global Imbal-
ances aimed at rebalancing domestic demand across countries, with supportive movements
in REERs.
C ase
Mahindra & Mahindra manufactures and markets jeeps and had a hold over a consider-
able portion of the jeep market in India in the past. It was ranked sixth in the automobile
sector of India in 2004, up from the 10th rank in 2003. The following are the prominent
jeeps that operate in the Indian market currently—Mahindra-Voyager, Mahindra-Armada,
and Mahindra-Commander. Mahindra & Mahindra is now facing problems like cut-throat
competition, price rise, and sluggish market for jeeps. In terms of price competition, Mahin-
dra & Mahindra has an upper hand when compared to Tata jeeps, whereas Tempo Trax has
comparatively a low price.
Realising the need to grow fast, the company formulated an export policy. It paid off well.
They formulated plans to develop and grow in a foreign market. The first step was participa-
tion in trade fairs abroad, particularly in Hanover (Germany) and Paris (France). This has
helped to popularise its vehicle in those countries. Mahindra jeeps started selling in France,
and jeep export became an important marketing activity of the company. The company start-
ed manufacturing diesel engines in collaboration with Peugeot of France.
As soon as the company came to know that Australia, Denmark, Italy, Norway, and Sweden
could prove to be potential markets, plans began to be made accordingly. The company estimat-
ed that it would be able to export about 2,500 jeeps annually to Australia. In order to cater to the
lower segment of the market, the Mahindra jeeps in Australia faced competition from Japanese
companies. Stringent design rules and requirements also needed to be met in Australia.
The company is confident of meeting all such requirements. The government’s liberaliza-
tion policy will also be helpful. The company’s new policy has to take into account the envi-
ronmental factors. The export policy, with a special reference to export market, also deserves a
considerable evaluation and analysis because environmental factors, such as technological, eco-
nomical, social, and political influences, relevant to strategic decisions, operate in an industry.
Mahindra & Mahindra assessed all the opportunities in the market as well as the impact
of external environment on their strategic planning before expanding the production. In
2004, Mahindra & Mahindra showed a significant improvement compared to Maruti Udyog,
ranked as the number one automobile company, as is evident from the table that follows:
S. No Factors Environmental Dynamism Belief in Innovation

Consciousness
1. Maruti Udyog 176.0 points 72.9 174.0
2. Mahindra & Mahindra 118.1 points 119.0 123.0
Case Question
In the case discussed above, which are the different environmental factors that lead to
opportunities and threats to Mahindra & Mahindra?
s u mma r y
A business environment comprises a number of environmen- casting, detailed demographic projections, national and
tal factors. It can be an ‘interface’, linking various such envi- international market trends, changing trade relationship be-
ronmental factors, making a common ground that determines tween governments, and so on, can be used for identifying
or influences the process of policy making in every business environmental changes. It is, however, not very easy to iden-
organization that functions within such an environment. An tify or accurately measure the changes in the interface, in
interaction of all such factors, or some of them, can also particular, or in the macro-environment, in general, though
take place, while the business organization is expected to some factors can be easily identified.
interact with the environment. In a global environment, a competitive situation is bound to
Any substantial change in the environment or in any of the exist in the market; hence, a competitive marketing strat-
factors of the environment is bound to lead to correspond- egy in terms of market leader strategy, challenger strategy,
ing changes in the business policy of the organization. It is niches strategy, or follower strategy is appropriate. Such a
here that this interface works. As observed elsewhere, the strategy must ensure a defensive position for the company in
demand–supply factors, for example, work as an interface the competitive environment. In such situations, the environ-
between business organizations and business environment. ment itself acts as an interface between the company and
While demand–supply factors make an environment by them- its competitor.
selves for the business organization, they act as an interface The structure of the industry, which includes the company
between the aggregate environment and the organization. and its competitors in addition to potential entrants, suppli-
Evidently, a business environment represented by certain ers, buyers, and so on determines the level of competition.
dominating factors, which can be called a micro-environment, Hence, the environment is influenced by all of them in some
such as government policies, legal provisions, competitive manner or the other. The business policy of every player has,
factors, inflation, deflation or recession, acting as an inter- therefore, to take cognizance of the threats posed by every
face between the organization and its macro-environment, other player including the new entrants. Thus, subject to the
provide opportunities, threats, or challenges to the organiza- influence of a number of factors, the business environment
tion. In the colour TV case discussed earlier, technological provides opportunities and threats, while its internal environ-
factors and competitive factors acted as micro-environment ment provides its strengths and weaknesses.
interface between the colour TV manufacturers and the A competitive business environment is an essential charac-
macro-environment. While a new entrant is concerned with teristic of globalization. The nature of competition varies in
the existing environment, particularly the micro-environment, different economic systems. In the context of widespread
and the ways and means for the company to fit in within the globalization process, tremendous changes are taking place
framework of the existing environmental interface, an exist- in the business environment of economic systems. Corpo-
ing company is more interested in tracking the changing en- rate concern for international business environment is un-
vironmental factors. derstandable in relation to the globalization of business. We
During the course of scanning the business environment, a may, therefore, throw some light on the international busi-
number of methods like economic and technological fore- ness environment here.
Key W o r d s
● Business Environment ● Fiscal Policy ● Political Factors
● Country Risk ● Geographical Factors ● Political Stability Risk
● Cultural Factors ● Globalization ● Security Risk
● Economic Factors ● Labour Factors ● Social Factors
● Ecological Factors ● Legal Factors ● Technological Factors
● Environmental Factors ● Infrastructure Risk
● Environmental Risk ● Monetary Policy
Q u est i o n s
1. Define ‘business environment’ and state the impor- 6. What are the economic factors affecting business
tance of its study. policies?
2. What is business environment? Explain the different 7. How does the socio-cultural environment influences
factors of business environment. the business policy of an organization?
3. Why a domestic company needs to become an inter- 8. Do you believe that political stability leads to busi-
national one? ness development and vice versa? Discuss.
4. ‘Business environment is dynamic’. Discuss.
5. How does political environment influence the busi-
ness policy of an organisation?
r efe r e n ces
n Aswathappa, K. (2004). Essentials of Business Environ- n Chidambaram, K. and V. Alagappan (2003). Business
ment, 2nd ed. Mumbai: Himalya Publishing House. Environment. New Delhi: Vikas Publishers.
n Batra, G. S. and R. C. Dangwal (2002). Business Manage- n Davis, K. and R. L. Blomstrom (1971). Business Society
ment and Globalisation. New Delhi: Deep & Deep Publica- and Environment. New York: Mcgraw-Hill.
tions. n Ghosh, P. K. (2002). Business Environment. New Delhi:
n Bedi, S. (2004). Business Environment. New Delhi: Excel Sultan Chand.
Books. n Kalyani, I. and Paranjpe (2001). Business Environment
n Chanchal, C. (2003). Foreign Investment in India: Liber- and Development, 2nd ed. Mumbai: Himalya Publishing
alization and WTO–The Emerging Scenario. New Delhi: House.
Deep & Deep Publications. n Michale, V. P. (1999). Globalisation, Liberalization and
n Cherunilam, F. (2000). Elements of Business Environ- Strategic Management, 1st ed. New Delhi: Himalaya
ment, 1st ed. Mumbai: Himalya Publishing House. Publishing House.
n Cherunilam, F. (2004). Global Economy and Business n www.economics.gov.nl.ca
Environment. Mumbai: Himalya Publishing House. n www.readeeconomics .com
02
C hapter
Planning in India
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• The Emergence of Planning 25 • Twelfth Five-Year Plan (2012–17) 49
• The Planning Commission 26 • Liberalization and Planning 76
• The National Development Council 27 • Case 77
• Objectives of Planning in India 27 • Summary 79
• Five-Year Plans 31 • Key Words 81
• Distribution of Public Sector Outlay of • Questions 81
Each Plan 40 • References 82
• Five-Year Plans—Achievements and Failures 45
The Emergence of Planning

The need for planned, coordinated economic development under government guidance was
recognised all along the freedom movement. In the 1930s, as the freedom struggle intensi-
fied, social and economic aims also became more well defined. In December 1938, Subhash
Chandra Bose, as the Congress President, laid great stress on national planning and appoint-
ed a National Planning Committee with Jawaharlal Nehru as its Chairman.
The so-called Bombay Plan (1944), a blueprint for economic development after inde-
pendence, was worked out by eight top industrialists, notably, Tata, Birla, and Shri Ram.
It recommended a very active role for the state in economic development. The Planning
Commission was set up in March 1950. Its task was to make an assessment of the material,
the capital, and the most effective utilisation of these resources on a priority basis.
Recovering from the horrors of partition, by 1951, India started planning seriously for
the future. India’s economic history may be broadly divided into the following phases—the
period from 1947 to the mid-1950s, which was the preparatory phase in planning for devel-
opment; the period from mid-1950s to mid-1960s, characterised by rapid industrialisation;
the period of late 1960s and the 1970s, when the plans tried to focus on agriculture; and
finally the phase of liberalization starting tentatively in the 1980s, and gearing up from 1991
to the present.
The period from independence to the mid-1950s signifies the preparatory phase in plan-
ning for development. During the first phase, the main concern was to work out a broad
framework for planned development. Although a step in this direction had already been
initiated with the formation of the National Planning Commission, serious work in this di-
rection gained momentum only after 1947. The Planning Commission set up in 1950 with
Nehru as its Chairman undertook the task of devising an appropriate development strategy
through five-year plans.
The Industrial Policy Resolution Strong advocacy of planning came from an emerging sub-discipline of economics called
of 1956 outlined Nehru’s vision ‘Development Economics’. This advocacy was reiterated by the spectacular economic suc-
of a socialistic pattern of soci- cess of the then USSR. The Industrial Policy Resolution of 1956 outlined Nehru’s vision of a
ety, making the public sector
socialistic pattern of society. The public sector soon became the pivotal sector of the Indian
the pivot of Indian economy.
Despite several changes in gov- economy and despite the changes in governmental policies in 1971, 1979, 1980, and 1985,
ernment policies in the subse- the provision of the Industrial Policy Resolution remained intact till 1990. The public sector
quent years, this resolution re- undertakings played a critical role in the generation of surplus capital for the infrastructural
mained intact till 1990.
development. Generation of employment opportunities, removal of disparities, and allevia-
tion of poverty were the objectives of the public sector units.
Under Jawaharlal Nehru, India adopted a flexible plan strategy in order to bring about
Under Jawaharlal Nehru, India
adopted a flexible plan strategy the functional and structural transformation of the economy. This strategy of planning was
in order to bring about the func- adopted keeping in mind the objectives, such as reduction in absolute poverty, unemploy-
tional and structural transforma- ment, and inequalities, and providing basic necessities and accelerating a balanced growth.
tion of the economy. This strat-
egy of planning was adopted
The Indian socio-economic order had been hard hit by the British handling of the Indian
keeping in mind the objectives, economy, by the Second World War, and, ultimately, by the partition of India. The need to
such as reduction in absolute reorganise the economy and to channelise it towards self-dependence became imperative. It
poverty, unemployment, and would not be wrong to say that given the monolithic problems, the early years, right through
inequalities, and providing ba-
sic necessities and accelerating
the mid-1960s, witnessed an optimistic assessment of India’s potential and performance.
a balanced growth. In the Second Plan, which was formulated in an atmosphere of economic stability, agri-
culture was accorded a complementary role while the focus shifted to the industrial sector,
especially to the heavy-goods sector. The domestic industry was protected from foreign
competition through high tariff walls, exchange-rate management, controls and licences or
outright bans. To begin with, P.C. Mahalanobis introduced a single-sector model, based on
variables of income and investment, which was further developed into a two-sector model.
The entire net output of the economy was supposed to produce only two sectors—the invest-
ment goods sector and the consumer goods sector. The basic strategy of the Second Plan was
to increase the investment in heavy industries and also the expenditure in services.
The Planning Commission

The Planning Commission was The Planning Commission of India was set up in March 1950 with Jawaharlal Nehru as its
set up in March 1950. This Chairman. The Commission comprises eight members:
Commission comprises eight
members: Prime Minister—who 1. Prime Minister (Chairman),
is the Chairman of the Commis-
sion, four full-time members, 2. Four full-time members (including Deputy Chairman),
Minister of Planning, Minister 3. Minister of Planning,
of Finance, and Minister of
Defence. 4. Minister of Finance, and
5. Minister of Defence.
With a change in the government at the Centre, a new Planning Commission is always
formed. The main functions of the Planning Commission include:
1. Making real assessment of various resources and investigating the possibilities of aug-
menting resources;
2. Formulating plans;
3. Defining stages of plan implementation and determining plan priorities;
4. Identifying the factors retarding economic growth and determining the conditions
for its successful implementation;
Planning in India | 27
5. Determining plan machinery at each stage of the planning process;

6. Making periodic policy measures to achieve objectives and targets of plan; and
7. Making additional recommendations as and when necessary.
The National Development Council

The National Development Council (NDC) has been working as the highest national forum
for the economic planning in India since 6 August, 1952. Representatives of both the Central
and the State government come together in the NDC to finally approve all important deci-
sions relating to planning.
The NDC is composed of the following members:
1. The Prime Minister of India,
2. Chief Ministers of all states, and
3. Members of Planning Commission.
The NDC works as an advisory body where the state governments occupy an important
position.
Functions
The following are the main functions of the NDC:
1. To review the National Plan periodically.
2. To consider important questions related to social and economic policy affecting
national development.
3. To recommend various means of achieving aims and targets set out in the National
Plan. The Council also recommends various measures for achieving active participa-
tion and cooperation of the people, for improving efficiency in administrative serv-
ices, for ensuring fullest development in the backward regions and the backward sec-
tions of the community, and also for building up resources for national development.
4. The NDC also takes the final decision regarding the allocation of Central assistance
for planning among different states. The ‘Gadgil formula’ and all other systems fol-
lowed in transferring Central assistance for plan to states are finalised by the NDC.
5. The NDC approves the draft plan prepared by the Planning Commission.
Objectives of Planning in India

In a developing country like India, economic planning plays a very important role in eco- The fundamental objective of
nomic development. The fundamental objective of the economic planning of our country is the economic planning of our
to accelerate the pace of economic growth and to provide social justice to the general masses. country is to accelerate the
pace of economic growth and
Thus ‘growth with social justice’ is the main objective of economic planning in India. The to provide social justice to the
major objectives of economic planning in India can be summarised as follows: general masses. Thus ‘growth
with social justice’ is the main
1. Attainment of higher rate of economic growth, objective of economic planning
in India.
2. Reduction of economic inequalities,
3. Achieving full employment,

4. Attaining economic self-reliance,
5. Modernisation of various sectors, and
6. Redressing imbalances in the economy.
Let us now discuss these objectives in detail.
Economic Growth
Attainment of a higher rate of economic growth has received topmost priority in almost all
the five-year plans of the country. Given the acute poverty in the country, a higher rate of eco-
nomic growth would help to eradicate poverty and improve the standard of living of the peo-
ple. The First Plan envisaged a target of 11 per cent increase in national income against which
18 per cent growth in national income was achieved. The Second, Third, and Fourth Plans
envisaged annual growth rates of 4.5 per cent, 5.6 per cent, and 5.7 per cent, respectively,
against which 4.2 per cent, 2.8 per cent, and 3.2 per cent, respectively, were achieved. Again,
the Fifth and Sixth and Seventh Plans proposed annual growth rates of 4.4 per cent and 5.2
per cent and 5 per cent respectively against which 4.7 per cent and 5.5 per cent, 5.6 per cent
respectively, were achieved. The Eighth and Ninth Plans set targets of 5.6 per cent and 6.5 per
cent, respectively, against which 6.5 per cent and 5.5 per cent, respectively, were achieved.
The Tenth and Eleventh Plans set targets of 7.9 per cent and 9 per cent, respectively, against
which 7.7 per cent and 8.2 per cent, respectively, were achieved. Thus, attaining higher rate of
economic growth is a common objective of all the five-year plans of our country.
Attaining Economic Equality and Social Justice

Reduction of economic inequal- With its objective of growth scenario, expansion of employment opportunity, and poverty
ities and eradication of pov- alleviation, the Eighth Plan focused entirely on socio-economic condition. The Ninth Five-
erty have been the objective of Year Plan endeavoured to be sensitive to the needs of the poor, focused on the accelerated
almost all the five-year plans of
our country. However, following
growth to realise the objective of removal of poverty.
a faulty approach in the initial Reduction of economic inequalities and eradication of poverty have been the objective of
planning process, economic almost all the five-year plans of our country, particularly since the Fourth Plan. Following a
inequality widened and poverty faulty approach in the initial planning process, economic inequality widened and poverty be-
became acute.
came acute. Under such circumstances, the Fifth Plan adopted the slogan of ‘Garibi Hatao’ for
the first time. The Seventh Plan document showed that nearly 37.4 per cent of the total popu-
lation of the country fell below the poverty line and the plan aimed to reduce this percentage
to 29.2 per cent by 1990. Thus, to achieve the target, various poverty alleviation programmes
like the National Rural Employment Programme (NREP), Composite Rural Training and
Technology Centre (CRTTC), Crash Scheme for Rural Employment Programme (CSREP),
Rural Landless Employment Guarantee Programme (RLEGP), and so on were introduced.
However, the performance of these programmes was not satisfactory.
The Ninth Plan focused on the objective of empowering women as agents of socio-
economic change and development, and subsequently the National Policy on Empowerment
of Women was adopted in April 2001. Accordingly, a National Plan of Action (NPA) was for-
mulated to ensure the requisite access of women to information, resources, and services. The
Tenth Plan addressed the need to ensure equity and social justice. Further, a three-pronged
strategy (social empowerment, economic empowerment, and social justice) for attaining
equity and social justice along with high rates of growth was proposed in the Tenth Plan
period. The Eleventh Plan includes several inter related components such as rapid growth
that reduces poverty and creates employment opportunities, access to essential services in
health and education especially for the poor, equality of opportunity, empowerment through
education and skill development, employment opportunities underpinned by the National
Rural Employment Guarantee, environmental sustainability, recognition of women’s agency,
and good governance.
Achieving Full Employment

The Seventh Plan emphasised on the policy for accelerating the growth in food produc-
tion, increasing employment opportunities, and raising productivity. The Eighth Plan had
its main focus on human development. In order to achieve this goal, employment genera-
tion, population control, literacy, education, health, drinking water, and provision of ade-
quate food and basic infrastructure are broadly considered as the priorities of the plan. The
Ninth Plan incorporates a primary objective to generate greater production employment in
the growth process of various sectors and by adopting labour intensive technologies in the
unemployment-prone areas.
India’s five-year plans have been laying stress on employment generation since the
Employment generation has
Third Plan. The generation of more employment opportunities was an objective of both been one of the objectives
the Third and Fourth Plans. However, up to the Fourth Plan, employment generation never of the Planning Commission
received its due priority. The Fifth Plan, in its employment policy, laid a special emphasis on since the Third Five-Year Plan.
To achieve the target, major
absorbing increment in labour force during the plan period. The Sixth Plan accorded much employment programmes were
importance to the reduction of incidence of unemployment. It was estimated that employ- introduced in the Sixth Plan
ment would grow at the rate of 4.17 per cent per annum as against the annual growth of period.
labour force at 2.54 per cent. To achieve this target, major employment programmes were in-
troduced during the plan period—Integrated Rural Development Programme (IRDP), NREP,
Operation Flood II Diary Development Project, schemes in the villages and small industries
sector, the national scheme of Training Rural Youth for Self Employment (TRYSEM), and
various other components of the Minimum Needs Programme (MNP).
One of the major objectives of the Seventh Plan was a faster growth of employment
opportunities. Thus, the plan aimed that the employment potential would grow at 4 per cent
as against the 2.6 per cent growth in the labour force. Again, the Eighth Plan envisaged an
annual employment growth of 2.6 per cent to 2.8 per cent over the next 10 years—1997–2006.
During the Tenth Plan period the results of the most recent 61st round of NSS for 2004–
05 reveal a somewhat better picture of employment growth than in the previous period.
During 1999–2000 and 2004–05, about 47 million work opportunities were created as com-
pared to only 24 million in the previous period, i.e., from 1993–94 to 1999–2000. Further,
employment growth accelerated from 1.25 per cent per annum during the period 1993–94
to 1999–2000 and then to 2.62 per cent per annum during the period from 1999–2000 to
2004–05. The annual increase in work opportunities increased from 4.0 million per year in
the first period to 9.3 million per annum in the second period.
The Eleventh Plan aimed at bringing the overall unemployment rate down by generating
new work opportunities exceeding the projected addition to the labour force. The results of
NSS 66th round (2009–10) indicate that 18 million new work opportunities were created on
CDS basis between 2004–05 and 2009–10. The unemployment rate in absolute terms came
down by 6.3 million and the unemployment rate declined to 6.6 per cent in 2009–10 for the
first time since 1993–94, after increasing to 7.31 per cent in 1999–2000 and 8.28 per cent in
2004–05. On UPSS basis also, during the same period, the unemployment rate declined to
2 per cent in 2009–10 from 2.3 per cent in 2004–05. The overall labour force expanded by
just 11.7 million. The increase in labour force was lower compared to previous years. This,
however, is a positive development as it can be attributed to higher retention of the young in
schools and colleges, and also lower distress labour participation by working age women as
family incomes improved in both rural and urban areas.
Attaining Economic Self-reliance

One of the very important objectives of Indian planning has been to attain economic self-
reliance. However, the objective came to the forefront only with the Fourth Plan, when the
plan aimed at elimination of the import of food grains under PL480. The Fifth Plan also laid
much importance on the attainment of self-reliance. It aimed at achieving self-sufficiency in
the production of food grains, raw materials, and other essential consumption goods. The
plan also emphasised the need for import substitution and export promotion for attaining
economic self-reliance. The Sixth Plan laid stress on strengthening the impulses of mod-
ernisation for the achievement of economic and technological self-reliance. The Seventh and
Eighth Plans followed the path for achieving self-reliance.
Although India has achieved self-sufficiency in respect of food grains, it has not yet
achieved self-sufficiency in respect of edible oil. In the meantime, we have developed a
number of import-substitute industries, particularly, basic and capital goods industries, but
the huge import of petroleum along with some other items is a serious drain on foreign
exchange reserves—such that in 1991–92, the country reached near-bankruptcy level with a
huge external debt obligation. Thus, the objective of self-reliance still remains unfulfilled.
The important component of the development policy and strategy envisaged under the
The important component of
the development policy and Ninth Five-Year Plan was self-reliance. Since self-reliance demanded balance of payments
strategy envisaged under the sustainability and avoidance of excessive external debt, what was needed was a commitment
Ninth Five-Year Plan was self- to sound and prudent macro-economic policies. Self-reliance also demanded that the most
reliance. Since self-reliance
demanded balance of payments
of investible resources be generated domestically. The component of self-sufficiency was es-
sustainability and avoidance pecially applicable to food and the Ninth Plan targeted the higher growth rate of agriculture
of excessive external debt, to tide over bad monsoon also.
what was needed was a com-
mitment to sound and prudent
macro-economic policies. Modernisation of Various Sectors
As far as technology was concerned, domestic capability was to be developed in that direc-
tion also and the Ninth Plan proposed to implement the technology policy statement, called
‘Vision 2020’.
Another very important objective of the five-year plans was the modernisation of vari-
Another very important objec
tive of the five-year plans was ous sectors, more specifically the agricultural and industrial sectors. The Fourth Plan laid
the modernisation of various much emphasis on the modernisation of the agricultural sector that took the form of green
sectors, more specifically the revolution. Successive plans also continued their efforts in the same direction but to a lesser
agricultural and industrial sec-
tors. The Fourth Plan laid much
extent. Box 2.1 lists the conditions that determine the success of a plan.
emphasis on the modernisa- The Sixth Plan categorically mentioned these objectives of modernisation for the first
tion of the agricultural sector time. Modernisation here meant those structural and institutional changes in economic
that took the form of green activities, which could transform a feudal and colonial economy into a progressive and
revolution.
forward-looking economy. Thus, through condensation an economy may be diversified.
Box 2.1 Conditions for the Success of Planning

1. Central planning authority 7. Mobilisation of resources
2. Reliable statistical data 8. Proper balance in a plan
3. Specific objective 9. Proper development policy
4. Fixation of targets and priorities 10. Flexibility in planning
5. Strong and stable government 11. International relations
6. Fair and efficient administration 12. Public cooperation
It requires setting up of various types of industries and advancement of technology. However,

some sort of modernisation has always gone against employment generation. Thus, the coun-
try is facing a conflict between the objective of modernisation and the objective of removal of
unemployment and poverty.
Redressing Imbalances in the Economy

Regional disparities and imbalances in the economy became so acute in India that they
needed special attention in our five-year plans. By regional development, we mean economic
development of all the regions by exploiting various natural and human resources and
increasing their per capita income and living standards. From the Second Plan onwards, the
government realised the need for balanced development. Thus, the Second, Third, Fourth,
and Fifth plans laid emphasis on the redressal of economic imbalances for attaining balanced
regional development. The Sixth Plan aimed at a progressive reduction in regional inequali-
ties in the pace of development and in the diffusion of technological benefits. The Seventh
and Eighth plans also carried forward this objective of balanced development in a systematic
manner. The Ninth Plan has allotted more public investment in infrastructural projects, in
favour of the poor and less-developed states.
Besides these long-term objectives, the plans also laid importance on short-term objec-
tives, such as control of inflation, industrialisation, rehabilitation of refugees, building up of
infrastructural facilities, and so on. Box 2.2 details on the definition and the tasks of a plan
model, which would help in a better understanding of the five-year plans.
Box 2.2 Plan Model

A plan model is a mathematical model designed to help • To provide a framework for assessing the soundness
in drawing up the plan of economic development. A plan of the target of a plan that might have been set by
model is defined as an optimally balanced collection of some less formal methods,
targets or quantitative measures with dates in the future, • To enable the making of quantitative projections for
standing for certain objectives and certain proposed the economy over the plan period and
steps leading to the attainment of those objectives.
• To provide a framework for the selection or prepara-
The tasks of a plan model can be described tion of projects for being integrated into a plan.
as follows:
Five-Year Plans
Let us now discuss the objectives of each five-year plan.
First Five-Year Plan (1951–52 to 1952–56)

The First Five-Year Plan of India had mainly two objectives: The objective of the First
Five-Year Plan was to correct
1. To correct the disequilibrium in the economy caused by the Second World War and economic disequilibrium and
the partition and initiate the process of an all-
round development.
2. To initiate the process of an all-round balanced development for ensuring a rising
national income and improvement in the standard of living.
Thus, the First Plan aimed at removing food crisis and shortages of raw materials, to develop
economic and social infrastructure, such as, roads, railways, irrigation and power projects, and
finally, rehabilitate refugees. The plan also tried to lay a foundation for the future development
of the economy, to attain social justice, and to contain inflationary pressures. The plan fixed
the targets for raising the rate of investment by 7 per cent and national income by 11 per cent.
Second Five-Year Plan (1956–57 to 1960–61)

India’s Second Five-Year Plan was a bit more ambitious and bolder in comparison to the First
The Second Five-Year Plan
aimed at laying the foundation Plan. The Second Plan tried to lay the foundations of industrial progress, made a strong case
of industrial progress and, at for rural development, and also tried to achieve a socialistic pattern of society.
the same time, achieve a social- The Second Plan had the following four main objectives:
istic pattern of society.
1. A sizeable increase in the national income to raise the level of living in the country,
2. Rapid industrialisation with particular emphasis on the development of basic and
heavy industries,
3. A large expansion of employment opportunities, and
4. Reduction of inequalities in income and wealth and a more even distribution of
economic power.
Third Five-Year Plan (1961–62 to 1965–66)

The Third Plan accorded great- The Third Plan accorded greatest importance to the achievement of balanced regional
est importance to the achieve- development. It realised the need for a balanced approach and, thus, gave importance to the
ment of balanced regional development of agriculture and rapid industrialisation through the promotion and develop-
development.
ment of heavy industries.
The main objective of the Third Plan was to attain self-sustaining growth in the economy.
The following were the other objectives of the Third Five-Year Plan:
1. To secure an increase in the national income of over 5 per cent per annum, the pat-
tern of investment being designed also to sustain the rate of growth during the subse-
quent plan period,
2. To achieve self-sufficiency in food grains and increase agricultural production to
meet the requirements of industry and exports,
3. To expand basic industries like steel, chemicals, fuel, and power and establish ma-
chine-building capacity, so that the requirements of further industrialisation could
be met indigeneously within a period of 10 years or so,
4. To utilise the manpower resources of the country to the fullest extent possible and to
ensure a substantial expansion in employment opportunities, and
5. To establish progressively, greater equality of opportunities and to bring about reduction
in disparities in income and wealth and a more even distribution of economic power.
Fourth Five-Year Plan (1969–70 to 1973–74)

The Fourth Plan aimed at two
main objects: The Fourth Plan aimed at two main objects:
• Growth with stability and
• Progressive achievement of 1. Growth with stability and
self-reliance.
2. Progressive achievement of self-reliance.
Besides these two, the other objectives were as follows:

1. Attaining social justice and equality along with care of the weak and under-privileged,
and the common man,
2. Generating more employment opportunities both in the rural and urban areas,
3. Assigning an increasing role to the public sector in the growth process, and
4. Correcting regional imbalances among different states.
The Fourth Plan set a target for increasing the national income by 5.5 per cent per annum and
for increasing the per capita income from ` 522 in 1968–69 to ` 643 in 1973–74.
Fifth Five-Year Plan (1974–75 to 1978–79)

The draft of the Fifth Plan was presented before the Parliament in December 1973 and the
plan became operative from April 1, 1974. The period of the Fifth Plan was originally sched-
uled to be from 1974–75 to 1978–79. However, with the formation of the Janata government
at the Centre in March 1977, the Fifth Plan was terminated at the end of March 1978—a year
before full term.
The Fifth Plan had two main objectives: The objects of the Fifth Five-
Year Plan were removal of pov-
1. Removal of poverty and erty and achievement of eco-
nomic self-reliance.
2. Achievement of economic self-reliance.
The Fifth Plan designed certain special measures to increase the level of income and con- The Fifth Five-Year Plan aimed
sumption of the lowest 30 per cent of the population who were living below the poverty line. at growth with stability and pro-
The plan paid more attention to improving the lot of the rural poor. Moreover, for promot- gressive achievement of self-
ing social justice, the Fifth Plan lunched the Minimum Need Programme for the first time. reliance.
It was designed to provide a minimum level of social consumption to all sections of people
throughout the country. The plan aimed to increase the per capita consumption expendi-
ture of the lowest 30 per cent of the population from ` 25 per month to ` 29 per month. For
achieving economic self-reliance, the Plan aimed at elimination of special forms of external
assistance, particularly food and fertiliser imports.
Sixth Five-Year Plan (1980–81 to 1984–85)

After the termination of the Fifth Plan in 1977–78, the Janata government prepared its own
draft of the Sixth Plan (1978–83). However, after the fall of Janata–Lok Dal government, the
Congress (I) government drew up a new Sixth Plan (1980–85). This draft was approved by
the NDC on February 14, 1981.
The Sixth Plan laid down the following objectives:
1. A significant step-up in the rate of growth of the economy by promoting efficiency in
the use of resources and improved productivity,
2. Strengthening the impulses of modernisation for the achievement of economic and
technological self-reliance, The Sixth Five-Year Plan aimed
at providing impetus to the
3. Progressive reduction in the incidence of poverty and unemployment, pace of economic development
and strengthening the impulse
4. Speedy development of indigenous sources of energy with a proper emphasis on the of modernisation and techno-
conservation and efficiency in energy use, logical self-reliance.
5. Improving the quality of life of the people, in general, with special reference to the
economically and socially challenged sections through an MNP,
6. Strengthening the redistributive bias of public policies and services in favour of the
poor and, thus, contributing to reduction in inequalities of income and wealth,
7. Progressive reduction in regional inequalities in the pace of development and in the
diffusion of technological benefits,
8. Promoting policies for controlling the growth of population through voluntary
acceptance of the small family norms,
9. Bringing about harmony between the long-term and the short-term policies, and
10. Promoting the active involvement of all sections of the people in the process of devel-
opment through appropriate education, communication, and institutional strategies.
Seventh Five-Year Plan (1985–86 to 1989–90)

The Seventh Five-Year Plan The NDC approved the Seventh Five-Year Plan draft on November 9, 1985. The plan laid
laid emphasis on develop- emphasis on development, equity, and social justice through the achievement of self-
ment, equity, and social justice reliance, efficiency, and increased production. The Seventh Plan emphasised the policy
through self-reliance, efficiency, for accelerating growth in food grains production, increasing employment opportunities,
and increased production.
and raising productivity. Thus, the Seventh Plan was mainly devoted to ‘food, work, and
productivity’.
The NDC approved the following objectives for the Seventh Five-Year Plan:
1. Achievement of self-sufficiency in the production of food grains as well as increase in
production of agro-raw materials like oil seeds, cotton, and sugarcane by raising the
rate of growth of production in the agricultural sector;
2. Generation of productive employment for maximum utilisation of human resources
Generation of productive em-
ployment for maximum utilisa- and solving the problem of unemployment through the development of agriculture
tion of human resources and and industry in a manner that would create employment potential for a large number
solving the problem of unem- of people;
ployment through the develop-
ment of agriculture and industry 3. To promote efficiency and productivity through elimination of infrastructural bottle-
in a manner that would create necks and shortages by improving capacity utilisation, and by promoting modernisa-
employment potential for a large
number of people; tion of plan and equipment and more extensive application and integration of science
and technology;
4. To promote equity and social justice through alleviation of poverty and reduction in
inter-class disparities in respect of income and wealth;
5. To improve the equality of life and standard of living of the people in general with
a special reference to the economically and socially weaker sections through an
MNP;
6. To promote a speedy development of power generation and irrigation potential along
with utilisation of existing capacities and also to conserve energy along with promo-
tion of non-conventional energy sources;
7. To ensure growth with stability by restraining inflationary pressures through non-
inflationary financing;
8. To achieve self-reliance through attaining self-sufficiency in food grains and by

reducing dependence on external finance through export promotion and import
substitution; and
9. To decentralise planning and to achieve full public participation in development
works along with promoting active involvement of all sections of population in the
process of development through appropriate education, communication, and institu-
tional strategies.
Annual Plans (1990–91 and 1991–92)

After the completion of the Seventh Plan by March 1990, the Planning Commission initially
decided to launch the Eighth Plan as per its schedule—from April 1, 1990. Accordingly, the
Planning Commission approved the approach to the Eighth Five-Year Plan (1990–95) on
September 1, 1989, under the chairmanship of Rajiv Gandhi. The highlights of this approach The highlights of this approach
were attainment of 6 per cent
were attainment of 6 per cent growth in gross domestic product (GDP), a sharp regional focus,
growth in gross domestic prod-
international competitiveness, self-reliance, poverty alleviation, and people p
articipation. uct (GDP), a sharp regional
However, after the 1989 General Election, the National Front government headed focus, international competi-
by V. P. Singh came to power at the Centre. The NDC then approved a new approach to tiveness, self-reliance, poverty
alleviation, and people partici-
the Eighth Plan on September 18, 1990, and finalised the total outlay of the Eighth Plan pation.
at ` 610,000 crore, including a public sector outlay of ` 335,000 crore. The total outlay of
the Annual Plan 1990–91 was fixed at ` 64,717 crore including a public sector outlay of
` 39,329 crore. The plan also envisaged a growth rate of 5.5 per cent in GDP, a domestic
savings rate of 22 per cent, and employment growth of 3 per cent per annum.
Following the collapse of the National Front government, the new government, headed
by Chandra Shekhar, expected to take a fresh look at the proposed size and other param-
eters of the Eighth Plan in view of the adverse impact of the Gulf crisis on the country’s
economy. The spurt in oil price aggravated the country’s balance of payments position con-
siderably. However, before it could take a final decision about the Eighth Plan, the Chandra
Shekhar government collapsed, making way for another General Election in the month of
May–June 1991.
After the formation of a new Congress (I) government at the Centre, headed by On July 19, Prime Minister
P.V. Narasimha Rao, on June 21, 1991, fresh discussions were held about the fate of Eighth Narasimha Rao announced in
Parliament that the Eighth Plan
Plan in the face of one of the worst financial crises faced by the country. On July 19, Prime would start from April 1, 1992,
Minister Narasimha Rao announced in Parliament that the Eighth Plan would start from taking the earlier two years
April 1, 1992, taking the earlier two years (1990–91 and 1991–92) as Annual Plans. (1990–91 and 1991–92) as
Annual Plans.
Eighth Five-Year Plan (1992–93 to 1996–97)

The approach paper of the Eighth Plan was approved by three different governments in
1989, 1990, and 1991. However, due to political changes, the Eighth Five-Year Plan could
not commence from 1990–91. Following the installation of the Congress (I) government in
June 1991, the Planning Commission was reconstituted with Pranab Mukherjee as its Deputy
Chairman. The revised time frame of the Eighth Plan was from 1992–93 to 1996–97.
In order to meet the challenges faced by the economy, the Eighth Plan finalised the The Eighth Five-Year Plan
following objectives: focused on the generation of
adequate employment oppor-
1. Generation of adequate employment opportunities to achieve near-full employment tunities, containing population
by the turn of the century, growth, and strengthening of
the infrastructure.
2. Containing population growth through people’s active cooperation and an effective

scheme of incentives and disincentives,
3. Universalisation of elementary education and eradication of illiteracy among people
in the age group of 15–33 years,
4. Provision of safe drinking water and primary health care including immunisation to
all villages and the entire population and complete elimination of scavenging,
5. Growth and diversification of agriculture to achieve self-sufficiency in food and
generate surplus for exports and
6. Strengthening of the infrastructure (energy, transport, communication, irrigation) in
order to support the growth process on a sustainable basis.
The Eighth Plan concentrated on the above objectives considering its need for (a) a continued
reliance on domestic resources for financing a planned investment; (b) increasing the techni-
cal capabilities for the continuous development of science and technology; and (c) moderni-
sation of competitive efficiency so that the economy of the country could keep pace with the
global development.
Ninth Five-Year Plan (1997–98 to 2001–02)

The NDC, in its meeting held on January 16, 1997, unanimously approved the draft approach
paper for the Ninth Five-Year Plan (1997–02) with a call for collective effort to raise ` 875,000
crore for implementing the plan.
The Planning Commission finalised the objectives of the Ninth Plan in conformity with
the Common Minimum Programme (CMP) of the United Front government and also in
consultation with the chief ministers of different states on maintenance of basic minimum
services. The draft approach paper of the Ninth Plan outlined the following important objec-
tives for the plan:
The Ninth Plan focused on

1. Accelerating the rate of economic growth with stable prices,
accelerating the rate of eco-
2. Giving priority to agriculture and rural development with a view to generating
nomic growth giving priority to
agriculture and rural develop- adequate productive employment and eradicating poverty,
ment.
3. Attaining food and nutritional security for all, particularly the vulnerable sections of
the society,
4. Providing basic minimum needs of safe drinking water, primary health care facilities,
universal primary education, shelter, and connectivity to all in a time-bound manner,
5. Containing the population growth of the country,
6. Ensuring environmental sustainability of the development process through social
mobilisation and participation of people at all levels,
7. Empowerment of women and all socially disadvantaged groups such as scheduled
castes, scheduled tribes, and other backward classes and minorities as agents of socio-
economic change and development,
8. Promoting and developing people’s participatory institutions like Panchayat Raj
Institution (PRIs), cooperatives, and self-help group, and
9. Strengthening efforts to build self-reliance.
The aforesaid objectives were finalised to achieve ‘growth with equity’ and were reflected in The aforesaid objectives were
four dimensions of the state policy: finalised to achieve ‘growth
with equity’ and were reflected
1. Quality of life of the citizens, in four dimensions of the state
policy:
2. Generation of productive employment, • Quality of life of the citizens,
3. Regional balance, and • Generation of productive
employment,
4. Self-reliance. • Regional balance, and
• Self-reliance.
Tenth Five-Year Plan (2002–03 to 2006–07)
The approach paper had proposed that the Tenth Plan should aim at an indicative target of
The Tenth Five-Year Plan (2002–
8 per cent average GDP growth for the period 2002–07. It is certainly an ambitious target, 07) had been prepared against
especially in view of the fact that GDP growth has decelerated to < 6 per cent at present. Even a backdrop of high expecta-
if the deceleration is viewed as a short-term phenomenon, the medium-term performance tions that aroused from some
aspects of the then per-
of the economy over the past several years suggests that the demonstrated growth potential formance. Growth targets
is only about 6.5 per cent. The proposed 8 per cent growth target therefore involves an in- had, therefore, focused on
crease of at least 1.5 percentage points over the recent medium term performance, which is the growth in per capita in-
substantial. Nevertheless, the National Development Council (NDC) affirmed its faith in the come on per capita GDP. The
Tenth Plan aimed at an in-
latent potentialities of the Indian economy by approving the 8 per cent growth target for the dicative target of 8 per cent
Tenth Plan period. GDP growth for the period
The approach paper also recognised that economic growth cannot be the only objective 2002–07.
of national planning and indeed, over the years, development objectives are being defined
not just in terms of increases in GDP or per capita income but more broadly in terms of
enhancement of human well-being. To reflect the importance of these dimensions in devel-
opment planning, the Tenth Plan identifies specific and monitorable targets for a few key
indicators of human development. The NDC has approved that, in addition to the 8 per cent
growth target, other targets should also be considered as being central to the attainment of
the objectives of the Plan as listed hereunder.
1. Reduction of poverty ratio by 5 percentage points by 2007 and by 15 percentage
points by 2012.
2. Providing gainful and high-quality employment at least in addition to the labour
force over the Tenth Plan period.
3. All children in school by 2003 and all children to complete 5 years of schooling by
2007.
4. Reduction in gender gaps in literacy and wage rates by at least 50 per cent by 2007.
5. Reduction in the decadal rate of population growth between 2001 and 2011 to
16.2 per cent.
6. Increase in literacy rate to 75 per cent within the plan period.
7. Reduction of infant mortality rate to 45 per 1000 live births by 2007 and to 28 by
2012.
8. Reduction of maternal mortality ratio to 2 per 1000 live births by 2007 and to 1 by 2012.
9. Increase in forest and tree cover to 25 per cent by 2007 and 33 per cent by 2012.
10. All villages to have sustained access to potable drinking water within the plan period.
11. Cleaning of all major polluted rivers by 2007 and other notified stretches by 2012.
Eleventh Five-Year Plan (from 2007–08

to 2011–12)
The NDC, in approving the approach to the Eleventh Plan, endorsed a target of 9 per cent
GDP growth for the country as a whole. This growth is to be achieved in an environment in
which the economy is much more integrated into the global economy, an integration that has
yielded many benefits but also poses many challenges. If this is achieved, it would mean that
per capita GDP would grow at about 7.6 per cent per year to double in less than 10 years.
However, the target is not just faster growth but also inclusive growth, that is, a growth proc-
ess which yields broad-based benefits and ensures equality of opportunity for all.
This broad vision of the Eleventh Plan includes several inter-related components such as
rapid growth that reduces poverty and creates employment opportunities, access to essential
services in health and education especially for the poor, equality of opportunity, empow-
erment through education and skill development, employment opportunities underpinned
by the National Rural Employment Guarantee, environmental sustainability, recognition of
women’s agency and good governance.
A key feature of the inclusive growth strategy in the Eleventh Plan is that growth of GDP
should not be treated as an end in itself, but only as a means to an end. This is best done by
adopting monitor able targets which would reflect the multi-dimensional economic and so-
cial objectives of inclusive growth. Furthermore, to ensure efficient and timely implementa-
tion of the accompanying projects and programmes, these targets need to be disaggregated at
the level of the States which implement many of the programmes.
Following this approach, 27 monitorable targets have been identified at the national level
of which 13 can be disaggregated at the level of individual States. These targets are ambitious,
but it is better to aim high and fail than to aim low. Naturally, the Eleventh Plan lays great
stress on attaining them.
The 27 National Targets

As many as 27 targets at the national level fall into six major categories that are listed hereunder.
(i) Income and poverty;
(ii) Education;
(iii) Health;
(iv) Women and children;
(v) Infrastructure, and
(vi) Environment.
The targets in each of these categories are detailed hereunder.
(i) Income and Poverty
• Average GDP growth rate of 9 per cent per year in the Eleventh Plan period.
• Agricultural GDP growth rate at 4 per cent per year on the average.
• Generation of 58 million new work opportunities.
• Reduction of unemployment among the educated to <5 per cent.
• As much as 20 per cent rise in the real wage rate of unskilled workers.
• R
eduction in the head count ratio of consumption poverty by 10 percentage
points.
(ii) Education
• Reduction in the dropout rates of children at the elementary level from
52.2 per cent in 2003–04 to 20 per cent by 2011–12.
• Developing minimum standards of educational attainment in elementary
schools to ensure quality education.
• Increasing the literacy rate for persons of age 7 years or more to 85 per cent by
2011–12.
• Reducing the gender gap in literacy to 10 percentage points by 2011–12.
• Increasing the percentage of each cohort going to higher education from the
present 10 per cent to 15 per cent by 2011–12.
(iii) Health
• Infant mortality rate (IMR) to be reduced to 28 and maternal mortality ratio
(MMR) to 1 per 1000 live births by the end of the Eleventh Plan.
• Total fertility rate to be reduced to 2.1 by the end of the Eleventh Plan.
• Clean drinking water to be available for all by 2009, ensuring that there are no
slip-backs by the end of the Eleventh Plan.
• Malnutrition among children of age group 0–3 to be reduced to half its present
level by the end of the Eleventh Plan.
• Anaemia among women and girls to be reduced to half its present level by the
end of the Eleventh Plan.
(iv) Women and Children
• Sex ratio for the age group 0–6 to be raised to 935 by 2011–12 and to 950 by
2016–17.
• Ensuring that at least 33 per cent of the direct and indirect beneficiaries of all
government schemes are women and girl children.
• Ensuring that all children enjoy a safe childhood, without any compulsion to work.
(v) Infrastructure
• To ensure electricity connection to all villages and BPL households by 2009 and
reliable power by the end of the Plan.
• To ensure all-weather road connection to all habitations with a population of
1000 and above (500 and above in hilly and tribal areas) by 2009, and all signifi-
cant habitations by 2015.
• To connect every village by telephone and provide broadband connectivity to all
villages by 2012.
• To provide homestead sites to all by 2012 and step up the pace of house con-
struction for rural poor to cover all the poor by 2016–17.
(vi) Environment
• To increase forest and tree cover by 5 percentage points.
• To attain WHO standards of air quality in all major cities by 2011–12.
• To treat all urban waste water by 2011–12 to clean river waters.
• To increase energy efficiency by 20 per cent by 2016–17.
The 13 State-Specific Targets

The Eleventh Plan has been formulated in a manner whereby 13 of the 27 monitorable
national targets have been disaggregated into appropriate targets for individual States. These
include
(i) GDP growth rate
(ii) Agricultural growth rate
(iii) New work opportunities
(iv) Poverty ratio
(v) Dropout rate in elementary schools
(vi) Literacy rate
(vii) Gender gap in literacy rate
(viii) IMR
(ix) MMR
(x) Total fertility rate (TFR)
(xi) Child malnutrition
(xii) Anaemia among women and girls
(xiii) Sex ratio
Distribution of Public Sector Outlay

of Each Plan (Refer Table 2.1 to 2.12)
Table 2.1
Distribution of Public
>
Heads
Expenditure Percentage
(` crore) of Total
Sector Outlay in the
First Plan Agriculture and community development 291 15
Major and medium irrigation schemes 310 16
Power 260 13
Villages and small industries 43 2
Industries and minerals 74 4
Transport and communication 523 27
Social services and miscellaneous 459 23
Total 1,960 100
Source: Plan documents, Planning Commission, Government of India.

Heads
Expenditure Percentage <Distribution
Table 2.2
of Public
(` crore) of Total
Agriculture and community development 530 11 Second Plan
Major and medium irrigation schemes 420 9
Power 445 10
Villages and small industries 175 4
Industries and minerals 900 20
Transport and communication 1,300 28
Social services and miscellaneous 830 16
Total 4,600 100

Source: Second Five-Year Plan Review, India.

Heads Actual Expenditure Percentage <Table 2.3
(` crore) of Total
Agriculture and community development 1,089 12.7 Third Plan
Major and minor irrigation schemes 664 7.7
Power 1,252 14.6
Villages and small industries 241 2.8
Organised industry and mining 1,726 20.1
Transport and communication 2,112 24.7
Social services and miscellaneous 1,492 14.4
Total 8,577 100
Source: Fourth Five-Year Plan, 1969–74 Draft, pp. 59–60.

Heads
Actual Expenditure Percentage <Table 2.4
(` crore) of Total Sector Outlay in the
Agriculture and irrigation 3,810 24 Fourth Plan
Power 2,450 15
Industries 3,630 23
Transport and communication 3,240 20
Social services 2,770 18
Total 15,900 100
Source: Plan documents, Planning Commission, Government of India.
Table 2.5
>
Heads
Actual Expenditure Percentage
(` crore) of Total
Sector Outlay of the
Fifth Plan Agriculture and community development 5,229 13.0
Irrigation and flood control 3,913 9.8
Power 7,491 18.7
Villages and small industries 611 1.5
Industry and minerals 9,129 22.8
Social services and miscellaneous 6,873 17.2
Total 40,097 100
Source: Complied from RBI on Currency and Finance, 1979–80, Vol. II, pp. 98–99.
Table 2.6
Sectoral Distribution of
>
Heads
Actual Expenditure Percentage
(` crore) of Total
Public Sector Outlay of
the Sixth Plan Agriculture 6,624 6.1
Rural development 6,997 6.4
Special area programme 1,580 1.4
Energy 30,751 28.1
Science and technology 1,020 0.9
Social services 16,764 15.4
Total 190,292 100
Source: Seventh Five-Year Plan, 1985–90, Economic Survey 1987–88, Government of India.
Table 2.7
Plan Outlay of First
>
Heads
First Second Third Fourth Fifth Sixth
Plan Plan Plan Plan Plan Plan
Six Plans (` crore)
Total outlay (proposed) 3,870 7,900 11,600 24,880 53,410 158,711
(a) Private sector 1,800 3,100 4,100 8,990 16,160 61,210
(b) Public sector outlay 2,070 4,800 7,500 15,900 37,250 97,500
Ratio between public
sector and private
sector outlay 53:47 61:39 65:35 64:36 69:31 61:39
Actual public
sector outlay 1,960 4,600 8,577 15,900 39,426 109,292
Source: Complied from Planning Commission’s India Planning Experience—A Statistical Profile, February
1989 and other plans.
Seventh Plan Total Expenditure < Table 2.8

Sectoral Allocation and
Heads Outlay (*) Percentage 1985–86 to Percentage
1985–90 of Total 1989–90 of Total Progress of Expenditure
of the Seventh Plan
Agriculture and rural Public Sector Outlay
development 22,333 12.4 30,317 13.6 (` crore)
Irrigation and food
control 16,979 9.4 16,719 7.5
Energy 55,129 30.6 62,719 28.6
Industry and minerals 22,008 12.3 30,052 13.5
Transport 22,645 12.6 30,140 13.6
Communication 4,474 2.5 8,664 3.9
Science, technology,
and environment 2,463 1.4 3,086 1.4
General economic
services 1,396 0.7 2,862 1.3
Social services 31,545 17.5 35,034 15.8
General services 1,028 0.6 1,667 0.8
Total (1–10)
(*) At 1984–85 prices 180,000 100.0 2,222,169 100.0
Source: Computed from the data given in Economic Survey 1989–90.
Eighth Plan * 1992–93** to Percentage < Table 2.9

Final Distribution of

Heads 1992–97 1996–97 of Total
Amount Per cent Public Sector Outlay in
the Eighth Plan
Agriculture and allied activities 22,467 5.2 23,081 4.9 (1992–97) (` Crore)
Rural development 34,425 7.9 35,263 7.4
Special area programmes 6,750 1.6 5,837 1.2
Irrigation and flood control 32,525 7.5 23,280 4.9
Energy (a+b+c+d) 115,561 26.6 130,563 27.5
a. Power 79,589 18.3 67,775 14.3
b Petroleum 24,000 5.5 49,038 10.3
c. Coal and lignite 10,507 2.4 12,009 2.5
d. Non-conventional 1,465 0.3 1,741 0.4
Industry and minerals (e+f) 46,922 10.8 51,403 10.8
e. Village and small industries 6,334 1.5 6,228 1.3
f. Large and medium 40,588 9.3 45,175 9.5
industries
Transport 55,926 12.9 69,745 14.7
Communications 25,110 5.8 38,383 8.1
(Continued)
Table 2.9
(Continued)
> Eighth Plan * 1992–93** to Percentage

Heads 1992–97 1996–97 of Total
Amount Per cent
Science, technology, 9,042 2.1 6,875 1.5
and environment
Social services 79,012 18.2 79,505 16.8
General and economic services 6,360 1.4 10,186 2.2
Total 434,100 100.0 474,121 100.0
Source: Planning Commission, Eighth Five-Year Plan, 1992–97, Vol. I; and Economic Survey 1996–97.
* At 1991–92 prices.
** At current prices: For 1992–93 and 1993–94 (Actual), 1994–95 and 1995–96 (Revised Estimates),
and for 1996–97 (Budget Estimate).
Note: As per the revised budget classification.
Table 2.10
> Proposed Outlay Percentage of
Heads (` crore) Total Outlay
Ninth Plan (1997–02*) Agriculture and allied activities 36,658 4.2
Rural development 74,942 8.6
Special area programme 3,790 0.4
Energy 221,973 25.4
Transport 124,188 14.2
Communication 48,791 5.6
Science and technology 26,343 3.0
General economic services 15,569 1.8
Social services 180,931 20.6
General services 12,396 1.4
Total 875,000 100
Source: Ministry of Planning and Programme Implementation.
Table 2.11
Sectorial Allocations of
> Tenth Plan
Heads Amount Percentage
Public Sector Resources
for the Tenth Plan Agriculture and allied activities 58933 3.9
Rural Development 121928 8.0
Special area programme 20879 1.3
Irrigation and flood control 103315 6.8
Sub-total (1+2+3+4) 305055 20.0
Energy 403927 26.5
(Continued)
Tenth Plan <Table 2.11

(Continued)
Heads Amount Percentage
Industry and minerals 58939 3.9
Transport 225977 14.8
communication 98968 6.5
Science and Technology and
environment 30424 2.0
General economic services 38630 2.5
Social services 347391 22.8
General services 16328 1.0
Total 1525639 100.0
Source: Planning Commission, Tenth Five-Year Plan, 2002–07.
Sectoral Allocation—Tenth Plan and Eleventh Plan < Table 2.12

Sectorial Allocations of
(` crore at 2006–07 prices)
Public Sector Resources
Tenth Plan Eleventh Plan for the Eleventh Plan
S.No. Sectors BE# % to Total Projected % to Total
Allocation
1 Education 62461 7.68 274228 19.29
2 Rural Development
Land resources and
Panchayati Raj 87041 10.70 190330 13.39
3 Health Family Welfare and
Ayush 45771 5.62 123900 8.71
4 Agriculture and Irrigation 50639 6.22 121556 8.55
5 Social Justice 36381 4.47 90273 6.35
6 Physical Infrastructure 89021 10.94 128160 9.01
7 Scientific Departments 29823 3.66 66580 4.68
8 Energy 47266* 5.81 57409 4.04
Total Priority Sector 448403 55.10 1052436 74.03
9 Other 365375 44.90 369275 25.97
Total 813778 100.00 1421711 100.00
Note: # Tenth Plan BE represents the actual allocation during the five years and not the original Tenth
Plan projections; *Includes APDRP grant component only.
Five-Year Plans—Achievements
and Failures
Six decades of planning experience has witnessed achievements and failures in different
sectors of the economy. At best, the planning experience has proved to be a mixed blessing.
Table 2.13 illustrates the growth performance in all the 11 five year plans.
(2007–12) Projections
and Eleventh Plan
(2002–07) Realizations
Resources—Tenth Plan
for Public Sector’s
Sectoral Allocation
Table 2.13
>
Centre States and UTs Centre, States, and UTs

Budgetary Support IEBR Total Outlay Total Outlay
Head of Tenth Eleventh % Tenth Eleventh % Tenth Eleventh % Tenth Eleventh % Tenth Eleventh %
Development Plan Plan Pro- in- Plan Plan Pro- in- Plan Plan Pro- in- Plan Plan Pro- in- Plan Plan Pro- in-
Realiza- jection crease Realiza- jection crease Realiza- jection crease Realiza- jection crease Realiza- jection crease
tion tion tion tion tion
1. Agriculture and 26108 50924 95.0 26108 50924 95.0 34594 85458 147 60702 136381 124.7
Allied Activities
2. Rural Develop- 79291 190330 140.0 79291 190330 140.0 58419 110739 89.6 137710 301069 118.6
ment
3. Special Area 16423 26329 603 16423 26329 60.3
Programmes
4. Irrigation & Flood 1716 6747 293.3 1716 6747 293.3 110699 203579 83.9 112415 210326 87.1
Control
5. Energy 27262 36912 35.4 238957 591826 147.7 266220 628739 136.2 97415 225385 116.1 363635 854,123 134.9
6. Industry & Miner- 24146 54382 125.2 25108 67196 167.6 49254 121579 146.8 15401 32021 107.9 64655 153600 137.6
als
7. Transport 97711 120188 23.0 85405 266118 211.6 183116 386306 111.0 80818 186137 130.3 263934 572443 116.9
8. Communications 5312 16133 203.7 77109 79204 2.7 82422 95337 15.7 523 43 –91.8 82945 95380 15
9. Science, 26667 75421 182.8 25 26667 75446 182.9 2006 12487 522.4 28673 87933 206.7
Technology &
Enviornment
10. General Economic 9972 13920 39.6 456 891 95.3 10428 14811 42.0 19921 47712 139.5 30349 62523 106.0
Services
11. Social Services 183.725 524414 185.4 31494 54450 72.9 215219 578864 169.0 221310 523463 136.5 436529 1102327 152.5
12. General Services 4887 7489 53.2 4887 7489 53.2 15602 34794 123 20489 42283 106.4
Total 486798 1096860 125.3 458530 1059711 131.1 945328 2156571 128.1 673132# 1488147 121.1 1618460 3644718 125.2
Note: # Based on the sectoral outlay reported by the States. Totals may not tally due to rounding errors.
Economic planning through public sector has been successful in laying a strong infra- Economic planning through
structure in the economy. It has provided congenial conditions for investment initiatives by public sector has been suc-
the private sector. It is also true that public sector has been mainly responsible for the devel- cessful in laying a strong infra-
structure in the economy. It has
opment of such industries as iron and steel, non-ferrous metals, petroleum, fertilisers, heavy provided congenial conditions
engineering, coal, electricity, armament, transport, and communications. for investment initiatives by the
A major achievement of economic planning is the increase in food grains produc- private sector.
tion from 50 million tonnes in 1950–51 to 208.9 million tonnes in 1999–2000, recording a
fourfold increase over a period of half a century. However, the increase in per capita avail-
ability of food grains per day has been modest: from 395 grams in 1951 to 466 grams in 2000.
A major achievement of eco-
This is attributable to the enormous increase in production that has helped the country to nomic planning is the increase
achieve a considerable degree of self-sufficiency in terms of food requirements and tide over in food grains production from
recurring food shortages reminiscent of the 1960s and 1970s. The breakthrough has been 50 million tonnes in 1950–51 to
208.9 million tonnes in 1999–
achieved as a result of substantial public investment in irrigation, agricultural research and 2000, recording a four-fold
extension schemes, subsidised inputs, credit facilities, and price-support programmes. increase over a period of half a
Through economic planning, India has successfully maintained a reasonable degree of century.
price stability during the post-independence period. The annual rate of inflation, with some
exceptions, has remained a single digit through better management of demand and supply
of essential commodities. A vast public distribution system has been built up to contain the
prices of essential goods.
Successive plans have stressed the need to develop the backward regions of the country. Successive plans have stressed
In promoting a regional balanced development, the public sector has played an important the need to develop the back-
role as many public enterprises are located in the most backward areas of the country. It has ward regions of the country. In
helped these areas in terms of development of infrastructure, employment opportunities, and promoting a regional balanced
development, the public sector
growth of ancillary industries. has played an important role
In the beginning, the planning process relied on the automatic benefits of growth as a as many public enterprises are
means to eradicate poverty. The unsatisfactory results of this approach forced the govern- located in the most backward
areas of the country.
ment to attack poverty directly through rural development and rural employment schemes.
Some major poverty alleviation schemes of the government launched since the late 1980s are
1. Integrated Rural Development Programme (IRDP), 2. The National Rural Employment
Programme (NREP), and 3. Rural Landless Employment Guarantee Programme (RLEGP).
Summing up the achievements of planning, the Eighth Five-Year Plan (1992–97) observed,
Growth has brought about a structural change in the economy. This has surfaced in
The composition of national
the form of a shift in the sectoral composition of production, diversification of activi- income has changed steadily
ties, advancement of technology and a gradual transformation of a feudal and colonial over the planning years. While
economy into a modern industrial nation. The composition of national income has the share of agriculture and
changed steadily over the planning years. While the share of agriculture and allied ac- allied activities in the GDP has
declined, that of the tertiary
tivities in the GDP has declined, that of the tertiary sector has increased. The expansion sector has increased.
of services has not only been conducive for employment generation but also for better
efficiency of the system and better quality of life.
In spite of achievements in agriculture and capital goods sector, economic planning has per-
formed poorly in several areas. The rate of growth in real gross national product (GNP)
envisaged in successive plans has generally ranged between 5 per cent and 5.5 per cent. How-
ever, during the first three decades of economic planning (1951–80), the economy progressed
at a modest average growth rate of 3.5 per cent per annum. If we take into account the an-
nual growth rate of population (around 2 per cent), the growth rate of per capita real income
would turn out to be very modest.
The massive backlog of unemployment in rural as well as in urban areas is a glaring fail-
ure of the planning process. The undue emphasis on heavy industries is partly responsible for
the present serious unemployment problem. The ICOR is quite high (around 6) in the Indian
economy due to a host of factors including higher interest rate and long gestation period of
projects. The reduction in ICOR can be achieved by giving priority to investment in agricul-
ture, rural work programmes, and village and small industries. Furthermore, ICOR can be
lowered if investment projects are completed on time.
The benefits of development under the plans have not trickled down to the poorest sec-
The benefits of development
under the plans have not trick-
tions of society. In the rural sector, the policy of land reforms has virtually failed. The growth
led down to the poorest sec- of black money in urban areas has led to a wasteful expenditure by the urban elite. The slogan
tions of society. In the rural sec- of establishment of a socialistic pattern of society has remained on paper only. The widening
tor, the policy of land reforms economic disparities among various classes and regions have caused social tensions.
has virtually failed. The growth
of black money in urban areas India’s internal and external debt has reached alarming proportions. The country is vir-
has led to a wasteful expendi- tually caught in a debt trap. Moreover, the budgets of the Central and state governments are
ture by the urban elite. showing huge deficits of a chronic nature. The fiscal policy has failed to contain budgetary
deficits with the result that deficit financing has to be resorted to on a large scale.
The experience of economic planning in India over the last five decades has been a mixed
blessing. Commenting on the achievements and failures of economic planning, the Ninth
Five-Year Plan (1997–02) remarked.
During the past 60 years, there has been an overall progress in all areas of social con-
During the past fifty years, there
has been an overall progress in cern. Yet, the achievements are mixed, with stark contrasts and disparities. The chronic
all areas of social concern. Yet, food deficit economy of the 1950s and the 1960s has been transformed into a self-
the achievements are mixed, sufficient one and an elaborate food security system is in place to enable the country
with stark contrasts and dis-
parities.
to face even droughts without any imports or foreign help. Yet, more than 300 million
people live below the poverty line and millions of children remain undernourished.
The economy grew at 6.5 per cent per year in the Eighth Plan period (1992–1996) and
then decelerated to 5.5 per cent in the Ninth Plan period (1997–2001), but recovered sharply
to achieve a growth rate of 7.7 per cent during the Tenth Plan. The last four years of the
Tenth Plan recorded an average of about 8.7 per cent and this momentum has continued into
2007–08 which is the first year of the Eleventh Plan. China has achieved growth rates exceed-
ing 9 per cent for two to three decades and while circumstances in India are not identical, the
Indian economy has much strength and now looks well positioned to achieve this goal. The
economy has been accelerating gradually for the past 15 years.
The Eleventh Plan (2007–12) had targeted an average annual growth of 9 per cent,
significantly higher than the realised rate of 7.6 per cent in the Tenth Plan (2002–07), but
broadly in line with the acceleration of economic activity and growth experienced after
2004–05. The Plan began well, with 9.3 per cent growth in 2007–08, but the global financial
crisis of 2008 reduced growth to 6.7 per cent in 2008–09. The economy rebounded well ini-
tially, to record 8.6 per cent growth in 2009–10, and then 9.3 per cent in 2010–11. However,
the downturn in the global economy in 2011 due to the sovereign debt crisis in Europe com-
bined with the emergence of domestic constraints on investment in infrastructure reduced
the GDP growth to 6.2 per cent in 2011–12. As a result, the average growth over the five years
of the Eleventh Plan was 8.0 per cent.
Achieving 8.0 per cent growth in a period which saw two global crises, one in 2008
and another in 2011 is commendable. However, the deceleration is also a matter of concern,
especially since growth in 2011–12 showed a continuous deceleration quarter by quarter dur-
ing the year, with the last quarter of 2011–12 registering a year on year growth rate of only
5.3 per cent. The preliminary estimates for the first half of 2012–13 show a growth of 5.4 per
cent, which is only marginally higher, suggesting that the first year of the Twelfth Plan will see
relatively low growth momentum. However, weak short term performance should not lead to
pessimism about the medium term. There is good reason to believe that the fundamentals of
the Indian economy remain strong, and the economy can return to 8–9 per cent growth path
depending on the state of the global economy and the domestic policy response to overcome
growth constraints.
The growth potential of the economy over a five-year period depends upon a number
of factors. These include the capacity of the economy to maintain high rates of investment,
while also ensuring productive use of capital. This in turn depends upon investor expecta-
tions and the ability to mobilise financing for investment. The existence of a dynamic entre-
preneurial and managerial class capable of taking risks and dealing with competitive pressure
is an important positive feature of our economy. It also depends upon the quality of public
sector managers responsible for investment and productivity in the public sector, which
remains important in many areas of the economy. We have good reason to be optimistic on
all these counts as evidenced by the fact that we grew rapidly between 2003–04 and 2008–09,
and the Indian enterprise has also begun to expand its global presence.
Growth also depends on the availability of labour in adequate quantities, and with the
right kind of skills to support rapid growth. We have the benefit of a demographic dividend
because the age structure of the population ensures that the labour force will be growing in
India even as it is falling in most industrialised countries, and even in China.
However, the level of skills of the labour force needs to be enhanced. Skill shortages did
emerge during our period of high growth and this is an area to which the government is
according high priority.
The external environment also affects the growth potential since it determines the scope
for exports to grow and thus contribute to the expansion of domestic economic activity.
It also determines the extent to which the economy can finance a current account deficit
through non-debt flows, especially FDI, which often serves as an instrument for technologi-
cal upgradation and modernisation.
Growth Performance in the Five Year Plans

(% per annum)
Plan Period Target Realization Plan Period Target Realization
1. First Plan (1951–55) 2.1 3.5 8. Sixth Plan (1980–84) 5.2 5.5
2. Second Plan (1956–60) 4.5 4.2 9. Seventh Plan (1985–89) 5.0 5.6
3. Third Plan (1960–65) 5.6 2.8 10. Annual Plan (1990–91) – 3.4
4. Annual Plans (1966–68) – 3.9 11. Eight Plan (1992–96) 5.6 6.5
5. Fourth Plan (1969–73) 5.7 3.2 12. Ninth Plan (1997–2001) 6.5 5.5
6 Fifth Plan (1974–78) 4.4 4.7 13. Tenth Plan (2002–2006) 7.9 7.7
7. Annual Plan (1979–80) – –5.2 14. Eleventh Plan (2007–2012) 9.0 8.2
Source: Planning commission
Note: The growth targets for the first three Plans were set with respect to National Income. In the further Plan it was Net Domestic Product.
The actual growth rates are in terms of GDP at factor cost. Average growth rates over a short period can be misleading because of fluctua-
tion in agriculture output due to variable monsoon.
TWELFTH FIVE-YEAR PLAN (2012–17)

Introduction
India’s 1.25 billion citizens have higher expectations about their future today, than they have
ever had before. They have seen the economy grow much faster in the past 10 years than it
did earlier, and deliver visible benefits to a large number of people. This has understandably
raised the expectations of all sections, especially those who have benefited less. Our people
are now much more aware of what is possible, and they will settle for no less. The Twelfth Five
Year Plan must rise to the challenge of meeting these high expectations.
Though expectations have mounted, the circumstances in which the Twelfth Plan has
commenced are less favourable than at the start of the Eleventh Plan in 2007–08. At that
time, the economy was growing robustly, the macroeconomic balance was improving and
global economic developments were supportive. The situation today is much more difficult.
The global economy is going through what looks like a prolonged slowdown. The domestic
economy has also run up against several internal constraints. Macro-economic imbalances
have surfaced following the fiscal expansion undertaken after 2008 to give a fiscal stimulus to
the economy. Inflationary pressures have built up. Major investment projects in energy and
transport have slowed down because of a variety of implementation problems. Some changes
in tax treatment in the 2012–13 have caused uncertainty among investors.
These developments have produced a reduction in the rate of investment, and a slowing
down of economic growth to 6.2 per cent in 2011–12, which was the last year of the Eleventh
Plan. The growth rate in the first half of 2012–13, which is the first year of the Twelfth Plan,
is even lower. The downturn clearly requires urgent corrective action but it should not lead to
unwarranted pessimism about the medium term. India’s economic fundamentals have been
improving in many dimensions, and this is reflected in the fact that despite the slowdown in
2011–12, the growth rate of the economy averaged 8 per cent in the Eleventh Plan period.
This was lower than the Plan target of 9 per cent, but it was better than the achievement of
7.8 per cent in the Tenth Plan. The fact that this growth occurred in a period which saw
two global crises, one in 2008 and another in 2011, is indicative of the resilience which the
economy has developed.
The Policy Challenge

The policy challenge in the Twelfth Plan is, therefore, twofold. The immediate challenge is
to everse the observed deceleration in growth by reviving investment as quickly as possible.
This calls for urgent action to tackle implementation constraints in infrastructure which are
holding up large projects, combined with action to deal with tax related issues which have
created uncertainty in the investment climate. From a longer term perspective, the Plan must
put in place policies that can leverage the many strengths of the economy to bring it back to
its real growth potential. This will take time but the aim should be to get back to 9 per cent
growth by the end of the Twelfth Plan period.
The preparation of a Five Year Plan for the country is an opportunity to step back, take
stock of the ‘big picture’, identify the strengths that can be leveraged to enable the country to
move forward, and the constraints that could hold it back, and on this basis develop a strate-
gic agenda. In developing such an agenda, the Planning Commission has relied on four key
elements.
• First, the strategy must be firmly grounded in an understanding of the complexities
of the development challenges that India faces, recognising the transformation that
is taking place in the economy and in the world. This understanding of the ground
reality must be used to identify the critical leverage points where government action
could have the maximum impact. The focus must be on identifying the strategic lev-
erage points where successful action could trigger many supportive reactions rather
than fixing everything everywhere.
• Second, progress will be achieved through a combination of government action in
both policies and public programmes, and the efforts of many private actors that are
important in the economy. Much of the inclusive growth we hope to achieve depends
on investment in the private sector which accounts for over 70 per cent of total
investment. This includes not only the organised corporate sector, but also micro,
small and medium enterprises (MSMEs), individual farmers and myriads of small
businessmen who add to gross domestic product (GDP) and create jobs. The dyna-
mism of this segment, and its ability to seize economic opportunities, is critical for
inclusive growth and the Plan must address the constraints faced by all these private
actors in achieving better results.
• Third, the outlay on government programmes has to increase in many areas but this
must be accompanied by improved implementation. For this, it is necessary to focus
on capacity building and governance reforms, including system change that will in-
crease accountability in the public sector. The Twelfth Plan must back this focus by
making specific allocations to improve the ability of government to work better.
• Finally, the planning process must serve as a way of getting different stakeholders to
work together to achieve broad consensus on key issues. These stakeholders include
(i) different levels of the government sector: Centre, States, and Panchayati Raj In-
stitutions (PRIs)/urban local bodies (ULBs); (ii) the private sector, both big compa-
nies and small businesses, whose investments will drive our growth, and (iii) citizens’
groups and the voluntary sector, who bring the key element of people’s participation
and can greatly help improve the quality of government action.
Vision and Aspirations

The broad vision and aspirations which the Twelfth Plan seeks to fulfill are reflected in the
subtitle: ‘Faster, Sustainable, and More Inclusive Growth’. The simultaneous achievement of
each of these elements is critical for the success of the Plan.
The Need for Faster Growth

The Twelfth Plan fully recognises that the objective of development is broad-based improve-
ment in the economic and social conditions of our people. However, rapid growth of GDP is
an essential requirement for achieving this objective. There are two reasons why GDP growth
is important for the inclusiveness objective. First, rapid growth of GDP produces a larger ex-
pansion in total income and production which, if the growth process is sufficiently inclusive,
will directly raise living standards of a large section of our people by providing them with
employment and other income enhancing activities. Our focus should not be just on GDP
growth itself, but on achieving a growth process that is as inclusive as possible.
The second reason why rapid growth is important for inclusiveness is that it generates
higher revenues, which help to finance critical programmes of inclusiveness. There are many
such programmes which either deliver benefits directly to the poor and the excluded groups,
or increase their ability to access employment and income opportunities generated by the
growth process.
Growth Prospects
Within the aggregate GDP growth target, two sub-targets are especially important for inclu-
siveness. These are a growth rate of 4 per cent for the agricultural sector over the Twelfth Plan
period and around 10 per cent in the last two years of the Plan for the manufacturing sector.
The policies needed to achieve these sectorial targets.
The Twelfth Plan’s strategy for growth depends crucially on productivity gains as one of
the key drivers of growth. Productivity is the additional contribution to growth after taking
account of the effect of capital accumulation and growth in labour. These traditional sources
of growth are not likely to be enough for India in the coming years and we must therefore
focus much more on productivity improvements among all constituents: big businesses, MS-
MEs, farmers and even government. This can be done by improving the business regulatory
environment, strengthening the governance capacity of States, investing more in infrastruc-
ture rather than subsidies, and by using Science and Technology (S&T) to drive innovation.
Sectoral Growth Rates – Previous Plans and Target for Twelfth Plan
XII th Plan
IXth Plan Xth Plan XIth Plan 9.0% Target 9.5% Target
1 Agriculture, Forestry and Fishing 2.5 2.3 3.2* 4.0 4.2
2 Mining and Quarrying 4.0 6.0 4.7 8.0 8.5
3 Manufacturing 3.3 9.3 7.7 9.8 11.5
4 Elect. Gas and Water Supply 4.8 6.8 6.4 8.5 9.0
5 Construction 7.1 11.8 7.8 10.0 11.0
6. Trade, Hotels and Restaurant 7.5 9.6 7.0
7. Transport, Storage and
Communication 8.9 13.8 12.5
6-7 Trade, Hotels etc. + Transport,
Communication, Storage 8.0 11.2 9.9 11.0 11.2
8 Financing, Insurance, Real
Estate and Business services 8.0 9.9 10.7 10.0 10.5
9 Community, Social and
Personal services 7.7 5.3 9.4 8.0 8.0
Total GDP 5.5 7.8 8.2 9.0 9.5
Industry 4.3 9.4 7.4 9.6 10.9
Services 7.9 9.3 10.0 10.0 10.0
Note: *It is likely that on revision of farm sector GDP growth rates for the previous year and an expected good harvest in 2011–12,
the average for the Eleventh Plan may be higher at 3.3–3.5 per cent.
Alternative Scenarios
The projection of 8 per cent growth in the Twelfth Plan period should not be viewed as a
‘business as usual’ outcome that can be realised with relatively little effort. It is in fact a pro-
jection of what is possible if we take early steps to reverse the current slowdown and also take
other policy actions needed to address other key constraints that will otherwise prevent the
economy from returning to a higher growth path. Failure to act firmly on these policies will
lead to lower growth and also poorer outcomes on inclusiveness.
To illustrate the consequences of inaction on key growth promoting policies, the
Planning Commission has undertaken a systematic process of ‘scenario planning’ based on
diverse views and disciplines to understand the interplay of the principal forces, internal and
external, shaping India’s progress. This analysis suggests three alternative scenarios of how
India’s economy might develop titled,
Impatience & Governance Availability of

< Figure 2.1
Systems Analysis for
Protest Models Earth’s Resources
Twelfth Plan Scenarios
Lack of Trust in
Institutions
Science and
Political Logjam Business Models
Innovation
Outcome: Pace and Outcome: State of

Pattern of Inclusion Nation’s Finances
Outcome: GDP
External Forces
Growth
‘Strong Inclusive Growth’, ‘Insufficient Action’ and ‘Policy Logjam’.

The first scenario ‘Strong Inclusive Growth’, describes the conditions that will emerge if
a well-designed strategy is implemented, intervening at the key leverage points in the system
(Figure 2.1). This in effect is the scenario underpinning the Twelfth Plan growth projections
of 8 per cent, starting from below 6 per cent in the first year to reach 9 per cent in the last two
years. The second scenario ‘Insufficient Action’ describes the consequences of half-hearted
action in which the direction of policy is endorsed, but sufficient action is not taken. The
growth in this scenario declines to around 6 per cent to 6.5 per cent. The third scenario
‘Policy Logjam’, projects the consequences of Policy Inaction persisting too long. The growth
rate in this scenario can drift down to 5 per cent to 5.5 per cent.
Ours is a diverse society and also an argumentative one. We are suspicious when deci-
sions that affect us are not taken transparently and we resent too much centralisation of
decision-making. However, we all believe in democracy, we respect the views of others and,
although we may disagree, we admire and learn from those who work together to offer any
vision of a better India. We need to do more to build a greater consensus around a common
national goal.
The Twelfth Plan should aim at a growth process that preserves emphasis on inclusion
and sustainability while minimising downside effects on growth. Plans are traditionally
viewed as being about what governments should do, but that is a narrow view since most
investment today is private, and much of that is corporate. The Twelfth Plan must provide a
competitive environment in which the private sector, including the corporate sector but also
all Indians, both as individuals and in the collective, are enable to reach their full potential.
The objective must be to stimulate new entrepreneurship while enabling existing MSMEs,
including in agriculture, to invest more and grow faster. For this, we need to meet their needs
for infrastructure and for easier, cheaper and faster access to capital.
India is fortunate that it is richly endowed in entrepreneurial talent. At a rough estimate,
the number of non-agricultural establishments in the country increases by about 8 million
every 10 years. While many of these enterprises are very small, and reflect basic survival
strategies, many are not. The past decade has shown the dynamism that is possible in this
sector under the right circumstances. Many of the leading corporates today belonged to the
Box 2.3 Twelve Focus Areas for the Twelfth Plan

1. Advanced Coal Technologies 8. Improving the Efficiency of Freight Transport
2. National Wind Energy Mission 9. Better Urban Public and Non-motorised Transport
3. National Solar Mission 10. Lighting, Labelling and Super-efficient Equipment
4. Technology Improvement in Iron and Steel Industry Programme
5. Technology Improvement in Cement Industry 11. Faster Adoption of Green Building Codes
6. Energy Efficiency Programmes in the Industry 12. Improving the Stock of Forest and Tree Cover
7. Vehicle Fuel Efficiency Programme
MSME category at the turn of the century. In this context, the Twelfth Plan’s overarching
priority on developing human capital can, with the proper prioritisation of infrastructure
and with innovative use of technology and finance, unleash a truly inclusive growth story
(Box 2.3).
This inclusive strategy involves a much greater role of the States, and closer coordination
between the Centre and the States, than would be needed for a purely corporate-led growth
strategy. This is because most of the policy measures and institutional support required for
small and medium entrepreneur led growth lie in the domain of state governments and local
bodies. The Centre’s contributions would lie mainly in creating the appropriate macroeco-
nomic framework, financial sector policies and national level infrastructure.
The Meaning of Inclusiveness

Inclusiveness means many different things and each aspect of inclusiveness poses its own
challenges for policy.
Inclusiveness as Poverty Reduction

Distributional concerns have traditionally been viewed as ensuring an adequate flow of ben-
efits to the poor and the most marginalised. This must remain an important policy focus
in the Twelfth Plan. It is worth noting that the record in this dimension of inclusiveness is
encouraging. The percentage of the population below the official poverty line has been falling
but even as that happens, the numbers below the poverty line remain large. According to the
latest official estimates of poverty based on the Tendulkar Committee poverty line, as many
as 29.8 per cent of the population, that is, 350 million people were below the poverty line in
2009–10. Questions have been raised about the appropriateness of the Tendulkar poverty
line which corresponds to a family consumption level of `3,900 per month in rural areas and
`4,800 per month in urban areas (in both cases for a family of five). There is no doubt that the
Tendulkar Committee poverty line represents a very low level of consumption and the scale
of poverty even on this basis is substantial. An expert committee under Dr. C. Rangarajan
has been set up to review all issues related to the poverty line keeping in view international
practices.
Inclusiveness as Group Equality

Ending of gender-based inequities, discrimination, and all forms of violence against girls
and women is being accorded overriding priority in the Twelfth Plan. This is fundamental to
enabling women participate fully in the development process, and in fulfilling their social,
economic, civil, and political rights (refer to Box 2.4).
Box 2.4 Former Prime Minister Dr Manmohan Singh at the 57th NDC
Gender inequality is an aspect which deserves special articipation of half the population and this participa-
p
attention. Women and girls represent half the population tion simply cannot take place if their security and safety
and our society has not been fair to this half. Their socio- are not assured. I urge all Chief Ministers to pay special
economic status is improving, but gaps persist.... There attention to this critical area in their states.
can be no meaningful development without the active
Inclusiveness as Regional Balance

In the Twelfth Plan, we must pay special attention to the scope for accelerating growth in
the States that are lagging behind. This will require strengthening of States’ own capacities
to plan, to implement and to bring greater synergies within their own administration and
with the Central Government. As a first step, the Planning Commission is working with its
counterpart Planning Boards and Planning Departments in all state governments to improve
their capabilities. An important constraint on the growth of backward regions in the country
is the poor state of infrastructure, especially road connectivity, schools and health facilities
and the availability of electricity, all of which combine to hold back development. Improve-
ment in infrastructure must therefore be an important component of any regionally inclusive
development strategy.
Inclusiveness and Inequality

Inclusiveness also means greater attention to income inequality. The extent of inequality is
measured by indices such as the Gini coefficient, which provide a measure of the inequal-
ity in the distribution on a whole, or by measures that focus on particular segments such as
the ratio of consumption of the top 10 per cent or 20 per cent of the population to that of
the bottom 10 per cent or 20 per cent of the population, or in terms of rural–urban, such as
the ratio of mean consumption in urban versus rural areas. An aspect of inequality that has
come sharply into focus in industrialised countries, in the wake of the financial crisis, is the
problem of extreme concentration of income at the very top that is, the top 1 per cent and this
concern is also reflected in the public debate in India.
As a society, we therefore need to move as rapidly as possible to the ideal of giving every
child in India a fair opportunity in life, which means assuring every child access to good
health and quality education. While this may not be possible to achieve in one Plan period,
the Twelfth Plan should aim at making substantial progress in this dimension (Box 2.4).
Inclusiveness as Empowerment
Finally, inclusiveness is not just about ensuring a broad-based flow of benefits or economic
opportunities, it is also about empowerment and participation. It is a measure of the success
we have achieved in building a participatory democracy that people are no longer prepared
to be passive recipients of benefits doled out by the Government. They are slowly beginning
to demand these benefits and opportunities as rights and they also want a say in how they are
administered. This brings to the fore issues of governance, accountability and peoples partici-
pation to much greater extent than before. This also covers areas like access to information
about government schemes, knowledge of the relevant laws and how to access justice. The
growing concern with governance has also focused attention on corruption. How to tackle
corruption is now at the centre stage of policy debates.
Inclusiveness through Employment Programmes

The main point to note is that employment schemes are not new in India, and they have a
well- established poverty reducing impact. With National Sample Survey showing an eight-
fold increase in employment in public works after MGNREGA, there is no doubt that its
impact on rural wage earnings and poverty has been much larger than all previous rural
employment schemes. What is less appreciated is that this has been achieved with a rather
modest increase in the share spent on rural employment schemes out of total Central Plan
expenditures. It has increased from an average of 11.8 per cent in the three years before
MGNREGA (2002–03 to 2004–05) to 13.3 per cent in the last three (2009–10 to 2011–12).
This means that although MGNREGA is not free of leakages, these have declined consid-
erably. Thus, far from opening a bottomless pit as some critics still claim, the provision of
employment as a legal right, has greatly improved the share of intended beneficiaries in what
government spends for development of rural areas.
Environmental Sustainability
While striving for faster and more inclusive growth, the Twelfth Plan must also pay attention
to the problem of sustainability. No development process can afford to neglect the environ-
mental consequences of economic activity, or allow unsustainable depletion and deteriora-
tion of natural resources. Unfortunately, the experience of development in many countries,
and our own past experience in some respects, suggests that this can easily happen unless
appropriate corrective steps are taken at early stages. The Twelfth Plan must devise a strategy
of development which effectively reconciles the objective of development with the objective
of protecting the environment.
Developing Capabilities
In this section, we focus on the capabilities we need to develop to achieve the objective of
faster, more inclusive and sustainable growth. We first consider the development of human
capabilities, which are in many ways the most important. Then we focus on institutional ca-
pabilities and the development of infrastructure which is a general capability enhancer for all
agents. Both the central and state governments have a large role to play in developing these
capabilities and the Twelfth Plan at the central and state level should accord high importance
to this effort.
Development of Human Capabilities

The development of human capabilities must be the first priority, for three reasons. First,
these capabilities are actually ends in themselves. Second, they are also important instrumen-
talities which interact positively with others to raise the productive capacity of our economy
and therefore its ability to satisfy the material needs of our population. Third, proper devel-
opment of human capabilities will also ensure that our growth is more inclusive in the sense
that the marginalised and disadvantaged sections of our society will be more able to access
the opportunities thrown up by the growth process.
Life and Longevity

The most fundamental of all human capabilities is life itself and the steady rise in life expecta-
tion in the country suggests that significant progress has been made in this dimension.
The infant mortality rate (IMR) is another dimension of human capability where we are
making progress. IMR fell from 80 in 1991 to 66 in 2001 and at a faster rate thereafter to 47
in 2010. The rate of decline was 14 in the first period and 19 in the second period. Neverthe-
less, the level of IMR remains high and we need to do much better for our children. We must
strive to bring the IMR down to 28 by the end of the Twelfth Plan.
Education
India has a young population, and consequently, the labour force, which is expected to
decline in most developed countries and even in China, is expected to increase over the next
20 years. This ‘demographic dividend’ can add to our growth potential through its impact
on the supply of labour and also, via the falling dependency ratio, on the rate of domestic
savings. To reap this demographic dividend we must ensure that our younger citizens come
into the labour force with higher levels of education and the skills needed to support rapid
growth. The SSA has brought us close to the target of universalisation of primary educa-
tion and the Right to Education Act (RTE) 2009 makes eight years of elementary education
a fundamental right for all the children. The MDM Scheme has ensured that retention
in schools has improved greatly. However, the learning outcomes for a majority of children
continue to be disappointing. Addressing the quality issue in our schools is critical for the
effective development of human capabilities and for achieving the objective of equality
of opportunities. The quality of teachers and, even more important, their motivation and
accountability will need to be improved. Many of the children who are presently in school are
first-generation learners, and these children need supplementary instruction. This is not easy
due to shortage of qualified teachers in many schools across the country. New and innovative
approaches such as multigrade learning, which has been successfully tried in Tamil Nadu,
could be adopted in such cases.
Skill Development
The Skill Development Mission is being launched to skill at least 50 million individuals by the
end of the Twelfth Plan. Skill development programmes in the past have been run mainly by
the government, with insufficient connection with market demand. To ensure that skills match
demand, special efforts are needed to ensure that employers and enterprises play an integral
role in the conception and implementation of vocational training programmes, including
managing Industrial Training Institutes (ITIs) and in the development of faculty. An enabling
framework is needed that would attract private investment in Vocational Training through
Public–Private Partnership (PPP). We should try to optimise on the respective strengths of
the public and private sector entities engaged in skill development. Mobilising the required
investments, setting up first rate ITIs, ensuring efficiency in operations and management
and enabling post-training employment will be the primary responsibilities of private sector
entities while the government will provide the enabling framework and the requisite financial
support especially in respect of SC, ST, Minorities and differently abled persons and other
deprived sections of society.
Nutrition
Poor learning outcomes in our schools are partly because of poor quality of teaching but they
are also partly due to high incidence of child malnutrition, which reduces learning ability.
India has had the largest and the longest running child development programme in the world
in the form of ICDS, but the problem of malnutrition remains large. Unfortunately, the latest
data on child malnutrition are from the National Family Health Survey (NFHS-3) conducted
in the period 2005–07 which pre-dates the Eleventh Plan.
Malnutrition is also a problem among adults, especially women. The incidence of
anaemia and low body mass among women is very high in the country. The causes of this
persistent malnutrition are not well understood. The availability of food, especially better
quality food products such as fruits, vegetables and dairy products, is significantly better
today than it was in the past. Nevertheless, the incidence of malnutrition remains high.
There is a need to bring this dimension of human capability to the fore front of policy atten-
tion. The Food Security Bill under consideration will address some of these issues, but the
problem of nutrition is actually much more complex and a multidimensional approach is
necessary.
Health
Health is another critical dimension of human capability, which needs much greater atten-
tion in the Twelfth Plan. At present, less than 30 per cent of outpatient and less than half
of inpatient health care capacity of the country is in the public sector, and the majority of
the population relies on private health care provision which often imposes a heavy financial
burden. It is, therefore, essential to expand public sector capacity in health care especially
in the rural areas. The NRHM, launched during the Tenth Plan, made an important start in
expanding health care facilities in rural areas.
Drinking Water and Sanitation

The problem of providing safe drinking water is particularly acute in the rural areas. The in-
cidence of ‘slipped back’ habitations appears to be accelerating and serious problems of water
quality have emerged in many areas. Part of the problem is that rural drinking water schemes
are not fully integrated with national system of aquifer management. Excessive drawal of
groundwater for irrigation is leading to lowering of water tables causing drinking water hand
pumps to run dry and lowering of the water table is also causing salinity and chemical pol-
lution, making the water non-potable. A sustainable solution to the rural drinking water
problem has to be found as part of a holistic approach for aquifer management.
Sanitation and clean drinking water are critical determinants of health and are comple-
mentary to each other. Without proper sanitation, the incidence of diarrhoeal diseases due
to contaminated drinking water will not come down, and without adequate water supply,
improved sanitation is generally not possible. It is, therefore, necessary to adopt a habitation
approach to sanitation and to institutionalise the integration of water supply with sanitation
in each habitation. The problem of sanitation in urban areas is also very serious since almost
all our cities, including even the State capitals and major metros, have a large percentage of
the population (45 per cent in Delhi) not connected to the sewer system. Urban development
must give top priority to planning for water, toilets and sewerage as an integrated whole tak-
ing into account the likely expansion of the urban population.
Enhancing Human Capabilities through Information Technology

The ability to access information is an important institutional capability we need to develop.
Lack of ready access information is often a major impediment in efforts to improve the well-
being of the people. With improvement in literacy and education, and developments in in-
formation technology, we are in a position to provide our people with access to information,
including obtaining birth records, land records, payment records for utilities and so on.
Development of Institutional Capabilities

The Twelfth Plan also needs to focus on developing the capabilities of our institutions to
perform the increasingly complex and demanding tasks expected of them. We have three
pillars of governance (legislature, executive, and judiciary) and three tiers of government
(centre, state, and panchayats/ULBs). The capabilities of these institutions to deliver on their
mandate need to be greatly improved. The gaps are most evident at the lowest level of PRIs
and ULBs, where trained personnel are lacking and the training systems are also inadequate.
It is also true at higher levels, where trained personnel may be available, but the capability of
the systems is poor because they are not performance oriented and motivation is low.
Implementation Capability
Where implementation rests within one Ministry, there are problems of (i) insufficient
attention to evidence-based analysis in the design of policies and programmes, (ii) insufficient
concurrent evaluation that would give feedback on outcomes achieved, and (iii) lack of will-
ingness or ability to bring about systemic changes needed to improve outcomes. Resolving
conflicting stands by consensus is of course desirable if possible, but beyond a point, it may
not be possible, and some systems for conflict resolution are needed.
To deal effectively with these problems it may be necessary to redesign governmental
decision- making systems. There has been a great deal of system redesign in the private sec-
tor in response to the new environment created by economic reforms. A similar redesign of
government is needed. For example, one way of accelerating the processing of large infra-
structure projects is to set up a National Investment Approval Board chaired by the Prime
Minister and including all key Ministers and to amend the Transaction of Business Rules
so that statutory clearances under various Acts for all infrastructure projects above a given
size are given by the Board, taking into account the views of all Ministries. The allocation of
business rules could provide that such clearances would be issued by the Cabinet Secretariat
based on the decision of the Board. This would be a systemic change which would ensure a
holistic consideration of complex issues and greatly accelerate decision making.
Delivery of Public Services

The first step in reforming public service delivery is to devise mechanisms for measuring
the extent of public satisfaction with public services and publicising the results. The Public
Affairs Centre at Bengaluru has done excellent work in conducting systematic surveys of
public perception or satisfaction with various types of public services ranging from water and
sanitation, health and education, public transport, police, and so on. Such surveys periodi-
cally conducted produce valuable information for the political leadership on where perform-
ance is felt to be poor and where it is improving.
Greater involvement of citizens’ organisations can help focus government attention on
these problem areas. The Delhi Government’s experiment with Bhagidhari is example of
citizen involvement and consultation operating through Resident Welfare Associations.
Regulatory Institutions
An area where the lack of institutional capability is beginning to manifest itself is in our
expanding system of regulatory bodies. As areas that were earlier dominated by the public
sector have been opened up for private operators, often competing among themselves or
with existing public sector operators, independent regulatory institutions have been estab-
lished to oversee the functioning of the players in the system. The effectiveness of regulatory
rganisations depends critically upon the quality of the personnel running the institutions
o
and the degree of independence established. Too many of the regulatory agencies are staffed
by former bureaucrats and there is not enough induction of specialists with domain knowl-
edge. A thorough review of the regulatory system established in different sectors is needed to
determine the weaknesses of the system currently in place and recommend ways of correct-
ing them. This is especially true as the next two five year Plans are likely to see faster change
in the global economy and in the structure of the Indian economy too.
Development of Infrastructure
Infrastructure provides the basic support system for other sectors of the economy expand-
ing capabilities everywhere. A distinguishing characteristic of infrastructure is that where
imports can meet the gap between demand and supply, deficiencies in infrastructure cannot
be made good through imports. Infrastructure requirements can only be met through devel-
opment of the relevant infrastructure capacity in the domestic economy. Furthermore, Good
quality infrastructure is important not only for faster growth but also to ensure that growth
is inclusive. Small businesses spread throughout the country need access to good quality and
reliable infrastructure services to compete effectively. Large enterprises can often develop
their own infrastructure as they often do with captive power, and being large can even locate
themselves ab initio where other infrastructure is better, that is, nearer ports and near trans-
port hubs. Small enterprises on the other hand are dispersed across the country, and have
to rely on the general infrastructure available. Their ability to compete successfully, which is
critical for growth to be employment generating and inclusive, depends upon the quality of
this infrastructure.
Financing Infrastructure
Traditionally, infrastructure development used to occur through the public sector. However,
given the scarcity of public resources, and the need to shift scarce public resources into health
and education, efforts have been made to induct private participation in the development of
infrastructure. These efforts have met with a fair degree of success. As of 31 March 2012, 390
PPP projects have been approved involving an investment of `3,05010 crore. According to a
report published by the World Bank, India has been the top recipient of PPP investment since
2006 and has accounted for almost half of the investment in new PPP projects implemented
in the first half of 2011 in developing countries. An Asian Development Bank report states
that India stands in the same league as developed economies like South Korea and Japan on
implementation of PPP projects and the Model Concession Agreements prepared in India
and used in our PPP projects have also been commended (Box 2.5).
Box 2.5 Model Concession Agreements for PPP

• National Highways • Procurement-cum-Maintenance Agreement for
• State Highways Locomotives
• Operation and Maintenance of Highways • Non-metro Airports
• National Highways (six laning) • Greenfield Airports
• Operation of Container Trains • Port Terminals
• Re-development of Railway Stations • Transmission of Electricity

• Urban Metro Rail
The total investment in infrastructure sectors in the Twelfth Plan is estimated to

be `55.7 lakh crore, which is roughly one trillion dollars at prevailing exchange rates. The
share of private investment in the total investment in infrastructure rose from 22 per cent in
the Tenth Plan to 36.61 per cent in the Eleventh Plan. It will have to increase to about 48 per
cent during the Twelfth Plan if the infrastructure investment target is to be met. These projec-
tions have also been validated by the high level committee on infrastructure set up under the
chairmanship of Shri Deepak Parekh. The committee has, however, qualified its projections
as dependent on several policy initiatives that the government would need to take for ensur-
ing this level of investment (Box 2.6).
Box 2.6 Infrastructure Debt Fund

Infrastructure projects are capital intensive and have terms of implicit government guarantees for repayment
long payback periods, and, therefore, require long-term of debt. The Reserve Bank of India, and the Securities
funds at comparatively low costs. Infrastructure projects and Exchange Board of India have already laid down
in India are financed mainly by commercial banks, as regulatory framework for the IDFs.
insurance and pension funds do not normally lend for Besides augmenting debt resources for financing
new projects. The present bond market lacks depth to infrastructure, the IDFs would refinance PPP projects
address the needs for a long-term debt. With a view to after their construction is completed and operations
overcoming these shortcomings, Infrastructure Devel- have stabilised. By refinancing bank loans of existing
opment Funds (IDFs) are being set up for channelizing projects, the IDFs are expected to take over a significant
long-term debt from domestic and foreign pension and volume of the existing bank debt, and this will release
insurance funds, as well as from other sources. These an equivalent volume of fresh lending for infrastructure
IDFs will also carry adequate credit enhancement in projects.
The Reach of Banking and Insurance

Like infrastructure, development of an efficient financial services system is a key enabler of
capabilities which affects how well individuals can manage life cycle needs and also affect the
functioning of enterprises and their prospects of growth. More broadly, it affects the extent
of entrepreneurship and of competition. India is underserved by financial services on every
parameter. More than 40 per cent of households avail no banking service at all. The ratio of
total bank credit outstanding to GDP is only about 57 per cent as against over 140 per cent
in East Asia and Pacific. Insurance premia account for less than 1 per cent of GDP, which is
only about a third of the international average. The organised financial sector does not reach
out to large segments of the population which are serviced if at all by all manner of informal
financial entities at terms and costs that retard their growth prospects.
Lack of insurance products is an example of under-supply of financial services. It can
be nobody’s case that the Indian economy has lower inherent risks than others, or that life
cover is any less important. It is rather that costs of providing cover and assessing claims
are currently so high relative to the cover itself that either premium-to-cover ratios become
exorbitant or appropriate insurance products are simply not created. High transactions costs
relative to size of accounts are also the main reason for low banking coverage and this is com-
pounded by high risk perception of banks, in part because of lack of insurance. Agriculture
and other forms of MSMEs are particularly ill-served and the situation has in fact deterio-
rated in some ways over the last two decades because of problems afflicting the cooperative
banking sector.
Plan
Infrastructure—Twelfth
Projected Investment in
Table 2.14
>
(` Crore at Current Prices)

Total Twelfth Plan Projections Total
Sectors Eleventh Twelfth
2012–13 2013–14 2014–15 2015–16 2016–17
Plan Plan
Electricity 7,28,494 2,28,405 2,59,273 2,94,274 3,33,470 3,86,244 15,01,666
Centre 2,33,501 69,059 77,650 87,228 97,616 1,09,242 4,40,7961
States 1,84,696 56,338 62,337 68,909 75,888 83,572 3,47,043
Private 3,10,297 1,03,008 1,19,286 1,38,137 1,59,966 1,93,429 7,13,827
Renewable Energy 89,220 31,199 42,590 58,125 79,075 1,07,637 3,18,626
Centre 9,630 3,631 4,739 6,179 8,027 10,427 33,003
States 1,018 744 886 1,056 1,253 1,487 5,425
Private 78,572 26,825 36,965 50,890 69,795 95,724 2,80,198
Roads and Bridges 4,53,121 1,50,466 1,64,490 1,80,415 1,98,166 2,21,000 9,14,536
Centre2 1,94,678 61,920 64,567 67,272 69,833 72,502 3,36,094
States 1,65,903 47,844 51,222 54,786 58,377 62,204 2,74,433
Private 92,540 40,702 48,702 58,357 69,955 86,294 3,04,010
Telecommunications3 3,84,962 1,05,949 1,36,090 1,76,489 2,30,557 2,94,814 9,43,899
Centre 86,375 15,203 14,827 14,446 14,023 13,611 72,110
Private 2,98,586 90,746 1,21,263 1,62,042 2,16,535 2,81,203 8,71,789
Railways 2,01,237 64,713 78,570 96,884 1,21,699 1,57,355 5,19,221
Centre 1,92,147 59,988 70,202 82,078 95,601 1,11,351 4,19,221
Private 9,090 4,725 8,368 14,806 26,098 46,003 1,00,000
MRTS 41,669 13,555 17,148 22,298 29,836 41,322 1,24,158
Centre 21,469 5,889 6,784 7,808 8,953 10,266 39,700
States 14,786 4,732 5,451 6,274 7,194 8,249 31,901
Private 5,414 2,934 4,912 8,215 13,688 22,806 52,557
Irrigation 2,43,497 77,113 87,386 99,178 1,12,506 1,28,186 5,04,371
(incl. Watershed)
Centre 14,426 4,679 5,952 7,713 10,161 13,666 42,171
States 2,29,071 72,434 81,434 91,466 1,02,346 1,14,520 4,62,200
Water Supply and 1,20,774 36,569 42,605 49,728 58,084 68,333 2,55,319
Sanitation
Centre4 46,003 13,999 16,423 19,248 22,473 26,240 98,382
States5 74,607 22,335 25,732 29,617 33,959 38,939 1,50,582
Private 164 235 451 864 1,651 3,154 6,355
Ports (+ILW) 44,536 18,661 25,537 35,260 49,066 69,256 1,97,781
Centre 5,480 2,888 3,415 4,034 4,747 5,586 20,670
States 2,759 794 930 1,089 1,269 1,480 5,563
Private 36,298 14,979 21,192 30,138 43,050 62,189 1,71,548
Airports 36,311 7,691 10,716 15,233 21,959 32,116 87,714
Centre 11,873 2,456 2,710 2,988 3,282 3,605 15,041
States 1,030 268 351 458 596 776 2,449
Private 23,408 4,967 7,655 11,787 18,081 27,735 70,224
(Continued)
(Continued)
Table 2.14
>
(` Crore at Current Prices)

Total Twelfth Plan Projections Total
Sectors Eleventh Twelfth
2012–13 2013–14 2014–15 2015–16 2016–17
Plan Plan
Oil and 62,534 12,211 16,604 23,833 36,440 59,845 1,48,933
Gas pipelines
Centre 35,179 9,335 11,367 13,827 16,757 20,308 71,594
States 4,070 832 985 1,164 1,372 1,616 5,969
Private 23,284 2,044 4,253 8,842 18,311 37,921 71,370
Storage 17,921 4,480 6,444 9,599 14,716 23,202 58,441
Centre 5,956 1,711 2,026 2,396 2,823 3,326 12,280
States 2,116 623 717 826 947 1,085 4,198
Private 9,850 2,146 3,701 6,377 10,947 18,791 41,963
Grand Total 24,24,277 7,51,012 8,87,454 10,61,316 12,85,573 15,89,308 55,74,663
Centre 8,56,717 2,50,758 2,80,662 3,15,217 3,54,296 4,00,129 16,01,061
States 6,80,056 2,06,944 2,30,045 2,55,645 2,83,201 3,13,928 12,89,762
Private 8,87,504 2,93,310 3,76,747 4,90,455 6,48,077 8,75,251 26,83,840
Grand Total 24,24,277 7,51,012 8,87,454 10,61,316 12,85,573 15,89,308 55,74,663
Public 15,36,773 4,57,702 5,10,707 5,70,862 6,37,497 7,14,057 28,90,823
Private 8,87,504 2,93,310 3,76,747 4,90,455 6,48,077 8,75,251 26,83,840
GDPmp 3,36,04,450 1,01,50,618 1,16,45,987 1,33,58,028 1,53,47,089 1,76,61,485 6,81,63,208
Investment as 7.21 7.40 7.62 7.95 8.38 9.00 8.18
% of GDPmp
1. Excludes projections for DAE (Power) and NLC (Power) but these are included in the Eleventh Plan.
2. Includes PMGSY.
3. Includes spectrum auction charges.
4. Includes projections for Integrated Low Cost Sanitation (ILCS) Scheme.
5. Includes JnNURM.
Science and Technology

Science and Technology is a vital aspect of national capability. Science departments/agencies
have played a significant role in solving the socio-economic issues. The Department of Space
through satellite-based system has provided nationwide land use/land cover mapping for
natural resources management, thematic mapping for national urban information system,
the process of measuring forest and wasteland, locating potential drinking water zones, and
potential fishing zone and crop production forecasting. The Twelfth Five Year Plan must
build on the scientific base created by earlier Plans and give a renewed thrust to empha-
sise creative and relevant research and innovation. The central focus must be to ensure that
science and technology becomes a major driver in the process of the national development.
The Twelfth Plan programmes of the Indian Science should aim at three outcomes:
Realisation of the Indian vision to emerge as global leader in advanced science; encour-
age and facilitate Indian science to address the major developmental needs of the country like
food security, energy and environmental needs, addressing the water challenges and provid-
ing technological solutions to affordable health care requirements, and gain global competi-
tiveness through a well-designed innovation ecosystem, encouraging global research centres
of multinational corporations (MNCs) to be set up in India.
Science and technology endeavours over the last decade have placed increasing empha-
sis on contributing to the societal development and improving the quality of life of citizens.
Such new initiatives in turn have also created in some cases societal reactions stemming from
issues like health and environmental safety. In the recent past, introduction of genetically
modified (GM) foods and nuclear energy are two such examples. The Twelfth Plan envis-
ages a more effective institutional framework in linking science and technology with society
through a variety of outreach strategies. This is proposed to be carried out both through
the scientific establishments as well as through educational programmes including initiatives
from non-governmental organisations (NGOs).
Managing Natural Resources and the Environment

Achievement of rapid and sustainable growth is critically dependent on our ability to man-
age our natural resources effectively. India is not liberally endowed with natural resources.
In fact, we are among the lowest in the world on almost all measures of resource availability
on a per capita basis. In recent years, the deficiencies in the way in which we manage natural
resources have come under increasingly critical scrutiny. Agitations around land acquisition,
deforestation, water use, air and water pollution, and also our response to natural disasters,
have become more common. These are no longer peripheral issues: they are issues which
demand mainstream attention and pose challenges which this Plan must address squarely.
Soil Health and Productivity

Soil is one of the basic natural resources that support life on earth and this resource is under
threat in India from soil erosion due to natural factors compounded by deforestation which
increases run off and also from excessive use of chemical fertilisers. The soil ecosystem is a
living self-balancing system and excessive use of synthetic chemical fertilisers disturbs this
balance often causing long-term damage to the soil.
Rational Use of Land

Land is a fixed resource and its availability in India on a per capita basis is relatively low
compared with most countries. Furthermore, the country’s population is likely to continue
to grow till at least 2040, whereas the land mass may actually shrink with increased coastal
erosion and flooding due to climate change. In these circumstances, the rational and planned
use of land must be an issue that needs the highest priority, and should be made a central
focus of our resource planning. Land is a state subject, but the issues are so critical that there
is need for better coordination at the national level.
There are three main areas of conflict that need to be addressed. The first relates to the al-
location of available land between agriculture, industry and urban use. The second potential
conflict arises from the fact that allocation across different uses cannot occur simply through
market processes and some land acquisition is therefore necessary, but the terms on which
this had been done in the past are no longer acceptable. The third potential conflict arises be-
cause most of our mineral resources are in areas, which are forested and the effective exploi-
tation of these resources calls for acquisition, which may disrupt some tribal communities.
Water as a Scarce Natural Resource

Water is another key natural resource in fixed supply and its availability is now at a level which
is just about equal to demand on average. Availability in some areas is greater than demand but
there are other areas which are seriously water-stressed. While intensive use of groundwater
made a great contribution to the green revolution, today in large parts of west, central and south
India there is a man-made crisis of falling water tables. Economic growth at between 8 per cent
and 9 per cent a year will only be possible if the water requirements of the expanding popula-
tion, with a growing degree of urbanisation and the water requirement of expanding GDP can
be met. Detailed studies suggest that on a business as usual basis, the total demand for water
by 2031 is likely to be 50 per cent higher than today. This gap as to be bridged if the projected
GDP growth is not to be choked. It is estimated that about 20 per cent of the gap at most can be
bridged by taking steps to augment available supply through additional storage and groundwa-
ter retention. The rest of the deficit has to be bridged through greater water use efficiency.
Engagement with the World

Economic reforms over the past two decades have made India a much more open economy.
The share of exports of goods and services in total GDP has increased from 6.9 per cent in
1991 to 24.6 per cent in 2012. Imports of goods and services as a percentage of GDP have also
increased from 8.3 per cent to 29.8 per cent in the same period. These changes are the result
of conscious efforts to open up the economy. Import duties have been reduced over time and
a number of preferential trading arrangements have been introduced as part of Comprehen-
sive Economic Partnership Arrangements with individual countries and groups of countries,
especially Association of Southeast Asian Nations (ASEAN), Japan, Korea, Singapore, and
Sri Lanka. More such agreements are being negotiated with the European Union and with
Australia. Investment into India, and also from India to other countries has increased. For all
these reasons, India’s growth prospects in the years ahead cannot be viewed in isolation from
what is happening in the world economy.
Global Economic Prospects

The global economy is currently going through a very difficult phase. The financial crisis
of 2008–09 interrupted what had been a long period of global growth. Initially, the global
economy appeared to respond well to the stimulus policies introduced by many countries in
2009, but the horizon was again clouded by the Eurozone crisis which is currently seen as
a major fault line in the world economy. Many European countries are facing severe social
and economic pain in their effort to introduce fiscal discipline aimed at regaining market
confidence. The International Monetary Fund (IMF) projects zero growth in the Eurozone
in 2012 with only a gradual improvement thereafter, on the assumption that a disruptive
outcome is avoided.
The major industrialised and developing countries, meeting at Summit level in the G20,
have repeatedly emphasised the importance of avoiding disruptive outcomes and the need for
all countries to act in concert and cooperation to bring the global economy back on a path
of sustainable growth. It is to be hoped that global economic cooperation will prove strong
enough to avoid a hard landing. Although uncertainty remains high, and downside risks are
significant, the most reasonable assumption on which to plan is that the global economy will
recover gradually. However, the structural change that has been underway for some time, with
industrialised countries growing more slowly while the emerging market countries, especially
in Asia, grow more rapidly, will continue in the foreseeable future. We must, therefore, plan for
a world in which the share of global GDP will therefore shift steadily away from the current
industrialised countries and towards the faster growing emerging economies, especially in Asia.
Implications for the Balance on Current Account

Slower growth in industrialised countries will mean that our exports to these countries
may be adversely affected. Our exports to Europe fell 9 per cent in April–December 2012,
undoubtedly affected by economic conditions there. Fortunately, India’s export basket is rela-
tively diversified and since emerging market countries are expected to grow more rapidly
in the years ahead, we may be able to benefit from this. There is also scope for increasing
our share in industrialised country markets by competing more aggressively with countries
like China, which will experience loss of competitiveness because of rising labour costs at
home. This is especially true of services, where India’s increasing sophistication will allow it
to win more business from cost-conscious developed countries However, there is no room
for complacency, because other developing countries, such as the Philippines, are improving
their capabilities and there are moves within developed countries to ‘on shore’ services hith-
erto outsourced. It is difficult to quantify the net effect of all these factors, but it is reasonable
to plan for merchandise exports growing at an average annual rate of about 15 per cent in
the Twelfth Plan than compared with 20.7 per cent in the Eleventh Plan. Growth of earnings
from tourism and also remittances are likely to be subdued.
India’s current account deficit was a surplus 2.3 per cent of GDP in 2003–04. Since then
it has gone into deficit, reaching 2.7 per cent of GDP in 2010–11 and 4.2 per cent in 2011–12.
As pointed out, a large part of the increase in 2011–12 was due to imports of gold, which
are not expected to be repeated. Even so, the current account deficit in the first year of the
Twelfth Plan will be around 5 per cent, which exceeds what has traditionally been regarded
as a sustainable level. The macroeconomic analysis in Chapter 2 prescribes that policies must
be calibrated to ensure that the current account deficit in the Twelfth Plan period averages
around 2.9 per cent. On current prospects, it is likely to be somewhat higher. The ability to
finance this deficit through stable capital flows is therefore critical.
Capital Flows
India has followed a calibrated policy of opening up the capital account, differentiating ac-
cording to the nature of capital flows. Foreign Direct Investment (FDI) is regarded as the
most stable capital flow which also provides technology and marketing links, and has there-
fore been most freely allowed. Portfolio flows are not as stable as FDI, but they are also not
as volatile as short-term debt and have been allowed freely from qualified FIIs. Short-term
debt from abroad is the least stable form of capital flow and is, therefore, highly controlled
except for trade credit. Longer-term external borrowing is allowed more liberally, but subject
to caps. This policy produced good results in the Eleventh Plan, yielding an annual average
net capital inflow of 4.1 per cent of GDP during the Eleventh Plan. Since the average current
account deficit was 2.7 per cent of GDP, the net capital inflows exceeded what was required to
finance the current account deficit and contributed to a build up of forex reserves.
Looking ahead, if we assume that worst case outcomes will be avoided, then even though
Europe may grow very slowly in the coming years, world financial markets can be expected
to stabilise. On this assumption, it is reasonable to assume that India can finance a current
account deficit of around 2.5 per cent of GDP relying mainly on FDI and FII flows, with
some recourse to long-term borrowing. Since the projected current account deficit for 8 per
cent growth is somewhat higher, financing the deficit will be a stress point in the years ahead.
Capital flows from Europe may well be subdued, but there is scope for diversifying to tap
other markets, notably Japan and also the sovereign wealth funds in the Middle East. The key
element that will make this possible is that India must be seen to be set on a high growth path,
with macroeconomic balances coming under control over the medium term, and policies
towards foreign investment being viewed as supportive.
Key Policy Initiatives Needed

In this section, we discuss some of the major policy initiatives needed to achieve rapid, more
inclusive and sustainable growth. Policies and programmes to improve human capabilities,
institutional capabilities and to develop infrastructure, have been discussed above. They are
all necessary for achieving the Twelfth Plan objectives and should have high priority.
Immediate Priorities: Reviving Investor Sentiments

An immediate policy objective in the very first year of the Plan must be to revive animal
spirits, which have suffered for a variety of reasons. Some of the reasons for a downturn in
investor sentiment can be easily corrected. For example, the perception among investors,
that some of the tax changes introduced in the budget are anti-investor need to be allayed
as quickly as possible. The Finance Ministry has appointed two expert committees to look
into these issues and it is hoped that the recommendations of these committees will provide
a reasonable basis for reviving investor confidence on these issues. A firm decision on the
recommendations of the Committee should be announced as early as possible.
The next important short-term action must be to remove the impediments to implemen-
tation of projects in infrastructure, especially in the area of energy. The following steps are
especially urgent.
Fuel Supply to Power Stations

The fuel supply problem affecting electric power generation stations that have been com-
missioned but do not have adequate assurance of supply of coal or gas, and the problems of
power stations currently under implementation which have yet to tie up fuel supply agree-
ments, need to be addressed urgently. Coal India is the dominant domestic producer of coal
because of nationalisation. It must take on the responsibility of making coal available to all
power plants which are governed by regulated tariffs or have entered into PPAs based on
competitive bidding for tariffs. Coal India must take steps to enhance its domestic produc-
tion capability as much as possible, including by exploring possible PPP arrangements with
mine development operators working on a contract basis. In the short run, however, the
shortage can only be made up by imports. Additional imports are possible but the fact that
imported coal is available only at much higher prices discourages potential consumers. One
way of resolving this problem is through a system of pricing pooling. This should be explored
and it should be implemented urgently.
Financial Problems of Discoms

Many discoms have accumulated high volumes of debt to finance their large current losses.
Commercial banks are increasingly unwilling to finance the losses any further. This in turn
has created unwillingness on the part of banks to finance power generation projects that are
being set up because of doubts that they will be paid by the discoms. A debt restructuring
plan, in which state governments take over a large part of the burden of paying back the
debt has been approved by the Cabinet and must be implemented by all the affected sates.
The commercial banks will have to bear part of the burden by restructuring the loans, and
the Reserve Bank of India (RBI) may have to allow some regulatory forbearance relieving the
banks of treating the restructured loans as non-performing assets (NPA) and making suitable
provisions for them. As envisaged in the package, these steps must be combined with cred-
ible steps on the part of the state governments and the discoms to ensure restoration of the
operational viability of the discoms in future. An early implementation of open access would
help create an environment that would promote efficiency and competitiveness.
Clarity in Terms of NELP Contracts

Several problems have arisen in interpreting existing New Exploration Licensing Policy
(NELP) contracts especially related to the process for approving expenditure on the devel-
opment plan and the approval for gas prices. This uncertainty is not conducive to attract-
ing private investment in this very important part of the energy sector. A committee under
Dr. C. Rangarajan has been set up to make recommendations on future NELP contracts, which
would avoid uncertainty and establish clear rules regarding the pricing of oil and gas from
future NELP fields. An early decision on this issue should be taken within calendar year 2012.
The Size of the Public Sector Plan

Although planning should cover both the activities of the government and those of the pri-
vate sector, a great deal of the public debate on planning in India takes place around the
size of the public sector plan. The Twelfth Plan lays out an ambitious set of government
programmes, which will help to achieve the objective of rapid and inclusive growth. These
programmes add up to a total plan size for the Centre of `43,33,739 crores including both
budget resources and the resources of the public sector enterprises which comes to about
6.35 per cent of GDP. This compares with `20,25,130 crores in the Eleventh Plan, which was
5.96 per cent of GDP. The total plan size of the States is `37,16,385 crore or 5.45 per cent of
GDP, as compared to `17,25,848 crore in the Eleventh Plan, which was 5 per cent of GDP.
Although the proposed Plan size is large, the demand from various sectors is also very
high. However, resource constraints are a reality and even the plan size projected is condi-
tional on high growth rate of revenue and a significant degree of control over subsidies. If
for any reason these assumptions prove too optimistic, the size of the Plan may have to be
trimmed at the time of the mid-term review.
In view of the scarcity of resources, it is essential to take bold steps to improve the
efficiency of public expenditure through plan programmes. To this end the Planning Com-
mission had established a Committee under Member B. K. Chaturvedi to make recommen-
dations for rationalisation and to increase efficiency of Centrally Sponsored Schemes (CSSs)
and for improving their efficiency. There has been a proliferation of CSS over the years, many
of which are quite small. The Chaturvedi Committee had recommended that the number
of CSSs should be drastically reduced and the guidelines under which the schemes are im-
plemented should be made much more flexible. The recommendations have been discussed
with the Ministries and the States and have generally been welcomed. It is proposed to imple-
ment these recommendations with effect from 2013–14.
Longer-Term Increase in Investment and Saving Rates

Bringing the economy back to 9 per cent growth by the end of the Twelfth Plan requires fixed
investment rate to rise to 35 per cent of GDP by the end of the Plan period. This will require
action to revive private investment, including private corporate investment, and also action
to stimulate public investment, especially in key areas of infrastructure especially, energy,
transport, water supply and water resource management.
The strategy of expanding investment will help to counter the weakening of external
demand on account of the global downturn. It is important that the expansion in domestic
demand should not be in the form of consumption, but in the form of higher levels of in-
vestment. This not only provides demand in the short run to support higher levels produc-
tion but also strengthens the longer-term growth potential of the economy. We should also
ensure that a large part of the increase in investment goes into infrastructure as this would
have a positive effect on reviving private investment in other sectors and would ease supply
constraints, which limit future growth. The Eleventh Plan succeeded in raising investment
in infrastructure from 5.04 per cent of GDP in the Tenth Plan to 7.2 per cent of GDP in the
Eleventh Plan. The Twelfth Plan aims to raise it further to 9 per cent of GDP by 2016–17.
Higher levels of investment have to be supported by a sufficient expansion in domestic
savings to keep the investment savings gap, which is also the current account deficit, at a level
which can be financed through external capital. India’s domestic savings capacity has been an
important strength of the economy, although recent years saw a distinct weakening in this area
because of deterioration in both government and corporate savings. Household savings, how-
ever, have remained strong and are likely to increase in the future, both because of our age com-
position and as result of increased financial inclusion. Nonetheless, reversal of the combined
deterioration in government and corporate savings has to be a key element in our strategy.
The Need for Fiscal Correction

The decline in public savings in the past few years is largely a reflection of the stimulus poli-
cies that were followed, which are reflected in the expansion in the fiscal deficit. The Central
Government fiscal deficit was 5.9 per cent of GDP in 2011–12. Allowing for a fiscal defi-
cit of just under 3 per cent for the states, the combined deficit of the Centre and the state
governments, which had fallen to 4.7 per cent in 2007–08, expanded to just under 9 per cent
in 2011–12. This has to be reversed through a credible correction over the medium term.
The Finance Ministry has set up an Independent Expert Committee to advise on a credible
medium-term road map for fiscal correction. The Committee has recommended a new road
map for fiscal deficit reduction to bring the central government deficit down to 3 per cent by
the end of the Twelfth Plan. It will be necessary to take action on two fronts:
1. The Centre must persevere with reforms of the tax structure, notably the introduc-
tion of good and services tax (GST), which will represent a major modernisation of
the indirect tax system. GST will greatly simplify the system and improve revenue
mobilisation, primarily by plugging loopholes. Since introduction of GST requires a
constitutional amendment, it needs a broad political support which has taken time to
build. However, if it can be introduced soon, it will give a boost to efficiency and to
revenue mobilisation without raising rates.
2. It will require a reversal of the trend witnessed in recent years for Central Government
subsidies to grow as a percentage of GDP. It must be emphasised that the objective
is not to eliminate subsidies. Subsidies can even increase in absolute terms as the
GDP grows, but they must be reduced as a percentage of the GDP. There is a role
for targeted subsidies that advance the cause of inclusiveness, but such subsidies can
be contained within a predetermined level of affordability. It should be possible to

do this without hurting the poor. Some subsidies such as under the proposed Food
Security Act will be predetermined. Others such as on fertiliser can be redesigned to
serve their purpose at less cost. Subsidies, on petroleum products are untargeted and
do not benefit the poor and the most needy. They will have to be reduced. The state
governments also need to take steps to reduce the growing burden of subsidies, most
especially the large and growing losses in the power sector.
Managing the Current Account Deficit

The initiatives described above to increase government savings and corporate savings will
create conditions conducive to keeping the current account deficit at 2.5 per cent of GDP.
This level of deficit can be financed through long-term capital flows as long as India’s mac-
roeconomic parameters are seen to be improving and GDP growth recovers above 7 per
cent. India is still under weight in most global portfolios given its economic size and growth
potential and positive signals about the revival of growth, combined with a credible commit-
ment to improve macroeconomic balances and a welcoming stance towards foreign invest-
ment will ensure the financing needed to maintain a current account deficit of 2.5 per cent.
The steps taken to liberalise FDI, especially in areas where there is evident investor interest
such as for example, FDI in retail, would help by sending the right signals. We must build on
the success of previous liberalization in FDI in other sectors, such as insurance, and before
that telecom.
Economic Reforms and Efficiency of Resource Use

While higher investment is necessary for faster growth, it is equally important to ensure ef-
ficiency in resource use, both in the public and private sectors. The implementation of the
reform relating to CSSs mentioned above will help achieve greater efficiency to implement
in the public sector.
In the private sector—which accounts for over 70 per cent of total investment—the main
instrument available for improved efficiency of resource use is to continue economic reforms,
which increase competitive pressure in the system and give producers the flexibility and free-
dom they need to upgrade technology and expand capacity. In this context, it is worth noting
that the global experience with the financial crisis, and the policy rethinking it has triggered,
a backlash against market based reform in the financial sector. We need to consider what
implications this has for our own policies of economic reforms.
The principal lesson we should learn is that we should continue with our strategy of
gradual liberalization in the financial sector. There is no case for reversing this process of
gradual liberalization, or even stopping it. Countries that had gone too far towards adopting
‘light touch regulation’ are quite correctly tightening their regulatory standards though it
should be noted that concern is beginning to be expressed in these countries that this process
may be going too far. India was never at that end of the spectrum. In fact, we were if anything
at the other end where control over banks and financial institutions is much stronger than in
most other jurisdictions and is sometimes excessive.
Looking beyond the financial sector, to the real sector, there is no reason to backtrack on
the use of market mechanisms to achieve efficiency or from an open economy, including a
freer flow of foreign direct investment. No such reversal is taking place anywhere in the world
and we should act no differently. Protectionist noises have certainly increased in industrial-
ised countries, which is disturbing, but actions have been relatively contained thus far. The
G20, of which India is a part, have regularly called in their summits for an avoidance of new
protectionist measures. It is to be hoped that this high level consensus will be translated into
action. None of this justifies a retreat from international openness on our part. Those argu-
ing for protectionism in industrialised countries are fighting to protect their economies from
the loss of competitiveness vis-à- vis emerging markets. It is not in India’s interest to support
such voices by willingly redirecting our own policies in that direction. On the contrary, it is
in our interest, as we gain in competitiveness, to ensure that global markets remain open.
Transparency in Allocating Scarce Natural Resources

The economic reforms successfully eliminated discretionary decision-making in areas such
as industrial licenses and import licenses. The process of extending transparent policies and
mechanisms to allocation of scarce natural resoruces to private companies for commercial
purposes has also been initiated. This is an extremely important gain. It will be further car-
ried forward during the Twelfth Plan.
Agricultural Growth
It is well recognised that faster growth of agriculture makes the overall growth process more
inclusive. A positive feature of the experience is that agricultural growth increased from
2.4 per cent in the Tenth Plan to 3.7 per cent in the Eleventh Plan. Further acceleration to
4 per cent is essential to ensure inclusiveness. Action is needed on several fronts including
provision of basic support services such as technology and irrigation infrastructure, access to
credit, good and reliable seeds and improved post-harvest technology. The latter is particu-
larly important since the bulk of the acceleration in growth will come from diversification
towards horticulture, animal husbandry and fisheries. The greatest potential for improving
productivity is in the rain-fed areas, which account for 55 per cent of net sown area and
where most of the poor live.
The Twelfth Plan must address some basic imbalances. First, to increase rice productivity
in Eastern India and at same time relieve North-West India from the stress on groundwater
caused by this water-intensive crop. Second, to focus on growing imbalances in nutrient use
that can affect productivity seriously. Third, to ensure that there is enough parity between
procurement operations for crops such as oilseeds and pulses as for rice and wheat, so that we
can avoid situations like at present when huge stocks of the latter coexist with huge imports
of the former. Fourth, to put at the centre of our agricultural policies.
Manufacturing
The manufacturing sector provides the best opportunity for creating quality jobs, which
require skills which are relatively easily imparted to someone who has finished secondary
school. However, this is also an area where business as usual will not produce rapid growth
and a paradigm shift is needed. The reasons why manufacturing in India has not grown suf-
ficiently rapidly and also not created as much employment in the formal sector as might have
been expected. The following are some of the initiatives needed to correct this performance:
• First, India ranks towards the bottom of international comparisons of ease of do-
ing business. The business regulatory environment in the country is intimidating for
manufacturers, especially small-scale enterprises. It saps their productivity and deters
further investments. The Plan proposes some initiatives to tune up India’s business
regulatory environment. Much of the action needed lies with state g overnments.
• Second is the state of the physical infrastructure— power and transport, in particu-
lar—on which manufacturing enterprises depend much more than IT-based service
enterprises, strategies for improving infrastructure are a core of the Plan and they will
make a difference to performance of manufacturing as a whole.
• Third, India needs to increase the technological depth of its manufacturing sector to
improve its competitiveness and also the country’s trade balance. India is increasingly
importing high-tech and capital goods and exporting raw materials in return. Strate-
gies are required to induce more depth and value addition in India’s manufacturing
sector that are not ‘protectionist’ and that leverage FDI and are compatible with an
open global trade regime.
• Fourth is a rethinking of the role of human resources in manufacturing. Suc-
cessful manufacturing requires learning and absorption of technologies and the
ability to improve them and this takes place principally through the human side
of the enterprise. Sustainable competitiveness will also require a new way of deal-
ing with labour refurbishing of India’s outdated labour laws is necessary, but im-
provement of industrial relations and the collaboration that is necessary between
employees and management will not be obtained merely by changing the laws. It
will require a new social contract founded on a developmental orientation and
on partnerships in India’s manufacturing and industrial sectors and in the enter-
prises within them.
• Fifth, the growth of the MSME sector must be a central focus of India’s manufactur-
ing strategy. This sector is the foundation for a strong manufacturing sector providing
more employment with less capital. It has a complementary relationship with large
industries because it supplies components and inputs to them. It is the entry point for
workers and entrepreneurs who move through it to larger-scale enterprises. Whereas
much government attention is given to consult with and address the issues of larger
enterprises, the development of the MSME sector must become more central to the
deliberations about the challenges of Indian industry and the Indian economy. The
sector must be viewed not as a static and weak sector, requiring constant support and
protection, but as an integral part of the industrial system with upward mobility for
individual units within it.
• Lastly, many of the changes in policy and implementation that are required to im-
prove the environment for manufacturing—in the business regulatory environment,
in implementing infrastructure projects, in industrial relations, and the requirements
of SMEs—are within the domains of the states. This includes the quality of power
supply, much of road connectivity, implementation of sales tax administration, im-
plementation of laws relating to safety, pollution control and labour, industrial parks,
and so on. The Centre also has a critical role to play in areas such as rail transpor-
tation, income tax, Cenvat, export regulation, and the functioning of the financial
system.
These issues are also relevant for India’s entire business sector, which apart from manufactur-
ing, covers services and off-farm rural enterprises. All of them will benefit from better busi-
ness regulation and better infrastructure.
Energy Policies for Long-Term Growth

A growth rate of 8 per cent in GDP requires a growth rate of about 6 per cent in total energy
use from all sources. Unfortunately, our capacity to expand domestic energy supplies to meet
this demand is severely limited. We are not well endowed with energy resources except for
coal and the existence of policy distortions make management of demand and supply more
difficult.
Coal Production
Coal is the most abundant primary energy source available in the country, but most of the
country’s coal resources are in forest areas, traditionally inhabited by our tribal population.
Coal production for supply to third parties is nationalised but projects in some sectors are
allowed to have captive coal mines. Coal India was not able to meet its coal production tar-
gets in the Eleventh Plan and, as pointed out earlier, domestic coal supplies are not assured
for coal-based power projects coming on stream in the Twelfth Plan. It is absolutely essential
to ensure that domestic production of coal increases from 540 million tonnes in 2011–12 to
the target of 795 million tonnes at the end of the Plan. This increase of 255 million tonnes
assumes an increase of 64 million tonnes of captive capacity with the rest being met by Coal
India Limited. However, even with this increase, we will need to import 185 million tonnes
of coal in 2016–17. Environmental and forest clearances of coal projects have presented prob-
lems. A special mechanism for inter-Ministerial coordination needs to be set up to accelerate
processing of these projects in a time bound manner. Unless this is done, India’s energy needs
will be in jeopardy and investor sentiment will weaken irreversibly, at least for the duration
of the Twelfth Plan. Taking a longer-term view, the policy of nationalisation of coal itself
needs to be reviewed as was pointed out in the Eleventh Plan. If private sector producers are
allowed in petroleum, which is a more valuable resource, there is no reason why they should
not be allowed in coal. They are allowed to a small extent in the State of Meghalaya, which has
private ownership of coal, because the tribal land there is not government land.
Petroleum Price Distortions

The petroleum sector suffers from a serious distortion in product prices which lead to huge
under-recoveries and discourage private investment. Domestic prices for diesel charged by
oil marketing companies (OMCs) was 35.3 per cent lower than trade parity prices before
the recent price adjustment. Prices for kerosene and LPG are 72.6 per cent and 53.6 per cent
lower than they should be. Continuation of these systems indefinitely, without provision of
a budgetary subsidy, would seriously damage the petroleum industry, limiting its ability to
invest in the discovery and development of new oil sources and discouraging all new private
investment. If on the other hand, the gap is covered by a budgetary subsidy, it will impose
an impossible burden on the budget, necessitating either a sharp cut in other government
expenditures or a highly destabilising increase in the fiscal deficit. It is in this context that
the diesel prices had to be raised to reduce the gap or a cap was placed on the number of
subsidised cylinders. The Twelfth Plan must ensure a move to more rational petroleum prod-
uct pricing, It may not be possible to remove all distortions immediately, but a phased price
adjustment is needed that would reduce subsidy to manageable levels. As a general rule small
increases in prices effected over time can help reduce the gap by manageable levels.
Natural Gas Pricing

Natural gas also faces problems of price misalignment. At present, the price of gas paid to
domestic producers is $4.25 per MMBtu, whereas the spot imported liquefied natural gas
(LNG) price is around $11–14 per MMBtu. Producers argue that unless they are assured of
prices linked to world prices, no investment will take place in this sector. The government
has appointed an expert committee under Dr. C. Rangarajan to advise on the form of NELP
contracts. The Committee is expected to submit its report very shortly and it is hoped that it
will recommend steps to introduce clarity about the policy regarding pricing of gas without
which new investment may be inhibited.
Urbanisation
More effective management of the process of urbanisation in the country will be critical for
more inclusive, more sustainable and faster economic growth. Urbanisation is a natural part
of the development process because cities provide substantial economics of scale and of ag-
glomeration. In India the cities are also effective drivers of inclusiveness because barriers of
caste, creed, and language are bridged in interconnected efforts by residents to earn better
livelihoods. At present, about 31 per cent of the population, that is, about 380 million, live in
urban areas and this will increase to about 600 million by 2030. Providing reasonable qual-
ity services to the growing urban population presents a major challenge. Urban services are
very poor, particularly sanitation, solid waste removal, water, roads and public transporta-
tion. Affordable, decent housing is woefully inadequate in all Indian cities, leading to the
formation of slums, health and living conditions in which are aggravated by poor water and
sanitation services.
The Jawaharlal Nehru National Urban Renewal Mission-II (JNNURM-II) was a landmark
initiative because it put India’s urban agenda centre stage. It set about providing resources to
the States linked to incentives for reforms which would trigger to focus on improvements to
cities and towns. The seven years’ experience with JNNURM has been a substantial learning
experience which has also revealed weaknesses in the governance systems and the capabili-
ties of cities, States and even the Centre to manage the process of urbanisation. Urban gov-
ernance is very weak, with poor coordination amongst the many agencies that must work
together to create and maintain good functioning habitats. Personnel and institutional capa-
bilities for urban management have to be developed on a massive scale across the country.
Capabilities for planning locally are woefully inadequate, which is leading to projects not
aligned with local priorities and poor coordination amongst separate initiatives.
Monitorable Targets for the Plan

Twenty-five core indicators that are listed below reflect the vision of rapid, sustainable, and more inclusive growth:
Economic Growth 8. Enhance access to higher education by creating two

1. Real GDP growth rate of 8.0 per cent. million additional seats for each age cohort aligned
2. Agriculture growth rate of 4.0 per cent. to the skill needs of the economy.
3. Manufacturing growth rate of 10.0 per cent. 9. Eliminate gender and social gap in school
4. Every state must have an average growth rate in the enrolment (that is, between girls and boys,
Twelfth Plan preferably higher than that achieved in and between SCs, STs, Muslims and the rest
the Eleventh Plan. of the population) by the end of Twelfth Five
Year Plan.
Poverty and Employment
Health
5. Head-count ratio of consumption poverty to be
reduced by 10 percentage points over the preceding 10. Reduce IMR to 25 and MMR to 1 per 1,000
estimates by the end of Twelfth Five Year Plan. live births, and improve child sex ratio
6. Generate 50 million new work opportunities in the (0–6 years) to 950 by the end of the
non-farm sector and provide skill certification to Twelfth Five Year Plan.
equivalent numbers during the Twelfth Five Year 11. Reduce total fertility rate to 2.1 by the end of
Plan. Twelfth Five Year Plan.
12. Reduce under-nutrition among children aged 0–3
Education
years to half of the NFHS-3 levels by the end of
7. Mean years of schooling to increase to seven years Twelfth Five Year Plan.
by the end of Twelfth Five Year Plan.
Infrastructure, Including Rural Infrastructure Environment and Sustainability

13. Increase investment in infrastructure as a percent- 21. Increase green cover (as measured by satellite
age of GDP to 9 per cent by the end of Twelfth Five imagery) by 1 million hectare every year during the
Year Plan. Twelfth Five Year Plan.
14. Increase the gross irrigated area from 90 million 22. Add 30,000 MW of renewable energy capacity in the
hectare to 103 million hectare by the end of Twelfth Twelfth Plan.
Five Year Plan. 23. Reduce emission intensity of GDP in line with the
15. Provide electricity to all villages and reduce AT&C target of 20 per cent to 25 per cent reduction over
losses to 20 per cent by the end of Twelfth Five 2005 levels by 2020.
Year Plan. Service Delivery
16. Connect all villages with all-weather roads by the
24. Provide access to banking services to 90 per cent
end of Twelfth Five Year Plan.
Indian households by the end of Twelfth Five Year
17. Upgrade national and state highways to the minimum
Plan.
two-lane standard by the end of Twelfth Five Year Plan.
25. Major subsidies and welfare related beneficiary
18. Complete eastern and western dedicated freight
payments to be shifted to a direct cash transfer by
corridors by the end of Twelfth Five Year Plan.
the end of the Twelfth Plan, using the Aadhar plat-
19. Increase rural tele-density to 70 per cent by the end
form with linked bank accounts.
of Twelfth Five Year Plan.
20. Ensure 50 per cent of rural population has access
to 40 lpcd piped drinking water supply, and
50 per cent gram panchayats achieve Nirmal Gram
Status by the end of Twelfth Five Year Plan.
LIBERALIzATION AND PLANNING

India’s adoption of liberalization came after more than six months of negotiations with the
India’s adoption of liberaliza-
tion came after more than six World Bank, starting from January 1991. However, the series of reforms that were initiated
months of negotiations with the in the country did not evolve through discussion or dialogue in any forum within India. The
World Bank, starting from Janu- content and implementation of reforms was neither debated in Parliament nor did it come up
ary 1991. However, the series
of reforms that were initiated
as the subject of discussion in any tripartite form comprising representatives of transparency,
in the country did not evolve extremely essential in a democracy. The reforms were announced as a package in July 1991
through discussion or dialogue by the newly installed minority government led by P. V. Narasimha Rao. They consisted of a
in any forum within India. two-pronged economic policy:
1. The IMF-inspired macro-economic stabilisation that would focus on reducing the
twin deficits in balance of payments and
2. A comprehensive programme for structural changes of the economy in the fields of
There is no doubt that the trade, industry, foreign investment, public sector among others, which was inspired
package of reforms were a by the World Bank.
conditionality imposed by the
World Bank and the Interna- The series of measures undertaken were expected to contribute not only to macro-econom-
tional Monetary Fund (IMF) as ic stabilisation but also to ensure higher growth, the benefits of which, it was felt, would
the basis for giving financial automatically percolate to the poor. There is no doubt that the package of reforms were a
assistance to India to tide over
the foreign exchange crises.
conditionality imposed by the World Bank and the International Monetary Fund (IMF) as
As such, the social conse- the basis for giving financial assistance to India to tide over the foreign exchange crises. As
quences of the reforms were such, the social consequences of the reforms were not taken into consideration before their
not taken into consideration implementation. They signified a sharp break from India’s economic and socialist political
before their implementation.
culture; nevertheless, they were implemented without a hitch. Although the government
claimed later that the new economic measures were a part of a well-thought out and well-
considered long-term programme contention, it is obvious that the pressure of economic
crisis pushed the government to make compromises and commitments and adopt policies
which were a startling break from the ethos of Indian planning. Economic liberalization in
India brings sharply into focus the relative failures of the democratic experience. It reflects
on the inability of a democratic state to fight off effectively the devils of want, hunger, and
deprivation.
The Structural Adjustment Policy (SAP) of the Indian government and terms of liberali- The Structural Adjustment Pol-
zation and globalisation, deregularisation, and privatization pose more threats than opportu- icy (SAP) of the Indian govern-
nities for the agriculture-based development which forms the focus of the plans. Apart from ment and terms of liberalization
and globalisation, deregula-
agriculture, concern also arises about the public sector in the new set-up. It is not only in the risation, and privatization pose
doldrums but also faces an uncertain future. The Exit Policy has not been all that successful. more threats than opportunities
The Ninth Plan also focused on the introduction of a countrywide Employment Assurance for the agriculture-based devel-
Scheme (EAS) to tackle unemployment as well as underemployment through PRIs. Its objec- opment which forms the focus
of the plans.
tive of equity is reflected in the seven basic services—safe drinking water, primary health,
primary education, public housing to the poor, nutritional support to children, connectivity
of villages by roads, and public distribution system targeted at the poor. All this shows a con-
tinued heavy reliance on planning even while the new economic policy entails fundamental
and far-reaching changes as far as economic development goes.
That liberalization is incompatible with planning is obvious. The question that arises
is—is liberalization warranted and does it augur well for the common man, the poor, the
unemployed, the undernourished, and the undereducated? What would be the implications
of a free market economy on the eradication of poverty, unemployment, inequalities, gender
disparities, and the multitude of problems that plague the country. The efficacy of planning
also comes to be seriously questioned in view of the kind of laissez fairism that liberalization
entails. Not with standing its noble projections, planning in India is up against a new adver-
sary in liberalization.
C ase
Not for nothing have all political parties, barring the constituents of the United Progressive
Alliance (UPA) governing at the Centre, taken serious exception to the formal induction
of representatives of the International Monetary Fund (IMF), the World Bank, the Asian
Development Bank (ADB), and McKinsey & Company into the Planning Commission of
India.
The move is as ill-advised as it is objectionable. The Deputy Chairman of the Planning
Commission justified the move on the argument that they have been brought in only to assist
in the mid-term review of the Tenth Plan, and not to oversee the functioning of the Com-
mission as a whole. He feels that being outsiders, they would be able to bring to bear their
critical professional judgement on the appraisal, drawing on their exposure to situations in
other countries; whereas one set of official within the government, undertaking the similar
exercise, and going over the work of another set of officials, might be inhibited in exposing
gaps and deficiencies in performance in an equally frank and forthright manner. Also, the
role the foreign agencies was meant to be strictly advisory, and not binding on the govern-
ment whose power and authority to take final decisions would continue to remain, without
its independence being in any way allowed to be compromised or diluted.
The matter is not as simple as it is made out and begs a whole host of questions:
Will the representative of foreign agencies be invited to attend meetings of only the
expert groups connected with the mid-term review or of all bodies set up under the aegis of
the Commission?
Will they, under the guise of reviewing the Tenth Plan, have the freedom to comment on
issues directly or indirectly related to the whole range of economic policies?
Will their access to official data be restricted only to open, unclassified documents or be
extended to cover whatever is relevant to the material under discussion in meeting?
Are the various sections of the Commission under obligation or instruction to accede to
their requests for information over and above what is furnished to them?
Can they, on their own, call on officials and hold private consultations?
Will the summary records of the proceedings explicitly record their views and
suggestions?
Does their participation in meetings and discussions entail payment of any fees?
The Deputy Chairman is being rather simplistic in assuming that the role of foreign
agencies being advisory in nature somehow gives the government the right to overrule them
and take independent decisions on issues according to its best lights and in the best interests
of the country.
It is astonishing and, at the same time, disappointing that both the Deputy Chairman and
Chairman, having dealt for so many years with the kind of foreign agencies now given entrée
into India’s corridors of power, should have failed to take note of some factors that compul-
sively and, even routinely, determine their behaviour in their relations to other countries.
The first set of factors has to do with their organisational culture and style of functioning.
Being largely peopled by self-centred and presumptuous know-alls, lacking in humility, and
unfamiliar with the complexities and diversities of countries like India, they act on knee-jerk
reflexes and impose their quick fixes based on the premise ‘one size fits all’.
They have a few simplistic prescriptions that they seek to thrust down the throat of coun-
tries without taking account of conditions peculiar to them. Those prescriptions are privatise
government undertakings, devalue the current, extract user fees, eliminate subsidies, remove
tariffs, let prices find their levels however high, open the doors for foreign investors, and so
on.
Here are a few examples from the writings of Western critics on their mind-set.
The IMF Secretariat with 2,300 staffers’ works in secret, drawing up policies for the 80
countries under its control, largely without their participation and without the knowledge of
the world. This shows the IMF’s monopoly of power over policies. The role of the IMF and
the World Bank is of concern. The conditions placed on their loans often force countries into
rapid liberalization with scant regard to the impact on the poor.
The problem with foreign agencies with their noses in the air is that they do not take it
well if the advice they give is rejected for good reasons. They hold it against the client and the
government concerned, sometimes going to the extent of influencing the opinion of inves-
tors, financing institutions, collaborators, and other governments against it.
Since realpolitik plays an invisible and significant role in the functioning of these agen-
cies, one cannot also be sure whether their advice is truly objective or subserves some other
extraneous interests. Again, as has happened in some other countries, the initial foothold
may end up as a repetition of ‘The story of the Arab and The Camel’.
Case Question
By considering both sides of the coin, give your view about the induction of representatives
of foreign agencies into the Planning Commission of India.
s u mma r y
Formulated against the backdrop of the Second World War the Five-Year Plans were abandoned and three annual plans
and the partition of the country, the First Five-Year Plan were adopted.
accorded high priority to agriculture, irrigation, and power The disappointing results of the first three Five-Year Plans ne-
projects. It endeavoured to solve the food crisis, reduce de- cessitated a change. There was a concerted effort to make
pendence on food grain imports, and ease the raw material the Fourth Plan, launched in 1969, more realistic and at-
problem, especially, in jute and cotton. As such, almost 45 tuned to the socio-economic problems faced by the country.
per cent of the resources were allocated to agriculture while At the time of formulation of the plan, it was felt that the GDP
the industry got a paltry 4.9 per cent. Although an ad hoc growth and a high rate of capital accumulation alone may
type of plan conceived in haste, the First Plan was success- not help to achieve economic self-sufficiency. Hence, the
ful in so far as national income rose to 18 per cent, per emphasis shifted to education and employment. The Fourth
capita income to 11 per cent, and per capita consumption to Plan which was to work within the framework of actual plan
9 per cent. However, the plan could hardly be called a ‘far- targets had two principal objectives. It aimed at maintaining
sighted’ one. In fact, it was a loose affair that put together a growth with stability and an accelerating progress towards
set of important projects and did not have a strong analytical the Nehruvian dream of self-reliance. Keeping in mind the
base. According to John P. Lewis, the First Five-Year Plan agrarian nature of the Indian economy, the Fourth Plan gave
was based on a bad procedural mode. It was simply a collec- priority to agricultural development. The strategy it adopted
tion of discrete state and ministerial projects with very little was known as the Green Revolution in popular parlance. This
independence. marked the third phase of India’s developmental planning.
In the Second Plan, which was formulated in an atmosphere During the Fourth Plan period, the country had faced severe
of economic stability, agriculture was accorded a comple- inflationary pressures. The Fifth Plan, therefore, concentrated
mentary role while the focus shifted to the industrial sector, on reigning in inflation and achieving stability in the economic
especially to the heavy goods sector. The domestic industry situation. With then Prime Minister Indira Gandhi’s slogan
was protected from foreign competition through high tariff of ‘Garibi Hatao’, this plan re-emphasised the objectives—
walls, exchange rate management, controls and licences, or removal of poverty and attainment of economic self-reliance.
outright bans. To begin with, P. C. Mahalanobis introduced a Among other things, it envisaged an expansion of productive
single-sector model based on variables of income and invest- employment, adequate procurement and distribution system
ment, which was further developed into a two-sector model. for essential consumption goods to the poor at reasonable
The entire net output of the economy was supposed to pro- rates, vigorous export promotion, and import substitution, to
duce only two sectors—the investment goods sector and the put the economy on the road to self-reliance. Several new
consumer goods sector. The basic strategy of the Second economic as well as non-economic variables such as nutri-
Plan was to increase the investment in heavy industries and tional requirements, health and family planning, and so on,
also the expenditure on services. were incorporated in the planning process. Poverty was de-
The Third Plan aimed at increasing the national income fined in terms of minimum level of consumption. Stress was
by 30 per cent from ` 145 bn in 1950–61 to ` 190 bn by laid on the upliftment of backward classes and backward
1965–66. It aimed at increasing the per capita income by regions. However, the issue of land reforms continued to be
17 per cent. It also targeted a 30 per cent increase in ag- neglected and the focus on technological modernisation con-
ricultural production and a 70 per cent in industry. It laid tinued.
stress on the need to mobilise domestic as well as exter- Like the Fifth Plan, the Sixth Plan also aimed at structural
nal resources. However, whether on account of spillovers of transformation of the economy with a view to achieving a
the Mahalanobis model or on account of the inability of the high, sustained rate of growth. The basic objectives con-
planners to make certain changes in long-term plans intro- tinued to be removal of poverty and unemployment. The
duced under the Second Plan, the Third Five-Year Plan failed Sixth Plan sought to achieve higher production target and
to bring about any noticeable progress in the agricultural and a concomitant increase in employment opportunities for the
the industrial sectors. Other major exogenous shocks came poorest section of society. The Sixth Plan emphasised the
when two successive monsoons failed. This not only led to need for a sharper redistribution of the share of the poorer
a drastic fall in food production but also had a deep nega- sections in national income, consumption, and utilisation of
tive impact on the overall growth prospects. The plan period public services. By adopting the IRDP, the Sixth Plan aimed
was also marked by two wars—the Chinese war in 1962 and at raising 12 million households in the rural sector above the
the Pakistan war in 1965. As a result, the period following poverty line. At the same time, the NREP aimed at provid-
the Plan was fraught with inflationary pressures and a stag- ing employment opportunity and utilising manpower for eco-
gering balance of payment crisis. With a kind of disillusion- nomic development. The Sixth Plan also gave importance to
ment setting in, during the period between 1966 and 1969,
the Minimum Need Programme introduced in the Fifth Plan. the Front, adopted the CMP that formed the basis for the
The Congress government returned to power in 1980 and, objective of the Ninth Five-Year Plan. The underlying objective
thereafter, sought to simultaneously focus on improvement ‘growth with equity’ emerged obviously in the four important
in agriculture as well as industry in order to achieve rapid dimensions of state policy:
economic growth. 1. Quality of life of the citizen,
The Seventh Plan that was formally launched with the Budget 2. Generation of productive employment,
for 1985–86 laid down three immediate objectives. It aimed
at accelerating the growth in food grain production, increas- 3. Regional balance, and
ing employment opportunities, and raising productivity. In 4. Self-reliance.
order to attain these objectives, the Seventh Plan proposed:
However, it goes without saying that such objectives may
1. Action to sustain and enhance the momentum of eco- not be necessarily attained by the free operation of market
nomic expansion; forces.
2. Adoption of effective promotional measures to raise The Tenth Five-Year Plan (2002–07) represented a subtle
productivity and incomes of the poorer sections of the shift in India’s development perspective with agriculture mov-
population, poorer regions, and poorer states; ing centre stage. At the same time, emphasis has been laid
3. Expansion and qualitative improvement in facilities for on improving the quality of governance. In fact, the Tenth
health education and other basic amenities; and Plan has devoted a separate chapter to the issue. It is in-
4. Measures for bringing about a sharp reduction in the deed an eye opener that the Planning Commission has now
rate of population growth. accepted governance as one of the most important con-
straints to growth and sought to make rectifications. Among
The Seventh Plan aimed at a direct attack on the problems the new features focused in the Tenth Plan the rapid growth
of poverty, unemployment, and regional imbalance. The plan of labour force is one. Keeping in view the looming danger
also gave high priority to the development of human resourc- of increase in unemployment, the Tenth Plan targets have
es, increasing the level of education, expanding health serv- been fixed accordingly. The plan also addresses the issue of
ices, and providing basic needs. poverty and the unacceptably low levels of social indicators.
The Eighth Plan also attempted to lift the economy from the For the first time, it has broken down the national targets to
mire of licence permits. After the demolition of licence quo- state-level so as to harness the states within the Indian Un-
tas and the granting of market orientation to the economy, ion in the larger development programme along with the Cen-
the very functioning of the economy underwent a structural tre. While approving the approach paper to the plan, the NDC
transformation. The role of the public sector was restricted made mandatory a set of objectives. These included the dou-
and the state intervention was selective and supportive bling of per capita income in 10 years, an 8 per cent growth
of the private sector. In fact, private enterprises including of GDP per annum, and harnessing the benefits of growth
foreign private investors have been permitted over a much for improving the quality of life. In keeping with the policy
larger space than ever before and state intervention has of economic liberalization, the Tenth Plan also provides for
been confined to strategic areas like defence, infrastructure, a government organisation and a voluntary organisation, an
social sectors, and correction of market failures. The terms interface. In fact, in the approach paper to the plan itself,
and conditions governing the flow of capital and goods and 11 targets that can be monitored had been laid down that
services with other countries have been eased. This type of provided for increased partnership between the government
‘indicative planning’ placed the Eighth Five-Year Plan on a sector and the voluntary sector.
different footing from other previous plans. The Eleventh Plan began in very favourable circumstances
The Ninth Five-Year Plan undertook the task of ushering in with the economy having grown at the rate of 7.7 per cent
a new era of people-oriented planning. Thus, not only the per year in the Tenth Plan period. However, far too many of
governments at the Centre and the states but also the peo- our people still lack the basic requirements for a decent liv-
ple at large, particularly, the poor, would participate in what ing in terms of nutrition standards, access to education and
was described by the Planning Commission as a participatory basic health, and also to other public services such as water
planning process. This was initiated with a view to assure supply and sewerage. Disadvantaged groups, especially the
equity while, at the same time, to target the areas of vul- Scheduled Castes and Scheduled Tribes and the minorities
nerability and weakness as exposed by the Eighth Five-Year have benefited less than they should have. Regional imbal-
Plan. Thus, even as India embarked on a process of opening ances have emerged across and even within states.
up of its economy, planning still remained an important com- The Eleventh Plan seeks to remedy these deficiencies by
ponent of development policy and strategy. seeking to accelerate the pace of growth while also making
The United Front government led by Prime Minister Deve it more inclusive. The growth objective is to achieve an aver-
Gowda, in consultation with the 13 parties that constituted age growth rate of 9 per cent per annum for the Plan period.
The objective of inclusiveness is reflected in the adoption of The slowdown witnessed in the first year of the Plan is partly
26 other monitorable targets at the national level relating to due to the global environment, which has affected all coun-
(i) income and poverty, (ii) education, (iii) health, (iv) women tries, but it is also due to a number of domestic constraints
and children, (v) infrastructure, and (vi) environment. Some which have arisen.
of these national targets have also been disaggregated into The Twelfth Plan has therefore proposed a two-pronged strat-
13 state-level targets and it is expected that the state gov- egy focusing initially on the need to bring the macroeconomic
ernments design policies and programmes to achieve them. imbalances under control and to reverse the slowdown, while
The Twelfth Plan period, however, presents both challenges also pushing for structural reforms in many areas that are
and opportunities. The Plan commenced at a time when the critical for maintaining medium-term growth.
global economy was going through a second financial crisis, One of the problems with our plans in the past has been that
precipitated by the sovereign debt problems of the Eurozone they have focused on outlining an attractive future, with not
which erupted in the last year of the Eleventh Plan. The crisis enough focus on what is needed to achieve it and the conse-
affected all countries including India. quences of failing in this regard.
Our growth slowed down to 6.2 per cent in 2011–12 and Recognising that outcomes will be the result of actions, the
the deceleration continued into the first year of the Twelfth Twelfth Plan, for the first time, has resorted to scenarios to
Plan, when the economy is estimated to have grown by only indicate the implications of different types of behaviour. Our
5 per cent. objective should be to achieve the scenario of ‘strong inclu-
The potential of the economy to grow much more rapidly is sive growth’ which can yield an average growth rate of around
evident from the Eleventh Plan experience, which produced 8 per cent of GDP and significant improvements in various
an average growth rate of 8 per cent during the period from inclusiveness indicators. Significantly, the Plan warns that if
2007–08 to 2011–12. This was lower than the Eleventh we fail to do what is necessary, we may slip into a scenario of
Plan target of 9 per cent, but higher than the Tenth Plan ‘Policy logjam’ which will lead to growth of 5 to 5.4 per cent,
achievement of 7.6 per cent and also the highest growth with a much worse outcome for inclusiveness.
rate ever recorded by the Indian economy in any Plan period.
Key W o r d s
● Central Financing ● Five-Year Plan ● Quantitative Restrictions (QRs)
● Economy ● Gross Domestic Product (GDP) ● Inclusiveness
● Economic Inequality ● National Plan of Action (NPA) ● State Financing
● Economic Self-Reliance ● National Development Council (NDC) ● Social Infrastructure
● External Sector ● Planning Commission ● Sustainability
● Financial Sector ● Targeted Public Distribution System ● Inflation
● Fiscal Deficit (TPDS)
Q u est i o n s
1. Explain the main objectives as incorporated in the 5. Analyse the objectives and public sector outlay of the
various five-year plans in India. Ninth Plan of India.
2. Explain the objectives, outlay, sectoral allocation, 6. Analyse the highlights, priorities, sectoral targets,
and achievements of the first three five-year plans in outlay, and macro-parameters of the Tenth Plan.
India. 7. Analyse the failures of planning in India.
3. Write a short note on the Planning Commission of 8. Suggest various measures for the success in eco-
India. nomic planning in the country.
4. Explain the background, outlay, sectoral allocation,
and targets of the Annual Plans for 1990–91 and
1991–92.
r efe r e n ces
n Adhikary, M. (2001). Economic Environment of Business, n Mithani, D. M. (2005). The Essence of International
8th ed. New Delhi: Sultan Chand. Economics, 1st ed. Mumbai: Himalaya Publishing
n Datt, R. and K. P. M. Sundharam (2005). Indian House.
Economy. New Delhi: Sultan Chand. n Mittal, A. C. and S. P. Sharma (2001). Indian Planning:
n Desai, S. S. M. and N. Bhalerao (2000). International Issues and Policies. New Delhi: RBSA Pub.
Economics. 2nd ed. Mumbai: Himalya Publishing House. n Planning Commission, Government of India (2005).
n Ghosh, B. N. and R. Ghosh (2000). Fundamentals of India’s Five Year Plans: Complete Documents: First Five
Monetary Economics, 2nd ed. Mumbai: Himalaya Pub- Year to Tenth Five Year Plan, 1951–56 to 2002–07. New
lishing House. Delhi: Academic Foundation.
n Kumar, N. and R. Mittal (2002). Economic Development n Trivedi, I. V. (2004). Emerging Dimensions of Economic
and Planning. New Delhi: Anmol Pub. Scenario. New Delhi: RBSA Pub.
n Kumar, N. and R. Mittal (2002). Monetory Economy.

New Delhi: Anmol Pub.
03
C hapter
Industrial Policy
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• Historical Background 83 • Recent Policies for Micro and Small
• Government’s Role 85 Enterprises (MSE) Sector 108
• Meaning and Objectives of • Case 114
Industrial Policies 86 • Summary 114
• Industrial Policies 87 • Key Words 115
• Evaluation of the New Industrial Policy 102 • Questions 115
• New Trade Policy of 1991 104 • References 115
• The New Small-scale Sector Policy of 1991 105
Historical Background
East India Company
The Britishers came to India in the year 1600 as traders of the East India Company. Attracted
by stories of the fabulous wealth of India, Englishmen were eager to establish commercial
contacts with the East. During the British rule in India, the government policy towards During the British rule in India,
industry and business was indifferent. The first century of British rule saw the decline of the government policy towards
industry and business was
nearly all indigenous industries for many reasons—technological, economic, and political.
indifferent. The first century of
The Britishers did not become a ruling power in India until the second half of the 18th British rule saw the decline of
century till it was only a trading concern. Thereafter, events of greater importance took place nearly all indigenous industries
in the interior of Bengal. It was a period of gradual disintegration of the Mughal Empire. for many reasons—technologi-
cal, economic, and political.
Soon after the death of Emperor Aurangzeb, the controlling and powerful unifying force
that existed in the country under his rule declined, and India became a battleground of r ival
Modern industrial enterprises
principalities. The East India Company took full advantage of this chaotic situation and, in India developed only after
gradually, established itself as the unrivalled master of the Indian subcontinent. 1850. Its earliest manifesta-
Modern industrial enterprises in India developed only after 1850. Its earliest manifes- tions came in the wake of the
tations came in the wake of the construction of railways, which made it essential to have construction of railways, which
made it essential to have mod-
modern workshops for repair and maintenance of the rolling stock. The development of ern workshops for repair and
railways ended the isolation of the villages, made the world market available to the Indian maintenance of the rolling
producer, facilitated both foreign and domestic trade, and created the necessary condition for stock.
the growth of large-scale industry.
The first isolated attempt at officially encouraging the growth of large-scale industry took The first isolated attempt at offi-
place around 1900. The Madras Government, under the guidance of Sir Alfred Chatterton, cially encouraging the growth of
large-scale industry took place
started a bold policy of surveying industrial possibilities, assisting private enterprises, around 1900.
improving technical education, and starting pioneer industries with state resources.
First World War

The outbreak of the First World War brought an end to the policy of hostility between British
Bengal Chamber of Commerce and the Government, and forced on the government a more
progressive policy that included selective encouragement of some industries and protective
tariff in order to meet war demands. There was an urgent need for a new constructive eco-
Indian Industrial Commission nomic policy. This led to the appointment, in 1916, of the famous Indian Industrial Commis-
was set up in 1916 to examine sion to examine and report the possibilities of a further industrial development in India and
and report the possibilities of submit recommendations for a permanent policy of industrial stimulation.
industrial development in India
and submit recommendations The Commission presented its report in 1918. Its proposals were based upon the funda-
for a policy of industrial growth. mental principles that in the future the government must play an active part in the industrial
development of the country. It summarized the industrial situation by saying that India was a
country rich in raw materials and industrial possibilities but poor in manufacturing accom-
plishments. The main recommendations of the commission fell under four headings.
First, it proposed an improved departmental organization for the encouragement and
control of industries. Second, suggestions were made to improve technical training and edu-
cation and also to improve the conditions in factories and industrial centres. Third, there
were proposals for the reorganisation of the scientific staff of the industrial departments.
Fourth, recommendation was made for technical and financial aid to industries, encourage-
ment of industrial cooperatives, and provision of improved transport and freight facilities.
The Government of India accepted these recommendations in principle, but little could
be done immediately due to the war and post-war problems of reorganization and the diffi-
culty of coordinating industrial policy with the political reforms of 1919 and with the recom-
mendations of the Fiscal Commission (1921–22).
Second World War

The Second World War was a major watershed in the development of government–business
As India became the main sup- relations in India. For one, as India became the main supply base of the Allied War efforts in
ply base of the Allied War efforts the Far Eastern and Middle Eastern fronts, its industrial development received a tremendous
in the Far Eastern and Middle boost from the substantial orders for locally manufactured goods and through setting up of a
Eastern fronts, its industrial
development received a tre- large number of new industrial units in the fields, hitherto, the inconceivable.
mendous boost from the sub- Secondly, in response to the needs of war-time economy, the government, in a bid to
stantial orders for locally manu- conserve and control the resources of the country and under the provisions of the Defence of
factured goods and through
India Rules, brought about a series of controls affecting various aspects of the economy, for
setting up of a large number of
new industrial units. example, import, export, capital investment, and foreign exchange.
These controls become a permanent picture of the economic landscape, as these were
found to be useful weapons by the government not only after the war, but even after inde-
pendence to meet the needs of planned development.
During the two brief years that intervened between the end of the war (1945) and
independence (1947), government efforts were mostly directed at dealing with shortages that
developed in a large numbers of items, both consumer goods as well as essential war materials.
In almost all the industries, for example, cotton, textile, cement, steel, sugar, and paper,
production showed a steep downward trend caused by the fall in demand, overworking of
the plants during the war, non-availability of capital equipment, shortage of many materials,
general unrest in the country, and transport and distribution bottlenecks.
Reconstruction programmes were talked of, but not pursued owing to the prevailing
uncertainty, and the difficulty in importing capital goods. Government efforts were mainly
directed at price and distribution controls through emergency powers in respect of a whole
range of articles like cotton, textile, woollens, paper, coal, steel, mica, and petroleum and
petroleum products.
Industrial Policy | 85
Government’s Role
Pandit Jawaharlal Nehru laid the foundation of modern India. His vision and determination The goals and objectives set
have left a lasting impression on every facet of national endeavour since independence. It is out for the nation by Pandit
Nehru on the eve of independ-
due to his initiative that India now has a strong and diversified industrial base and is a major ence were (a) agricultural
industrial nation of the world. The goals and objectives set out for the nation by Pandit Nehru and industrial development,
on the eve of independence were as follows: (b) generation of employment
opportunities, (c) removal of
1. Rapid agricultural and industrial development of the country, poverty, and (d) alleviation of
economic and social disparity.
2. Rapid expansion of opportunities for gainful employment,
3. Progressive reduction of social and economic disparities, and
4. Removal of poverty and attainment of self-reliance.
These objectives remain as valid today as they were at the time Pandit Nehru first set them
out before the nation. Any industrial policy must contribute to the realization of these goals
and objectives at an accelerated pace.
The emergence of India as an independent nation on 15 August 1947 was the beginning The emergence of India as
of the new glorious era in the history of our country. Initial government efforts were directed an independent nation on
towards improving the climate of industrial relations. On 7 April 1948, Parliament adopted 15 August 1947 was the be-
ginning of the new glorious era
an Industrial Policy Resolution laying down the broad objective of the government policy in the history of our country.
in the field of industrial development and demarcating the respective shapers for public and Initial government efforts were
private sector. The government also took steps to clarify its policy towards foreign capital in directed towards improving the
climate of industrial relations.
a policy statement made by the Prime Minister on 6 April 1949.
Since 1950–51, India has passed through ten five-year plans and several annual plans
and is now in the Eleventh Five-Year Plan. The financial and the balance of payment crises The financial and the balance of
that the nation faced from the onset of the 1990s compelled the acceptance of deregula- payment crises that the nation
faced from the onset of the
tion, reduced role for public sector, making the public sector efficient and surplus generat- 1990s compelled the accept-
ing, and much reliance in general on the private sector for industrial and infrastructure ance of deregulation, reduced
development. role for public sector, making
The vastly enlarged role for the private sector indicates that India is in step with the pre- the public sector efficient and
surplus generating, and much
vailing dominant trend in government–business relationship in the world scene. The govern- reliance in general on the pri-
ment has a crucial role to play in the context of the emerging liberalization of business. In this vate sector for industrial and
context, the following aspects deserve special consideration: infrastructure development.
• Government role as a promoter, caretaker, and regulator,

• Promoting and protecting the small-scale sector,
• Facilitating the revival of sick units,
• Facilitating the development of Indian companies for the global market,
• Promoting inflow of foreign capital and technology,
• Promoting and maintaining ecological balance,
• Promoting the social role of business,
• Developing adequate infrastructural facilities for the overall development of the
economy, and
• Formulating and operating industrial policies conducive to balance industrial and
economic growth.
Meaning and Objectives of

Industrial Policies
Meaning
Industrial policy means rules,
Industrial policy means rules, regulations, principles, policies, and procedures laid down
regulations, principles, poli- by government for regulating, developing, and controlling industrial undertakings in the
cies, and procedures laid down country. It prescribes the respective roles of the public, private, joint, and cooperative sectors
by government for regulating, for the development of industries. It also indicates the role of the large, medium, and small-
developing, and controlling in-
dustrial undertakings in the
scale sector. It incorporates fiscal and monetary policies, tariff policy, labour policy, and the
country. government attitude towards foreign capital, and role to be played by multinational corpora-
tions in the development of the industrial sector.
After independence, the Gov-
After independence, the Government of India has formulated policies for industrial
ernment of India has formulat- growth and development. For regulating these industrial policies, adequate measures were
ed policies for industrial growth also adopted by way of industrial licensing policies. These polices have substantially regu-
and development. These polices lated the business environment in the country.
have, substantially, regulated
the business environment in
the country. Objectives
Industrial policy statements have been announced from 1948 onwards. A number of
objectives have been projected by the Government of India while making industrial policy
declarations. Some of the important objectives can be identified as follows:
• Achieving a socialistic pattern of society,
• Preventing undue concentration of economic power,
• Achieving industrial development,
• Achieving economic growth,
• Reducing disparities in regional development,
• Developing heavy and capital goods industry,
• Providing opportunities for gainful employment,
• Expanding the public sector for achieving socialism,
• Achieving faster economic growth,
• Achieving a self-sustained economy,
• Alleviating poverty,
• Protecting and developing a healthy small-scale sector,
• Building up a large and growing cooperative sector,
• Updating technology and modernisation of industry, and
• Liberalization and globalization of economy.
Many measures have been adopted by the Central government for the accomplishment of
these industrial policy objectives.
Industrial Policies
We examine the following industrial policy resolutions and the important aspects involved
in the industrial policies:
• Industrial Policy Resolution of 1948.
• Industrial Policy Resolution of 1956.
• Industrial Policy Statement of 1973.
• The New Industrial Policy of 1991.
Industrial Policy Resolution of 1948

The Government of India announced its first Industrial Policy Resolution on 6 April 1948.
The policy resolution laid stress on the role of the state in the development of industry. The
industrial activities were divided into four broad areas:
1. Items under the Central government control—arms and ammunition production
and control of atomic energy, ownership and control of railway transport, and others;
2. Items under the state government control—coal, iron and steel, aircraft manufacture,
shipbuilding, manufacture of telephones, telegraphs, and wireless apparatus;
3. Items of basic importance planned and regulated by the Central government—salt,
automobiles, tractors, heavy machinery, fertiliser, cement, sugar, paper, and so on; and
4. Items for the private sector—all other items left to the private sector.
Highlights of Policy
The 1948 policy resolution visualized a mixed economy. It aimed at laying the foundation for The 1948 policy resolution
India’s economic and industrial development through such an economy which was guided by visualised a mixed economy. It
aimed at laying the foundation
the desire for establishing a strong industrial base in India.
for India’s economic and indus-
Although foreign investment, know-how, and technology were felt to be necessary for trial development through such
building up a proper industrial base, it was felt that, as a rule, the major interest in ownership an economy which was guided
and effective control should always be in Indian hands. by the desire for establishing a
strong industrial base in India.
Industrial Policy Resolution of 1956

After the introduction of the Industrial Policy Resolution of 1948, a number of changes took
place in the country. India became a republic, the first Five-Year Plan was envisaged, social-
istic pattern of society was accepted as the national policy, public sector was assigned the
task of raising the pillars of economic structure, and so on. Besides, the concept of a mixed The concept of a mixed econo-
economy was widely recognized as the basis for the national economic policy. All these my was recognised as the ba-
aspects paved the way for a new approach and the second Industrial Policy Resolution was sis for the national economic
policy.
announced on 30 April 1956. The basic objectives of the policy included the following:
1. Speeding up the process of industrialisation in India,
2. Developing heavy and capital goods industries,
3. Expanding an effective public sector,

4. Accelerating the rate of economic growth,
5. Building up a large and growing cooperative sector,
6. Encouraging private sector industries,
7. Preventing private monopolies,
8. Developing small-scale, village, and cottage industries,
9. Achieving balanced economic development,
10. Participation of workers in management, and
11. Maintenance of industrial peace.
With these objectives in mind, a new approach was given to the industrial sector of India.
A new vision was announced in respect of the industrialisation of the country. It provided
guidelines to and laid the foundation for a well-planned industrial backbone in the country.
The Industrial Policy Resolu- The Industrial Policy Resolution of 1956 gave the broad policy framework of industrial
tion of 1956 gave the broad development in India. In spite of the considerable changes that took place from time to time,
policy framework of industrial
development in India. In spite of this resolution remained the Magna Carta for Indian industry till its replacement by the July
the considerable changes that 1991 industrial policy, which, in many aspects, sought to return to the spirit of 1956.
took place from time to time, The classification of industries under three heads, viz., Schedule A, Schedule B, and
this resolution remained the
Schedule C, made in this policy are still being followed. In fact, all following industrial policy
Magna Carta for Indian industry
till its replacement by the July resolutions kept these classifications in mind while defining industries. The following in-
1991 industrial policy, which, in dustries were placed in the first and second categories, respectively. The third category was
many aspects, sought to return included in the remaining where future development would generally be left to the initiative
to the spirit of 1956.
and enterprise in the private sector.
Classification of Industries
Schedule ‘A’
• Arms and ammunitions and defence equipment,
• Atomic energy,
• Heavy castings and forging of iron and steel,
• Iron and steel,
• Heavy plant and machinery required for iron and steel production. Mining, machinery
tools, and other basic industries,
• Heavy electrical plant,
• Coal and lignite,
• Mineral oils,
• Mining of iron ore, manganese ore, chrome ore, gypsum, gold, diamonds, and
s ulphur,
• Mining and processing of copper, zinc, lead, tin, wolfram, and molybdenum,
• Minerals as per Atomic Energy Order, 1953,
• Aircraft,
• Air transport,
• Railway transport,
• Shipbuilding,
• Telephone and telephone cables and telegraph and wireless instruments, excluding
radio-reviewing sets, and
• Generation and distribution of electricity.
Schedule ‘B’
• Other minerals excepting minor minerals defined in the Minerals Concession Rules,
1949, Section ‘B’,
• Aluminium and other non-ferrous metals not included in Schedule ‘A’,
• Ferro alloys and tool steels,
• Machine tools,
• Manufacture of drugs, dyestuffs, plastics, and other basic and intermediate products
required by chemical industries,
• Antibiotics and other essential drugs,
• Fertilizers,
• Synthetic rubber,
• Carbonization of coal,
• Chemical pulp,
• Road transport, and
• Sea transport.
Industries placed under Schedule ‘A’ were treated as the exclusive responsibility of the state.
Schedule ‘B’ industries were progressively state owned. Schedule ‘C’ industries were left
for the private sector. In schedule ‘A’, 17 industries were included whereas in Schedule ‘B’,
12 industries were listed.
The resolution made it clear that division of industries into separate categories did not The resolution made it clear
imply that they were being placed in watertight compartments. It was open to the state to that division of industries into
start any industry not included in Schedule ‘A’ and Schedule ‘B’ when the needs of planning separate categories did not
imply that they were being
so required. The Industrial Policy Resolution of 1956 had a positive approach to industriali- placed in watertight compart-
sation in many ways which are as follows: ments.
1. Rapid industrial growth backed by balanced regional development was the backbone
of the policy.
2. Appropriate manpower development and industrial harmony between public, private,
and large and small sectors were the basic ideals of the policy.
3. Small sector was encouraged in such a way that even some of the items of Schedule ‘A’
were allowed to be taken up by small enterprises.
4. Providing exclusive incentive system, direct subsidies, and differential tax rates
protected the small-scale sector.
Thus, a new direction was given to industrial development in India in the Industrial Policy
Resolution of 1956, and it laid the foundation for all future developments.
Industrial Policy Statement of 1973

An industrial policy statement was made in a press note on 2 February 1973. It was an exten-
sion of the Industrial Policy Resolution of 1956. It was specifically mentioned that Industrial
Policy Resolution of 1956 would continue to govern the industrial policy for achieving the
objectives of growth, that is social justice and self-reliance in the industrial sector. The main
features of Industrial Policy Statement of 1973 were as follows:
1. The statement declared that the state would be directly responsible for the future
development of industries.
2. The role of public sector was further stressed in attaining a socialistic pattern of
society. Both the public and private sector were assigned specific roles.
3. As an initiative towards the development of joint sector units, they were supposed to
function under the direction of the government.
All foreign investment propos- 4. Foreign investment was allowed only in specific industries. All foreign investment
als were screened with special proposals were screened with special reference to technological expertise, export
reference to technological ex- possibilities, and overall effect on the balance of payment position, subject to Foreign
pertise, export possibilities, and
Exchange Regulation Act (FERA) and monopoly-restrictive trade practices (MRTP)
overall effect on the balance of
payment position. restrictions.
5. Small-scale and cooperative sectors were assigned a special role to play. Small and
medium sectors were given preferential treatment.

6. In the area of agricultural produce, cooperative enterprises were encouraged.

Thus, a fresh approach to industrialization was made in Industrial Policy Statement of 1973
within the framework of the Industrial Policy Resolution of 1956.
Industrial Policy Statement of 1977

The Janata Party came to power in March 1977. The Janata Party government presented to
Parliament an industrial policy on 23 December 1977. This policy was considered to have
made a new approach to the industrial development in India. The government claimed that
they had introduced this dynamic industrial policy for removing the distortions of the past.
The Industrial Policy Statement of 1977 aimed at utilising ideal resources for enhancing the
living conditions of the masses. The major objectives set in the policy were as follows:
1. Preventing of monopoly and concentration of economic power,
2. Maximising production of consumer goods, and
3. Making industry responsive to social needs.
The Janata government’s industrial policy was basically aimed at making use of the available
The industrial policy of the
Janata Party government was human resources for the maximum benefit of the masses. It was a consumption-oriented
aimed at making use of the and labour-intensive industrial policy. It aimed at maintaining the close interaction of the
available human resources for agricultural- and industrial sector.
the maximum benefit of the
masses.
The thrust area of this policy was the generation of rural employment opportunities.
The first priority of the policy was to develop the small village and cottage industrial sector.
The small-scale sector consisting of 180 items was expanded to accommodate 500 items.
An annual industrial review was proposed for ensuring:
1. That the industrial units could take care of the national requirements,
2. That the efficiency principle was fulfilled, and
3. That the production would be maintained economically and was qualitatively
acceptable.
The basic elements of the Janata government’s industrial policy were as follows:
1. Development of small-scale industries, cottage industries, tiny sector units, village
and household industries,
2. Encouraging the large-scale industrial units for meeting the minimum needs of the
population,
3. Reversing the process of growth of large industries which grew with the help of funds
from public financial institutions,
4. Public sector was to be used as a producer and supplier of essential consumer goods,
5. Import of technology only in high-priority areas, and
6. Restricted foreign collaboration—the ownership and control were to remain in
Indian hands.
The Industrial Policy Statement of 1977 was an indirect reflection of the 1956 policy, with minor An important contribution of
deviations. The thrust area of industrial policy was small-scale industry. An important contri- the 1977 policy was the setting
bution of the 1977 policy was the setting up of District Industries Centre (DIC) in every district up of District Industries Centre
for the development of the small-scale sector. It continues to function effectively. Speedy action (DIC) in every district for the
development of the small-scale
was also planned to issue licences in time and timely implementation of approved projects. sector.
New Industrial Policy Statement of 1980

After the fall of the Janata Party government, the Congress came to power again in 1980. The
Union Minister of State announced the new industrial policy on 23 July 1980. The Congress
government was committed to rapid and balanced industrialisation for benefitting the com-
mon masses. The socio-economic objectives of the 1980 Industrial Policy were as given below:
1. Optimum utilisation of the installed capacity,
2. Higher employment generation,
3. Achieving higher productivity and maximum production,
4. Development of industrially backward areas,
5. Promotion of agro-based industries,
6. Faster promotion of export-oriented and import-substitution industries,
7. Consumer protection against high prices and bad quality,
8. Promoting economic federalism with spread of investment in rural as well as urban
areas, and
9. Revival of the economy by overcoming infrastructural gaps.
The following policy measures were specified to achieve these objectives:
1. Promoting the process of rural industrialization,
2. Removing regional imbalances,
3. Regulating the excess capacity in the private sector,

4. Efficient operational management of the public sector,
5. Developing small-scale sector by increasing the limit of investment,
6. Automatic expansion in large-scale industrial units, and
7. Dealing with industrial sickness effectively.
The Industrial Policy Statement The New Industrial Policy Statement of 1980 was a growth-oriented industrial policy. The
of 1980 was a balanced indus- factors considered by this policy were, import–export, labour relations, pollution control,
trial policy aimed at developing ecological balance, merger and amalgamation, correcting industrial sickness, pricing
the industrial sector in India.
policy, takeover of sick units, foreign collaboration and investment. The Industrial Policy
Statement of 1980 was a balanced industrial policy aimed at developing the industrial
sector in India.
New Industrial Policy of 1991

Despite the impressive growth performance of the New Industrial Policy Statement of 1980,
serious budgetary and fiscal deficits of the government and balance of payment crises led
India to a critical economic and financial situation. The country was almost on the brink of
defaulting international payments. There was no other alternative but to introduce a new
regulatory and liberal economic reign.
As a part of the liberalization, a new industrial policy was announced by the Govern-
As a part of the liberalization,
a new industrial policy was
ment of India in two parts, on 24 July 1991 and 6 August 1991, respectively. Some of the
announced by the Government major aspects of the industrial policy were as follows:
of India in two parts, on 24
July 1991 and 6 August 1991,
1. Industrial licensing dispensed with exception in 18 items (Box 3.1).
respectively. 2. Foreign Direct Investment (FDI) up to 51 per cent of equity allowed in high-priority
industries.
3. The threshold of the assets of MRTP companies and dominant undertakings removed
(Box 3.2).
4. Automatic clearance introduced for import of capital goods, provided foreign-
exchange requirement for such import are met through foreign equity.
5. Automatic permission for foreign technology agreements in high-priority industries
up to a sum of ` 1 crore granted.
Box 3.1 Quantitative Restrictions

Ever since 1991, when the economic reforms process However, no major import surge has taken place as a
started, there has been gradual dismantling of Quantita- result of the removal of such restrictions. Further, the
tive Restrictions (QRs). import duty rates have been lowered on a large number
At present, QRs have been lifted from more than of product groups. The average collection rate, defined
95 per cent of the products which were earlier subject to as the ratio of realized import revenue, including basic
such restrictions on balance of payments (BoP) grounds. additional and special custom duties, and countervailing
Restrictions on the remaining, less than 5 per cent duty as a percentage of the import value of the
products, balance of payments have been maintained product for an overall import, has gradually fallen from
on the grounds of health, safety, and moral conduct. 47 per cent in 1990–91 to 21 per cent in 2000–01.
Box 3.2 Vanishing Companies / Promoters

An offshoot of the liberalization measures and capital 1. Non-compliance with listing requirement with
market reforms has been the problem of vanishing the respective stock exchange and Registrar of
companies, which has assumed serious proportion in Companies for two years;
recent years in India. 2. Non-submission of required reports to and absence
Although the government and the regulatory agencies of correspondence with regional exchanges for two
have initiated several measures to tackle this problem, years; and
still, sustained and stepped-up efforts are required to 3. Non-availability at the registered office for inspection
ensure that companies do not vanish in the way they by the stock exchange.
have vanished in recent past.
The criteria defined jointly by SEBI and the Department
of Company Affairs on July 2002 to term a company as
vanishing is
6. Foreign equity proposals need not be accompanied by foreign technology agreement.

7. Existing and new industrial units provided with broad-banding facility to produce
any article so long as no additional investment in plant and machinery is involved.
Exemption from licensing will apply to all substantial expansion of existing units.
8. Pre-eminent role of public sector in eight core areas including arms and ammuni-
tions, mineral oils, rail transport, and mining of coal and mineral.
9. Part of government’s shareholding in public sector is proposed to be disinvested,
which will be offered to mutual funds, financial institutions, general public, and
workers.
10. Chronic loss-making public sector units to be referred to the Board of Industrial and
Financial Reconstruction (BIFR) for formulation of revival schemes.
11. A simplified procedure for new projects was introduced to manufacture goods not
covered by compulsory licensing. Even a substantial expansion of a project requires
submitting a memorandum in the prescribed form to the secretariat for industrial
approvals.
12. Decisive contribution was expected from foreign investment including foreign cor-
porate bodies, foreign individuals, and non-resident Indians.
13. Industrial policy for the small-scale sector announced on 6 August 1991 provided a
four-point scheme to provide financial support to this sector.
An analysis of Table 3.1 reveals that the contributions of agriculture and industry to the
increase in GDP were record lows over the period of 1997–98 to 2003–04. Growth (increment)
has been propelled by the services sector to the tune of two-thirds. These trends have some
important implications.
First, the ‘poor showing’ of agriculture in regard to its contribution to output increases,
needs a bit of attention. It is a fact of life that in growing and maturing economies, agricul-
ture’s overall share in GDP and, hence, its contribution to successive GDP increments will
keep falling. Thus, while due attention must be focused on the performance of the agricul-
tural sector and more so on the welfare of the farming community (far too many have taken
their lives in some states in recent years), one need not be unduly alarmed by the falling
contribution of the sector to GDP increases.
Table 3.1
Indian Economy:
> Gross Domestic Product (GDP) Sectoral Share in GDP
Sectoral Sources of (At factor cost) (At Market Prices) Primary Secondary Tertiary
Growth, 1950–2012
` crs %
At Current
Prices
1950–51 10,036 10,401 53 13.5 33.5
1960–61 17,049 17,942 43.6 18.2 38.2
1970–71 44,382 47,638 43.2 19.5 37.4
1980–81 136,838 149,642 37.3 22.7 40.1
1990–91 531,813 586,212 31.7 24 44.3
2000–01 1,991,982 2,168,652 25.4 23.8 50.8
2007–08 4,540,987 4,987,090 21 26.3 52.7
2008–09 5,303,567 5,630,063 20.4 25.7 53.9
2009–10 6,091,485 6,457,352 20.3 25 54.7
2010–11 7,157,412 7,674,148 20.4 24.5 55.1
2011–12 8,232,652 8,855,797 19.9 23.7 56.4
At 2004–05
Prices
1950–51 279,618 293,937 55 14.7 30.3
1960–61 410,279 436,037 50.9 18.3 30.8
1970–71 589,786 644,389 44.5 21.7 33.8
1980–81 798,506 866,340 38.7 23.3 38
1990–91 1,347,889 1,487,615 33.1 24.2 42.7
200–01 2,342,774 2,554,004 25.3 24.4 50.4
2007–08 3,896,636 4,250,947 19.3 26.3 54.5
2008–09 4,158,676 4,416,350 18.1 25.8 56.1
2009–10 4,507,637 4,780,179 17 25.8 57.2
2010–11 4,885,954 5,236,823 16.8 25.6 57.7
2011–12 5,202,514 5,595,856 16.1 24.9 59
(Source: Statistical Outline of India 2012–13, Tata Services Ltd.)
Second, and more alarming, is the dwindling contribution of the industrial sector to
GDP increase. The relatively low contribution of industry in 2003–04 must be attributed in
part to the structural adjustments now going on in the sector, basically getting rid of it fast
and getting set to compete. One hopes that the industry-declining scenario will not last long
and all will be well soon. How can that happen? On the supply side there is hardly any prob-
lem since if not domestic firms, MNCs will set up shop and produce. (One can see this most
visibly in the auto sector.)
If there is demand, industry will produce. That demand could be domestic as well as
external. Domestic demand, in my view, will be most severely constrained by lack of up-
ward mobility of the relatively low-income families. The demand constraint is with refer- Unless income increases
ence to all sorts of consumer durables and services. Unless income increases reach the reach the bottom and mid-
dle of the income ladder, the
bottom and middle of the income ladder, the industrial demand and output will not pick
industrial demand and output
up at a relatively rapid pace. Put in an oversimplified fashion, whoever could buy the white will not pick up at a relatively
goods, bought but there are millions who have the desire but not the demand backed by rapid pace.
purchasing power.
Finally, the growing importance of services in GDP should be taken with due caution.
World over, estimation of services sector output and value added (which is what enters GDP)
is at best an approximation, unlike in the goods-producing sectors, where the material inputs
and output are relatively more clear-cut and distinct. Before concluding, it is worth looking It is industry and not services
at how the Chinese have moved forward on the growth front. It is industry and not services that has propelled the increase
that has propelled the increase in Chinese GDP since 1990. in Chinese GDP since 1990.
Objectives
The objectives of the 1991 policy included:
1. Reducing or minimizing the bureaucratic control of the industrial economy of India,
2. Liberalization of industrial and economic activities for integrating the Indian
economy with the world economy,
3. Removing restrictions on foreign direct investment,
4. Freeing the domestic entrepreneur from excessive MRTP restrictions, and
5. Streamlining the role of public sector enterprises.
Among the areas covered, the most important ones are:
1. Industrial licensing,
2. Foreign investment,
3. Technology transfer and import of foreign technology,
4. Public sector policy,
5. Policy relating to MRTP Act, and
6. An exclusive small-sector policy.
Specific policy initiatives were made in respect to all these policy areas. These aspects are
briefly examined here.
Industrial Licensing
In tune with the emerging trends of globalization of business, the 1991 industrial policy initi- In tune with the emerging
ated a number of measures to liberalize the licensing system in India. Industrial licensing was trends of globalization of busi-
abolished for all industries except a list of 18 areas (consisting of many items) presented in ness, the 1991 industrial policy
initiated a number of measures
Schedule II. Compulsory licensing is necessary in these areas for various reasons like security
to liberalise the licensing sys-
and strategic factors, social reasons, safety aspects, environmental issues, production of haz- tem in India.
ardous goods and elitist consumption goods, and so on. The basic thrust of the policy was to
liberalize the industrial sector so as to minimise the bureaucratic restrictions.
Foreign Investment
Greater liberalization was Greater liberalization was offered for foreign investment from foreign corporate bodies,
offered for foreign investment individuals, and non-resident Indians. In high-priority areas requiring heavy investment and
from foreign corporate bodies, advanced technology, direct foreign investment was allowed up to 51 per cent foreign equity.
individuals, and non-resident
Indians.
According to a government notification of 28 October 1991, NRIs and OCBs (Non-resident
Indians and Overseas Corporate Bodies) were allowed to invest up to 100 per cent foreign
equity in high-priority industries, tourism-related industries, hotels, shipping, and hospitals
with repatriation benefits. The scheme for up to 100 per cent foreign investment on export-
oriented industries and projects, for the revival of sick units, also continued.
Besides all these, NRI equity holding up to 100 per cent was also permitted in export-
NRI equity holding up to 100
per cent was also permitted in
oriented deep-sea fishing industry, oil exploration industry, and advanced diagnostic centres
export-oriented deep-sea fish- with full repatriation benefits. In line with the interest of IMF, the NRI and OCB proposals
ing industry, oil exploration in- were allowed automatic clearance and provided foreign equity covers on the foreign-exchange
dustry, and advanced diagnos- requirements for import of capital goods. One condition of such automatic approval was that
tic centres with full repatriation
benefits. dividend payment in terms of foreign exchange must be balanced by export earnings for a
period of seven years.
No indigenous clearance would be required for import of new capital goods financed by
NRIs from their own resources abroad if they were not covered by Appendix I, Part A of the
Exim Policy of 1990–93. Items not covered by any of these conditions required prior clear-
ance under the existing procedures.
Foreign Technology
In order to update the technolo-

In order to update the technology base and to ensure adequate technological competence,
gy base and to ensure adequate adequate incentives were provided for technology imports. Automatic approvals were pro-
technological competence, ade- posed for technology-import agreements relating to high-priority areas within specified
quate incentives were provided conditions. Facilities were also made available for other industries for similar agreements,
for technology imports.
provided they did not involve free foreign exchange. Indian companies were given the free-
dom to negotiate the terms of technology transfer with their foreign collaborators in accord-
ance with their commercial requirements.
Foreign technology agreements in high-priority industries (Annexure III) up to
` 1 crore were given automatic permission. Royalty on domestic sales was allowed at the
rate of 5 per cent and on exports at the rate of 8 per cent, subject to a total payment of up to
8 per cent of sales over a period of 10 years from the date of agreement or seven years from
the commencement of production. The same principle would be applicable in other indus-
tries also, provided no free foreign exchange is required. No permission was required for
hiring foreign technicians and foreign testing of indigenously developed technologies.
Public Sector Policy

A new approach to the public sector was visualized in the Industrial Policy Statement of 1991.
The priority areas for the growth of public sector in future were identified, viz.:
1. Essential infrastructure goods and services,
2. Exploration and exploitation of oil and mineral resources,
3. Technology development and building of manufacturing capabilities in areas crucial
for the long-term development of the economy, and also in the areas where private
sector investment is inadequate, and
4. Production of items of strategic importance, like defence equipment.
Public sector enterprises in these areas were identified to be strengthened. Such high-priority
areas and areas which generated substantial profits were identified for a greater degree of
autonomy, while private enterprise was welcomed in such areas for providing a competitive
structure. Disinvestment of the public sector equity share capital was also visualised.
A new approach to perennially loss-making public enterprises was made, necessitating
a considerable dilution of the original concept of the public sector. Since almost one-third of
the losses accumulated by the public sector was the contribution of the loss-making private
enterprises which were taken over by government, the government had to make a specific
approach for this category of enterprises.
The government realized that the time had now come to evaluate the actual contribu-
tion of the public enterprises, particularly with reference to its viability. In the context of
the huge losses to the tune of ` 8,500 crore made by the public sector, such a revised poli-
cy was necessary. Of the loss-making units, 54 units had already been referred to the BIFR.
A parliamentary sub-committee was appointed by the Government of India in 1992 to prepare A parliamentary sub-committee
a comprehensive report on the viability of these sick public sector units. In this context, the was appointed by the Govern-
ment of India in 1992 to prepare
Financial Dimensions and Macro Parameters of the Eighth Plan (1992–97) produced by the a comprehensive report on the
Planning Commission in 1991 is worth a mention. The Planning Commission called for a re- viability of sick public sector units.
examination and reorientation of the government’s role in public sector. The paper suggested,
Learning from the global experience in development as well as experience of difficul-
ties in our own country which has ultimately culminated into high inflation and fis-
cal crisis threatening to halt even our modest pace of development. It is increasingly
realized that the role of the public sector should be very selective.
Thus, only a selective role was assigned to the public sector. Core areas, such as energy, trans-
port, communication, irrigation, elementary education and literacy, health and population
control, drinking water, rural roads, specific problems of the poor, unemployed, and under-
developed regions, and so on would continue to get the attention of the government.
Another important policy in respect of the public sector was that it was brought under The public sector was brought
the MRTP Commission with effect from 27 September 1991. The areas reserved for the pub- under the MRTP Commission
lic sector were limited to items like arms and ammunition, and allied items of defence equip- with effect from September
27, 1991.
ment, defence aircraft and warships, atomic energy, coal and lignite, mineral oils; mining of
iron ore, manganese ore, chrome ore, gypsum, sulphur, gold and diamond; mining of copper,
lead, zinc, tin, molybdenum and wolfram; minerals specified in the schedule to the Atomic
Energy (Control of Production and Use) Order 1953, railway transport, and so on.
Under the changed conditions, the government decided to go ahead with a gradual dis-
investment of selected public sector units primarily to the tune of up to 20 per cent, first
` 2,500 crore and, then, ` 3,500 crore in 1992–93. In order to rehabilitate the affected workers,
a National Renewal Fund was proposed to be formed with an investment of ` 1,000 crore.
Policy Relating to MRTP Act

In accordance with the liberalization process, a number of measures were adopted to liberal-
ize the MRTP restrictions on large and MRTP companies. In an ordinance promulgated by
the Central government, provisions in both the MRTP Act and the Companies Act for pre-
entry restrictions on establishment of new undertakings and expansion of the existing ones
were amended. Provisions relating to acquisition or transfer of shares of MRTP undertakings
was deleted from the MRTP Act and new provisions were introduced and in the Compa-
nies Act as Sections 108-A to 108-I, covering acquisition and transfer of shares of dominant
undertakings.
Similarly, provisions relating to registration under Section 26 to the MRTP Act was
deleted. Existing provisions in the MRTP Act were amended to eliminate the requirement
of prior approval for the projects and proposals for merger, amalgamation, and takeover by
MRTP companies. At the same time, the MRTP Commission was vested with additional
powers for taking more effective action in providing better protection to consumer interests.
The government considered the The government considered the need for bringing in public sector and cooperative under-
need for bringing in public sec- takings, having monopoly practices under the provision of the MRTP Act. However, govern-
tor and cooperative undertak- ment-controlled and owned companies dealing in arms and ammunition and allied items of
ings, having monopoly practices
under the provision of the MRTP
defence equipment, defence aircraft and warships, atomic energy, minerals specified in the
Act. schedule to Atomic Energy (Control of Production and Use) Order 1953, and industrial units
under currency and coinage (a division of the Ministry of Finance, Department of Economic
Affairs), and so on were exempted from the control of the MRTP Act.
In an ordinance promulgated
In an ordinance promulgated by the Central government on 27 September 1991,
by the Central government on pre-entry restrictions in connection with the establishment of new undertakings and
27 September 1991, pre-entry expansion of existing units were lifted. This, reportedly, resulted in the entry of a number
restrictions in connection with of large MNCs, on the one hand, and expansion of many large domestic enterprises to be
the establishment of new un-
dertakings and expansion of multinationals themselves, on the other. It would facilitate the expansion and diversification
existing units were lifted. of Indian companies, whereas foreign companies could take it as an incentive to enter the
Indian market in a big way.
Exclusive Small-sector Policy
An important aspect of the An important aspect of the industrial policy of 1991 was the introduction of an exclusive
industrial policy of 1991 was small-sector policy. A small industrial policy was announced by the Government of India
the introduction of an exclusive vide notification dated 2 April 1991, and the press note dated 6 August 1991, so as to make
small-sector policy. it a vibrant sector to maximise its contribution in terms of growth of output, exports, and
employment. For this purpose, a considerable magnitude of deregulation was visualised to
minimise the bureaucratic controls. Revised norms have been fixed to define small-scale,
ancillary, and tiny industries in terms of investment limits in plant and machinery as follows:
Units which manufacture parts, components, sub-assemblies, tooling, intermediates,
rendering services, and supplying or rendering or proposing to supply or render at least 50
per cent of their production or total services, as the case may be, to one or more other units
for production of other articles are considered to be ancillary units, provided that no such
undertaking shall be a subsidiary or owned or controlled by any other undertaking. A small-
A small-scale unit which un- scale unit which undertakes to export at least 30 per cent of the annual production by the
dertakes to export at least third year is considered to be an export-oriented unit (EOU).
30 per cent of the annual The service sub-sector which includes all industry-related services, irrespective of loca-
production by the third year
is considered to be an export-
tion, is brought under the banner of ‘small sector’. Similarly, the small-scale sector, including
oriented unit (EOU). tiny enterprises, has been made eligible for additional support on a continuing basis, includ-
ing institutional finance, priority in government purchase programmes, and relaxation from
certain provision of labour laws.
Type of Units in the Investment in Plant and Machinery on Ownership,

Small-scale Sector by Lease or by Hire Purchase up to
Small-scale industry ` 60 lakh
Ancillary units/export- ` 75 lakh
oriented units
Tiny units ` 5 lakh
Other important measures adopted to help the small-scale sector are also worth
mentioning. The single-window loan scheme has been enlarged to cover projects up to
` 20 lakh with a working capital margin up to ` 10 lakh, while composite loans under the sin- The single-window loan scheme
gle-window scheme, which were available only through State Financial Corporations and the has been enlarged to cover
State Small Industries Development Corporations (SSIDCs), would be channelized through projects up to ` 20 lakh with
a working capital margin up to
commercial banks also in order to facilitate access for a larger number of entrepreneurs. ` 10 lakh.
Specific financial support measures were also adopted. Adequate flow of credit on nor-
mative basis would be made available to viable operations while quality of delivery would be
maintained. An important policy to provide access to small-scale units to the capital market
for encouraging modernisation and technological upgradation was announced. For this pur-
pose, other industrial undertakings were allowed equity participation up to 24 per cent in the
SSI units, which was an important deviation from the existing norms. Similarly, in order to
expand the employment opportunities, ancillarisation and sub-contracting were encouraged.
Factoring services were proposed through the Small Industries Development Bank of
India (SIDBI) for solving the problem of delayed payment to small-scale units. Such services
have been proposed to be operated though commercial banks throughout the country. The
government had expressed concern to solve the financial problems of the small-scale sector.
Infrastructural facilities were proposed to be provided extensively. It was proposed to set
up a Technology Development Cell (TDC) in the Small Industries Development Organiza- Technology Development Cell
tion (SIDO), which would provide technology inputs to improve the competitiveness and (TDC) was proposed to be set
up in the Small Industries De-
productivity of the small-scale sector. The TDC is expected to coordinate the activities of the velopment Organisation (SIDO)
tool rooms and Process cum Product Development Centres (PPDs). to provide technology inputs to
The export potentiality of the small-scale sector was visualized to be streamlined. SIDO’s improve the competitiveness of
the small-scale sector.
role as a nodal agency for export promotion of the small-scale sector was stressed, while an
Export Development Centre was proposed to be set up under SIDO to improve the export
of small-scale units. While a link between National Small Industries Corporation (NSIC) A link between National Small
and Small-Scale Industries Development Corporation (SSIDC) was stressed to improve the Industries Corporation (NSIC)
and Small-Scale Industries
marketing efforts of the small-scale sector, it was also proposed to market mass consumption Development Corporation
goods under a common brand name. (SSIDC) was stressed to improve
In order to improve productivity, efficiency, and cost effectiveness of the small-scale the marketing efforts of the
sector, a programme of modernisation and technological upgradation was proposed. small-scale sector.
Industry associations were assigned the responsibility of providing facilities for common
testing and quality counselling, while institutions like IITs and selected engineering colleges
were expected to serve as Design and Development Centres and Technological Information
Centres. These efforts were proposed to cope with modernisation and technological
upgradation needs and quality specifications.
The Small-Scale Industrial Policy of 1991 emphasized the need for promoting entrepre- The Small-Scale Industrial
neurship, particularly for developing the first-generation entrepreneurs. A large number of Policy of 1991 emphasised
entrepreneurship development programme (EDP) trainers and motivators were proposed the need for promoting entre-
to be trained for this purpose. Industry associations were to be encouraged to contribute preneurship, particularly for
developing the first-generation
in this respect. Multi-disciplinary ‘Barefoot Managers’ would find additional employment entrepreneurs.
opportunities, while women entrepreneurs would receive entrepreneurship training.
Adequate steps were to be taken to promote the handloom sector. The Janata Cloth
Scheme was proposed to be replaced by an omnibus project package scheme under which ad-
equate funds would be provided for the modernisation of looms, providing training facilities,
providing better designs, better dyes and chemicals, and providing assistance in marketing.
While assistance would be provided for production and marketing of handicrafts, activities
of the Khadi and Village Industries Boards and Khadi and Village Industries Commission
were to be expanded. In order to expand the non-farm employment opportunities in the
rural areas, promotion of rural and cottage industries was identified. Similarly, the ongoing
evelopmental programmes relating to weaker sections like scheduled castes, scheduled

d
tribes, and women would be extended throughout the country.
Thus, an all-round development of the small industries sector consisting of small, ancil-
Thus, an all-round develop-
ment of the small industries lary, tiny, khadi, and village industries was visualized in the small-sector industrial policy of
sector consisting of small, an- 1991. In order to supplement the industrial policy, a major trade policy was also announced
cillary, tiny, khadi, and village by the Government of India on 4 July 1991.
industries was visualised in the
small-sector industrial policy of
1991. India’s Foreign Trade Policy of 1991
The trade policy announced by the then Union Commerce Minister P. Chidambaram on 4 July
1991, had its roots in earlier policies, particularly policies from 1985 onwards. These policies
took impetus from the Abid Hussain Committee recommendations.
The Abid Hussain Committee The Abid Hussain Committee on Trade Policies (1984) submitted its report in December
on Trade Policies (1984) con- 1984. The report contained major recommendations regarding export-promotion policy and
tained major recommendations strategy, import policy, technology imports, and so on. In respect of the export-promotion
regarding export-promotion pol-
icy and strategy, import policy, policy and strategy, the committee’s recommendations included rationalization of the duty
technology imports, and so on. drawback system, exemption of cash compensatory support (CCS) and 50 per cent of the
exports profit from income tax, reformulation of import replenishment (REP) system for
export production, exemption of export production from capacity-licensing provision,
exchange entitlement scheme for exporters, and so on. With regard to import policy, the
committee felt the need for canalization of imports to be treated as an exception. As far as
possible, import substitution should be found out and the policy of restricting imports of
non-essential consumer goods should continue. At the same time, essential capital goods
for rapid modernisation should be included under Open General Licence (OGL). As far as
technology imports were concerned, the committee felt that import of technology must be
liberalized. Hence, foreign technology imports without foreign equity participation should
be placed under OGL subject to appropriate ceilings on lump-sum payments and royalties
for a specified maximum period, while imports above the ceiling should be selective.
De-escalation of the level of protection was visualized for an efficient import substitution.
The committee’s recommendations provided background material for the trade policy from
1985 onwards.
According to the Export–Import (EXIM) Policy announced by the then Commerce
Minister V. P. Singh on 12 April 1985, a three-year trade policy came into effect which aimed
at facilitating production through easier and quicker access to imported inputs, stability of
export–import policy, strengthening the export production base, upgrading technological
base, and so on. About 201 items of industrial use were decanalized. The ‘Import–Export
Pass-Book Scheme’ was introduced with effect from 1 October 1985, to reduce delays in
obtaining licences under the duty exemption scheme. Import of computer or computer-base
systems up to ` 16 lakh was allowed for own use. Imports of 76 items of raw materials and
components was placed under the limited permissible list.
Minor modification was made in the import–export policy announced in March 1988,
according to which 745 items, including 200 items of life-saving equipment, 108 items of drugs,
and 99 items of machinery were placed under OGL. While 26 items of import were decanal-
ized, the import REP scheme was broadened. Certain other administrative liberalization for
The Export–Import policy export and trading houses, condition of import by permanent returnees of NRIs, extension of
announced on 30 April 1990,
terminated the 1988 policy one
the pass-book scheme to domestic manufactures, and so on were also introduced.
year ahead of schedule. The The Export–Import policy announced on 30 April 1990, terminated the 1988 policy one
ongoing effort for liberalization year ahead of schedule. The ongoing effort for liberalization was further stimulated by the
was further stimulated by the 1990 policy. The list of items imported under OGL was expanded to include 82 capital goods
1990 policy.
items, expanding the total list from 1,261 to 1,343 items. An important policy decision in the
context of modernisation was about the import of instruments required for modernisation
and technological upgradation. Such items could be imported either under supplementary
licensing as capital goods, or against REP licences and additional licences. Automatic licens-
ing, under which 10 per cent of the value of the previous year’s licence could be imported,
introduced in the 1990 trade policy is worth mentioning. Similarly, REP licensing scheme
was expanded and simplified.
Registered exporters, trading houses, and star trading houses were given place of promi-
nence. For example, important raw materials, such as petroleum products, fertilizers, oils
and oil seeds, feature and video films, newsprint, cereals, phosphoric acid, ammonia, and so
on, which were placed under public sector agencies, were allowed to be imported by trading
houses and star trading houses too. In order to obtain licences, net foreign exchange (NFE)
earnings were introduced as a condition for registered exporters. Registered manufacturers Registered manufacturers and
and exporters who were regularly exporting for a period of three years were, on the other exporters who were regularly
hand, permitted to import capital goods up to an amount of ` 10 crore at a concessional exporting for a period of three
years were, on the other hand,
customs duty of 25 per cent, on condition that they take up an export obligation of three permitted to import capital
times the value of imports within a period of four years. Moreover, import REPs at the rate of goods up to an amount of
10 per cent of NFE earnings were allowed on export of services, such as computer software, ` 10 crore at a concessional
customs duty of 25 per cent.
overseas management and consultancy services, contracts, advertising, and so on.
An export house having export earnings of not less than ` 5 crore and a trading house
with ` 20 crore would be eligible for the above benefits as well as for additional licences for
import of raw materials, components, consumables and tools, and capital goods permissible
under OGL. Export houses, which had an average annual foreign exchange earnings (for the
previous three years) of ` 75 crore were considered as star trading houses, which were granted
special additional licences equivalent to 15 per cent of the NFE earned in the preceding year.
Blanket advance licensing was also introduced for manufacturers–exporters who earned a Blanket advance licensing was
minimum NFE of not less than ` 10 crore during the preceding three years. However, the also introduced for manufac-
turers–exporters who earned a
import–export pass-book scheme introduced in January 1986 was withdrawn in 1990. minimum NFE of not less than
The Foreign Trade Policy of 1991 visualized the suspension of CCS, uniform rate of REP ` 10 crore during the preceding
(30 per cent) on Free-on-board (FOB) value, abolition of supplementary licences except in three years.
respect of the small-scale sector and production of life-saving drugs and equipment, aboli-
tion of unlisted OGL, and removal of import licensing for capital goods and raw materials
(barring a small negative list). The government could draw enthusiastic notes from the aver-
age annual growth rate of about 17 per cent during the period from 1986–87 to 1989–90,
due to the liberalization policy of the Rajiv Gandhi government, and initiated the following
liberalization measures:
1. Exim scrip (REP for export-based imports) was made to be freely traded. A uniform
rate of 3 per cent of FOB value of all exports was fixed as REP as against the variable
rates (5 per cent–20 per cent) that existed. (Special rates on books and magazines, and
certain metal-based handicrafts and gems and jewellery were retained.)
2. Greater incentive has been provided for exporters with low level of imports.
3. All supplementary licences have been abolished except those of the small-scale
industry SSI sector and production of life-saving drugs and equipment. All addi-
tional licences entitled to export houses have been abolished. However, a REP rate of
30 per cent and an additional REP of 5 per cent have been granted on FOB value to
export houses.
4. All items in unlisted OGL, and all items earlier listed in limited permissible list
(Appendix 3A and 3B), and PMP units (Appendix 6) shall be imported through REP
scheme.
5. REP rate for advance licence exports has been increased from 10 per cent to 20 per cent
of NFE earnings. Advance licensing, which was an alternative to REP for making im-
ports against exports, was expected to be less attractive to exporters as a result.
6. It was proposed to review the entire canalization process and decanalize all items
except those which are indispensable.
7. In the light of liberalization, CCS was suspended with effect from 3 July 1991.
Foreign Exchange Certificates (FECs) were to be introduced in place of exim scrips in due
course (the rupee was expected to be fully convertible in three to five years).
A new package of incentives
A new package of incentives was announced for EOUs and Export-Promotion Zones
was announced for EOUs and (EPZs) on 3 August 1991, which included higher rates of exim scrips. Even though the basic
Export-Promotion Zones (EPZs) rate of exim scrips would be 30 per cent of the FOB value of export, items like agricultur-
on 3 August 1991, which in- al products, electronics, bulk drugs, marine products, and certain category of engineering
cluded higher rates of exim
scrips.
goods were eligible for 40 per cent. EOUs and EPZs would also be eligible for 30 per cent
of the NFE earnings. Administrative procedures were simplified and advance licences were
to be issued within 15 days from the date of application, while exim scrips were to be issued
within 48 hours once the application accompanied by the bank certificate for the realization
of export proceeds. Sixteen items of exports and 20 items of imports were simultaneously
decanalized and placed under OGL. The government expressed its desire to progressively
eliminate licensing and restrictions, so that capital goods, raw materials, and components
could be placed under OGL in due course. Thus, a liberalized trade policy to suit the liberli-
zation in industrial policy was announced by the government.
Evaluation of the New Industrial

Policy
The liberalization process started in 1973 and was carried forward 1985 in 1988, and 1990.
It culminated in a manner of opening up of the economy with the industrial policy of 1991,
The Licence Raj gave way to in consonance with the globalization process emerging all over the world. The Licence Raj
an open economy in which all gave way to an open economy in which all industrial activities, except a list of 18 items, were
industrial activities, except a list freed from the clutches of licensing. Besides all these, a formidable number of MRTP and
of 18 items, were freed from
the clutches of licensing.
FERA restrictions were liberalized in order to cope with the need for integrating the Indian
economy with the world economy. The investment limit of MRTP companies was removed
and many of bureaucratic restrictions done away with.
In the face of acute short- In the face of acute shortage and scarcity of foreign exchange, it was proper on the part of
age and scarcity of foreign government to lay down all-out policy measures to strengthen the inflow of foreign capital.
exchange, it was proper on Although investments from non-resident Indians, foreign corporate bodies, and foreign
the part of government to lay
down all-out policy measures to investors were encouraged, foreign equity participation in Indian companies up to 51 per cent
strengthen the inflow of foreign was normalized. Meanwhile, foreign investment up to 100 per cent stood permissible in
capital. export-oriented units and sophisticated technology-based industries. This was a welcome
sign for foreign investors. These measures made a dramatic impact on India’s foreign-
exchange reserve, which grew from a level of $425 million to $1,600 million. Although critics
(political critics) did not favour the government policy of inducing the inflow of foreign
capital indiscriminately, Dr. Manmohan Singh’s foreign capital policy dramatically improved
the country’s foreign exchange position which substantially embellished India’s image before
international bodies and foreign governments. Moreover, India could recoup from financial
sickness, in spite of critiques based on factors, such as dividend payments, repatriation, and
intellectual property rights.
The public sector policy, which invited widespread criticism from various political
quarters, particularly from communist and socialist thinkers and their political allies,
deserves a special mention here. The classification of public sector enterprises in the indus-
trial policy of 1991 is worth mentioning in the context of the government policy adopted:
1. Public enterprises in the reserved category or in high-priority areas or the units,
which make reasonable or substantial profit, should be strengthened.
2. Public sector units, which may not be successful presently but are potentially viable,
must be restructured and placed on a strong footing.
3. Chronically sick public sector units making heavy losses must either be closed down Chronically sick public sec-
or its ownership transferred to private hands. The government, thus, strongly felt tor units making heavy losses
the need for keeping viable units. The units, to be retained under the public sector, must either be closed down or
its ownership transferred to pri-
must be effectively and profitably managed, and chronically loss-making enterprises vate hands.
disowned.
It, therefore, necessitates that the government makes fundamental decisions on whether most
of the units in consumer goods, textiles, contract and construction projects, technical consul-
tancy, and so on, should continue to function. The most basic question in this respect is about
the future of the workforce, since thousands of workers and executives are involved. They
must either be retrained and absorbed in alternative employments or parted with through
golden-handshake schemes. The government’s concern for the workers has been declared by
responsible quarters in unequivocal terms. The National Equity Fund raised by the govern-
ment may play a role in this respect.
Public sector units, which have been acting as monopoly houses under the direct protec- Public sector units, which
tion of the government ever since the introduction of first Industrial Policy Resolution in have been acting as monopoly
1948, are now expected to face competition. They can grow faster in a competitive atmos- houses under the direct protec-
tion of the government are now
phere, with the resources and attention of the government. This, however, needs waiting and expected to face competition.
watching, particularly when they are subjected to MRTP restrictions. However, in the context They can grow faster in a com-
of globalization, integration with the global economy, and competitive marketing environ- petitive atmosphere, with the
ment, the future of the public sector needs to be watched further. resources and attention of the
government.
An exclusive, small industrial policy announced by the government reveals its
concern for developing a vibrant small industrial sector in India to function complemen-
tarily to the large industrial sector, free from hurdles and obstructions. However, bureau-
cratic restrictions, corruption, and red tapism still stand on the way of the development
of small-scale sector, and mere policy may not be sufficient enough to nurse and nourish the
small-scale sector.
The minority United Front Government which came to power in 1996 ruled for a period
of less than 20 months under two Prime Ministers, first under H. D. Deve Gowda and then
I. K. Gujral with the help of Congress. They followed the policies of the Congress government
and, hence, no substantial change took place in the industrial policy.
One policy change took place was the definition of the small-scale industry. After the One policy change took place
resignation of the Gujral government, the government and its policy have enhanced the was the definition of the small-
scale industry. After the resigna-
investment limit in small-scale industries from ` 65 lakh to a massive ` 3 crore vide their tion of the Gujral government,
notification of 15 December 1997. Such a policy decision taken by a caretaker government was the Government and its policy
criticised by the think-tank of the BJP. That sort of a decision is bound to have adverse effects have enhanced the investment
limit in small-scale industries
since the benefits which are applicable to small entrepreneurs will be grabbed by powerful
from ` 65 lakh to a massive
individuals or big business houses. A huge investment of ` 3 crore would be possible only for ` 3 crore vide their notification
a rich investor. This can affect the very development of a small-scale sector itself in a negative of 15 December 1997.
manner.
After the mid-term elections in February 1998, a coalition government of 18 political

parties under the leadership of A. B. Vajpayee came to power in March 1998. They followed
almost the same liberalization policy initiated by Narasimha Rao government. However,
the economic sanctions declared by many countries against India as a result of the Pokhran
nuclear blasts considerably affected foreign investment in India.
New Trade Policy of 1991

The Government of India announced its new trade policy in support of its liberalization
policy in 1991, which stemmed from the announcements of 4 July 1991 and 13 August
1991. The trade regime was liberalised by streamlining and strengthening advance licensing
systems and decanalizing 16 export and 20 import items. A new package of incentives was
also provided for 100 per cent export units and processing zones. Some important aspects
of the trade policy statement made by Union Commerce Minister P. Chidambaram in the
Lok Sabha were as follows:
1. As a whole, promotion of export, moderation of growth of import, and simplification
of procedure are the general objectives of the 1991 trade policy.
2. Advance licensing system was strengthened. (Provision of substantial manufacturing
activity as a basic requirement for advance license was dispensed with. Procedures
have been streamlined and the number of documents have been reduced.)
3. A ‘transferable advance license’ scheme for general area has been introduced in the
items like textiles, engineering goods, and leather goods.
4. Exporters are allowed to dispose of the materials imported against advance licenses
by way of REP without prior approval in cases where no MODVAT (modified value,
added tax) facility was availed of on the domestic material used in exports.
5. Considerable reduction in the licensing and in the number and types of licenses has
been outlined.
6. Supplementary licenses for import of items in Appendices 3, 4, and 9 of the Exim
Policy (1990–1993) have been abolished.
7. Additional licenses issued to export houses and trading firms as an incentive earlier
have been abolished with effect from 1 April 1992.
8. The procedure for obtaining bank guarantee and legal undertaking from different
categories of exporters has been liberalised.
9. It is decided to appoint a high-level committee to outline modalities for eliminating
restrictions and licensing.
10. Sixteen items of exports, including castor oil, coal and coke, polyethylene (LD),
colour picture tubes and assemblies of colour TV containing colour TV picture tubes,
Khandsari, molasses, sugar, iron grade bauxite ore exposed cinematographic films,
video tape, and cinema film, have been reanalyzed.
11. Sixteen import items have been decanalized and placed under REP so as to import
against exempted scrapes; another six import items are decanalized and put under
OGL.
12. Export houses, trading houses, and star trading houses, are given leeway to import a
wide range of items against additional licenses.
A trade policy is an important arm of the liberalization policy, since trade between various
countries is the crux of global business. Import restrictions practised in India had to be re-
moved for making liberalization more meaningful. The government, therefore, acted in this
direction also.
The New Small-Scale Sector

Policy of 1991
Small enterprises have emerged as a dynamic and vibrant sector of the economy. At 2004, Small enterprises have emerged
it accounts for 55 per cent of industrial production, 40 per cent of exports, and over 88 per as a dynamic and vibrant sec-
cent of manufacturing employment. Although their relative importance tends to vary in- tor of the economy, presently
versely with the level of development, their contribution remains significant in the country. accounting for 55 per cent of in-
dustrial production, 40 per cent
The small-scale enterprises have being playing a significant role in the economics and social of exports, and over 88 per cent
development of the country. Over the years, small enterprises have emerged as leaders in the of manufacturing employment.
industrial sector in India. In recognition of their significance and stature, the new govern-
ment announced policy measures for promoting and strengthening the small, tiny, and vil-
lage enterprises, on 6 August 1991, for the first time in post-independence period. The new
policy on tiny, small, and village enterprises envisages almost a U-turn in policy stimulants
and structure of micro and small enterprises in the country.
Objectives
The primary objective of the small-scale industrial policy during the 1990s would be to im-
part more vitality and growth impetus to the sector, so that the sector can contribute in terms
of growth of output, employment, and export. The other objectives are as follows:
1. To decentralise and delicense the sector,
2. To deregulate and debureaucratise the sector,
3. To review all statutes, regulations, and procedures and effect suitable modifications
wherever necessary,
4. To promote small enterprise, especially industries in the tiny sector,
5. To motivate small and sound entrepreneurs to set up new green enterprises in the
country,
6. To involve traditional and reputed voluntary organizations in the intensive develop-
ment of Khadi and Village Industrial Commission (KVIC) through area approach,
7. To maintain a sustained growth in productivity and attain competitiveness in the
market economy, especially in the international markets,
8. To industrialize the backward areas of the country,
9. To accelerate the process of development of modern small enterprises, tiny enter-
prises, and village industries through appropriate incentives, institutional support,
and infrastructure investments.
Salient Features of New Policy

1. Equity participation up to 24 per cent by other industrial undertakings (including
foreign companies).
2. Legislation to limit financial liability of new or non-active partner-entrepreneurs to
the capital invested.
3. Hike in investment limit for tiny sector, up from ` 2 lakh to ` 5 lakh.
4. Services sector to be recognized as tiny sector.
5. Support from National Equity Fund for projects up to ` 10 lakh.
6. Single-window loans to cover projects up to ` 20 lakh. Banks too to be involved.
7. Relaxation of certain provision of labour laws.
8. Sub-contracting Exchanges to be set up by industry associations.
9. Easier access to institutional finance.
10. Factoring services through SIDBI to overcome the problem-delayed payments. Also,
legislation to ensure payment of bills.
11. Women enterprises redefined.
12. Marketing of mass consumption items by National Small Industries Corporation
under common brand name.
13. Composite loan under the single-window scheme also to be given by banks.
14. Tiny sector to be accorded priority in government purchase programme.
15. Priority to SSIs and tiny units in allocation of indigenous raw materials.
16. Promises to deregulate and debureacratise small and tiny sectors.
17. PSUs and NSIC to help market products through consortia approach, both domesti-
cally and internationally.
18. Janata Cloth Scheme to he replaced by a new scheme which will provide fund for
loom modernisation.
19. Compulsory quality control for products that pose rise to health and life.
20. Legislation to ensure payment of small-scale industries bills.
21. A special monetary agency to be set up for the small-scale sector’s credit needs.
22. A new scheme of integrated infrastructure development to be implemented.
23. A TDC to be set up.
24. Incentive and services package to be delivered at the district level.
25. An export development centre to be set up.
26. KVIC and board to be expanded.
27. Investment limit of ancillary units and EOU raised to ` 75 lakh.
28. Traditional village industries to be given greater thrust.
In pursuance of the objectives of the policy statement, the Government of India decided to
take a series of initiative in respect of policies related to the following areas.
Small-scale Industries
1. Financial support.
2. Infrastructure facilities.
3. Marketing and exports.
4. Modernisation.
5. Promotion of entrepreneurship.
6. Simplification of rules and procedures.
7. Tapping resources.
Tiny Sector
1. Investment.
2. Broadening the concept of service sector.
3. Locational.
4. Simplification of rules.
Handloom Sector
1. Project package scheme.
2. Welfare packages scheme.
3. Organization and development scheme.
4. NHDC as a nodal agency.
Handicraft Sector
1. Extending services like supply of raw materials and so on.
2. Market development support and expansion of training facilities.
3. Other village industries.
4. Improving quality.
5. Ensuring better flow of credit from financial institution.
6. Thrust on traditional village industries.
7. Setting up of functional industries estates.
8. Upgrading training programmes.
9. Coordinating with development programmes.
Recent Policies for Micro and Small

Enterprises (MSE) Sector
Worldwide, the micro and small enterprises (MSEs) have been accepted as the engine of
The MSEs constitute over 90
economic growth and for promoting equitable development. The MSEs constitute over
per cent of the total enterprises 90 per cent of the total enterprises in most of the economies and are credited with generating
in most of the economies and the highest rates of employment growth and account for a major share of industrial produc-
are credited with generating the tion and exports. In India too, the MSEs play a pivotal role in the overall industrial economy
highest rates of employment
growth and account for a major of the country. It is estimated that in terms of value, the sector accounts for about 39 per cent
share of industrial production of the manufacturing output and around 33 per cent of the total exports of the country. Fur-
and exports. In India too, the ther, in recent years, the MSE sector has consistently registered higher growth rate compared
MSEs play a pivotal role in the to the overall industrial sector. The major advantage of the sector is its employment potential
overall industrial economy of
the country. at low capital cost. As per available statistics, this sector employs an estimated 31 million
persons spread over 12.8 million enterprises and the labour intensity in the MSE sector is
estimated to be almost four times higher than the large enterprises.
To help the MSEs in meeting To help the MSEs in meeting the challenges of globalization, the government has taken
the challenges of globalisation, several initiatives and measures in the recent years. First and foremost among them is the en-
the government has taken sev- actment of the ‘Micro, Small, and Medium Enterprises Development Act, 2006’, which aims
eral initiatives and measures in
to facilitate the promotion and development and to enhance the competitiveness of MSMEs.
the recent years.
(refer to Box 3.3). The Act came into force from 2 October 2006. Other major initiatives tak-
en by the government are setting up of the National Manufacturing Competitiveness Council
(NMCC) and the National Commission of Enterprises in the Unorganized Sector (NCEUS).
Further, in recognition of the fact that delivery of credit continues to be a serious problem
for MSEs, a policy package for stepping up credit to small and medium enterprises (SME)
was announced by the government with the objective to double the credit flow to the sector
within a period of five years. The government has also announced a comprehensive pack-
age for promotion of micro and small enterprises, which comprises the proposals/schemes
having direct impact on the promotion and development of the micro and small enterprises,
particularly in view of the fast-changing economic environment, wherein ‘to be competitive’
is the key to success (refer to Box 3.4, 3.5 and 3.6).
Box 3.3 Implementation of the MSME Development Act, 2006

For implementation of the MSMED Act 2006, the entrepreneurs’ memorandum could be filed by the
notifications of rules were to be issued by the Central medium enterprises.
and state governments. The Central notifications are as Notification in September 2006 for the form of
follows: memorandum to be filed by the enterprises, procedure of
Principal notification in July 2006 that MSMED Act its filing and other matters incidental thereto.
becomes operational from 2 October 2006. Notification in October 2006 for exclusion of items
Notification in September 2006 for the Rules for while calculating the investment in plant and machinery;
National Board for Micro, Small, and Medium Enterprises Notification in May 2007 for constitution of NBMSMEs.
(NBMSMEs) to be constituted under the Act. Notification in May 2007 for dividing the country into
Notification in September 2006 for the constitution of six regions, and notification in June 2007 for the
the Advisory Committee. Notification in September 2006 amendment of EM format.
for classifying enterprises. About 28 states/UTs have notified the authority for filing
Notifications in September and November 2006 of entrepreneurs’ memorandum, 17 states/UTs have
declaring DICs (District Industries Centres) in the notified rules for MSEFCs, and 15 states/UTs have
states/union territories (UTs) as ‘Authority’ with which notified constitution of MSEFCs.
Box 3.4 Major Initiatives in the Petroleum Sector During 2007–08

The Coal Bed Methane (CBM) Policy was approved in July Reserve replacement ratio has been decided to be
1997. Since then, 26 CBM blocks have been awarded maintained at more than one during the Eleventh Five-
for exploration and production of CBM gas. About 6 Year Plan period. The Assam Gas Cracker Project was
TCF reserves have already been established in four formally launched in April 2007.
CBM blocks. The First commercial production of CBM Initiatives have been taken to meet the demand for
commenced from July 2007. The work relating to the gas through intensification in domestic exploration and
launch of CBM IV has started. production activities, LNG import, CBM, underground
The seventh round of NELP was launched on 13 coal gasification, gas hydrates, and transnational gas
December 2007, under which bids have been invited pipelines, etc.
for 57 (29 onland, 9 shallow water, and 19 deep-water
blocks) exploration blocks.
The Ministry of Micro, Small,

The Ministry of Micro, Small, and Medium Enterprises (MSMEs) performs its tasks
and Medium Enterprises (MS-
of formulation of policies and implementation of programmes mainly through two central MEs) performs its tasks of
organizations. They are as follows: formulation of policies and im-
plementation of programmes
mainly through two central
Micro, Small, and Medium Enterprises organisations.
Development Organisation The Micro, Small, and Medium

Enterprises Development Or-
The Micro, Small, and Medium Enterprises Development Organization (earlier known as ganisation (earlier known as
Small Industries Development Organization) set up in 1954, functions as an apex body Small Industries Development
Organisation) set up in 1954,
functions as an apex body.
Box 3.5 Coal: Policy Developments During 2007–08

During April–December 2007, 45 coal blocks with A proposal to confer Nav Ratna status on Coal India
geological reserves of 11,384.49 MT were allocated to Limited (CIL) has been submitted to the Department of
the government and private companies. Public Enterprises. An order has been issued to confer
Guidelines have been framed for undertaking detailed Mini Ratna Category-I status on six coal companies,
exploration by allottees of unexplored coal blocks in including CIL.
public and private sectors. To ensure the free play of market forces, a system
To encourage private investment in development of new of e-auction for sale of about 20 per cent of the total
technologies, a notification specifying coal gasification production has been introduced.
and liquefaction as end uses has been published in the For securing metallurgical coal supplies overseas
Gazette of India on 12 July 2007. by the PSUs, a proposal for formation of a Special
New Coal Distribution Policy has been notified on 18 Purpose Vehicle (SPV) has been approved. The CIL
October 2007. has committed to contribute ` 1,000 crore in the
SPV as equity out of the total authorised capital of
The royalty rates on coal and lignite have been revised
` 3,500 crore.
in July 2007 on the basis of a formula consisting of ad
valorem plus a fixed component. The Expert Committee on the Road Map for Coal
Sector Reforms has submitted its report which is being
The Administrative Staff College of India, Hyderabad,
examined by the government.
appointed as a consultant for preparing the report on the
appointment of a Coal Regulator, has submitted a draft
report.
Box 3.6 Policy Developments and New Initiatives in Information Technology

The Special Incentive Package Scheme (SIPS) to enabled common service centres in the rural areas in
encourage investments for setting up semiconductor the public–private partnership mode.
fabrication and other micro- and nano-technology The government has approved a scheme for establishing
manufacturing industries was announced in March the State Wide Area Networks (SWANs) across the
2007. The incentives admissible would be 20 per cent country in 29 states/6 UTs (union territories) with a
of the capital expenditure during the first 10 years for total outlay of ` 3,334 crore with Central assistance
units located in Special Economic Zones (SEZs) and component of ` 2,005 crore over a period of five years.
25 per cent for units located outside SEZs. The scheme envisages to provide Central assistance
A Task Force has been constituted to promote the to states/UTs for establishing SWANs for states/UTs
growth of electronics in IT hardware manufacturing headquarters up to the block level with a minimum
industry. bandwidth capacity of 2 Mbps.
The Department of Information Technology has unveiled The Department of Information Technology is setting
various components of the National e-Governance Plan up Nano Electronic Centres at the Indian Institute of
(NeGP) covering 27 Mission Mode Projects (MMP) and Technology, Mumbai and the Indian Institute of Science,
eight support components to be implemented at central, Bangalore, with an outlay of about ` 100 crore to carry
state, and local government levels, at an estimated out R&D activities in nano-electronics devices and
cost of ` 23,000 crore over the next five years. The materials.
government has approved the approach, strategy, key The software tools and fonts for 10 Indian languages,
components, and the implementation framework for viz., Hindi, Tamil, Telugu, Assamese, Kannada,
NeGP with the vision: ‘Make all Government services Malayalam, Marathi, Oriya, Punjabi, and Urdu, have been
accessible to the common man in his locality through released in the public domain.
common service delivery outlets and ensure efficiency,
The Information Technology Amendment Bill, introduced
transparency and reliability of such services at affordable
in the Parliament in December 2006, was referred to the
costs to realise the basic needs of the common man’.
Parliament Standing Committee which has presented its
The government has approved a scheme for facilitating report to both the Houses of Parliament.
the establishment of one lakh broadband Internet-
for sustained and organized growth of micro, small, and medium enterprises. As an apex/
nodal organ, it provides a comprehensive range of facilities and services to the MSMEs
through its network of 30 Small Industries Service Institutes (SISIs), 28 branch SISIs, four
Regional Testing Centres (RTCs), seven Field Testing Stations (FTSs), six Process-cum-
Product Development Centres (PPDCs), 11 Tool Rooms, and two Specialised Institutes, viz.,
Institute for Design of Electrical Measuring Instruments (IDEMI) and Electronics Service
and Training Centre (ESTC).
National Small Industries Corporation Limited

The National Small Industries
The National Small Industries Corporation, since its inception in 1955, has been working with
Corporation, since its inception its mission of promoting, aiding, and fostering the growth of micro and small enterprises.
in 1955, has been working with It has been working to promote the interest of micro and small enterprises and to enhance
its mission of promoting, aid- their competitiveness by providing integrated support services under marketing, technology,
ing, and fostering the growth of
micro and small enterprises. finance, and Support services.
The corporation has been introducing several new schemes from time to time for meet-
ing the change aspirations of the micro and small enterprises. The main objective of all these
schemes is to promote the interest of the micro and small enterprises and to put them in com-
petitive and advantageous positions. The schemes of NSIC have been found to be very useful
in stimulating the growth of micro and small enterprises in the country. The information
pertaining to the schemes planned to be continued/implemented in the Eleventh Plan period
by the corporation with government support is given as follows.
Performance and Credit Rating

NSIC, in consultation with Rating Agencies and Indian Banks Association, has formulated NSIC, in consultation with Rat-
Performance and Credit Rating Scheme for small industries. The scheme is aimed at creating Agencies and Indian Banks
ing awareness amongst small enterprises, about the strengths and weaknesses of their exist- Association, has formulated
Performance and Credit Rating
ing operations, and at providing them with an opportunity to enhance their organizational Scheme for small industries.
strengths and credit worthiness. The rating under the scheme serves as a trusted third-party
opinion on the capabilities and creditworthiness of the small enterprises. An independent
rating by an accredited rating agency has a good acceptance from the banks/financial institu-
tions, customers/buyers, and vendors. Under this scheme, rating fees to be paid by the small
enterprises is subsidised for the first year only and that is subject to a maximum of 75 per cent
of the fee or ` 40,000, whichever is less.
Marketing Assistance Scheme

This is an ongoing old scheme. Marketing, a strategic tool for business development, is criti- NSIC acts as a facilitator to
cal for the growth and survival of small enterprises in today’s intensely competitive market. promote marketing efforts and
One of the major challenges before the small enterprises is to market their products/services. enhance the competency of the
NSIC acts as a facilitator to promote marketing efforts and enhance the competency small enterprises for capturing
the new market opportunities.
of the small enterprises for capturing the new market opportunities by way of organizing
or participating in various domestic and international exhibitions/trade fairs, buyer–seller
meets, intensive campaigns, seminars, and consortia formation. NSIC helps small enterprises
to participate in international/national exhibitions/trade fairs at the subsidized rates to
exhibit and market their products. Participation in these events provides small enterprises an
exposure to the national/international markets.
Buyer–seller meets are being organized to bring bulk buyers/government departments
and micro and small enterprises together on one platform. This enables the micro and small
enterprises to know the requirements of bulk buyers, on the one hand, and help the bulk
buyers to know the capabilities of micro and small enterprises for their purchases, on the
other hand. Intensive campaigns and seminars are organised all over the country to dissemi-
nate/propagate the various schemes for the benefit of the small enterprises and to enrich the
knowledge of small enterprises regarding latest developments, quality standards, and so on.
In addition, the Ministry has three national-level entrepreneurship development The Ministry has three national-
institutes, viz., Indian Institute for Entrepreneurship (IIE), Guwahati; National Institute for level entrepreneurship devel-
Entrepreneurship and Small Business Development (NIESBUD), Noida; and National Insti- opment institutes, viz., Indian
tute for Micro, Small, and Medium Enterprises (NIMSME), Hyderabad. Institute for Entrepreneurship
(IIE), Guwahati; National Insti-
tute for Entrepreneurship and
Definition of Micro, Small, and Medium Small Business Development
(NIESBUD), Noida; and National
Enterprises Institute for Micro, Small, and
Medium Enterprises (NIMSME),
Hyderabad.
A. Manufacturing Enterprises
1. A micro enterprise, where the investment in plant and machinery does not exceed
` 25 lakh;
2. A small enterprise, where the investment in plant and machinery is more than
` 25 lakh but does not exceed ` 5 crore; and
3. A medium enterprise, where the investment in plant and machinery is more than
` 5 crore but does not exceed ` 10 crore.
B. Service Enterprises
1. A micro enterprise, where the investment in equipment does not exceed ` 10 lakh,
2. A small enterprise, where the investment in equipment is more than ` 10 lakh but
does not exceed ` 2 crore, and
3. A medium enterprise, where the investment in equipment is more than ` 2 crore but
does not exceed ` 5 crore.
Performance of MSE Sector

As per the third All India Census held for the year 2001–02, there were 105.21 lakh enter-
prises (registered and unregistered) in the country, out of which 13.75 lakh were registered
working enterprises and 91.46 lakh, unregistered enterprises. Their contribution to produc-
tion was ` 282,270 crore and to employment was 249.32 lakh persons. It is estimated that dur-
ing 2006–07 (provisional), the number of units has increased to 128.44 lakh 123.42 lakh in
the previous year, registering a growth rate of 4.1 per cent. The value of production at current
prices is estimated to have increased by 15.8 per cent to ` 497,842 crore from ` 429,796 crore.
The employment is estimated to have increased to 312.52 lakh from 299.85 lakh persons in
the previous year. The MSE sector has been registering a higher growth rate than the overall
industrial sector in the past few years consistently.
Infrastructure Development
For setting up of industrial For setting up of industrial estates and to develop infrastructure facilities like power distri-
estates and to develop infra- bution network, water, telecommunication, drainage and pollution-control facilities, roads,
structure facilities. banks, raw materials, storage and marketing outlets, common service facilities and techno-
logical back up services, and so on, for MSMEs, the Integrated Infrastructural Development
The Integrated Infrastructural
Development (IID) Scheme was (IID) Scheme was launched in 1994. The scheme covers districts, which are not covered
launched in 1994. under the growth centres Scheme. The scheme covers rural as well as urban areas with a
provision of 50 per cent reservation for rural areas and 50 per cent industrial plots are to
be reserved for the tiny units. The scheme also provides for upgradation/strengthening of
the infrastructural facilities in the existing old industrial estates. The estimated cost to set
up an IID Centre is ` 5 crore (excluding cost of land). The Central government provides
40 per cent (up to a maximum of ` 2 crore) in case of general states and up to 80 per cent
(up to a maximum of ` 4 crore) for Northeast Region (including Sikkim), J&K, Himachal
Pradesh, and Uttrakhand, as grant and remaining amount could be loan from SIDBI/Banks/
financial Institutions or the state funds. For the promotion and development of MSEs in the
country, cluster approach is one of the thrust areas of the Ministry in the Eleventh Plan. The
IID Scheme has been subsumed under the Micro and Small Enterprise Cluster Development
Programme (MSECDP). All the features of the IID Scheme have been retained and will be
covered as ‘New Clusters’ under MSECDP.
Technology Upgradation in MSE Sector

With a view to enhancing the
competitiveness of this sector, The opening up of the economy has exposed MSE sector to global and domestic competition.
the government has taken vari- With a view to enhancing the competitiveness of this sector, the government has taken vari-
ous measures. ous measures, which include: (i) Assistance to Industry Associations for setting up of testing
centres and to state governments and their autonomous bodies for modernisation/expansion
of their quality marking centres; (ii) Regional testing centres and field testing stations to pro-
vide testing services and services for quality upgradation; (iii) Implementation of MSECDP,
under which 91 clusters have been taken up, including national programme for the develop-
ment of toy, stone, machine tools, and hand-tool industry in collaboration with UNIDO;
(iv) A scheme of promoting ISO 9000/14001 Certification under which SSI units are given
financial support by way of reimbursing 75 per cent of their expenditure to obtain certifica-
tion, subject to a maximum of ` 75,000 per unit; and (v) Setting up of a biotechnology cell
in SIDO.
Further, a scheme on credit-linked capital subsidy was launched in the year 2000 to fa- A scheme on credit-linked capi-
cilitate technology upgradation of small enterprises. Under the scheme, capital subsidy of tal subsidy was launched in the
12 per cent was provided on institutional finance availed by the SSI units for induction of year 2000 to facilitate technol-
ogy upgradation of small enter-
well-established and improved technology in select sub-sectors/products up to a maximum prises.
ceiling of ` 40 lakh. The scheme has been revised with effect from 29 September 2005. Under
the revised scheme, the rate of upfront capital subsidy has been enhanced to 15 per cent and
ceiling on loan has been raised to ` 1 crore, the admissible capital subsidy is calculated with
reference to purchase price of plant and machinery, instead of the term loan disbursed to the
beneficiary unit.
Measures for Export Promotion

Export promotion from the MSE sector has been accorded a high priority. The following
schemes have been formulated to help MSEs in exporting their products:
1. Products of MSE exporters are displayed in international exhibitions and the expend-
iture incurred is reimbursed by the government;
2. To acquaint MSE exporters with latest packaging standards, techniques, and so on,
training programme on packaging for exporters are organized in various parts of the
country in association with the Indian Institute of Packaging;
3. Under the MSE Marketing Development Assistance (MDA) Scheme, assistance is
provided to individuals for participation in overseas fairs/exhibitions, overseas study
tours, or tours of individuals as member of a trade delegation going abroad. The
scheme also offers assistance for
a. Sector-specific market study by MSE Associations/Export Promotion Councils/
Federation of Indian Export Organization;
b. Initiating/contesting anti-dumping cases by MSE Associations; and
c. Reimbursement of 75 per cent of the one-time registration fee and annual fee
(recurring for first three years) charged by GS1 India (formerly EAN India) for
adoption of bar coding.
Entrepreneurship and Skill Development

The Ministry conducts Entrepreneurship Development Programmes (EDPs) to cultivate the The Ministry conducts Entre-
skill in unemployed youths for setting up MSEs. Further, under the Management Devel- preneurship Development Pro-
opment Programmes (MDPs), existing MSE entrepreneurs are provided training on vari- grammes (EDPs) to cultivate
the skill in unemployed youths
ous areas to develop skills in management to improve their decision-making capabilities, for setting up MSEs.
resulting in higher productivity and profitability. To encourage more entrepreneurs from
SC/ST, women, and physically challenged groups, The Ministry of MSME provides a stipend
of ` 500 per capita per month to them during the period of the training.
C ase
The Kerala State Industrial Development Corporation (KSIDC) has mooted an amalgamation
arrangement of a number of troubled seafood processing units to form a single entity, in a bid
to help them overcome their present financial crises.
There are around 90 sick seafood units in India, against many of whom the Debt Recovery,
Tribunal has initiated proceedings. Collectively, these units owe around ` 260 crore to vari-
ous banks and financial institutions. More than half of this amount is accumulated interest
on loans. KSIDC, which has around 20 units, conducted a study on the seafood industry
before coming up with the proposal for amalgamation, an official said.
The Seafood Exporters Association of India (SEAI) and the Forum of Revival and
Reconstruction of Seafood Export Industries in India are now supporting the proposal which
suggests that 10 or more units be amalgamated into one company so that it will have a strong-
er financial base and better economies of scale.
As a first step towards this plan, six units in Kerala have come together to be amalga-
mated into a single firm. However, this unit now requires approvals of their tenders to go
ahead with the scheme for amalgamation, which is an optional scheme for the forum.
According to SEAI, the seafood unit started incurring losses and eventually turned sick
because of a number of reasons that were ‘beyond their control’. Incidents, such as ‘blacklist-
ing of cooked shrimp’ by the United States and, ‘ban on Indian seafood’ announced by the
European Economic community (EEC) are factors that contributed to the weakening of the
industry. On the other hand, processing units had to invest in modernizing their facilities to
remain competitive in the global markets, but they are facing financial problems. There is not
sufficient raw material available and competition in the sector is unhealthy too.
The SEAI and the Forum are now seeking the help of the Indian Banks Association and
the Finance Ministry to settle their dues to the banks.
According to SEAI, a similar model of amalgamation was tried out successfully in Ice-
land 20 years ago. About 100 sick, traditional seafood units in the country were amalgamated
into 10 units to achieve a turnaround.
Case Questions
What are the reasons for sickness of seafood units? Do you support the strategy of SEAI for
revival and reconstruction?
SUMMARY
India started her quest for industrial development after inde- The Industrial Policy Statement of 1973 identified high-priority
pendence in 1947. The Industrial Policy Resolution of 1948 industries where investments from large industrial houses
not only defined the broad contours of development, it also and foreign companies would be permitted. The Industrial
delineated the role of the state in industrial development Policy Statement of 1977 laid emphasis on decentralization
both as an entrepreneur and as an authority. The Industrial and on the role of small-scale-, tiny-, and cottage industries.
Policy Resolution of 1956 categorized industries which could The Industrial Policy Statement of 1980 focused attention on
be the exclusive responsibility of the state or would progres- the need for promoting competition in the domestic market,
sively come under state control and others. technology upgradation, and modernisation. The policy laid
Earmarking the pre-eminent position of the public sector, it the foundation for an increasingly competitive export base
envisaged private sector coexisting with the state, and private and for encouraging foreign investment in high-technology
sector attempted to give flexibility to the policy framework. areas. A number of policy and procedural changes were
introduced in 1985 and 1986 that aimed at increasing industrial achievements and to accelerate the process of
productivity, reducing costs, and improving quality. making Indian industry internationally competitive. The proc-
The industrial policy initiatives undertaken by the government ess of reform has been continuous.
since July 1991 have been designed to build on the past
Key W o r d s
● Ancillary Units ● Foreign Investment ● Sick Unit
● Exim Policy (Export–Import policy) ● Gross Domestic Product (GDP) ● Small-Scale Industry (SSI)
● Exim Scrip ● Industrial Policy ● Technology Development Cell
● Export Development Centre ● Open General Licence (OGL) (TDC)
● Technology Transfer
● Export House ● Public Sector
● Tiny Units
● Export-Promotion Zones ● Registered Exporters
● Trading House
● Foreign Exchange Certificates (FECs) ● Replenishment (REP)
Q u est i o n s
1. Discuss the main features of the Industrial Policy 8. Analyse the recent slowdown in industrial sector and
Resolution of 1956. the factors responsible for the same.
2. Review the industrial policies of the Government of 9. Explain the role played by the public sector undertak-
India since 1948. ings in the industrial development of the country.
3. Discuss the main features of the Industrial Policy of 10. Examine critically the new Small-Scale Industrial
1977. Policy of 1991.
4. List the main features of the Industrial Policy State- 11. Explain the role played by the small-scale sector in
ment of 1980. employment generation in the country.
5. The Industrial Policy Resolution of 1956 is recog- 12. Explain the role played by the private sector in the
nised and regarded as the Magna Carta of Indian industrial development of the country.
industrialisation. Discuss. 13. Trace the evaluation of industrial policies in India
6. Explain the importance and role of industries in the after independence.
economic development of the country. 14. Write a note on the Industrial Policy Statement of
7. Discuss the role of private sector in the light of New 1991. Discuss critically the provisions incorporated
Industrial Policy of 1991. in the policy to encourage foreign investments.
Refe r e n ces
n Government of India. India 2004: A Reference Annual, n Prasad, C. S. (2005). India: Economic Policies and
Complied and Edited by Research, Reference, and Train- Performance: 1947–48 to 2004–05: Year-Wise Economic
ing Division, Publications Division, Ministry of Informa- Review of the Indian Economy Since Independence. New
tion and Broad Casting, Government of India. Delhi: New Century Pub.
n Michale, V. P. (1999). Globalisation, Liberalization and n Sengupta, D. N. and A. Sen (2004). Economics of
Strategic Management, 1st ed. New Delhi: Himalaya Business Policy. New Delhi: Oxford University Press.
Publishing House. n Virmani, A. (2004). Accelerating Growth and Poverty
n Mittal, A. C. and S. P. Sharma (2002). Industrial Reduction: A Policy Framework for India’s Development.
Economics: Issues and Policies. Jaipur: RBSA Pub. New Delhi: Academic Foundation.
n Nambiar, V. (2003). Liberalization and Development
(Agenda for Economic Reforms). New Delhi: Common-
wealth.
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Industrial Licensing
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• Industrial Licensing in India 116 • Annexure II 135
• Objectives of Industrial Licensing 117 • Annexure III 136
• Industrial Licensing Act of 1951 117 • Summary 140
• Industrial Licensing Policy 123 • Key Words 141
• Policy Decisions 130 • Questions 141
• Recent Industrial Licensing Policy 133 • References 141
• Annexure I 135
INDUSTRIAL LICENSING IN INDIA

The Constitution of India in The Constitution of India in its Preamble and the Directive Principles of State Policy laid down
its Preamble and the Direc- that a state has the power to control and regulate economic activities. The Directive Principles
tive Principles of State Policy
of State Policy specifically require the state to direct its policy towards securing the following:
laid down that a state has the
power to control and regulate 1. Equal right of men and women to adequate means of livelihood
economic activities.
2. Distribution of ownership and control of the material resources of the community to
the common good
3. To ensure that the economic system does not result in concentration of wealth and
The Constitution of India means of production to the common detriment
imposed two important limita-
tions on the powers of the cen-
4. Equal pay for equal work for both men and women
tral government in the matter
5. To protect the health and strength of workers and tender age of children.
of regulation of business, which
are as follows: The Constitution of India imposed two important limitations on the powers of the central
• Divisionof powers between government in the matter of regulation of business, which are as follows:
the states and the central
government 1. Division of powers between the states and the central government
• Fundamental rights
2. Fundamental rights
The Planning Commission that It is important to note that much of the powers that the central government in India exercises
was created in 1950, as an in the economic field is not derived from the Constitution of India, but from the system of
executive organ of the central
planning that has been in operation since 1951. The Planning Commission that was created
government, is charged with the
responsibility of determining in 1950, as an executive organ of the central government, is charged with the responsibility
the size of the five-year plans of determining the size of the five-year plans and the annual plans of the state, including
and the annual plans of the the pattern of financing and allocating a central plan assistance to the states. The Planning
state, including the pattern
of financing and allocating a
Commission also determines the plan size of the central ministries and approves all major
central plan assistance to the plans and projects of these ministries. Planning assumes a commanding position in India’s
states. economic system.
Industrial Licensing | 117
OBJECTIVES OF INDUSTRIAL LICENSING

The basic objectives of industrial licensing are as follows:
1. Planned industrial development through appropriate regulations and controls
2. Balanced industrial growth and development by regulating the, proper location of
industrial units and check regional disparities
3. Directing industrial investment in accordance with plan priorities
4. Ensuring government control over industrial activities in India
5. Regulating the industrial capacity as per targets set for planned economy
6. Preventing concentration of industrial and economic power and monopoly
7. Checking unbalanced growth of industrial establishments and ensuring economic
size of industrial units
8. Encouraging healthy entrepreneurship, while discouraging unhealthy competition,
monopoly, and restrictive industrial practices
9. Broadening the industrial base in India through new entrepreneurship development
and ensuring industrial dispersion
10. Protecting of small-scale industries against undue competition of large-scale
industries
11. Utilizing full capacity of large-scale industries
12. Utilizing appropriate technology and
13. Licence was necessary to carry on an industrial activity. Licensing is mandatory in
respect of starting a new unit, change in product, manufacturing a new product, ef-
fecting a substantial expansion by an established unit.
INDUSTRIAL LICENSING ACT OF 1951

Industrial licensing became a part of the industrial economy of India with the passing of Industrial licensing became a
Industries (Development and Regulation [D&R]) Act, 1951. Hence, before we go into the part of the industrial economy
of India with the passing of
details of industrial licensing, a brief discussion of the salient features of this Act is relevant. Industries (Development and
Regulation) Act, 1951.
The Industries (Development and Regulation
[D&R]) Act of 1951
This Act came into effect on 8 May, 1952. It had three important objectives:
1. To implement the industrial policy
2. To ensure regulation and development of important industries and
3. To ensure planning and future development of new undertakings
An industrial undertaking, according to the Act, pertains to a scheduled industry carried on
in one or more factories by any person or authority, including the government. At the same
time, a factory means any premises, including the precincts, thereof, in any part of which a
manufacturing process is being carried on or so is ordinarily carried on
1. with the aid of power if 50 or more workers are working or were working, thereon, on
any day of the preceding 12 months; or
2. without the aid of power if 100 or more workers are working or were working, ther-
eon, any day of the preceding 12 months.
Further, in no part of such premises should any manufacturing process be carried on with
the aid of power. The Act defined ‘scheduled industry’ in Section 3(1) as any of the indus-
tries specified in the First Schedule of the Act, which includes 38 industries engaged in the
manufacture or production of any of the articles mentioned under each of the headings or
subheadings given in the schedule.
An owner, according to Section 3(f ), in relation to an industrial undertaking, is a person
who or the authority which, has the ultimate control over the affairs of the undertaking.
Where the said affairs are entrusted to a manager or managing director, such manager or
managing director shall be deemed to be the owner of the undertaking. The Act applies to the
The Act applies to the whole whole of India, including the State of J&K, and to the industrial undertakings, manufacturing
of India, including the State any of the products mentioned in the First Schedule, that is, where the manufacturing process
of J&K, and to the industrial is carried on
undertakings, manufacturing
any of the products mentioned 1. with the aid of power, and employing or employed on any day of the preceding 12
in the First Schedule, that is, months 50 or more workers; or
where the manufacturing pro-
cess is carried on. 2. without the aid of power, provided that 100 or more workers are working or worked
on any day of the preceding 12 months.
The Act is applicable to industrial undertakings.
The Act contains 31 sections Provisions of Industries (D&R) Act of 1951

which can be broadly classified
as
The Act contains 31 sections which can be broadly classified as
• Sections dealing with Preven- 1. Sections dealing with Preventive Provision,
tive Provision,
• Curative Provision, 2. Curative Provision,
• Creative Provision, and 3. Creative Provision, and
• Other Provisions.
4. Other Provisions.
Preventive Provisions
Three types of provisions are included in the preventive provisions, viz., registration and
licensing provisions, investigation provisions, and revocation of licence provisions. Owners
of all the existing undertakings other than the central government were expected to get their
industrial establishments registered within a stipulated period, according to Section 10 of the
Act. Extensive provisions were made in the Act for industrial licensing, viz.,
1. Licensing of new undertakings
2. Production of new products
3. Licensing for expansion
4. Shifting location and
5. Licensing to carry on business itself
Section 11 of the Act stipulates that no person or authority, including a state government
(other than the central government), shall establish a new industrial establishment w ithout
a licence issued by the central government, while Section 11A stipulates that no industrial
e stablishment (other than those owned by the central government) registered under
Section 10 or licensed under Section 11 shall produce or manufacture a new product without
any licence from the central government. According to Section 13, no industrial undertaking
(other than the central government) can make substantial expansion without a licence issued
by the central government. Generally speaking, any expansion exceeding 25 per cent of the
existing capacity can be considered substantial. This section also provides that the location
should not be changed without a proper licence granted for establishing new undertakings,
or manufacturing new products on finding that the licence failed to establish or take effective
steps to implement the licence within the time allowed, without a reasonable cause.
Curative Provisions
Curative provisions include
1. Taking over the management or control industrial enterprises, and
2. Control of supply, price, and distribution of certain commodities.
Section 18A empowers the central government to authorize any person or body of persons
to take over or control any industrial undertaking if it is confirmed, after investigation, that
the concerned undertaking has failed to comply with the directions issued under Section 16
of the Act, and that an undertaking subject to investigation, under Section 51, is found being
managed in a manner detrimental to the scheduled industry concerned or detrimental to
public interest. In such cases, the period of takeover can be to a maximum of 12 years, first
for five years and then can be extended by further two-year periods. Section 18AA provides
for taking over even without an investigation.
According to Section 18FA, the central government can authorize any person or body
of persons to take over, any industrial undertaking under liquidation, with the permission
of the concerned High Court. Section 18FC, at the same time, empowers the central govern-
ment to sell an undertaking as a running concern or to reconstruct the same in the inter-
est of the general public or in the interest of the shareholders of the company. In order to
ensure equitable distribution and fair prices of any article or class of articles relating to any
scheduled industry, the central government may, by a notified order, exercise control of price, In order to ensure equitable dis-
supply, or distribution. tribution and fair prices of any
article or class of articles relating
to any scheduled industry, the
Creative Provisions central government may, by
a notified order, exercise con-
Creative provisions represent the central government’s concern for cooperation with indus- trol of price, supply, or distribu-
try, labour, and consumers. Development Councils consisting of members capable of repre- tion.
senting the interests of the scheduled industry or group of industries, persons with special
knowledge, persons representing the interest of workers, and people representing the Second
Schedule of the Act also laid down the functions of such councils. The central government has
retained the powers to license,
The central government has retained the powers to license, take over, permit expansion, take over, permit expansion,
or levy and collect any cess on goods manufactured in any scheduled industry. Section 9 of or levy and collect any cess
the Act provides for the levy and collection of cess on all goods manufactured in any sched- on goods manufactured in any
uled industry. In contravention of the provisions of the Act or for a false statement made by scheduled industry. Section
9 of the Act provides for the
any person, a fine up to ` 5,000 and/or imprisonment up to six months are provided in the levy and collection of cess on
Act. Thus, the Industries (Development and Regulation) Act, 1951 has made extensive provi- all goods manufactured in any
sions for industrial licensing and regulations. scheduled industry.
Licensing was mandatory in respect of

a. Starting a new unit,
b. Manufacturing a new product by an established unit,
c. Effecting a substantial expansion by an established unit, and
d. Changing a part or whole of an established undertaking, if the articles manufactured
come under the First Schedule of the Industries (D&R) Act. Actually speaking, in or-
der to carry on business (an industrial activity) licence was necessary.
Letter of Intent
Any industrial activity, beyond Any industrial activity, beyond the exemption limit, has to obtain a licence from the Secre-
the exemption limit, has to tariat for Industrial Approvals (SIA), a division of the Ministry of Industrial Development, in
obtain a licence from the Sec-
advance. An application that satisfies all the necessary conditions would be approved. If no
retariat for Industrial Approvals
(SIA), a division of the Ministry further clearances like foreign collaboration, capital goods imports, and so on are involved,
of Industrial Development, in no further conditions are to be fulfilled, and an industrial licence is normally issued. A licence
advance. is initially valid for two years. The commercial production must start within this period.
However, this period may be extended twice for one year each, provided the ministry is con-
vinced by valid reasons. The Administrative Ministry should be approached for extension of
time. Production as per the licensed capacity must start within the specified period.
However, if some more clarification on important aspects, such as foreign collaboration,
capital goods imports, and so on are to be provided or conditions have to be fulfilled, a Let-
An LOI is granted if clarification
on foreign collaboration, capital
ter of Intent (LOI) would be granted. An LOI was initially valid for 12 months. Further, two
good imports is provided. It is extensions of six months each were also provided for. Later, in 1988, the period for LOI was
issued for three years and can- extended to three years. In the event of the concern’s inability to convert the LOI to an in-
not be extended beyond a maxi- dustrial licence within the stipulated period of three years, the LOI holder may apply for an
mum period of five years.
extension. Under normal circumstances, no LOI will be extended beyond a maximum period
of five years.
An LOI is converted to an industrial licence by the Government of India for setting up an
industrial undertaking, provided the applicant has made all financial arrangements for the
project, and other arrangements for the movement of raw materials and finished goods. Ad-
equate steps must also be taken by the applicant for prevention of pollution, effluent disposal,
installing pollution-control equipment, and so on. The holder of an LOI must obtain govern-
ment permission for import of capital goods, for foreign collaboration, and foreign tie-ups,
if any. The central government must also be informed of the manufacturing programme in a
phased manner, which should be carried out to its satisfaction.
Thus, industrial licensing has become an essential aspect of the industrial policy of the
Government of India. There are, however, some areas of exception. Certain exemptions are
granted for obtaining industrial licences.
Exemptions from Licensing

Although licensing is widespread, 27 broad categories of industries are exempted from
licensing. These include automotive ancillaries, agricultural implements, cycles, leather
goods, glassware, and so on. Export-oriented units (EOUs), import-substitution items, latest
technology industries, capital goods industries, which produce mass consumption goods
for lower and middle classes, are considered for exemption if they are not monopolies and
restrictive trade practices (MRTP) and Foreign Exchange Regulation Act (FERA) companies
and if the items are not reserved for the small-scale sector. However, even multinationals are
permitted to hold equities up to 49 per cent in selected small-scale industries according to a

government decision taken in 1995. Besides, exemption was granted for 82 bulk drugs and
their formulations. Re-endorsement of licensed capacity and group licensing for 32 groups
was considered.
Exemptions were specifically granted in the following items:
1. Items relating to an industry which is not included in the First Schedule of the Act
2. Items to be manufactured in an undertaking which does not come under the defini-
tion of a ‘factory’ under the Industries (D&R) Act, 1951
3. Items manufactured in the delicensed sector of investment up to ` 25 crore in fixed
assets in non-backward areas and up to ` 75 crore in backward areas (earlier limits
were ` 15 crore and ` 60 crore, respectively)
4. Expansion which does not come under substantial expansion, that is, up to 25 per cent
of the existing capacity
5. Small-scale units subject to certain conditions and
6. Items which do not fall under the definition of ‘new article’
Spectacular exemptions were announced in July 1991 in a Notification (477-E) by the Gov- Spectacular exemptions were
ernment of India. Except in respect of 18 items, industrial licensing was done away with. announced in July 1991 in a
Industrial undertakings have been exempted from the operation of Section 10, 11, 11A, and Notification (477-E) by the Gov-
ernment of India. Except in
13 of the Industries (D&R) Act, 1951 subject to fulfillment of certain conditions. Section 10 respect of 18 items, industrial
refers to the requirement of registration of existing industrial units. Section 11 refers to the licensing was done away with.
requirement of licensing of new industrial undertaking. Section 11A deals with licences for
the production of new articles. Section 13 refers inter alia to the requirement of licensing for
effecting substantial expansion.
Industrial Licensing: A Critical Approach

Ever since the introduction of industrial licensing policy, it underwent considerable amount Ever since the introduction of
of revision, even though it was subjected to widespread criticism. Some of the grounds under industrial licensing policy,
which it has been criticised may, therefore, be relevant here. it underwent considerable
amount of revision, even though
It is argued that most of the objectives of industrial licensing could not be achieved in it was subjected to widespread
spite of its operation for over four decades. It could not considerably regulate industrial criticism.
location. Although concentration of industries to given areas and state could not be restricted,
concentration of economic power has been progressively going on. Similarly, industrial
investment, particularly private investment, could not be fully streamlined in accordance
with the plan priorities. On the contrary, it stood in the way of unrestricted industrial growth
in the country. Although the government could ensure some control on industrialization, it
resulted in redtapism, corruption, and nepotism. At the same time, it could not fully succeed
in preventing concentration of monopoly and economic power. Much control could also not
be put on technology utilization. Even though channelising
Even though channelizing investment in priority areas was one of the most important investment in priority areas
objectives of economic planning for which industrial licensing was considered to be a tool, this was one of the most important
objective could not be achieved in the expected manner. Heavy and capital goods industries objectives of economic plan-
ning for which industrial
were encouraged in the initial stages for which public sector investment was channelized. licensing was considered to be
A balanced industrial development could not be achieved as expected, though some amount a tool, this objective could not
of success could be achieved through public sector policies. The development of an industrial be achieved in the expected
base which the Indian economy could achieve through planned efforts cannot be ignored. manner.
However, this success is not the result of industrial licensing. On the contrary, licensing, it is
widely criticized, stood in the way of unrestricted industrial development.
Curbing monopoly, concentration of economic power, and accumulation of resources
Curbing monopoly, concentra-
were the aims of industrial licensing when it was introduced. The Indian economy is subject
tion of economic power, and ac-
cumulation of resources were to these ills even after more than four decades of industrial licensing. At the same time, it acted
the aims of industrial licensing as an obstruction, on the one hand, and facilitated corruption, red-tapism, and bureaucratic
when it was introduced. pressure, on the other. The Dutt Committee rightly pointed out the fact that licensing helped
the large and monopoly houses to grow further. This was, primarily, because economic fac-
tors were seldom taken into consideration while technical considerations guided the licens-
ing decisions. The Monopolies Inquiry Commission had indicated, as early as 1965, that large
and monopoly houses were well placed and well informed to gain most of the licences issued,
since they had a greater comparative advantage.
Amalgamations, takeovers, and virtual purchases of small houses by large monopoly
houses were not rare. Thereby, large houses became larger and dominant undertakings be-
came monopoly houses. Large and monopoly business houses, or units associated with
them, enjoyed a comparative advantage, while new entrants and potential entrepreneurs were
scared away, particularly because of administrative lapses, bureaucratic restrictions, corrupt
practices, and disenchantment with the restrictive practices in the administrative ministries.
The potential entry of new entrepreneurs was, therefore, minimized.
The Licensing Committee considered the cases under the criteria, which it deemed fit
from time to time, without well-defined policy guidelines. A long list of pending cases existed
Large and influencial business though cases which received their attention by hook or by crook could get their clearance.
houses could influence the
officials easily and could get Large and influencial business houses could influence the officials easily and could get their
their cases cleared in time. cases cleared in time. Thus, large business houses grew larger, defeating the very objective of
Thus, large business houses licensing. Moreover, many unviable projects were approved and many viable projects were
grew larger, defeating the very
pushed to the background. Actually, the method of choosing the cases itself was not based on
objective of licensing.
any relevant criterion.
Although influential persons and business houses could obtain clearance within the
expected time frame by various ways, it was a time-consuming affair in respect of most of
the cases, which affected the enthusiasm of the entrepreneurs and initiators. Such an inordi-
nate delay on the part of the licensing mechanism substantially retarded the very industrial
growth and killed the initiatives of many entrepreneurs, which was noted by the Estimates
Committee of 1967–68.
The Licence Raj Period had been a period of restrictions, redtapism, and corruption.
Restrictions on large houses, items of commodities, the quantity produced, expansions, and
everything connected to industry, characteristised the Licence Raj. The MRTP Act and FERA
also stood in the way of industrial development and industrialization. At the same time, pro-
liferation of uneconomic units, promoted by influential business houses and individuals, was
Due to the industrial licenc- the order of the day.
ing policy along with MRTP Act While licensing acted as an obstruction against unrestricted industrial growth, it did not
and FERA, the inflow of foreign
capital, technology, processes, provide any clear-cut guidelines about industrial location. Hence, there was a concentration
and, thereby, the speedy mod- of industries in and around potential urban centres while other areas remained industrially
ernisation of the industrial sec- undeveloped, resulting in an unbalanced industrialization.
tor were adversely affected. In
Foreign investment was restricted from time to time, not only with the help of industrial
spite of the criticism, licensing
had an important role to play licensing policy, but with the help of the MRTP Act and FERA. This affected the inflow of
in regulating, controlling, and foreign capital, technology, and processes and, thereby, the speedy modernisation of the in-
coordinating the economic dustrial sector. Some multinationals like Coca Cola and IBM even had to wind up their direct
activities in the formative stage
of the economy of free India.
operations in India. The government later realized the mistake of this policy and introduced
the liberalization policy.
Inspite of the criticism levelled against the licensing policy, licensing had an important
role to play in regulating, controlling, and coordinating the economic activities in the forma-
tive stage of the economy of free India. However, when the government felt the need for
greater liberalization, economic liberalization was introduced without hesitation. Although
licensing has been relaxed gradually, it is still in force for some items.
INDUSTRIAL LICENSING POLICY

The industrial licensing policy was laid down to be complementary to the industrial policy The industrial licensing policy
resolution announced by the Government of India from time to time. Industrial licensing in was laid down to be comple-
India can be studied in the following stages: mentary to the industrial policy
resolution announced by the
1. The Industries (D&R) Act, 1951 Government of India from time
to time.
2. Industrial Licensing Policy, 1951–60
3. Industrial Licensing Policy, 1960–70
4. Industrial licensing policy, 1970–77
5. Industrial Policy Statement, 1980–90 and
6. Liberalization in industrial licensing, 1991 and after
Following are some of the details of each policy:
The Industries (D&R) Act of 1951

This Act has been described as ‘the single most important piece of economic development
legislation’ in our legal structure. Along with the Companies Act, 1956, and the MRTP Act,
1969, it can be said to confer on the government powers of almost total regulation and con-
trol over the working of the private industry and corporate sector in a manner that is almost
unique.
Main Provisions
The important provisions of the Act are as follows:
1. All existing industrial undertakings in the scheduled industries, that is, industries
which are listed in the First Schedule of this Act, should be registered with the gov-
ernment within the prescribed period and issued with a certificate of registration
(Section 10).
2. Section 11 of the Act says that no new industrial undertakings of a major size can be
started in the scheduled industry.
3. It is provided in the Act that an industrial undertaking cannot change the location of
unit without the express permission of the central government.
4. Section 12 states that the central government can revoke the registration of licence, in
case of any misrepresentation and so on by the party concerned or failure on the part
of the party to take effective steps.
5. Under Section 15 of the Act, the government can order an investigation into the
working of an industrial undertaking.
6. The government can, under Section 16 of the Act, issue directions to the manage-
ment in respect of prices, production, quality, and other areas of its performance for
the progress of the industry and country’s economic development if investigation
demands so.
7. Section 18 provides that in the event of the undertaking not carrying out these in-
structions, the government can take over its management for a specific period and
appoint an authorized controller to manage the company.
8. Section 18G gives the central government comprehensive powers to control and regu-
late the supply, distribution, and prices of any of the articles produced by an industry
listed in Schedule A and no order made for this purpose can be called in question in
a court of law.
9. For the purpose of advising the central government on matters concerning the D&R
of scheduled industries, Section 5 of the Act authorizes the establishment of a Central
Advisory Council (CAC) with necessary sub-committees and standing committees.
10. Development councils are to be constituted in respect of each scheduled industry or
group of industries (Section 6).
The development councils along with the CAC for industries represent the more positive
There was an important amend- side of the Act. The idea of such councils was borrowed from the development councils of
ment to the Act in August 1984,
to provide a legal basis for the UK and also shows the influence of the French technique of indicative planning through the
central government—the right modernisation councils.
to issue notifications for reser- There was an important amendment to the Act in August 1984, to provide a legal basis
vation of specific products for for the central government—the right to issue notifications for reservation of specific prod-
small-scale industry.
ucts for small-scale industry. The amended Act asserts the government’s right to issue such
notification in the larger public interest.
Industrial Licensing Policy of 1951–60

Planned economic development Generally speaking, control and planning go hand in hand. Planned economic development
has been accepted as a national has been accepted as a national objective which obviously brings with it the economic control.
objective which obviously brings Industrial licensing has been accepted as a tool for economic control.
with it the economic control.
Industrial licensing has been Industrial licensing prior to 1960 aimed at achieving the following among other things:
accepted as a tool for economic
control.
1. Development of industries and encouraging industrial activity in accordance with
the plan priorities
2. Checking the concentration of economic power
3. Reduction of regional disparities
4. Proper allocation of foreign exchange
5. Development, protection, and encouragement of small-scale industries, and
6. Modernisation of technology and achievement of industrial growth
In the earlier years of indus- In the earlier years of industrial licensing, the licensing policy was generally welcomed by
trial licensing, the licensing the private sector industry, as a happy expression of the government’s declared policy of a
policy was generally welcomed
by the private sector industry,
mixed economy. Most businessmen also welcomed this policy under which the government,
as a happy expression of the through a system of licensing and through an expanding public sector, would control all the
government’s declared policy of strategic points of industry, but private sector industry was also to play an important role in
a mixed economy. future industrial development.
The government’s policy in the 1950s and early 1960s was also liberal, allowing indus-
trial licences without much ado. However, with the gradual drift of the country’s economic
policy towards the ‘socialist pattern of society’, towards ‘sovereignty and supremacy of the
public sector’, and towards the goal of avoiding the concentration of economic power in the
larger business houses, more and more restrictions were sought to be introduced in the pol-
icy of industrial licensing in the late 1960s.
The left-wing politicians and
A wave of criticism of the licensing policy steadily followed. This policy, in early 1960s,
academicians criticised it
came to be the object of criticism from two opposite angles. The left-wing politicians and as having unduly helped the
academicians criticized it as having unduly helped the growth of large business houses and, growth of large business hous-
thus, furthered the concentration of economic power to common detriment. Leaders of pri- es and, thus, furthered the con-
centration of economic power
vate business and their academic supporters criticized it as stifling the industrial growth of to common detriment.
the country and, thus, creating unemployment and large production gaps.
Industrial Licensing Policy of 1960–70

The licensing policy came in for sharp criticism from S.G. Barve, Member of Planning
C ommission, in 1966; from R.K. Hazari, who submitted two reports to the Planning Com-
mission in 1967; from the study team of the Administrative Reforms Commission on
Economic Administration, which submitted a report in 1967–68; and finally from the Indus-
trial Licensing Policy Enquiry Committee (Dutt Committee) in 1969.
The report of the Dutt Committee, 1969 was extremely critical. Its main conclusions were
that the working of the industrial licensing policy had not been consistent with the Industrial
Policy Resolution of 1956. That no specific instruction had been given to the licensing author-
ities, keeping in view the general objective of preventing concentration of economic power
and monopolistic tendencies. That the licensing policy had, by and large, taken forward the The industrial licensing policy
growth of large industrial houses and shut out other entrepreneurs. The report was also criti- came in for sharp criticism from
cal of some unethical practices followed by a section of large business houses, for example, various committees. The main
criticisms levelled against it
multiple applications in different names for the same items, deliberate preemption of capacity.
were promotion of large indus-
A major finding of the committee was that the public financial institutions, in their lend- trial houses and usage of some
ing policies, had shown a great deal of preference for companies belonging to large business unethical practices followed
houses to the exclusion of other entrepreneurs. Thus, some of these houses had built large by a section of large business
houses.
private empires with public money. The committee recommended that, in such cases, the
government should consider converting at least a part of the low-yielding loan to high-yield-
ing equity and, thus, change the character of the enterprises from private sector enterprises to
joint sector enterprises, in which the government and private parties might share both equity
holding and management. In fact, the committee recommended the joint sector as a main
policy instrument against concentration of economic power in private hands.
The report of the Dutt Commit-
The report of the Dutt Committee ushered in a spell of restrictive licensing policy marked tee ushered in a spell of restric-
by suspicion on the part of large business houses and, a generally negative attitude towards tive licensing policy marked by
proposals coming from them. For a few years what mattered more in a licence application suspicion on the part of large
was not the techno-economic merits of the projects, but the source of its sponsorship. If it business houses and, a gener-
ally negative attitude towards
came from a large industrial house or a foreign majority company, it had little chance of proposals coming from them.
approval unless there were some special reasons in its favour.
Industrial Licensing Policies of 1970–80

It banned the entry of large
Industrial Licensing Policy of 1970 industrial houses and for-
eign companies into any field
Following the Dutt Committee Report and also the enactment of the MRTP Act, 1969, except core industries, heavy
the Government of India announced a new industrial licensing policy in February 1970. investment projects, and ex-
port-oriented projects.
It banned the entry of large industrial houses and foreign companies into any field except core
industries, heavy investment projects, and export-oriented projects. Several other restrictive
policies followed:
1. The MRTP Act, 1969, that came into force on 1 June, 1970, introduced control over
(a) All undertakings or groups of interconnected undertakings with assets of
` 20 crore and above, and
(b) The dominant undertakings in cases of substantial expansion or establishing new
undertaking.
1. For such parties, getting an LOI or industrial license was not enough. A separate
approval of the project by the central government under the new Act was also
essential.
2. Following a recommendation made by the Dutt Committee Report, the government
accepted the policy of convertibility of term loans into equity, granted to industry, by
public financial institutions; and it became the standard practice to insert a convert-
ibility clause, as a condition of approval, for all such projects which depended on
substantial term loans.
3. In a bid to reduce the proportion of foreign shareholding in the foreign-majority
companies, the government announced, in 1972, a policy of dilution of the propor-
tion of foreign holding by issuing fresh equity to the Indian public, whenever such a
company would launch a new project. The additional fresh capital to be issued was
to bear a proportion of the project cost, according to a graduated scale. Companies
with foreign holding, of 75 per cent and above, had to issue fresh equity equivalent to
40 per cent.
Another industrial licensing pol- Industrial Licensing Policy of 1973

icy was announced in February
1973, which refined the 1970 Another industrial licensing policy was announced in February 1973, which refined the 1970
policy. The definition of larger policy. The definition of larger industrial houses, as recommended by the Dutt Committee
industrial houses, as recom- and accepted by the 1970 policy, viz., assets exceeding ` 35 crore, was abandoned. In its place,
mended by the Dutt Commit- the definition adopted by Section 20 of the MRTP Act, viz., the assets of a company by itself or
tee and accepted by the 1970
policy, viz., assets exceeding along with assets of interconnected undertakings amounting to ` 20 crore and above, was ac-
` 35 crore, was abandoned. cepted. This removed the contradiction between the definition of a large industrial house, for
licensing proposes under the 1970 policy, and the conception of a large house, on the basis of
interconnected undertaking, defined in the MRTP Act.
The list of the core industries defined by the 1970 policy was also substantially enlarged.
A consolidated list of these industries was attached in Appendix 1 to this policy announce-
ment. These core industries of importance to the national economy or industries having
direct linkage with such core industries or industries with a long-term export potential, large
houses, as now defined, and foreign majority companies will now be eligible to participate in
and contribute to the establishment of industries listed in this appendix, provided the item of
manufacture is not one reserved for the public sector or the small-scale sector. The concept of
heavy investment sector, that is investment of over ` 5 crore, was altogether abandoned.
The existing policy of reservation for the small-scale sector and the policy with regard to
joint sector as a promotional instrument were to continue, without allowing the joint sector
to be used for the entry of large houses, dominant undertakings, and foreign companies.
There were also some procedural changes in October 1973, creating a Project Approval Board
(PAB) to deal with composite applications, seeking approval under the four major procedural
hurdles, simultaneously, viz., licensing, MRTP, capital goods, and Foreign Investment Board.
The policy also introduced a common secretariat, viz., the SIA to receive and process all types
of applications concerning an industrial project—industrial licence applications, capital
goods applications, applications for foreign investment or foreign collaboration, applications
under Section 21–22 of the MRTP Act.
Industrial Licensing Policy of 1977

From around 1974–75, in response to the need for greater productivity and efficiency in the
industrial economy in the wake of the shock of the oil price increases, first in 1973 and again
in 1979, the government initiated a number of measures to relax and liberalise licensing pro- With the change of government
at the Centre, the industrial pol-
visions. icies keep getting revised. The
Meanwhile the Janta Party government, which came to power after the General Elections new industrial policy statement,
of 1977, announced a New Industrial Policy (NIP)Statement on December 23, 1977. It did issued in 1977, provided thrust
not replace the Industrial Policy Resolution of 1956 or the Industrial Licensing Policy of mainly prioritizing small-scale
village, and tiny-sector indus-
1973, but only supplemented them by redefining some of the priorities. tries in future industralization
The Licensing Policy of 1977 provided thrust mainly in two aspects: and secondly, geographical dis-
persal of industries from met-
1. Priority to small-scale, village, and tiny-sector industries in future industrialization ropolitan centres to rural and
and backward areas.
2. Geographical dispersal of industries from metropolitan centres to rural and back-

ward areas
The other aspects covered in the policy were as follows:
3. To provide a fillip to the small-scale sector, over 500 items were reserved (subse- The Licensing Policy of 1977
quently raised to about 800) for the sector provided thrust mainly in two
aspects:
4. To ensure locational redistribution of industry, licenses were to be issued to new in- • Priority to small-scale, vil-
dustrial units, within certain limits of large metropolitan cities having population of lage, and tiny-sector indus-
more than 10 lakh and in urban area with a population of more than 5 lakh, accord- tries in future industrializa-
ing to the 1971 census. tion and
• Geographical dispersal of
5. A District Industrial Centre (DIC) in each district to help the growth of the small- industries from metropolitan
scale sector. These centres were to have adequate decision-making authority and ex- centres to rural and back-
ward areas.
pertise.
Industrial Policy Statement of 1980–90

The general elections of 1980 and the return to power of the Congress Party brought about
the Industrial Policy Statement of 1980 and 1982. In pursuance of this policy, a new licensing
policy was adopted, aiming at reviving the economic infrastructure inhibited by the infra- The basic objective of the new
licensing policy reflected a de-
structural gaps and inadequacies in performance. The basic objective of the new licensing sire for the fruit of industrializa-
policy reflected a desire for the fruit of industrialization and economic progress, to be trans- tion and economic progress, to
mitted to a maximum number of people both in rural and urban areas. be transmitted to a maximum
Under this policy, licensing was not required for an existing licensed undertaking to number of people both in rural
and urban areas.
substantially increase production capacity on the existing lines, if the total investment did
not exceed ` 3 crore and if it did not require foreign exchange in excess of 10 per cent of
e x-factory value of output or ` 25 lakh, whichever was less.
An existing licensed undertaking did not require a fresh license to manufacture any new No industrial license was
item from Schedule I to the maximum of the licensed capacity. Similarly, any licensed unit required for small-scale units
could get liberal permission to expand or to manufacture a new product, making use of its to produce any of the items
own wastes or effluents on the recommendation of the Administrative Ministry. No indus- reserved for the sector.
trial license was required for small-scale units to produce any of the items reserved for the
sector under the following conditions:
1. The unit should not belong to any dominant undertaking as defined in the MRTP
Act.
2. The unit and other interconnected unit together should not possess assets exceeding
` 20 crore.
3. In respect of foreign ownership, there should not be over 40 per cent equity owned by
foreign companies or subsidiaries or foreign individuals.
4. The items produced should not belong to the Schedule A category.
In March 1982, the government In March 1982, the government declared liberal licensing policy for industrial ventures to be
declared liberal licensing policy started in 87 industrially backward districts of 18 States. Over ridding preference was given in
for industrial ventures to be the industrial licensing policy to applicants, who proposed to establish their ventures in the
started in 87 industrially back-
ward districts of 18 States. above districts, with a view to correct regional imbalances, on the one hand, and to ensure
rapid industrialization of the backward areas, on the other. These districts were to get prefer-
ences over all other locations on a priority basis.
Various state governments and administrative ministries were also instructed to give
pointed attention to these districts, so that adequate infrastructural developments could be
made in different States. A facility of excess capacity was allowed for a specific list of selected
items.
The policy further laid down that the Administrative Secretariat and the concerned com-
The policy further laid down
that the Administrative Secre- mittee had to take into account a number of factors such as project feasibility, potentiality for
tariat and the concerned com- economies of scale, production targets, and competence of entrepreneur prior to granting a
mittee had to take into account licence.
a number of factors such as
project feasibility, potentiality
However, in the interest of the rapid industrialization, automatic registration facilities
for economies of scale, produc- were also provided for items listed in Schedule V of the Exemption Notification of the Minis-
tion targets, and competence of try of Industry (February 16, 1973). Out of this list, 66 items were withdrawn in the notifica-
entrepreneur prior to granting tion of the Government of India in April 1982. A number of such measures were adopted by
a licence.
the government from time to time to achieve a balance and concerted industrial growth.
The new policy would also permit manufacturers to follow market trends more effec-
tively, changing products in response to shifts in demands. The overall licensed capacity
The process of liberalization
would remain unchanged and separate clearances would be required for foreign collabora-
during 1984–85 culminated tion where necessary.
in certain policy decisions The process of liberalization during 1984–85 culminated in certain policy decisions
announced by the new govern- announced by the new government on March 15, 1985, at the time of presentation of the
ment on 15 March, 1985, at
the time of presentation of the
1985–86 budget. The most significant element was the decision to raise the asset limit for large
1985–86 budget. The most sig- houses from ` 20 crore to ` 100 crore.
nificant element was the deci- In May 1985, 22 industries were freed from both MRTP and FERA controls. Besides, 23
sion to raise the asset limit for other industries were delicensed for MRTP and FERA companies located in the centrally
large houses from ` 20 crore to
` 100 crore. declared backward areas on January 30, 1986.
The Industrial Licensing Policy of 1988 was another advance in the process of liberali-
zation. According to government notification of 3 June, 1988, industrial undertakings with
In May 1985, 22 industries were fixed assets up to ` 50 crore were exempted from licensing if they were located in central-
freed from both MRTP and FERA
ly declared backward areas. In the non-backward areas, this exemption limit was fixed at
controls. Besides, 23 other
industries were delicensed for ` 15 crore. Import liberalization was also enhanced from 15 per cent to 30 per cent of inputs.
MRTP and FERA companies The Janta Dal government, under the leadership of V.P. Singh, announced its new policy
located in the centrally declared on 31 May, 1990. It could be interpreted as an extension of the Janta Party government’s
backward areas on January 30,
1986.
policy of 1977 to the extent that it had considerable bias in favour of small-scale and rural
industrialization.
In order to make Indian industry more competitive internally, the government felt the In order to make Indian indus-
need for releasing the industry from bureaucratic obstructions and reducing the number of try more competitive internally,
clearances. All new units with an investment up to ` 75 crore in centrally notified backward the government felt the need
for releasing the industry from
areas and ` 25 crore in other areas were exempted from licensing. Import of capital goods
bureaucratic obstructions and
was allowed to the tune of 30 per cent of the plant and machinery. The EOUs and units located reducing the number of clear-
in export processing zones (EPZs) with an investment up to ` 75 crore were delicensed. ances.
However, units set up by MRTP and FERA companies required clearances under the provi-
sions of these Acts.
Industrial development is now considered as an interdisciplinary concept. It includes
all the relevant aspects of industrial activity in accordance with plan priorities. In a planned
economy, adequate control measures have to be exercised by the government for providing
In a planned economy, adequate
necessary direction to industries, especially the private sector, to contribute their best towards control measures have to be
the socio-economic objectives of the nation. Hence, government control measures should be exercised by the government
viewed from this angle. for providing necessary direc-
The industrial and industrial licensing polices of the Government of India have a regu- tion to industries, especially
the private sector, to contrib-
lating and controlling effect on the industrial activities in India. However, after 1973, it was ute their best towards the
widely felt that greater liberalization was required for achieving adequate growth of industri- socio-economic Objectives of
alization in India. Hence, the government initiated a number of measures to provide greater the Nation
liberalization.
Liberalization in Industrial Licensing—1991

and After
Industrial licensing is governed by the Industries (D&R) Act, 1951. The Industrial Policy Res-
olution of 1956 identified the following three categories of industries:
1. Those that would be reserved for development in the public sector
2. Those that would be permitted for development through private enterprises, with or
without state participation
3. Those in which investment initiatives would emanate from private entrepreneurs
Over the years, keeping in view the changing industrial scene in the country, the policy has Over the years, keeping in view
the changing industrial scene
undergone modifications. Industrial licensing policy and procedures have also been liberal-
in the country, the policy has
ised from time to time. A full realization of the industrial potential of the country calls for a undergone modifications. In-
continuation of this process of change. dustrial licensing policy and
In order to achieve the objectives of the strategy for the industrial sector for 1991 and procedures have also been lib-
eralised from time to time. A
beyond, it was necessary to make a number of changes in the system of industrial approvals. full realization of the industrial
Major policy initiatives and procedural reforms were called for in order to actively encour- potential of the country calls for
age and assist the Indian entrepreneur to exploit and meet the emerging domestic and global a continuation of this process
opportunities and challenges. of change.
The bedrock of any such package of measures must be to let the entrepreneurs make
investment decisions on the basis of their own commercial judgement. The attainment of
technological dynamism and international competitiveness requires that enterprises must be
able to respond swiftly to fast-changing external conditions that have become the character-
istic of today’s industrial world.
Government policy and procedures must be geared to assisting entrepreneurs in their
efforts. This can be done only if the role played by the government were to be changed from
that only of exercising control to one of providing help and guidance, by making essential
procedures fully transparent and eliminating the delays.
POLICY DECISIONS
In view of the consideration outlined above, the government decided to take a series of meas-
ures to unshackle the Indian industrial economy from the chains of unnecessary bureaucratic
control. These measures complement the other series of measures being taken by the gov-
ernment in the areas of trade policy, exchange-rate management, fiscal policy, financial sector
reform, and overall macro-economic management.
Industrial Licensing Policy
The Abid Hussain Committee 1. Industrial licensing will be abolished for all projects except for a short list of indus-
on Trade Policies (1984) con- tries related to security and strategic concerns, social reasons, hazardous chemicals,
tained major recommendations and over-riding environmental reasons, and items of elitist consumption. Industries
regarding export promotion pol-
reserved for the small-scale sector will continue to be so reserved.
icy and strategy, import policy,
technology imports, and so on. 2. Areas where security and strategic concerns predominate will continue to be reserved
for the public sector.
3. In projects where imported capital goods are required, automatic clearance will be
given:
a. In cases where foreign capital goods availability is ensured through foreign equity.
b. If the CIF (cost, insurance, and freight) value of imported capital goods required
is less than 25 per cent of the total value (net of taxes) of plant and equipment, up
to a maximum value of ` 2 crore. In view of the current difficult foreign-exchange
situation, this scheme, (that is, 3[b]) will come into force from April 1992.
In other cases, the imports of capital goods will require clearance from the SIA in
the Department of Industrial Development according to the availability of foreign
exchange resources.
4. In locations other than cities of more than one million population, there will be no
requirement of obtaining industrial approvals from the central government except
for industries subject to compulsory licensing. In respect of cities with population
greater than one million, industries other than those of a non-polluting nature such
as electronics, computer software, and printing will be located 25 kms outside the
periphery, except in prior-designated areas.
A flexible location policy would be drawn up in respect of such cities (with popu-
lation greater than one million) which require industrial registration. Zoning and
land use regulation and environmental legislation will continue to regulate industrial
locations.
Appropriate incentives and the design of investments in infrastructure development
will be used to promote the dispersal of industry, particularly to rural and backward
areas and to reduce congestion in cities.
5. The system of phased manufacturing run on an administrative case-by-case basis will
not be applicable to new projects. Existing projects with such programmes will con-
tinue to be governed by them.
6. Existing units will be provided a new broad-banding facility to enable them to pro-
duce any article without additional investment.
7. The exemption from licensing will apply to all substantial expansions of existing
units.
8. The mandatory convertibility clause will no longer be applicable for term loans from
financial institutions for new projects.
Procedural Consequences
9. All existing registration schemes (Delicensed Registration, Exempted Industries Reg-

istration, DGTD [Director General of Technical Development]) will be abolished.
10. Entrepreneurs will, henceforth, be required only to file an information memorandum
on new projects and substantial expansions.
11. The lists at Annexure II and Annexure III will be notified in the Indian Trade Clas-
sification (Harmonised System).
Foreign Investment
1. Approval will be given for foreign direct investment (FDI) up to 51 per cent foreign
equity in high-priority industries (Annexure III). There shall be no bottlenecks of
any kind in this process. Such clearance will be available if foreign equity covers the
foreign exchange requirement for imported capital goods. Consequent amendments
to the Foreign Exchange Regulation Act (1973) shall be carried out.
2. Although the import components, raw materials, and intermediate goods, and pay-
ment of know-how fees and royalties will be governed by the general policy applica-
ble to other domestic units, the payment of dividends would be made through the
Reserve Bank of India to ensure that outflows on account of dividend payments are
balanced by export earnings over a period of time.
3. Other foreign equity proposals, including proposals involving 51 per cent foreign
equity, which do not meet the criteria under first point given before, will continue to
need prior clearance. Foreign equity proposals need not necessarily be accompanied
by foreign technology agreements.
4. To provide access to international markets, majority foreign equity holding up to
51 per cent will be allowed for trading companies, primarily engaged in export activities.
5. Although the thrust would be on export activities, such trading houses shall be at par
with domestic trading and export houses in accordance with the exim Policy.
6. A special empowered board would be constituted to negotiate with a number of
large international firms and approve FDI in select areas. This would be a special
programme to attract substantial investment that would provide access to high
technology and world markets. The investment programmes of such firms would be
considered in totality, free from pre-determined parameters or procedures.
Foreign Technology Agreements

1. Automatic permission will be given for foreign technology agreements in high-prior-
ity industries (Annexure III) up to a lump sum payment of ` 1 crore, with 5 per cent
royalty for domestic sales and 8 per cent for exports, subject to a total payment of
8 per cent of sales over a 10-year period from the date of agreement or seven years
from the commencement of production. The prescribed royalty rates are net of taxes
and will be calculated according to the standard procedures.
2. In respect of industries other than those in Annexure III, automatic permission will
be given, subject to the same guidelines as above if no free foreign exchange is required
for any payments.
3. All other proposals will need specific approval under the general procedure in force.
4. No permission will be necessary for hiring foreign technicians and foreign testing of
indigenously developed technologies. Payments may be made from blanket permits
or free foreign exchange according to RBI guidelines.
Public Sector
1. The portfolio of public sector investments will be reviewed with a view to focus the
public sector on strategic, high-tech, and essential infrastructure. Whereas some
reservation for the public sector is being retained, there would be no bar for areas of
exclusivity to be opened up to the private sector. Similarly, the public sector will also
be allowed an entry into areas not reserved for it.
2. Public sector enterprises which are chronically sick and are unlikely to be turned
around will, for the formulation of revival/rehabilitation schemes, be referred to the
Board for Industrial and Financial Reconstruction (BIFR), or other similar high-level
institutions created for the purpose. A social security mechanism will be created to
protect the interest of the workers who are likely to be affected by such rehabilitation
packages.
3. In order to raise resources and encourage wider public participation, a part of the
government’s shareholding in the public sector would be offered to mutual funds,
financial institutions, general public, and workers.
4. The boards of public sector companies would be made more professional and given
greater powers.
5. There will be a greater thrust on performance improvement through the Memoranda
of Understanding (MoU) systems through which management would be granted
greater autonomy and will be held accountable. Technical expertise on the part of the
government would be upgraded to make the MoU negotiations and implementation
more effective.
6. To facilitate a fuller discussion on performance, the MoU signed between govern-
ment and the public enterprise would be placed in Parliament. While focusing on
major management issue, this would also help to place maters on day-to-day opera-
tions of public enterprises in their correct perspective.
MRTP Act
1. The MRTP Act will be amended to remove the threshold limits of assets in respect
of MRTP companies and dominant undertakings. This eliminates the requirement
of prior approval of the central government for establishment of new undertakings,
expansion of undertakings, merger, amalgamation, and takeover and appointment of
directors under certain circumstances.
2. Emphasis will be placed on controlling and regulating monopolistic, restrictive, and

unfair trade practices. Simultaneously, the newly empowered MRTP Commission
will be authorized to initiate investigations Suo moto or on complaints received from
individual consumers or classes of consumers in regard monopolistic, restrictive, and
unfair trade practices.
3. Necessary comprehensive amendments will be made in the MRTP Act in this regard
and for enabling the MRTP Commission to exercise punitive and compensatory
powers.
RECENT INDUSTRIAL LICENSING POLICY

With the introduction of the New Industrial Policy (NIP) in 1991, a substantial programme With the introduction of the
of deregulation has been undertaken. Industrial licensing has been abolished for most items. New Industrial Policy (NIP) in
Presently, Industrial licensing is required in the following cases: 1991, a substantial programme
of deregulation has been under-
a. for manufacturing an item under compulsory licensing, or taken. Industrial licensing has
been abolished for most items.
b. if the project attracts locational restriction applicable to large cities with population
of more than 10 lakh (according to 1991 census), or
c. when an item reserved for small-scale sector is intended to be manufactured by an
undertaking other than small-scale industrial. Only the following five industries are
under compulsory licensing on account of security, strategies, and environmental
concerns:
(i) distillation and brewing of alcoholic drinks;
(ii) cigars and cigarettes of tobacco and manufactured tobacco substitutes;
(iii) electronic, aerospace and defence equipment of all types;
(iv) industrial explosives, including detonating fuses, safety fuses, gun powder,
nitrocellulose, and matches; and
(v) Specifies hazardous chemicals, that is, (i) hydrocyanic acid and its deriva-
tives, (ii) phosgene and its derivatives, and (iii) isocyanates and disocyanates of Industries not covered un-
hydrocarbon der compulsory licensing are
required to file an Industrial
Industries not covered under compulsory licensing are required to file an Industrial Entre- Entrepreneurs Memorandum
preneurs Memorandum (IEM) to Secretariat for Industrial Assistance (SIA), provided the (IEM) to Secretariat for Industri-
al Assistance (SIA), provided the
value of investment on plant and machinery of such unit is above ` 10 crore. value of investment on plant
A significant number of industries had earlier been reserved for public sector. The policy and machinery of such unit is
has been liberalised progressively and presently, the areas reserved for the public sector are: above ` 10 crore.
(a) atomic energy; (b) the substances specified in the schedule to the notification of the Gov-
ernment of India in the Department of Atomic Energy number S.O.212(E), dated March 15,
1995; and (c) railway transport. The government continues to
The government continues to provide protection to the small-scale sector, inter alia, provide protection to the small-
through the policy of reserving items for exclusive manufacture in the small-scale sector. scale sector, inter alia, through
the policy of reserving items for
Recently, Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 has been exclusive manufacture in the
enacted by the government. In this Act, investment limit for micro-, small-, and medium small-scale sector.
enterprises have been prescribed as ` 10 lakh, ` 5 crore, and 10 crore, respectively. Industrial
u ndertakings, other than the small-scale industrial undertakings, engaged in the manufac-
The list of items reserved for ture of items reserved for exclusive manufacture in the small-scale sector, are required to
manufacturing in the SSI sector obtain an industrial license and have undertaken export obligation of 50 per cent of their
is being reviewed from time to annual production. However, the condition of licensing is not applicable to industrial under-
time. Presently, 114 items are takings operating under 100 per cent Export-Oriented Undertakings Scheme, in the export
reserved for manufacture in the
small-scale sector. processing. The list of items reserved for manufacturing in the SSI Sector is being reviewed
from time to time. Presently, 114 items are reserved for manufacture in the small-scale sector.
Foreign Direct Investment

Major Changes in the Recent Years
The FDI policy was liberalized

The Government of India embarked upon major economic reforms, since mid-1991, with
progressively through review of a view to integrating with the world economy, and to emerge as a significant player in the
the policy on an ongoing basis globalization process. Reforms undertaken include decontrol of industries from the stringent
and allowing FDI in more indus- regulatory process, simplification of investment procedures, promotion of foreign direct
tries under the automatic route.
investment (FDI), liberalization of exchange control, rationalization of taxes, and public
sector divestment.
The FDI policy was liberalised progressively through review of the policy on an ongoing
basis and allowing FDI in more industries under the automatic route. The major changes
made in the policy aimed at rationalization/simplification of procedures are listed below:
1. Policy Liberalization/Rationalization (FDI Policy 2013)
1. FDI cap in telecom raised to 100 per cent from 74 per cent; up to 49 per cent through
automatic route and beyond via FIPB
2. No change in 49 per cent FDI limit in civil aviation
3. FDI cap in defence production to stay at 26 per cent, higher investment may be con-
sidered in state-of-the-art technology production by CCS.
4. 100 per cent FDI allowed in single brand retail; 49 per cent through automatic,
49–100 per cent through FIPB
5. FDI limit in insurance sector raised to 49 per cent from present 26 per cent, subject
to Parliament approval
6. FDI up to 49 per cent in petroleum refining allowed under automatic route, from
earlier approval route
7. In power exchanges 49 per cent FDI allowed through automatic route, from earlier
FIPB route.
8. Raised FDI in asset reconstruction companies to 100 per cent from 74 per cent; of this
up to 49 per cent will be under automatic route
9. FDI limit increased in credit information companies to 74 per cent from 49 per cent.
10. FDI up to 49 per cent in stock exchanges, depositories allowed under automatic route
11. FDI up to 100 per cent through automatic route allowed in courier services
12. FDI in tea plantation up to 49 per cent through automatic route; 49–100 per cent
through FIPB route.
2. Procedural Simplification
a. FDI is permissible under the automatic route wherever the sectoral policy so speci-
fies, except where the foreign investor has an existing joint venture or technology/
trademark agreement in the same field. In such cases, prior approval of the govern-
ment is required for FDI, irrespective of the sectoral policy permitting FDI on the
automatic route (refer to Press Note 1 [2005]).
b. Transfer of shares from resident to non-resident (including NRIs) placed on the au-
tomatic route where initial investment is allowed on the automatic route and where
Press Note 1 [2005] is not attracted.
c. Conversion of ECBs and preference shares on the automatic route.
d. FDI in manufacturing sector, including those where an industrial licence is required,
has been allowed on the automatic route without any caps. Exceptions are manufac-
ture of cigars and cigarettes and defence items, where prior government approval is
required for FDI and manufacture of items reserved for the small-scale sector. In the
defence sector, FDI is permitted only up to 26 per cent. (refer to Press Note 4 [2006]).
ANNEXURE I
Proposed List of Industries to be Reserved for the
Public Sector
1. Arms and ammunition and allied items of defence equipment, defence aircraft, and
warships
2. Atomic energy
3. Coal and lignite
4. Mineral oils
5. Mining of iron ore, manganese ore, chrome ore, gypsum, sulphur, gold, and diamond
6. Mining of copper, lead, zinc, tin, molybdenum, and wolfram
7. Minerals specified in the Schedule to the Atomic Energy (Control of Production and
Use) Order, 1953
8. Railway transport
ANNEXURE II
List of Industries in Respect of Which Industrial
Licensing will be Compulsory
1. Coal and lignite
2. Petroleum (other than crude) and its distillation products
3. Distillation and brewing of alcoholic drinks

4. Sugar
5. Animal fats and oils
6. Cigars and cigarettes of tobacco and manufactured tobacco substitutes
7. Asbestos and asbestos-based products
8. Plywood, decorative veneers, and other wood-based products such as particle board,
medium density fibre board, block board
9. Tanned or dressed fur skins
10. Paper and newsprint except bagasse-based units
11. Electronic, aerospace, and defence equipment: all types
12. Industrial explosives, including detonating fuse, safety fuse, gunpowder, nitrocellu-
lose, and matches
13. Hazardous chemicals
14. Drugs and pharmaceuticals (according to the drug policy)
15. Entertainment electronics (VCRs, colour TVs, CD players, tape recorders)
Note: The compulsory licensing provisions would not apply in respect of the small-scale units
taking up the manufacture of any of the above items reserved for the exclusive manufacture
in the small-scale sector.
ANNEXURE III
List of Industries for Automatic Approval of
Foreign Technology Agreements and for
51 Per Cent Foreign Equity Approvals
1. Metallurgical industries
i. Ferro alloys
ii. Castings and forgings
iii. Non-ferrous metals and their alloys
iv. Sponge iron and pelletization
v. Large-diameter steel-welded pipes of over 300 mm diameter and stainless steel
pipes
vi. Pig iron
2. Boilers and steam-generating plants
3. Prime movers (other than electrical generators)
i. Industrial turbines
ii. Internal combustion engines
iii. Alternate energy systems like solar, wind, and equipment

iv. Gas/hydro/steam turbines up to 60 MW
4. Electrical equipment
i. Equipment for transmission and distribution of electricity, including power and
d
istribution transformers, power relays, high tension (HT) switch gear, and
synchronous condensers
ii. Electric motors
iii. Electrical furnaces, industrial furnaces, and induction heating equipment
iv. X-ray equipment
v. Electronic equipment, components, including subscribers and telecommunica-
tion equipments
vi. Component wires for manufacture of lead in wires
vii. Hydro/steam/gas generators/generating sets up to 60 MW
viii. Generating sets and pumping sets based on internal combustion engines
ix. Jelly filled telecommunication cables
x. Optic fibre
xi. Energy-efficient lamps
xii. Midget carbon electrodes
5. Transportation
i. Mechanised sailing vessels up to 10,000 DWT including fishing trawlers
ii. Ship ancillaries
iii. (a) Commercial vehicles, public transport vehicles—including automotive,
commercial, three-wheeler, jeep-type vehicles, and industrial locomotives
(b) Automotive two wheelers and three wheelers
(c) Automotive components/spares and ancillaries
iv. Shock absorbers for railway equipment
v. Brake systems for railway stock and locomotives
6. Industrial machinery
i. Industrial machinery and equipment
7. Industrial tools and equipments

i. Machine tools and industrial robots and their controls and accessories
ii. Jigs, fixtures, tools, and dies of specialised types and cross-land tooling
iii. Engineering production aids, such as cutting and forming tools, patterns and
dies and tools
8. Agricultural machinery
i. Tractors
ii. Self-propelled harvester combines
iii. Rice transplanters
9. Earth-moving machinery
Earth-moving machinery and construction machinery and components thereof
10. Industrial instruments
Indicating, recording, and regulating devices for pressure, temperature, weight rate of
flow levels, and the like
11. Scientific and electro-medical instruments and laboratory equipment
12. Nitrogenous and phosphatic fertilizers falling under
Nitrogenous fertilizers under ‘18 Fertilizers’ in the First Schedule to IDR Act, 1951
13. Chemicals (other than fertilizers)
i. Heavy organic chemicals including petrochemicals
ii. Heavy inorganic chemicals
iii. Organic fine chemicals
iv. Synthetic resins and plastics
v. Man-made fibres
vi. Synthetic rubber
vii. Industrial explosives
viii. Technical grade insecticides, fungicides, weedicides, and the like
ix. Synthetic detergents
x. Miscellaneous chemicals (for industrial use only)
a. Catalysts and catalyst supports
b. Photographic chemicals
c. Rubber chemicals
d. Polyols
e. Isocynates, urethanes, and so on
f. Special chemicals for enhanced oil recovery
g. Heating fluids
h. Coal tar distillation and products therefrom
i. Tonnage plants for the manufacture of industrial gases
j. High-altitude breathing oxygen/medical oxygen
k. Nitrous oxide
l. Refrigerant gases like liquid nitrogen, carbon dioxide, and so on in large
volumes
m. Argon and other rare gases
n. Alkali/acid-resisting cement compound
o. Leather chemicals and auxiliaries
14. Drugs and pharmaceuticals

According to the drug policy
15. Paper products
i. Paper and pulp including paper products
ii. Industrial laminates
16. Automobile accessories
i. Automobile tyres and tubes
ii. Rubberised heavy-duty industrial beltings of all types
iii. Rubberised conveyor beltings
iv. Rubber-reinforced and rubber-lined fire-fighting hose pipes
v. High-pressure braided hoses
iv. Engineering and industrial plastic products
17. Plate glass
i. Glass shells for television tubes
ii. Float glass and plate glass
iii. HT insulators
iv. Glass fibre of all types
18. Ceramics
Ceramics for industrial uses
19. Cement products
i. Portland cement
ii. Gypsum boards, wall boards, and the like
20. High-technology reproductions and multiplication equipment
21. Carbon and carbon products
i. Graphite electrodes and anodes
ii. Impervious graphite blocks and sheets
22. Pretensioned high-pressure re-inforced cement concrete (RCC) pipes
23. Rubber machinery
24. Printing machinery
i. Web-fed high-speed off-set rotary printing machine having output of 30,000 or
more im pressions per hour
ii. Photocomposing/type-setting machines
iii. Multi-colour sheet-fed off-set printing machines of sizes of ‘18 × 25’ and above
iv. High-speed rotogravure printing machines having output of 30,000 or more
impressions per hour
25. Welding electrodes other than those for welding mild steel
26. Industrial synthetic diamonds
27. Biological equipments
i. Photosynthesis improvers
ii. Genetically modified free-living symbiotic nitrogen fixer
iii. Pheromones
iv. Bioinsecticides
28. Extraction and upgrading of mineral oils
29. Pre-fabricated building material
30. Soya products
i. Soya texture proteins
ii. Soya protein isolates
iii. Soya protein concentrates
iv. Other specialized products of soyabean
v. Winterised and deodourized refined soyabean oil
31. a. Certified high-yielding hybrid seeds and synthetic seeds
b. Certified high-yielding plantlets developed through plant tissue culture
32. All food-processing industries other than milk food, malted foods, and flour, but
excluding the items reserved for small-scale sector
33. All items of packaging for food-processing industries excluding the items reserved
for small-scale sector
34. Hotels and tourism-related industry
SUMMARY
Industrial licensing constituted the key element in Govern- There were also several indirect but important controls. The
ment of India’s industrial policy from 1951 to 1991. This most important among them was the MRTP Act, Capital
meant a tight investment licensing system was administered Goods Import Control, and government policy with regard to
primarily through the Industries (D&R) Act, 1951 and was foreign investment and foreign collaborations.
supplemented by a host of other regulatory laws and admin- With the introduction of the NIP in 1991, a substantial pro-
istrative practices. Most of these regulations arose from the gramme of deregulation began to be undertaken. Industrial
system of planning in India and from the provision in the licensing was abolished for all items except for six indus-
Constitution preaching a socialist pattern of society, equality tries related to security, strategic, or environmental concern.
of wealth, and opportunities in general. They are:
Until 1991, the inner core of policy and legal instruments 1. Distillation and brewing of alcoholic drinks,
consisted of the Industrial Policy Regulation of 1956, the 2. Cigars and cigarettes of tobacco and manufactured
Industries (D&R) Act 1951, and Industrial Licensing Policy tobacco substitutes,
of 1973. Since 1978, it has become the practice to supple-
ment the two policy documents mentioned above with yet 3. Electronic, aerospace, and defence equipment,
another document—Industrial Policy Statement of 1978, 4. Industrial explosives including detonating fuses,
1980, and 1982. safety fuses, gunpowder, nitrocellulose, and matches,
5. Hazardous chemicals, and The government continues to provide protection to the

small-scale sector, inter alia, through the policy of reserving
6. Drugs and pharmaceuticals (according to the modi-
items for exclusive manufacture in the small-scale sector.
fied Drug Policy, 1994; as amended in 1999).
Industrial undertakings, other than the small-scale industrial
A significant number of industries had earlier been reserved undertakings, engaged in the manufacture of items that are
for the public sector. In 2004, a decision was taken to open reserved for exclusive manufacture in the small-scale sector,
the defence industry sector to the private sector with FDI are required to obtain an industrial licence and undertake
permissible up to 26 per cent. Now, the areas reserved for an export obligation of 50 per cent of the annual production.
the public sector are: However, the condition licensing is not applicable to industri-
al undertaking operating under 100 per cent EOU schemes,
1. Atomic energy,
the EPZ and the SEZ schemes. Industrial undertakings with
2. Substances specified in the schedule to the notifica- investments in plant and machinery up to ` 1 crore qualify
tion of the Government of India in the Department of for the status of small-scale or ancillary industrial undertak-
Atomic Energy number S.O. 212 (E), dated March 15, ing from 24 December, 1999. The investment limit for tiny
1995, and units is ` 25 lakh.
3. Railway transport.
Key W o r d s
● Licensing ● Exemption ● Scheduled Industries
● Licence Raj ● Preventive Provisions ● Liberalization
● Curative Provisions ● Public Sector ● Exchange Rate
● Creative Provisions ● MoU System
● Letter of Intent (LOI) ● Delicensing
Q u est i o n s
1. Describe the importance and objective of industrial 9. What do you mean by privatization? Critically examine
licensing systems in India. the issues involved in privatization.
2. Assess the rationale of the industrial licensing policy 10. Explain the reform process initiated by the govern-
and comment on the changes incorporated therein. ment for the industrial development of the country.
3. Explain the industrial licensing policy and liberalization. 11. Make a comparative study on the performance of the
4. Explain the changes incorporated in the industrial li- public and private sectors in India.
censing policies to attract foreign investment. 12. Examine the impact of the reform process on the
5. Explain the major changes in the policy directions of industrial development of the nation.
the government towards public sector enterprises in 13. Briefly analyse the provisions and objectives of the
India. Industries (D&R) Act, 1951.
6. Critically examine the performance of the public sec- 14. Discuss the effectiveness of the licensing systems
tor enterprises in India. Discuss their problems. in India.
7. List the various support and control measures of the 15. The Government of India has been reviewing its in-
government on the private sector of the country. dustrial licensing from time to time. Is this a neces-
8. Explain the measures to be followed for the revival of sary step? Discuss.
public sector enterprises in India.
r efe r e n ces
n Datt, R. and K. M. P. Sundaram (2005). Indian Economy. n Sengupta, A. K. (2004). Government and Business,
Delhi: Sultan Chand. 4th ed. New Delhi: Vikas Publishers.
n Mankar, V. G. (1999). Business Economics. Delhi:
Macmillan.
05
C hapter
India’s Monetary and

Fiscal Policy
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I. Monetary Policy of India • Techniques of Fiscal Policy 154
• Concept and Meaning of Monetary Policy 142 • Merits of Fiscal Policy of India 157
• Objectives of the Monetary Policy 143 • The Shortcomings of the Fiscal
• Differences Between Monetary Policy and Policy of India 158
Fiscal Policy 143 • Suggestions for Necessary Reforms in Fiscal
• Meaning of Monetary Policy Terms 144 Policy 159
• Impact of the Monetary Policy 147 • Fiscal Policy Statement, 2012–13 160
• Measures to Regulate Money Supply 148 • Fiscal Policy—An Assessment 161
• The Monetary Policy and Imf 149 • Conclusions 163
• Rbi’s Monetary Policy Measures 149 • Case 165
• Rbi’s Monetary Policy, 2012–13 151 • Summary 166
II. Fiscal Policy of India • Key Words 166
• Concept and Meaning of Fiscal Policy 153 • Questions 167
• Objectives of the Fiscal Policy 153 • References 167
• Fiscal Policy and Economic Development 154
I. MONETARY POLICY OF INDIA

CONCEPT AND MEANING OF MONETARY
POLICY
Monetary policy is primarily Monetary policy is primarily concerned with the management of supply of money in a
concerned with the manage- growing economy and managing the rate of growth of money supply per period. In a growing
ment of supply of money in a economy, the optimal conduit of monetary policy requires that the supply of money is grown
growing economy and manag-
ing the rate of growth of money to sub-order certain well defined social goals. Talking in terms of the annual rate of growth of
supply per period. money supply, the optimal monetary policy requires that this rate of growth, on an average, is
such as to be consistent with the attunement of the desired social goals.
It is universally admitted that the best combination of these social goals is growth
The monetary and credit policy with stability and equity. Stability here means severe economic stability but for all practical
is the policy statement, tradi- purposes, is generally equated with the general price stability. It has been argued that, in the
tionally announced twice a year, Indian context, the pursuit of the above set of goals will mean a maximum feasible output and
through which the Reserve
employment in every short run and also promotion of a healthy balance-of-payment posi-
Bank of India (RBI) seeks to
ensure a price stability for the tion in the medium run. The monetary and credit policy is the policy statement, traditionally
economy. announced twice a year, through which the Reserve Bank of India (RBI) seeks to ensure a
price stability for the economy.
India’s Monetary and Fiscal Policy | 143
These factors include—money supply, interest rates, and the inflation. In banking and
economic terms, money supply is referred to as M3, which indicates the level (stock) of legal
currency in the economy. Besides, the RBI also announces norms for the banking and finan-
cial sector and the institutions which are governed by it.
Those norms would be banks, financial institutions, non-banking financial institutions,
Nidhis and primary dealers (money markets), and dealers in the foreign exchange (forex)
market. Historically, the monetary policy was announced twice a year—a slack-season policy
Historically, the monetary
(April–September) and a busy-season policy (October–March) in accordance with agricul- policy was announced twice
tural cycles. These cycles also coincide with the halves of the financial year. a year—a slack-season policy
Initially, the RBI used to announce all its monetary measures twice a year in the monetary (April–September) and a busy-
and credit policy. The monetary policy has now become dynamic in nature as RBI reserves season policy (October–March)
in accordance with agricul-
its right to alter it from time to time, depending on the state of the economy. However, with tural cycles. These cycles also
the share of credit to agriculture coming down and credit towards the industry being granted coincide with the halves of the
the whole year around, the RBI, since 1998–99, has moved in for just one policy in April end. financial year.
However, a review of the policy does take place later in the year.
OBJECTIVES OF THE MONETARY POLICY

The objectives are to maintain price stability and to ensure an adequate flow of credit to The objectives are to maintain
the productive sectors of the economy. The stability for the national currency (after look- price stability and to ensure
ing at prevailing economic conditions), growth in employment, and income are also looked an adequate flow of credit to
into. The monetary policy affects the real sector through long and variable periods, while the the productive sectors of the
economy.
financial markets are also impacted through short-term implications.
There are four main ‘channels’ which the RBI looks at. They are
1. Quantum channel: money supply and credit (affects real output and price level
through changes in reserves money, money supply, and credit aggregates).
2. Interest-rate channel.
3. Exchange-rate channel (linked to the currency).
4. Asset price.
DIFFERENCES BETWEEN MONETARY POLICY

AND FISCAL POLICY
Two important tools of macro-economic policy are monetary policy and fiscal policy.
The monetary policy regulates the supply of money and the cost and availability of The monetary policy aims to
credit in the economy. It deals with both the lending and borrowing rates of interest for maintain price stability, full
commercial banks. The monetary policy aims to maintain price stability, full employment, employment, and economic
and economic growth. The RBI is responsible for formulating and implementing monetary growth.
policy. It can increase or decrease the supply of currency, as well as interest rate, carry out
open-market operations (OMO), control credit, and vary the reserve requirements. The The fiscal policy can be used to
monetary policy is different from fiscal policy as the former brings about a change in the overcome recession and control
inflation. It may be defined as a
economy by changing money supply and interest rate, whereas fiscal policy is a broader tool deliberate change in the govern-
of the government. ment revenue and expenditure
The fiscal policy can be used to overcome recession and control inflation. It may be to influence the level of national
output and prices.
defined as a deliberate change in the government revenue and expenditure to influence the
level of national output and prices. For instance, at the time of recession the government
can increase expenditures or cut taxes in order to generate demand. On the other hand,
the government can reduce its expenditures or raise taxes during inflationary times. Fiscal
policy aims at changing aggregate demand by suitable changes in government expenditure
and taxes.
The annual Union Budget showcases the government’s fiscal policy.
MEANING OF MONETARY POLICY TERMS

CRR
CRR, or cash reserve ratio, Cash reserve ratio (CRR) is the ratio of deposits banks must maintain with the Reserve Bank
refers to a portion of the deposit of India. This implies that if a person deposits ` 1,000 in his account, the bank can use it to
(as cash) which banks have to lend others, but it has to deposit a percentage of that amount with the RBI. Hence, if CRR is
keep/maintain with the RBI.
5%, the lender will deposit ` 50 with the RBI and has ` 950 left to a borrower who will eventu-
ally repay the bank. The bank will once again lend this amount (` 950) to another borrower
after depositing 5% of the amount (` 47.5) to the RBI. In this manner, the money will keep
exchanging hands, or it continues to be created and available for subsequent borrowers. This
means that ` 1,000 is helping generate a far higher amount in the economy in an indirect
manner. Therefore, even if the CRR were to be increased by only 1 per cent, the money gen-
erated in the economy would reduce drastically. This serves two purposes. It ensures that a
portion of bank deposit is totally risk-free and secondly, it enables that RBI controls liquidity
in the system, and, thereby, inflation.
The other purpose it serves is, it helps to adjust liquidity in the system, the supply of
money circulating in the economy. When there is excess money supply in the market, RBI
will increase the CRR to drain out the excess. Inversely if the economy is falling short of
liquidity, then RBI will decrease the CRR to release more funds in the market. This is thus one
of the instruments that the central bank uses to control inflation. The CRR has fallen from
15 per cent in March 1991 to 4 per cent in October 2013.
SLR
Banks in India are required to maintain 23 per cent of their demand and time liabilities in
government securities and certain approved securities. These are collectively known as SLR
securities. The buying and selling of these securities laid the foundations of the 1992 Harshad
Mehta scam.
The government securities (also known as gilt-edged securities or gilts) are bonds
issued by the central government to meet its revenue requirements. Although the bonds are
long-term in nature, they are liquid as they can be traded in the secondary market. Since
1991, as the economy has recovered and sector reforms increased, the SLR has fallen from
38.5 per cent to 23 per cent over the past decade and same is in effect upto October 2013.
Bank Rate
Bank rate is the minimum rate at which the central bank provides loans to the commercial
banks. It is also called the discount rate. Usually, an increment in bank rate results in com-
mercial banks increasing their lending rates. Changes in bank rate affect credit creation by
banks through altering the cost of credit.
Inflation
Inflation refers to a persistent rise in prices. Simply put, it is a situation of too many buyers
Inflation refers to a persistent
and too few goods. Thus, due to scarcity of goods and the presence of many buyers, the prices rise in prices. Simply put, it is
are pushed up. The converse of inflation, that is, deflation, is the persistent fall in prices. RBI a situation of too many buyers
can reduce the supply of money or can increase interest rates to reduce inflation. and too few goods.
Stagflation
Stagflation occurs when the economy is not growing but prices are, which is not a good situ-
ation for a country to be in. This happened to a great extent during the 1970s, when world oil
prices rose dramatically, fueling sharp inflation in developed countries.
Money Supply (M3)

This refers to the total volume of money circulating in the economy, and, conventionally,
This refers to the total volume
comprises currency with the public and demand deposit (current account + savings account) of money circulating in the
with the public. The RBI has adopted three concepts of measuring money supply. The first economy, and, conventionally,
one is M1, which equals the sum of currency with the public, demand deposit with the pub- comprises currency with the
lic, and other deposit with the public. Simply put, M1 includes all coins and notes in circu- public and demand deposit
(current account + savings ac-
lation and personal current accounts too. The second, M2 is a measure of money supply, count) with the public.
including M1, personal deposit accounts government deposit, and deposit in currencies
other than rupee. The third concept, M3 or the broad money concept, as it is also known, is
quite popular. M3 includes net time deposit (fixed deposit), savings deposit with post office
saving banks, and all the components of M1.
Repo
The repo or repurchase rate is the interest charged by the RBI to banks when they approach it
for short-term loans. The repo rate is linked to the interest rate borrowers pay when they take
loans from banks because the latter always charges interest which is higher than the existing
repo rate. Hence, lower repo rates could induce lenders into lowering the interest rates they
charge from individual borrowers too, thereby making credit more affordable.
When the repo rate is raised, banks are compelled to pay higher interest to the RBI which
in turn prompts them to raise the interest rates on loans they offer to customers. The custom-
ers then are dissuaded in taking credit from banks, leading to a shortage of money in the
economy and less liquidity. Therefore, while on the one hand, inflation is under controlled
as there is less money to spend, growth suffers as companies avoid taking loans at high rates,
leading to a shortfall in production and expansion.
Open Market Operations

The RBI, an important instrument of credit control, purchases and sells securities in open
market operations (OMO). In times of inflation, RBI sells securities to mop up the excess
In times of inflation, RBI sells
money in the market. Similarly, to increase the supply of money, RBI purchases securities. securities to mop up the excess
The RBI revises CRR and repo rates in their quarterly and mid-quarter policy reviews money in the market. Similarly,
to maintain a balance between growth and inflation. The past two years have been proof of to increase the supply of money,
RBI purchases securities.
this practice as the apex bank tried to first tame the monster of inflation with aggressive rate
hikes, and once it saw growth taking a hit, reduced key rates to revive the economy.
A brief trajectory of CRR, SLR, and Repo Rate

CRR SLR Repo
Rates Effective Date Rates Effective Date Rate Effective Date Rates Effective Date
7 21-08-1981 11 29-08-1998 34.5 25-09-1981 9 27-04-2001
7.25 27-11-1981 10.5 13-03-1999 35 30-10-1981 8.75 30-04-2001
7.5 25-12-1981 10 8/5/1999 35.5 28-07-1984 8.5 7-06-2001
7.75 29-01-1982 9.5 6/11/1999 36 1/9/1984 8 28-03-2002
7.25 9/4/1982 9 20-11-1999 36.5 8/6/1985 7.5 12-11-2002
7 11/6/1982 8.5 8/4/2000 37 6/7/1985 7.1 7-03-2003
7.5 27-05-1983 8 22-04-2000 37.5 25-04-1987 7 19-03-2003
8 29-07-1983 8.25 29-07-2000 38 2/1/1988 6 31-03-2004
8.5 27-08-1983 8.5 12/8/2000 38.5 22-09-1990 6.25 26-10-2005
8.5 12/11/1983 8.25 24-02-2001 38.5 (29-02-1992) 6.5 24-01-2006
9 4/2/1984 8 10/3/2001 38.25 9/1/1993 6.75 8-06-2006
9 27-10-1984 7.5 19-05-2001 38 6/2/1993 7 25-07-2006
9 1/12/1984 5.75 3/11/2001 37.75 6/3/1993 7.25 31-10-2006
9 26-10-1985 5.5 29-12-2001 37.5 21-08-1993 7.5 31-01-2007
9 22-11-1986 5 01.06.2002 37.25 18-09-1993 7.75 31-03-2007
9.5 28-02-1987 4.75 16-11-2002 34.75 16-10-1993 8 12-06-2008
9.5 23-05-1987 4.5 25-08-2003 34.25 20-08-1994 8.5 25-06-2008
10 24-10-1987 4.75 18-09-2004 33.75 17-09-1994 9 30-07-2008
10 23-04-1988 5 2/10/2004 31.5 29-10-1994 8 20-10-2008
10.5 2/7/1988 5.25 23-12-2006 25 25-10-1997 7.5 3-11-2008
11 30-07-1988 5.5 6/1/2007 24 8-11-2008 6.5 8-12-2008
15 1/7/1989 5.75 17-02-2007 25 7-11-2009 5.5 5-01-2009
15 4/5/1991 6 3/3/2007 24 18-12-2010 5 5-03-2009
15 11/1/1992 6.25 14-04-2007 23 11-08-2012 4.75 21-04-2009
15 21-04-1992 6.5 28-04-2007 23 04-10-2013 5 19-03-2010
15 8/10/1992 7 4/8/2007 5.25 20-04-2010
14.5 17-04-1993 7.5 10/11/2007 5.5 2-07-2010
14 15-05-1993 7.75 26-04-2008 5.75 27-07-2010
14.5 11/6/1994 8 10/5/2008 6 16-09-2010
14.75 9/7/1994 8.25 24-05-2008 6.25 2-11-2010
15 6/8/1994 8.5 5/7/2008 6.5 25-01-2011
14.5 11/11/1995 8.75 19-07-2008 6.75 17-03-2011
14 9/12/1995 9 30-08-2008 7.25 3-05-2011
13.5 27-04-1996 6.5 11/10/2008 7.5 16-06-2011
13 11/5/1996 6 25-10-2008 8 26-07-2011
(Continued)
A brief trajectory of CRR, SLR, and Repo Rate

CRR SLR Repo
Rates Effective Date Rates Effective Date Rate Effective Date Rates Effective Date
12 6/7/1996 5.5 8/11/2008 8.25 16-09-2011
11.5 26-10-1996 5 17-01-2009 8.5 25-10-2011
11 9/11/1996 5.5 13-02-2010 8 17-04-2012
10.5 4/1/1997 5.75 27-02-2010 7.75 29-01-2013
10 18-01-1997 6 24-04-2010 7.5 19-03-2013
9.75 25-10-1997 5.5 28-01-2012 7.25 3-05-2013
9.5 22-11-1997 4.75 10/3/2012 7.50 20-09-2013
10 6/12/1997 4.5 22-09-2012
10.5 17-01-1998 4.25 3/11/2012
10.25 28-03-1998 4 9/2/2013
10 11/4/1998 4 04-10-2013
Source: www.rbi.org.in
Note: Till 29 March, 1985 the banks were required to maintain statutory liquidity ratio as a prescribed proportion of gross DTL as on every
Friday in the following week on a daily basis. Thereafter, it is maintained daily on a fortnightly basis as a prescribed portion of net DTL as
on last Friday of second preceding fortnight. The data pertains only to domestic deposits.
• The Liquidity Adjustment Facility (LAF) system was operating on ‘auction based variable rate’ during the period from 27 April, 2001 to
28 March, 2004, moved to ‘fixed rate’ mode from 29 March, 2004 in terms of circular RBI/115/2004 dated 25 March, 2004.
IMPACT OF THE MONETARY POLICY

Impact of Cut in CRR on Interest Rates
From time to time, RBI prescribes a CRR or the minimum amount of cash that banks have
From time to time, RBI pre-
to maintain with it. The CRR is fixed as a percentage of total deposit. As more money chases scribes a CRR or the minimum
the same number of borrowers, interest rates come down. amount of cash that banks have
to maintain with it. The CRR is
fixed as a percentage of total
Impact of Change in SLR and Gilt Products on Interest Rates deposit. As more money chases
the same number of borrowers,
SLR reduction is not so relevant in the present context for two reasons: First, as part of the interest rates come down.
reform process, the government has begun borrowing at market-related rates. Therefore,
banks get better interest rates compared to what they used to get earlier for their statutory
investments in government securities.
Second, banks are still the main source of funds for the government. This means that
despite a lower SLR requirement, banks’ investment in government securities will go up as
government borrowing rises. As a result, bank investment in gilts continues to be high despite
the RBI bringing down the minimum SLR to 23 per cent upto October 2013. Therefore, for
For the purpose of determining
the purpose of determining the interest rates, it is not the SLR requirement that is important
the interest rates, it is not the
but the size of the government’s borrowing programme. As government borrowing increases, SLR requirement that is impor-
interest rates, too, rise. tant but the size of the govern-
Besides, the gilts also provide another tool for the RBI to manage interest rates. The RBI ment’s borrowing programme.
As government borrowing
conducts OMO by offering to buy or sell gilts. If it feels that interest rates are too high, it may increases, interest rates, too,
bring them down by offering to buy securities at a lower yield than what is available in the rise.
market.
Impact on Domestic Industry and Exporters

The exporters look forward to the monetary policy since the central bank always makes an
announcement on export refinance, or the rate at which the RBI will lend to banks which
have advanced pre-shipment credit to exporters. A lowering of these rates would mean lower
borrowing costs for the exporter.
Impact on Stock Markets and Money Supply

Most people attribute the link between the amount of money in the economy and movements
in stock markets to the amount of liquidity in the system. This is not entirely true. The factor
connecting money and stocks is interest rates. People save to get returns on their savings.
A hike in interest rates would A hike in interest rates would tend to suck money out of shares into bonds or deposit; a fall
tend to suck money out of would have the opposite effect. This argument has survived econometric tests and practical
shares into bonds or deposit;
experience.
a fall would have the opposite
effect. This argument has sur-
vived econometric tests and Impact of Money Supply on Jobs, Wages, and Output
practical experience.
At any point of time, the price level in the economy is determined by the amount of money
floating around. An increment in the money supply—currency with the public demand
deposit, and time deposit—increases prices all around because there is more currency
moving towards the same goods and services.
Typically, the RBI follows a least-inflation policy, which means that its money market
operations as well as changes in the bank rate are generally designed to minimise the infla-
tionary impact of money supply changes. Since most people can generally see through this
strategy, it limits the impact of the RBI’s monetary moves on jobs or production. The markets,
however, move to the RBI’s tune because of the link between interest rates and capital market
yields. The RBI’s policies have maximum impact on volatile forex and stock markets. The
The jobs, wages, and output jobs, wages, and output are affected over the long run, if the trends of high inflation or low
are affected over the long run, liquidity persist for a very long period. If the wages move slower than other prices, higher
if the trends of high inflation or
low liquidity persist for a very
inflation will drive real wages lower and encourage employers to hire more people. This, in
long period. turn, ramps up production and employment. This was the theoretical justification of a long-
term trend that showed that higher inflation and employment went together; whereas, when
inflation fell, unemployment increased.
MEASURES TO REGULATE MONEY SUPPLY

The RBI uses the interest rate, OMO, changes in banks’ CRR, and primary placements of
government debt to control the money supply. OMO, primary placements, and changes in
the CRR are the most popular instruments used. Under the OMO, the RBI buys or sells
government bonds in the secondary market. By absorbing bonds, it drives up bond yields
and injects money into the market. When it sells bonds, it does so to suck money out of the
system.
The changes in CRR affect the The changes in CRR affect the amount of free cash that banks can use to lend—reducing
amount of free cash that banks the amount of money for lending cuts into overall liquidity, driving interest rates up, lower-
can use to lend—reducing the ing inflation, and sucking money out of markets. Primary deals in government bonds are a
amount of money for lending
cuts into overall liquidity, driving
method to intervene directly in markets, followed by the RBI. By directly buying new bonds
interest rates up, lowering infla- from the government at lower than market rates, the RBI tries to limit the rise in interest rates
tion, and sucking money out of that higher government borrowings would lead to.
markets.
THE MONETARY POLICY AND IMF

One of the important conditionalities of the loan assistance granted by the International
Monetary Fund (IMF) to India since 1991–92, has been to lower its fiscal deficit as a pro-
portion of the gross domestic product (GDP). ‘Fiscal deficit’ is defined as the excess of total
(government) expenditure over revenue receipts, grants, and non-debt capital receipts. This
deficit is met by loans of all kinds and from all sources—domestic and foreign (and is inclu-
sive of all landings by the centre to the states and others). These loan funds were raised from
the open market loans, subscribed by banks and other financial institutions under the pres-
sure of statutory requirement (such as the SLR for banks), small savings and, most of all, the
net RBI credit to the government, which led to automatic monetisation of the government
debt and, thereby, to increase in money supply and in prices.
Moreover, the government debt was raised at relatively low administered rates, which
induced high-fiscal profligacy. The commercial sector was starved of ample bank credit and High and growing fiscal defi-
this credit was too costly. The monetary policy was reduced to the status of a handmaid, cits lay at the root of several of
Indian economic ills, including
confined to financing fiscal deficits at administered rates, so as to minimize the interest cost its serious balance-of-payment
to the government. Thus, high and growing fiscal deficits lay at the root of several of Indian problems. Therefore, it was
economic ills, including its serious balance-of-payment problems. Therefore, it was impera- imperative to lower signifi-
tive to lower significantly, as soon as possible, the fiscal deficit–GDP ratio, without which all cantly, as soon as possible, the
fiscal deficit–GDP ratio, without
loan assistance by the IMF would have gone down the drain. It is ironical that the same advice which all loan assistance by the
had been tendered several times by the RBI in its annual reports. However, the government IMF would have gone down the
did not pay any heed to it. However, coming from the IMF, it was a dictate; that is, an essential drain.
condition for loan assistance, and the Government of India fell in line readily.
Over the following two years, using a combination of revenue raising and expenditure-
control measures, the government has been able to bring down significantly the fiscal deficit–
GDP ratio. Thus, this ratio (at current market prices and in percentage terms) had the value
of 9.4 for 1990–91 and had been brought down to the value of 8.2 for 2011–2012 and the
value of 7.1 for 2012–2013 (refer Table 5.1).
RBI’S MONETARY POLICY MEASURES

Till recently, the RBI was greatly handicapped by the government’s fiscal policy in its role of
regulating the rate of growth of money supply. As pointed out in the previous section and
at several places in the book, ‘excess’ deficit financing by the government has been a major
source of increase in inflation, which, in turn, has been largely responsible, for excessive
increases in money supply year after year. The RBI, in its annual reports, had been plead-
The RBI, in its annual reports,
ing unsuccessfully, for several years, that the government must exercise checks on its very had been pleading unsuccess-
large budget deficits in the interest of monetary stability. But to no avail. Unfortunately, as fully, for several years, that
explained in the previous section, the Chakravarty Committee (1985) had recommended a the government must exercise
checks on its very large budget
high annual rate of growth (of 14 per cent) of money supply. The external IMF–World Bank
deficits in the interest of mon-
pressure on the government since June 1991, to cut down its deficit and carry through other etary stability. But to no avail.
structural reforms, has opened the gate for monetary policy reforms as well.
The RBI has been authorised to formulate the monetary policy of the country, with the
objective to accelerate the pace of economic development, for raising national income and
the standard of living as well as to control and minimise the inflationary spiral in prices in the
country. Thus, the monetary policy of the country aims to attain higher level of output and
employment, price stability, exchange stability, and balance of payment equilibrium.
Table 5.1
Key Fiscal Indicators
> (As per cent to GDP)
Year Primary Revenue Gross Outstanding Outstanding
Deficit Deficit Fiscal Liabilities@ Liabilities$
Deficit
1 2 3 4 5 6
1990–91 5.0 4.2 9.4 64.7 70.9
1995–96 1.6 3.2 6.5 61.1 69.3
2000–01 3.6 6.6 9.5 70.4 76.5
2007–08 –1.2 0.2 4.0 69.5 71.4
2008–09 3.3 4.3 8.3 69.7 72.2
2009–10 4.5 5.7 9.4 69.0 70.8
2010–11 2.4 3.2 6.9 64.5 66.0
2011–12 RE 3.6 4.4 8.2 64.1 65.6
2012–13 BE 2.6 3.0 7.1 – –
Source: Budget documents of the central and state governments.

1. – : Not available. RE : Revised Estimates. BE : Budget Estimates.
2. Negative sign (–) indicates surplus in deficit indicators.
3. @ : Includes external liabilities of the centre calculated at historical exchange rate.
4. $ : Includes external liabilities of the centre calculated at current exchange rate.
Since the First Plan onwards, the RBI followed the monetary policy to attain ‘economic
The monetary policy pursued growth with reasonable price stability.’ Accordingly, the monetary policy pursued by the RBI
by the RBI wanted to enhance wanted to enhance the flow of currency and credit for meeting the increasing demand for
the flow of currency and credit investment funds for attaining rapid economic development. Simultaneously, the monetary
for meeting the increasing
demand for investment funds policy has also made a serious attempt to control the inflationary trend in prices since 1973.
for attaining rapid economic In recent years, the monetary policy of the country has been following two sets of objec-
development. tives. Firstly, the policy is trying to enhance the flow of bank credit in adequate quantity to
industry, agriculture and trade to meet the requirement, and also to provide special assist-
ance for neglected sectors and weaker sections of the community. Secondly, monetary policy
of the RBI is also trying to maintain internal price stability by controlling the flow of credit to
the optimum level.
Credit Control
As per the RBI Act, 1934 and the Banking Regulation Act, 1949, the RBI has been empow-
The credit control measures
ered to adopt credit control measures for proper regulation of the volume of credit. The
are of two types, that is, quan- credit control measures are of two types, that is, quantitative controls and qualitative con-
titative controls and qualitative trols. While the quantitative controls are trying to control the volume of credit in general
controls. the qualitative controls are trying to control the volume of credit in a selective manner. The
following are some of the measures adopted by RBI to control credit.
Bank Rate: By adopting a variation in the bank rate, the RBI is trying to influence the
interest rate charged by the commercial banks on its lending. Initially, the bank rate was
fixed by the RBI at 2 per cent till November 1951. After the bank rate was gradually raised to
12 per cent in October 1991 and, then, reduced again gradually to 6 per cent in January 2009.
Open Market Operations (OMO): The RBI has also been empowered to buy and sell
short term commercial bills and securities so as to control the volume of credit.
Cash Reserve Ratio (CRR): The variation in the CRR is another method of credit con-
trol pursued by the RBI. As per RBI Act, 1934, the commercials have to keep certain mini-
mum cash reserve with the RBI. Accordingly, the CRR has been raised from 3 per cent in
1962 to 15 per cent in July 1989 and then it, subsequently, declined to 5 per cent in January
2009.
The efficacy of the selective
Selective Credit Control (SCC): As per Banking Regulation, 1949, the RBI is empow- credit controls should not be
ered to control credit on qualitative basis, that is, in a selective manner. Accordingly, the SCC assessed mainly in terms of
was first introduced in 1956. The SCC wanted to check speculation activities in the market their positive influence on
and, thereby, controls the flow of credit selectively. Since 1993–94, the RBI adopted stricter prices since the latter primarily
depends on the availability of
SCC. Accordingly, stricter controls have been imposed on six broad groups of commodities, supply of the relevant commodi-
which include food grains, sugar, oilseeds, cotton, vegetable oil, and cotton textiles. ties relative to demand. The suc-
Regarding the effectiveness of SCC, the RBI quotes: cess of these controls is to be
judged in a limited sphere, viz.,
The efficacy of the selective credit controls should not be assessed mainly in terms of their impact on the pressure of
their positive influence on prices since the latter primarily depends on the availability demand originating from bank
credit—in this sense, the mea-
of supply of the relevant commodities relative to demand. The success of these controls sures should be deemed suc-
is to be judged in a limited sphere, viz., their impact on the pressure of demand origi- cessful, but for their operation it
nating from bank credit—in this sense, the measures should be deemed successful, is likely that the price situation
but for their operation it is likely that the price situation might have been somewhere might have been somewhere
worse.’
worse.
Box 5.1 defines the differences between the restrictive and the accounting monetary policy.
Box 5.1 Restrictive Vs Accounting Monetary Policy
Restrictive Monetary Policy Accounting Monetary Policy

A restrictive monetary policy seeks to raise Liberal or Accommodating Monetary Policy
the rate of interest, reduce money supply
It is generally mean to fight recession and stimulate demand through
growth rate and restrict the flow of credit,
credit liberalization, monetary expansion, and fall in rate of interest.
and in, generally, aimed to fight inflation.
RBI’S MONETARY POLICY, 2012–13

The Annual Policy for 2012–13 is set in a challenging macroeconomic environment. At the
global level, concerns about a crisis have abated somewhat. The US economy continues to
show signs of modest recovery. Large scale liquidity infusions by the European Central Bank
(ECB) have significantly reduced stress in the global financial markets. The euro area sover-
eign debt problem will continue to weigh on the global economy. Growth risks have emerged
in emerging and developing economies and amidst all these, crude oil prices have risen by
about 10 per cent.
GDP growth moderated to 6.1 per cent during Q3 of 2011–12 from 6.9 per cent in Q2
and 8.3 per cent in the corresponding quarter of 2010–11. This was mainly due to modera-
tion in industrial growth from 2.8 per cent in Q2 to 0.8 per cent in Q3. The services sector
held up relatively well (with growth being 8.7 per cent in both Q2 and Q3 of 2011–12).
Overall, GDP growth during April–December 2011 slowed significantly to 6.9 per cent from
8.1 per cent in the corresponding period of the previous year.
Growth in the index of industrial production (IIP) decelerated to 3.5 per cent during
2011–12 (April-February) from 8.1 per cent in the corresponding period of the previous
year. In terms of use-based classification, while capital goods and intermediate goods sectors
registered negative growth of 1.8 per cent and 0.9 per cent, respectively, the growth of the
consumer durables sector decelerated to 2.7 per cent. These trends suggest that activity may
have expanded slower than 6.9 per cent in Q4 implied in the advance estimates of GDP.
Going forward into 2012–13, assuming a normal monsoon, agricultural growth could
stay close to the trend level. Industry is expected to perform better than in last year as lead-
ing indicators of industry suggest a turnaround in IIP growth. The global outlook also looks
slightly better than expected earlier. Overall, the domestic growth outlook for 2012–13 looks
a little better than in 2011–12. Accordingly, the baseline GDP growth for 2012–13 is pro-
jected at 7.3 per cent.
Chart 1: Projection of GDP growth (y-0-y) for 2012–13

9.0
8.0
Per cent
7.0
6.0
5.0
2008–09
2009–10
2010–11
2011–12
2012–13
50 per cent CI 70 per cent CI 90 per cent CI Base Line CI – Confidence Interval
Source: www.rbi.org.in
Monetary Measures
In Annual Monetary Policy 2012–13, RBI surprised markets by easing Repo rate by 50 bps
to 8 per cent.
The consensus market expectations were for a cautious 25 bps cut.
Policy Rate changes
• Repo rate lowered by 50 bps to 8 per cent

• Reverse Repo rate and Marginal Standing Facility (MSF) Rate automatically lowered
by 50 bps at 7 per cent and 9 per cent respectively. Further, RBI increased borrowing
under MSF from 1 per cent of NDTL to 2 per cent of NDTL. Banks with excess SLR
can also borrow under MSF.
• CRR remains unchanged at 4.75 per cent of NDTL.
Economic Projections
• RBI pegged the growth forecast for 2012–13 at 7.3 per cent vs. 7.0 per cent projection
for 2011–12
• Inflation projection lower at 6.5 per cent in Mar-13 lower than 7 per cent in Mar-12
• Money supply growth for 2012–13 pegged at 15 per cent slightly lower than
15.5 per cent for 2011–12
• Credit growth increased to 17 per cent for 2012–13 compared to 16 per cent for 2011–12
II. FISCAL POLICY OF INDIA

CONCEPT AND MEANING OF FISCAL POLICY
The fiscal policy plays an important role on the economic and social front of a country. Tra- The fiscal policy plays an impor-
ditionally, fiscal policy is concerned with the determination of state income and expendi- tant role on the economic and
ture policy. But with the passage of time, the importance of fiscal policy has been increasing social front of a country. Tra-
continuously given the need to attain rapid economic growth. Accordingly, it has included ditionally, fiscal policy is con-
cerned with the determination
public borrowing and deficit financing as a part of fiscal policy of the country. An effec- of state income and expendi-
tive fiscal policy is composed of policy decisions relating to entire financial structure of the ture policy.
government, including tax revenue, public expenditures, loans, transfers, debt management,
budgetary deficit, and so on. The policy also tries to attain a proper balance between these
aforesaid units so as to achieve the best possible results in terms of economic goals.
Harvey and Johnson, M. defined fiscal policy as ‘changes in government expenditure and
taxation designed to influence the pattern and level of activity.’
According to G. K. Shaw, ‘We define fiscal policy to include any design to change the
price level, composition or timing of government expenditure or to vary the burden, struc-
ture of frequency of the tax payment.’
Otto Eckstein defines fiscal policy as ‘changes in taxes and expenditure which aim at
short run goals of full employment price level and stability.’
OBJECTIVES OF THE FISCAL POLICY

In India, the fiscal policy is gaining its importance in recent years with the growing involve- In India, the fiscal policy is gain-
ment of the government in developmental activities of the country. The following are some of ing its importance in recent years
the important objectives of fiscal policy adopted by the Government of India: with the growing involvement
of the government in develop-
1. To mobilise adequate resources for financing various programmes and projects mental activities of the country.
adopted for economic development;
2. To raise the rate of savings and investment for increasing the rate of capital formation;
3. To promote necessary development in the private sector through fiscal incentive;
4. To arrange an optimum utilisation of resources;
5. To control the inflationary pressures in economy in order to attain economic stability;
6. To remove poverty and unemployment;
7. To attain the growth of public sector for attaining the objective of socialistic pattern
of society;
8. To reduce regional disparities; and

9. To reduce the degree of inequality in the distribution of income and wealth.
In order to attain all these aforesaid objectives, the Government of India has been formulat-
ing its fiscal policy by incorporating the revenue, expenditure, and public debt components
in a comprehensive manner.
FISCAL POLICY AND ECONOMIC

DEVELOPMENT
One of the important goals of One of the important goals of fiscal policy formulated by the Government of India is to attain
fiscal policy formulated by the rapid economic development of the country. To attain such economic development in the
Government of India is to attain
country, the fiscal policy of the country has adopted the following two objectives:
rapid economic development of
the country. 1. To raise the rate of productive investment of both public and private sector of the
country.
2. To enhance the marginal and average rates of savings for mobilising adequate finan-
cial resources, for making investment in public and private sectors of the economy.
The fiscal policy of the country is trying to attain both these two objectives during the plan
periods.
TECHNIQUES OF FISCAL POLICY

The following are the four im- The following are the four important techniques of fiscal policy of India:
portant techniques of fiscal
policy of India: 1. Taxation Policy
• Taxation Policy
2. Public Expenditure Policy
• Public Expenditure Policy
• Public Debt Policy 3. Public Debt Policy
• Deficit Financing Policy
4. Deficit Financing Policy
Policy of Taxation of the Government of India
One of the important sources One of the important sources of revenue for the Government of India is the tax revenue.
of revenue for the Government Both the direct and indirect taxes are being levied by the Government of India. Direct taxes
of India is the tax revenue. Both are progressive by nature and most of the indirect taxes are regressive in nature. Taxation
the direct and indirect taxes are
being levied by the Government
plays an important role in mobilising the resources for a plan. During the First, Second,
of India. and Third Plan, additional taxation alone contributed nearly 12.7 per cent, 22.8 per cent,
and 34 per cent of public sector plan expenditure, respectively. The same shares during
the Fourth, Fifth, Sixth, and Seventh Plan were 27 per cent, 37 per cent, 22 per cent, and
15 per cent, respectively.
The total tax revenue collected by the Government of India stands at 72.13 per cent of
the total revenue of the government. Mobilisation of taxes by the government stands around
15 per cent to 16 per cent of the national income of the country during the recent years. The
main objectives of taxation policy in India include
1. Mobilisation of resources for financing economic development;

2. Formation of capital by promoting saving and investment through time deposit,
investment in government bonds, in units, insurance, and so on;
3. Attainment of quality in the distribution of income and wealth through the imposi-
tion of progressive direct taxes; and
4. Attainment of price stability by adopting anti-inflationary taxation policy.
Public Expenditure Policy of the Government of India

The public expenditure is playing an important role in the economic development of a
country like India. With the increase in the responsibilities of the government and with the With the increase in the re-
increasing participation of government in economic activities of the country, the volume of sponsibilities of the govern-
public expenditure in a highly populated country like India is increasing at a galloping rate. ment and with the increasing
participation of government
In 1992–93, the public expenditure as percentage of GDP was around 30 per cent. Public
in economic activities of the
expenditure is an expenditure of the government and is mostly related to the developmental country, the volume of public
activities, viz., development of infrastructure, industry, health facilities, educational institu- expenditure in a highly populat-
tions, and so on. The non-developmental expenditure is mostly a maintenance type of ex- ed country like India is increas-
ing at a galloping rate.
penditure and is related to maintenance of law and order, defence administrative services,
and so on. The public expenditure incurred by the Government of India has been creating a
serious impact on the production and distribution pattern of the economy.
The following are some of the important features of the policy of public expenditure
formulated by the Government of India.
Development of Infrastructure: The development of infrastructural facilities, including
development of power projects, railways, roads, transportation system, bridges, dams, irriga-
tion projects, hospitals, educational institutions, and so on, involves huge expenditure by the
government as private investors are very much reluctant to invest in these areas, considering
the low rate of profitability and high risk involved in it.
Development of Public Enterprises: The development of heavy and basic indus- The development of heavy and
tries is very important for the development of an underdeveloped country. However, the basic industries is very impor-
establishment of these industries involves huge investment and a considerable proportion tant for the development of an
of risk. Naturally, private sector cannot take the responsibility to develop these industries. underdeveloped country.
Therefore, the development of these industries has become a responsibility of the Govern-
ment of India, particularly since the introduction of the Industrial Policy, 1956. A significant
portion of public expenditure has been utilised for the establishment and improvement of
these public enterprises.
Support to Private Sector: Providing the necessary support to the private sector for
the establishment of industry and other projects is another important objective of public
expenditure policy formulated by the Government of India.
Social Welfare and Employment Programmes: Another important feature of public
expenditure policy pursued by the Government of India is its growing involvement in attain-
ing various social welfare programmes and also on employment-generation programmes.
Policy of Deficit Financing of the Government of India

The deficit financing in India
Following the policy of deficit financing as introduced by J. M. Keynes, the Government
indicates loan taking by the
of India has been adopting the policy for financing its developmental plans since its incep- government from the RBI in the
tion. The deficit financing in India indicates loan taking by the government from the RBI form of issuing fresh dose of
in the form of issuing fresh dose of currency. Considering the low level of income, low rate currency.
of savings, and capital formation, the government is taking recourse to deficit financing in
increasing proportion.
Deficit financing is a kind of forced savings. Accordingly, Dr. V. K. R. V. Rao
observed, ‘Deficit financing is the name of volume of those forced savings which
are the result of increase in prices during the period of the Government investment.’
Thus deficit financing helps the country by providing necessary funds for meeting
the requirements of economic growth but, at the same time, it also creates the prob-
lem of inflationary rise in prices. Thus, the deficit financing must be kept within the
manageable limit.
During the First, Second, Third, and Fourth Plan, deficit financing as percentage of total plan
resources was to be to the extent of 17 per cent, 20 per cent, 13 per cent, and 13.5 per cent,
respectively. However, due to the adverse consequence of deficit financing through inflation-
ary rise in price level, the extent of deficit financing was reduced to only 3 per cent during
the Fifth Plan.
But due to resource constraint, the extent of deficit financing again rose to 14 per cent
Knowing fully well the evils of and 16 per cent of total plan resources, respectively. Thus, knowing fully well the evils of
deficit financing, planners are deficit financing, planners are still maintaining a high rate of deficit financing in the absence
still maintaining a high rate of of increased tax revenue due to a large-scale tax evasion and negative contribution of public
deficit financing in the absence
of increased tax revenue due enterprises. However, considering the present inflationary trend in prices, the government
to a large scale tax evasion and should give lesser stress on deficit financing.
negative contribution of public
enterprises.
Public Debt Policy of the Government of India
As the taxation has got its own limit in a poor country like India due to poor taxable capacity
of the people, the government is taking are course to public debt for financing its develop-
mental expenditure. In the post-independence period, the central government has been rais-
ing a good amount of public debt regularly, in order to mobilise a huge amount of resources
for meeting its developmental expenditure. The total public debt of the central government
includes internal and external debt.
The Internal debt indicates the Internal Debt: The Internal debt indicates the amount of loan raised by the government
amount of loan raised by the from within the country. The government raises internal public debt from the open market
government from within the by issuing bonds and cash certificates and 15 years annuity certificates. The government also
country.
borrows for a temporary period from RBI (treasury bills issued by RBI) and also from com-
mercial banks.
External Debt: As the internal debt is insufficient, the government is also collecting loan
from external sources, that is, from abroad, in the form of foreign capital technical know-
the central government is also how and capital goods. Accordingly, the Central government is also borrowing from inter-
borrowing from international fi- national financing agencies for financing various developmental projects. These agencies
nancing agencies for financing include World Bank, IMF, IDA, IFC (Integrated Finance Corporation), and so on. Moreover,
various developmental projects.
the government is also collecting inter-governmental loans from various developed countries
of the world for financing its various infrastructural projects.
The volume of public debt in India has been increasing at a considerable rate, that is,
from ` 204 crore during the First Plan to ` 2,135 crore during the Fourth Plan to ` 103,226
crore during the Seventh Plan and then to ` 36,945 crore in Eighth plan, further it went
to ` 54,239 crore in 1996–97, ` 55331.97 in 1997–98, ` 57254.33 in 1998–99, ` 58437.19
in 1999–2000 ` 58,428.45 in 2001, ` 59593.55 in 2002 and finally at ` 2,93,219 in the
year 2010.
MERITS OF FISCAL POLICY OF INDIA

The following are some of the important merits or advantages of fiscal policy of Government
of India.
Capital Formation
The fiscal policy of the country has been playing an important role in raising the rate of capi-
tal formation in the country, both in its public and private sectors. The gross domestic capital
formation as per cent of GDP in India has increased from 10.2 per cent in 1950–51 to 22.9 per
cent in 1980–81 and, then, to 24.8 per cent in 1997–98, and 30 per cent in 2011–12. Therefore,
it has created a favourable impact on the public and private sector investment of the country.
Mobilisation of Resources
The fiscal policy of the country has been helping to mobilise considerable amount of resourc-
The fiscal policy of the country
es through taxation, public debt, and so on, for financing its various developmental projects. has been helping to mobil-
The extent of internal resource mobilisation for financing plan has increased considerably ise considerable amount of
from 70 per cent in 1965–66 to around 90 per cent in 1997–98. resources through taxation,
Box 5.2 defines the terms—Monetary Policy and Fiscal Policy. public debt, and so on, for
financing its various develop-
mental projects.
Incentives to Savings
The fiscal policy of the country has been providing various incentives to raise the savings
rate, both in household and corporate sector, through various budgetary policy changes, viz.,
tax exemption, tax concession, and so on. Accordingly, the savings rate has increased from a
mere 10.4 per cent in 1950–51 to 23.1 per cent in 1997–98.
Inducement to Private Sector

The private sector of the country has been getting necessary inducements from the fiscal
policy of the country to expand its activities. Tax concessions, tax exemptions, subsidies, and The private sector of the coun-
try has been getting necessary
so on, incorporated in the budgets have been providing adequate incentives to the private
inducement from the fiscal pol-
sector units engaged in industry, infrastructure, and export sector of the country. icy of the country to expand its
activities.
Reduction of Inequality
The fiscal policy of the country has been making constant endeavour to reduce the inequality
The fiscal policy of the coun-
in the distribution of income and wealth. Progressive taxes on income and wealth tax exemp- try has been making constant
tion, subsidies, grant, and so on, are making a consolidated effort to reduce such inequality. endeavour to reduce the
Moreover, the fiscal policy is also trying to reduce the regional disparities through its various inequality in the distribution of
budgetary policies. income and wealth.
Box 5.2 Monetary Policy and Fiscal Policy
Monetary Policy Fiscal Policy

It refers to all actions of the government or the central Fiscal policy is basically concerned with the use of
government of a country which affect, directly or taxes and government expenditure, through the issues
indirectly, the supply of money, credits, rate of interest, relating to non-tax revenue, government borrowing,
and the banking system. Basically, it affects the cost and and fiscal federalism are closely associated with these
availability of credit in the economy. factors for achieving predetermined objectives.
Export Promotion
The fiscal policy of the govern- The fiscal policy of the government has been making constant endeavours to promote export
ment has been making constant through its various budgetary policies in the form of concessions, subsidies, and so on.
endeavours to promote export
through its various budgetary
As a result, the growth rate of export has increased from a mere 4.6 per cent in 1960–61 to
policies in the form of conces- 10.4 per cent in 1996–97.
sions, subsidies, and so on.
Alleviation of Poverty and Unemployment
Another important merit of the Another important merit of the Indian fiscal policy is that it is making constant effort to
Indian fiscal policy is that it is alleviate poverty and unemployment problem through its various poverty eradication
making constant effort to allevi-
ate poverty and unemployment
and employment generation programmes, like, IRDP (Integrated Rural Development
problem through its various programme), JRY (Jawahar Rozgar Yojana), PMRY (Pradhan Mantri Rozgar Yojana), SJSRY
poverty eradication and employ- (Swarna Jayanti Shahari Rozgar Yojana), EAS (Employment Assurance Scheme), and so on.
ment generation programmes
THE SHORTCOMINGS OF THE FISCAL

POLICY OF INDIA
The disequilibria in its b
alance
The following are the main shortcomings of the fiscal policy of the country. Instability The
of payments has also affected fiscal policy of the country has failed to attain stability in various fronts. The growing volume
the external stability of the of deficit financing has created the problem of inflationary rise in the price level. The dis
country. equilibria in its balance of payments has also affected the external stability of the country.
Defective Tax Structure

The fiscal policy has also failed The fiscal policy has also failed to provide a suitable tax structure for the country. The tax
to provide a suitable tax struc- structure has failed to raise the productivity of direct taxes and the country has been relying
ture for the country.
much on indirect taxes. Therefore, the tax structure has become burdensome to the poor.
Inflation
The fiscal policy of the country has failed to contain the inflationary rise in price level. The
increasing volume of public expenditure on non-developmental heads and deficit financing
has resulted in demand-pull inflation. The higher rate of indirect taxation has also resulted in
the direct taxes has failed cost-push inflation. Moreover, the direct taxes has failed to check the growth of black money,
to check the growth of black which is again aggravating the inflationary spiral in the level of prices.
money, which is again aggravat-
ing the inflationary spiral in the
level of prices. Negative Return of the Public Sector
The negative return on capital invested in the public sector units (PSUs) has become a serious
problem for the Government of India. In spite of having a huge total investment to the extent
of ` 204,054 crore in 1998 on PSUs, the return on investment has remained mostly negative.
In order to maintain those PSUs, the government has to keep huge amount of budgetary pro-
visions, thereby, creating a huge drainage of scarce resources of the country.
Growing Inequality
The fiscal policy of the country The fiscal policy of the country has failed to contain the growing inequality in the distribu-
has failed to contain the grow-
ing inequality in the distribution tion of income and wealth throughout the country. The growing trend of tax evasion has
of income and wealth through- made the tax machinery ineffective for the purpose. Again, the growing reliance on indirect
out the country. taxes has made the tax structure regressive.
SUGGESTIONS FOR NECESSARY REFORMS IN

FISCAL POLICY
The following are some of the important measures suggested for necessary reforms of the
fiscal policy of the country.
Progressive Taxes
The tax structure of the country should try to infuse more progressive elements so that it can
The tax structure of the country
put a heavy burden on the rich and less burden on the poor. Necessary amendments have to be should try to infuse more pro-
made in respect of irrigation tax, sales tax, excise duty, land revenue, property taxes, and so on. gressive elements so that it can
put a heavy burden on the rich
and less burden on the poor.
Agricultural Taxation
The tax net of the country should be extended to the agricultural sector for tapping a huge
amount of revenue from the rich agriculturists.
Broad-based Tax Net

Tax net of the country should be broad-based so that it can cover an increasing number of
population having the taxable capacity.
Checking Tax Evasion

Adequate measures must be taken to check the problem of tax evasion in the country. Tax
Adequate measures must be
laws should be made stricter for prosecuting the tax evaders. Tax machinery should be made taken to check the problem of
more efficient and honest to gear up its operations. Tax rate should be reduced to encourage tax evasion in the country.
the growing trend of tax compliance.
Increasing Reliance on Direct Taxes

The tax machinery of the country should attach much more reliance on direct taxes instead
of indirect taxes. Accordingly, the tax machinery should try to introduce wealth tax, estate
duty, gift tax, expenditure tax, and so on.
Simplified Tax Structure

The tax structure and rules of the country should be simplified so that it can encourage tax com- The tax structure and rules of
pliance among the people and can also remove the unnecessary harassment of the tax payers. the country should be simplified
so that it can encourage tax
compliance among the people
Reduction of Non-development Expenditure and can also remove the unnec-
essary harassment of the tax
The fiscal policy of the country should try to reduce the non-developmental expenditure of payers.
the country. This would reduce the volume of unproductive expenditure and can reduce the
inflationary impact of such expenditure.
Checking Black Money

The fiscal policy of the country should try to check the problem of black money. In this direc- The fiscal policy of the country
tion, schemes like VDIs should be repeated and tax rates should be reduced. Corruption and should try to check the problem
political interference should be abolished. Smuggling and other nefarious activities should of black money.
be checked.
Raising the Profitability of PSUs

The government should try to restructure its policy on public sector enterprises, so that
PSUs should be managed in a its efficiency and rate of return on capital invested can be raised effectively. PSUs should
rational manner with least gov- be managed in a rational manner with least government interference and in commercial
ernment interference and in
commercial lines.
lines. Accordingly, the policy of budgetary provisions for maintaining the PSUs should be,
gradually, eliminated. Box 5.3 lists the major areas of second wave of economic reform.
Box 5.3 Second Wave of Economic Reform

Major areas of second wave of economic reform are as follows:
1. Fiscal Policy Reform 5. Industrial Policy Reform

2. Monetary Policy Reform 6. Foreign Investment Policy Reform
3. Pricing Policy Reform 7. Trade Policy Reform
4. External Policy Reform 8. Public Sector Policy Reform
FISCAL POLICY STATEMENT, 2012–13

Fiscal Policy Overview
Global economic situation during 2008–09 and 2009–10 impacted the performance of
emerging market economies and India was no exception. The swift revival during 2010–11,
wherein Indian economy grew at 8.4 per cent on the base of similar growth in 2009–10,
showed that resilience of Indian economy in steering through difficult international scenari-
os have further improved. However, continuance of the financial crisis in Euro Zone coupled
with exogenous shocks like increase in the international crude prices brought out the vul-
nerability of Indian economy towards global events back to the forefront. Growth in Indian
economy is estimated to moderate to 6.9 per cent in 2011–12 as against the earlier estimate
of 9 per cent at the time of presentation of Budget 2011–12.
The moderation in growth coupled with sticky inflation at much higher than the comfort
level necessitated a change of stance in fiscal policy of the government. The process of fis-
cal consolidation which resumed in 2010–11 had to be paused once again during 2011–12.
However, this change in policy would be temporary in nature and government is committed
to get back to the path of fiscal consolidation. While the economy is estimated to register
growth of about 7.6 per cent during 2012–13 which is lower than the potential growth rate,
yet government has come up with a revised fiscal roadmap with gradually reducing fiscal
deficit in coming year.
The change in fiscal policy stance during 2011–12 should be seen against the backdrop of
some significant changes in the macro-economic parameters in the Indian and world econo-
my during 2011. First is the issue of international crude prices; while it was hovering around
US $ 85 to 90 per barrel at the time of presentation of Budget 2011–12, it went up sharply and
remained sticky at about US $ 110 to 115 per barrel during most part of the calendar year
2011. Presently, it is well above US $ 120 per barrel. In tandem with high crude price, prices
of most of the petroleum products in the international market went up sharply. As India
imports bulk of its crude requirements and the pricing of petroleum products by oil market-
ing companies (OMCs) for the purpose of calculating under-recoveries are benchmarked to
the international prices, there was significant increase in the estimated under-recovery of
OMCs. With high level of prevailing inflation, it was felt that pass through of high interna-
tional prices to retail level would compound the problem of inflation. The government there-
fore decided to lower the tax incidences on these products. Along with partial increase in
retail prices of petroleum products during June 2011, the under-recoveries of the OMCs were
reduced to some extent. Though this intervention reduced the under-recoveries of OMCs,
government had to give tax concession to the extent of `36,750 crore for the remaining part
of fiscal 2011–12.
FISCAL POLICY—AN ASSESSMENT

The Indian Fiscal Situation
Fiscal situation may worsen due to rising inflation, decline in economic growth, and glo-
bal slowdown. With little room available for taking counter-cyclical fiscal measures, India’s
faltering growth coupled with unresponsive inflation can push the country’s economy to a
precarious situation which could be closer to the one prevailing at the time of 1991 economic
crisis. Continued turbulence in the global economic conditions and widening infrastructure
deficiencies are the major challenges for India’s growth story.
The current account deficit needs to be financed through external capital inflows, add-
ing that the government’s funding of the deficit through domestic sources tends to cause
inflation. Deviation from the Fiscal Responsibility and Budget Management (FRBM) Act by
the government has resulted in deteriorated fiscal health of the public finances. The slower
pace of GDP growth has affected the manufacturing and trade sectors thereby resulting in
lower than estimated excise duty collections. Higher policy rates of RBI, in an effort to con-
tain inflation, has led to an investment downturn.
Financial Repression
India has been a financially repressed economy, since at least the 1960s, and, especially
since 1969, when all major banks were nationalised. The links of financial repression to
fiscal policy come about through its implicit tax on the financial system, as well as through
its growth consequences, which, in turn, have implications for government finances.
Repressionist policies include
Repressionist policies include various interest rate controls, directed credit programmes, various interest rate controls,
and required liquidity and reserve ratios. An index based on these measures (Demetriades directed credit programmes,
and Luintel 1997) shows an increase in financial repression from 1961 through 1984. The in- and required liquidity and
reserve ratios.
dex fell in 1985, reflecting a partial deregulation of deposit rate controls. However, controls
were re-introduced after a couple of years, and it was only in 1990 that financial liberaliza-
tion appeared to take a firm hold.
The financial repression policies force the non-government sector, including publicly
owned commercial banks, to lend to the government at an interest rate below what would
have prevailed in the absence of such policies. The government is, therefore, able to reduce
the borrowing cost of financing its expenditures, as well as the need to monatise as an alter-
native financing mechanism, which would instead constitute a politically unpopular infla-
tion tax. One potential consequence of this system is lower growth through negative impacts
on the financial system. Further, borrowing at a rate below that which would have cleared
markets induces the government to borrow more than what it would have at higher, market-
clearing rates, besides reducing the interest cost of what it can borrow.
Fiscal Adjustment
Credit growth was rapid in India in the years before the crisis, with lending to the private
sector expanding by 20 percentage points of GDP during 2001–08. It remained strong in the
aftermath of the crisis, with a growing concentration on infrastructure projects, in response
to the government’s ambitious investment targets. India’s banks remain well capitalized, and
the likelihood of financial sector stress is low (as noted in the October 2012 World Economic
Outlook). However, credit quality has tended to deteriorate recently, particularly among the
state-owned banks, which account for 73 per cent of the banking assets. Gross nonperforming
assets in public banks reached 3.3 per cent of advances in 2012. However, the long-run risk
may be underestimated, as historically about 15 per cent of assets reported as ‘restructured’
(a category that likely accounted for 7.3 per cent of the public banks’ assets as of September
2012) are eventually classified as nonperforming. The Reserve Bank of India has recently
taken important steps to tighten bank reporting requirements to get a more accurate picture
of asset quality.
However, state-owned bank portfolios remain vulnerable to losses from delayed infra-
structure projects and, most importantly, to the recent growth slowdown that has dented
the profits of the large companies that account for the bulk of Indian banks’ loan portfolios.
The economy now appears to have bottomed out, but this may not yet be fully reflected in
banks’ credit quality. The new and higher capital standards under Basel III will also demand
an increase in bank capital if credit growth is to continue. Although precise estimates of
state-owned banks’ future capital needs are difficult to compute, these needs are expected to
be about 1 per cent of GDP cumulatively between 2013 and 2019, depending on the growth
trajectory. Further asset quality deterioration could raise needs substantially, but reducing
government ownership (which would require legislative action) could bring them down.
Beyond bank capitalisation, potential losses among India’s state-owned enterprises and
the large program of public–private partnerships also represent contingent liabilities.
Financing Development Priorities

A major concern with any fiscal A major concern with any fiscal adjustment is its potential cost in slowing economic devel-
adjustment is its potential opment, and, in particular, its possible adverse effects on the poor, whose dependence on
cost in slowing economic
development, and, in particular,
public services and income support is larger than of the non-poor. There are two factors that
its possible adverse effects on suggest that such cost may not be high. First, India is, at least for now, in a position to im-
the poor, whose dependence plement some fiscal adjustment before a crisis possibly hits. This allows Indian government
on public services and income the opportunity to choose carefully how to go about getting its fiscal house in order, without
support is larger than of the
non-poor.
any constraints that would be imposed in a crisis situation. There appears to be a reasonable
technical consensus on needed reforms, and on how sufficient political support can be mo-
bilised to implement these reforms. These factors, in principle, would moderate the cost of
adjustment.
The second advantage—if it can be termed is, that in India, delivery of public services
is very inefficient in terms of cost-effectiveness. Improvements in efficiency can allow fewer
rupees to achieve the same or even greater benefits than is currently the case. Examples of
such ‘X-inefficiency’ include the core administrative service at the Centre and the states, pro-
‘The burden of weak adminis-
tration falls particularly on the
grammes such as the public distribution system (PDS) for food, and PSEs, such as the SEBs.
poor, who suffer from skewed In many of these cases, there will be losers, since public sector employees may currently be
government spending, lim- enjoying monetary rents or leisure that will be lost. However, one can hazard that at least
ited access to services, and some of the leisure in inefficient organisations is involuntary, and results in frustration rather
employee indifference.’
than any utility gain. As for the impacts on the poor, the World Bank (2003) is quite clear in
its conclusions: ‘The burden of weak administration falls particularly on the poor, who suffer
from skewed government spending, limited access to services, and employee indifference.’
Thus, it seems that there is room for fiscal adjustment that benefits rather than hurts the poor.
In this context, it has also been noted in the past that a system of explicit user charges oft en
allows for more efficient as well as more equitable delivery of services.
The efficiency of delivery of health and education in rural areas can be improved sub-
stantially, either through restructuring government efforts, or bringing in private partici-
pants such as non-governmental organisations or community groups. There is substantial
evidence that institutional innovations can improve efficiency. In either case, the gains come
from improved incentives and reduced transaction costs. Of course, there are many areas
where more cannot be simply squeezed out of the existing expenditures just by improving
incentives for those responsible for the service delivery. In particular, India still suffers from
major bottlenecks in roads, ports, electric power, and urban infrastructure.
In any case, if India is to achieve a fiscal adjustment that protects growth and develop-
In any case, if India is to
ment, it needs to create conditions in its financial sector that will allow for the reduction of achieve a fiscal adjustment
the risks associated with imperfect information, as well as allow for mechanisms that allow that protects growth and devel-
participants to manage such risks better. In addition to regulatory reforms in the financial opment, it needs to create con-
sector, mechanisms for approval of foreign direct investment (FDI) need to be streamlined ditions in its financial sector
that will allow for the reduction
further, and FDI to be opened up more. For example, only if protecting small, but inefficient of the risks associated with
retailers, is deemed an appropriate social objective (even though it may raise costs for the imperfect information, as well
poor) and there is no other socially cost-effective means of protection, does banning FDI in as allow for mechanisms that
allow participants to manage
retailing make sense. On the other hand, new entrants, including foreigners, can be required
such risks better.
to provide urban infrastructure that is essential for efficient retailing. While in some cases,
attracting foreign investors requires the government to increase its investment in infrastruc-
ture, if the opportunity is attractive enough (as is likely to be the case for retailing in India’s
large market), entrants will be willing to provide needed infrastructure. Alternatively, requir-
ing entrants to obtain a government license and auctioning of such licenses could generate
resources for the government to undertake investment in the needed infrastructure.
In conclusion, fiscal adjustment does not have to imply a reduction in public services.
In conclusion, fiscal adjustment
There is ample scope in India for improvements in the efficiency of delivery of services does not have to imply a reduc-
through internal restructuring or private participation. Indeed, cost cutting may be neces- tion in public services. There
sary (though not sufficient) for increased government productivity. Reasonable user charg- is ample scope in India for
improvements in the efficiency
es can also lead to improved budgetary positions without hurting the poor. For large-scale of delivery of services through
infrastructure projects, improvements in the workings of the financial sector are the key to internal restructuring or private
allowing for private participation in ways that allow government budgets to be stretched fur- participation.
ther. All of these reforms involve political economy challenges, and it is these challenges that
are most difficult to overcome.
CONCLUSIONS
What are the final lessons of the conference papers, and our own analysis? In this section,
we provide our summary answers, including some thoughts on priorities for action, then
discuss some remaining issues, with respect to the underlying theoretical framework, as well
as policymaking and institutional reform. Our long list of summary lessons goes as follows:
• India’s fiscal situation requires immediate attention: high growth and low interest
rates will not take care of the problem of long-run sustainability of the debt, nor the
risks of a crisis in the short or medium run.
• In fact, the growth in recent years may have been significantly lower than earlier, if
the fiscal deficits had not been so high.
• A focus only on budget deficits can be misleading, because the problem of off-budget
and contingent liabilities is serious, and shifting liabilities off budget without reduc-
ing systemic risk does not improve matters.
• India’s external position is relatively strong, in terms of trade flows, forex reserves,
and level and maturity structure of external debt: to some extent, monetary and
exchange-rate policies are biased by attempts to compensate for fiscal looseness.
• However, high reserves and a conservative monetary policy may not be sufficient
insurance against a crisis of confidence. There are theoretical reasons and previous
empirical evidence of high domestic debt and deficits being associated with such a
crisis. Furthermore, there are numerous potential sources of risk, including interest
rate volatility as well as exogenous shocks.
• Many of the risks facing the public sector are intertwined with the fragility of the
banking sector, in general—there is, probably, a two-way causality here that must be
recognised explicitly in planning any adjustment. There are structural aspects of the
financial system, as well as the high availability of government bonds, that may be
crowding out productive investment.
• Neither comfort in India’s external position nor concerns about destabilising the
financial sector should be an argument against fiscal and financial reform: in fact, the
good external situation gives India a window of opportunity to move forward with
structural reforms.
• Financial sector reform needs to be broader and deeper than it has been so far, and
reduction in the direct and indirect influence of the government in this sector must
continue.
• A narrow focus on deficits or debts, even including off-budget liabilities, can lead to
a neglect of long-run growth implications: it is essential to examine public consump-
tion, investment, taxation, and deficits in a framework that recognises these, which
are endogenously determined, along with the growth rate.
• Available theoretical models surely leave a lot to be desired, but they have the ingredi-
ents of what is needed to make a headway in empirically examining the optimal path
of fiscal adjustment, as well as long run targets: Current policy making in India may
still not fully appreciate the endogeneity of behavioural factors.
• The coordination of fiscal policy with monetary and exchange-rate policies would be
better than letting the latter adjust to fiscal looseness, as seems to have been happen-
ing recently.
• India’s democratic system and federal structures present challenges to fiscal policy
that are common across all federal democracies (including developed one), and are
well recognised in theoretical terms.
• However, given the potential improvements that can be made in policy, one has to
search for institutional changes that will provide the right incentives to policymakers:
this applies to all reforms, not just fiscal reforms.
• In order for this process to work, policymakers must have an incentive to act: one
obvious idea is that reforms may need to be bundled in ways that garner sufficient
political support. This may be especially relevant where there are potential centre–
state conflicts.
• While the consequences of the Fifth Pay Commission Award and the states’ worsening
fiscal positions are obvious and related points of concern, both may be overstated.
For example, the states’ budgetary position in the aggregate may have stabilised.
Furthermore, there is sufficient variation across the states (not all states implemented
the award in full) to indicate that policy matters, and the right incentive structures
may lead to beneficial competition among the states in fiscal management.
• However, the quality of expenditures at the centre and the states overall has deterio-
rated, and the solution to this has to be a rationalisation of government, both inter-
nally and through privatization. Thus, expenditure restructuring must accompany
expenditure control.
• Privatization, when combined with increased competition, thus has a role that goes
beyond any immediate contribution to reducing fiscal deficits, viz., promoting
efficiency in ‘public’ service delivery, and merely changing ownership, without re-
moving government control, may not fulfill this second role. In the long run, how-
ever, the second role may be a more important contribution to fiscal health.
• The revenue enhancing tax reform is critical at all levels, including centre, states, and
local governments. Although there is ample room for improving the structure of
indirect taxes, in particular (including moving away from inefficient internal border
taxes), improved tax administration and enforcement remains one of the most criti-
cal areas for internal government reform. Tax reform is an essential step towards
increasing government revenue, as well as reducing micro-economic distortions.
• Institutional reforms such as improvements in the intergovernmental transfer system,
borrowing mechanisms for state governments, and budgeting practices and norms
are all technically possible and may well be politically feasible.
• Although fiscal adjustment requires some immediate attention; Indian governments
have the opportunity to plan it intelligently, rather than being straitjacketed by a crisis.
• Therefore, measures such as hiking tariffs to raise revenue, or cutting productive
expenditures, as ways of achieving a better fiscal balance, are to be avoided.
C ase
The problem of India is not a lack of resource; it is the inability and/or unwillingness to
mobilize resources into the public sector. Indian economy is not facing a resource crisis, but
it is confronting the fiscal crisis.
The reasons are that the share of direct taxes had steadily declined over the years inspite
of the fact that both incomes and savings of the top 10 per cent of the households in the coun-
try had been steadily increasing. The government is not showing any commitment towards
placing greater reliance on the direct taxes to mobilise resources. The government is unwill-
ing to tax the rich and, therefore, it has no other option except to fall back on indirect taxes
and rely more than ever on borrowing from those who expect interest and tax concessions,
from temporarily parting with their resources, to enable the government to continue its
‘development programmes.’ Grave inter-sectoral imbalances also exist in India’s tax structure
because agricultural incomes are virtually tax free. The Raj Committee had recommended
introduction of an agricultural tax to remove this inequity, but the state governments did
nothing to implement the recommendations of this Committee. The long term fiscal policy
also did nothing to eliminate this inter-sectoral inequity.
Failure of public sector enterprises to generate the contemplated re-investible surplus

and small surplus, which became available from these enterprises, was not attributable to
improved efficiency. The fiscal deficit reflects the total resource gap, which equals the excess
of total government expenditure over government revenue and grants. The fiscal deficit, thus,
fully indicates the indebtedness of the government.
Case Question
Suggest some remedies for the new fiscal policy to face the fiscal crisis.
s u mma r y
Monetary policy in India has been formulated in the context bank rate clearly suggest that the entire concern of the mon-
of economic planning, whose main objective has seen to ac- etary policy in the 1990s has been to ensure an adequate
celerate the growth process in the country. Economic plan- expansion in the credit to assist the industrial growth. The
ning in a country like ours leads to an expansionary fiscal fiscal policy formulated by the Government of India has been
policy, under the compulsions of increasing demand to ex- creating a considerable impact on the economy of the coun-
pand both the plan and the non-plan expenditure. Monetary try. Taxation, public expenditure, and public debt have been
policy under those circumstances is asked to play a difficult increasing at a considerable pace. The public sector of the
role, on the one hand, it is required to facilitate the role of a country has also been expanded considerably. The country
countervailing force. has been able to attain a significant development of this
According to C. Rangarajan, over the years, the following industrial infrastructural sector, but the burden of taxation
factors have essentially guided the conduct of the monetary in our country is comparatively heavily and, thereby, it has
policy. First, the monetary policy measures have generally been affecting the saving capacity of the people. Moreover,
been a response to the fiscal policy. Secondly, monetary with the failure of the fiscal policy of the country to check
policy has been primarily acting through availability of credit, the extent of the inadequacy in the distribution of income
and thirdly, the areas of operation of monetary policy did not and wealth, and also the failure to solve the problem of un-
remain confined to the factors related to the regulation of employment and poverty even after 50 years of planning, is
money supply and keeping the prices in check. highly alarming. The fiscal policy has always failed to main-
tain the stability in the price level of the country. It would now
Since the introduction of the economic reforms in 1991, the be better to study advantages and shortcomings of the fiscal
lowering of the CRR and the SLR and the reduction in the policy of the country in a brief manner.
Key W o r d s
● Monetary Policy ● Economic Crises ● EPS
● Credit Control ● Cash Reserve Ratio (CRR) ● X-inefficiency
● Fiscal Policy ● Bank Rate ● Fiscal Adjustment
● Public Expenditure ● Open-Market Operations (OMOs) ● Subsidies
● Deficit Financing ● External Debt ● Tax Evasion
● Inflation ● Internal Debt
● Public Debt ● Tax
Q u est i o n s
1. Discuss the monetary policy measures announced by 6. What are the reasons for negative return of the public
RBI recently. sector in India?
2. What do you mean by monetary policy? Discuss its 7. Analyse the merits and shortcomings of fiscal policy
objectives and importance. of India. Suggest necessary reforms in the fiscal
3. What are the tools used by RBI to control liquidity in policy of the country.
the market? 8. Evaluate fiscal policy of India and give suggestion for
4. What are the effects of changes in CRR and SLR its reforms.
rates? 9. Discuss the recent fiscal policy announced by the
5. Define the fiscal policy of India. Analyse its objectives Government of India.
and techniques.
r efe r e n ces
n Dewett, K. K. (2002). Modern Economic Theory. New n http://www.rbi.org.in
Delhi: Sultan Chand. n Budget documents of the Central and State governments
n Fiscal Policy Statement, Government of India. n http://www.planning commission.nic.in
n http://www.rediff.com/money/2002/apr/25tut.htm n The Hindu Businessline. April 30, 2008.
n Misra, S. K. and Puri V. K. (2000). Indian Economy. www.flame.org/knowledge centre
Mumbai: Himalaya Publishing House.
n Paul, H. (2003). The Economic Way of Thinking, 10th ed.
New Delhi: Pearson Education.
06
C hapter
Economic Trends
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I. The Indian Financial Systems II. The Price Policy
• Indian Money Market 168 • Price Movement Since Independence 178
• Indian Capital Market 170 • Objectives of Price Policy 183
• Call Money Market 171 • Prices of Industrial Products 183
• Bill Market 171 • Control of Expenditure 183
• Financial System 171 • Key Words 186
• Structure of the Financial System 172 • Questions 186
• Functions of the Indian Financial System: • References 186
Promotion of Capital Formation 172
I. The Indian Financial Systems

Indian Money Market
Concept and Meaning of Money Market
A well-organised money market is the basis for an effective monetary policy. A money
market may be defined as the market for lending and borrowing of short-term funds. It is the
A money market may be defined
as the market for lending and market where the short-term surplus investible funds of bank and other financial institutions
borrowing of short-term funds. are demanded by borrowers comprising individuals, companies, and the government.
Commercial banks are both suppliers of funds in the money market and borrowers.
The Indian money market consists of two parts: the unorganised and the organised
The Indian money market con-
sectors. The unorganised sector consists of an indigenous banker who pursues the banking
sists of two parts: the unorgan- business on traditional lines and non-banking financial companies (NBFCs). The organised
ised and the organised sectors. sector comprises the Reserve Bank of India (RBI), the State Bank of India (SBI) and its associ-
ate banks, the 20 nationalised banks, and other private sector banks, both Indian and foreign.
The organised money market in India has a number of sub-markets, such as the treasury
bills market, the commercial bills market, and the inter-bank call money market. The Indian
money market is not a single homogeneous market but is composed of several sub-markets,
The Indian money market is
not a single homogeneous mar- each one of which deals in a particular type of short-term credit.
ket but is composed of several
sub-markets, each one of which
deals in a particular type of The Composition of the Indian Financial System
short-term credit.
The Indian financial system which refers to the borrowing and lending of funds or to the
demand for and supply of funds, consists of two parts, viz., the Indian Money Market and
the Indian Capital Market. The Indian money market is the market in which short-term
Economic Trends | 169
funds are borrowed and lent. The capital market in India, on the other hand, is the market for
medium and long-term funds.
Usually, we classify the Indian money market into organised sector and the unorganised
sector. The organised sector of the money market consists of commercial banks in India,
which includes private sector and public sector banks, and also foreign banks. The unorgan-
ised sector consists of indigenous bankers, including the NBFCs. Besides these two, there are
many sub-markets in the Indian money market.
The Composition of the Indian Banking System

The organised banking system in India can be broadly divided into three categories, viz., The organised sector of the
the central bank of the country known as the Reserve Bank of India (RBI), the commer- money market consists of com-
cial banks, and the cooperative banks. Another and more common classification of banks in mercial banks in India, which in-
cludes private sector and public
India is between scheduled and non-scheduled banks. The Reserve Bank of India is the su- sector banks, and also foreign
preme, monetary and banking authority in the country and has the responsibility to control banks. The unorganised sector
the banking system in the country. It keeps the reserves of all scheduled banks and, hence is consists of indigenous bankers,
including the NBFCs. Besides
known as the ‘Reserve Bank’.
these two, there are many sub-
Under the Reserve Bank of India (RBI) Act, 1934, banks were classified as scheduled markets in the Indian money
banks and non-scheduled banks. The scheduled banks are those which had been entered market.
in the Second Schedule of RBI Act, 1934. Such banks are those which have a paid-up capi-
tal and reserves of an aggregate value, of not less than ` 5 lakh, and which satisfy RBI that
their affairs are carried out in the interests of their depositors. All commercial banks—Indian All commercial banks—Indian
and foreign, regional rural banks, and state cooperative banks—are scheduled banks. Non- and foreign, regional rural
scheduled banks are those which have not been included in the Second Schedule of the RBI banks, and state cooperative
Act, 1934. At present, there are only three non-scheduled banks in the country. The sched- banks—are scheduled banks.
Non-scheduled banks are those
uled banks are divided into commercial banks and cooperative banks. The commercial banks which have not been included
are based on profit, while cooperative banks are based on cooperative principle. A compara- in the Second Schedule of the
tive analysis of global finance markets has been given in Box 6.1. RBI Act, 1934.
Box 6.1 Comparative Analysis of Global Finance Markets

United States Japan Swiss/German Euro Markets India
Characteristics Biggest and Let entry, steady Swiss: Biggest Biggest international Comparable
versatile interest rates foreign bond market: Major to most of the
currency, most market, low currencies handled developed markets.
popular interest rates Highest number of
listed companies
Regulatory SEC: Watchdog MOF: monitored, No formal Market-driven BIS SEBI, Watchdog
Frame Work Securities Act, controlled, yet laws, (Bank for International RBI, SEBI—Act
1993; Securities competitive central bank Settlements: Capital Depositories Act,
and Exchange monitoring adequacy banking, Companies Act
Act, 1934 prudence ensured)
Instruments Multiple Multiple Simplicity of Loans/Bonds/euro Multiple instruments
instruments CP/ instruments, approach: notes debt, equity,
bonds Samurai/Shib Public vs government, and
Osai bonds/Loan unlisted bonds corporate securities
Overall Bold and Quiet but Cautious and Bold and innovative Young and
Assessment competitive effective, based conservative challenging
on consensus.
Indian Capital Market

Capital market is the market Capital market is the market for long-term funds, just as the money is the market for short-
for long-term funds, just as the term funds. It refers to all the facilities and the institutional arrangements for borrowing and
money is the market for short- lending term (medium and long-term funds). It does not deal in capital goods but is con-
term funds. cerned with the raising of capital for the purpose of investment.
The demand for long-term capital comes predominantly from private sector manufac-
turing industries and agriculture, and from the government, not only for the purpose of
economic overheads like transport, irrigation, and power development but also on basic
industries and, sometimes, even consumer goods industries, as they require substantial sums
The supply of funds for the cap- from the capital market. The supply of funds for the capital market comes largely from indi-
ital market comes largely from vidual savers, corporate savings, banks, insurance companies, specialised financing agencies,
individual savers, corporate and the government. Among institutions, we may refer to the following:
savings, banks, insurance com-
panies, specialised financing 1. Commercial banks are important investors, but are largely interested in govern-
agencies, and the government. ment securities and, to a small extent, debentures of companies.
2. LIC (Life Insurance Corporation) and GIC (General Insurance Corporation) are
gaining importance in the Indian capital market, though their major interest is still
in government securities;
3. Provident funds constitute a major medium of saving, but their investment too are
mostly in government securities; and
4. Special institutions set up since independence, viz., IFCI (Industrial Finance
Corporation of India), ICICI (Industrial Credit and Investment Corporation of
India), IDBI (Industrial Development Bank of India), UTI (Unit Trust of India),
and so on—generally called Development Financial Institutions—aim at supply-
ing long-term capital to the private sector.
There are financial intermediar- There are financial intermediaries in the capital market, such as merchant bankers, mutual
ies in the capital market, such funds, leasing companies, and so on, which help on mobilising, saving and supplying fund
as merchant bankers, mutual to the capital market. Like all markets, the capital market is also composed of those who
funds, leasing companies, and
demand funds (borrowers) and those who supply funds (leaders). An ideal capital mar-
so on, which help on mobilising,
saving and supplying fund to ket attempts to provide adequate capital at a reasonable rate of return for any business or
the capital market. individual proposition, which offers a perspective yield high enough to make borrowing
worthwhile. The rapid expansion of the corporate and public enterprises since 1951 has
The Indian capital market is necessitated the development of the capital market in India. The Indian capital market is
broadly divided as the gilt-edged broadly divided as the gilt-edged market and the industrial securities market. The gilt-edged
market and the industrial se- market refers to the market for government and semi-government securities, backed by the
curities market. The gilt-edged RBI. The securities traded in this market are stable in value and are much sought after by
market refers to the market
for government and semi- banks and other institutions.
government securities, backed The industrial securities market refers to the market for shares and debentures of old and
by the RBI. The securities traded new companies. This market is further divided as the new-issue market and the old capital
in this market are stable in val-
market, meaning ‘the stock exchange’. The new-issue market—often referred to primary mar-
ue and are much sought after
by banks and other institutions. ket, denotes the raising of new capital in the form of shares and debenture, whereas the old-
issue market deals with securities already issued by companies. The old-issue market or the
stock market exchange is also known as the secondary market. Both markets are equally im-
portant, but often, the new-issue market is much more important from the point of economic
growth. However, the functioning of the new-issue market will be facilitated only when there
are abundant facilities for transfer of existing securities. Besides the gilt-edged market and
variable-yield industrial securities, the Indian capital market includes development financial
institutions and financial intermediaries.
Call Money Market

One important sub-market of the Indian money market is the Call Money Market, which is
One important sub-market of
the market for short-term funds. This market is also known as ‘money at call and short no- the Indian money market is the
tice’. The locations of call money centres in India are given in Box 6.2. This market has actu- Call Money Market, which is the
ally two segments, viz., (a) the call market or overnight market and (b) short notice market. market for short-term funds.
The rate at which funds are borrowed and lent in this market is called the ‘call money rate’. This market is also known as
‘money at call and short notice’.
Box 6.2 Call Money Centres in India

Call money centres are mainly located in
1. Mumbai 2. Kolkata 3. Delhi 4. Chennai 5. Ahmedabad 6. Mangalore
Call money rates are market determined, that is, by demand for and supply of short-
term funds. The public sector banks account for about 80 per cent for the demand (i.e., The public sector banks ac-
borrowings), and foreign banks and Indian private sector banks account for the balance of count for about 80 per cent for
20 per cent of borrowings. Non-banking financial institutions, such as IDBI, LIC, GIC, and the demand (i.e., borrowings),
and foreign banks and Indian
so on, enter the call money market as lenders and supply up to 80 per cent of the short-term private sector banks account
funds. The balance of 20 per cent of the funds is supplied by the banking system. Although for the balance of 20 per cent
some banks operate both as lender and borrowers, others are either only borrowers or only of borrowings.
lenders in the call money market.
Bill Market
The bill market or the discount market is the most important part of the money market The bill market or the discount
where short-term bills normally up to 90 days are bought and sold. The bill market is fur- market is the most important
ther subdivided into commercial bill market and treasury bill market. The 91-day treasury part of the money market
bills are the most common way the Government of India raises funds for the short period. where short-term bills normally
up to 90 days are bought and
Some years ago, the government had introduced the 182-day treasury bills which were later sold.
converted into 364-day treasury bills. In 1997, the government introduced the 14-day inter-
mediate treasury bills.
Financial System
In a broad sense, finance refers to funds of monetary resources needed by individuals, busi- In a broad sense, finance refers
ness houses, and the government. Individuals and households require funds essentially for to funds of monetary resources
meeting their current requirements or day-to-day expenses or for buying capital goods needed by individuals, business
(commonly known as investment). A list of some investments in international money market houses, and the government.
is given in Box 6.3. A business unit, a factory, or a workshop needs funds for paying wages
and salaries, for buying raw materials, for purchasing new machinery, or for replacing an
old one, and so on. Traders require finance for buying and stocking goods in their shops and
godowns; whereas farmers for different periods and for different purposes.
Box 6.3 Global Instruments

The more common instruments which are available for investment and some investments in international money
market are:
1. International bank deposits (FD) 7. Treasury bills and treasury bonds of major interna-
2. Certificates of deposits (CD) tional markets, say New York, London, Frankfurt, and
so on
3. Euro currency deposits
8. Corporate bonds and junk bonds of short maturities
4. Euro commercial paper
5. Banker’s acceptance 9. Floating-rate notes
6. Bills of exchange 10. Notes-issuance facility.
Structure of the Financial System

The Financial System of India The Financial System of India refers to the system of borrowing and lending of funds or the
refers to the system of borrow- demand for and the supply of funds to all individuals, institutions, companies, and of the
ing and lending of funds or the government, commonly. The financial system is classified into
demand for and the supply of
funds to all individuals, institu- (a) Industrial Finance: Funds required for the conduct of industry and trade;
tions, companies, and of the
government, commonly. (b) Agricultural Finance: Funds needed and supplied for the conduct of agriculture and
allied activity;
(c) Development Finance: Funds needed for development; actually, it includes both
industrial finance and agricultural finance; and
(d) Government Finance: Relates to the demand for and supply of funds to meet govern-
ment expenditure.
Indian financial system includes Indian financial system includes the many institutions and the mechanism that affects the
the many institutions and the generation of savings by the community, the mobilisation of savings, and the effective dis-
mechanism that affects the
tribution of the savings among all those who demand the funds for investment purposes.
generation of savings by the
community, the mobilisation of Broadly, therefore, the Indian financial system is composed of
savings, and the effective distri-
bution of the savings among all (a) The banking system, the insurance companies, mutual funds, investment funds, and
those who demand the funds other institutions that promote savings among the public, collect their savings, and
for investment purposes. transfer them to the actual investors; and
(b) The investors in the country are composed of individual investors, industrial and
The stock exchanges in India trading companies, and the government—these investors enter the financial system
facilitate the buying and selling as borrowers.
of shares and debentures of
existing companies and, thus, The stock exchanges in India facilitate the buying and selling of shares and debentures of
help savers to shift from one
existing companies and, thus, help savers to shift from one type of investment to another.
type of investment to another.
Functions of the Indian Financial

System: Promotion of Capital Formation
The Indian financial system performs a crucial role in the economic development of India
through savings investment process, also known as ‘capital formation’. It is for this reason that
the financial system is sometimes called the ‘financial market’. The purpose of the financial
market is to mobilise savings effectively and allocate the same efficiently among the ultimate The Indian financial system
users of funds, via investors. A high rate of capital formation is an essential condition for performs a crucial role in the
rapid economic development. The process of capital formation depends upon economic development of In-
dia through savings investment
(a) Increase in savings, that is, the resources that would have been normally used for process, also known as ‘capital
formation’. It is for this reason
consumption purposes can be released for other purposes; that the financial system is
(b) Mobilisation of savings, that is domestic savings collected by banking and financial sometimes called the ‘financial
market’.
institutions and placed at the disposal of actual investors; and
(c) Investment proper, which is the production of capital goods.
The third stage or process is the real capital formation, but this stage cannot arise or exist
without the first two processes. Thus, the general public should save and be prepared to re-
The importance of banking and
lease real resources from consumption goods to capital goods. The savings of the people financial institutions in the capi-
should be mobilised by banking and financial institutions. Finally, the savings of the peo- tal formation process arises
ple should be made available to investors to produce capital goods. All these three steps because those who save and
those who invest in India are
or processes, though independent of each other, are necessary for accumulation of capital.
generally not the same persons
The importance of banking and financial institutions in the capital formation process arises or institutions. The financial
because those who save and those who invest in India are generally not the same persons or institutions and the banks act
institutions. The financial institutions and the banks act as intermediaries to bring the savers as intermediaries to bring the
savers and investors together.
and investors together.
Growth of Capital Markets in India

Table 6.1 shows the growth of capital markets in India from 2008–09 to 2011–12.
From Table 6.1 it is revealed that the capital market growth in India from 2008–09 to
2011–12 is satisfactory. The value of market capitalization in the year 2008–09 was 3,086,076
crores which grew to 6,214,941 crores. It means the value of market capitalization increased to
End March 2011–12 2010–11 2009–10 2008–09

< Table 6.1
Growth of Capital
Stock Exchanges (No.) 19* 19* 19* 19* Markets in India
Companies Listed on BSE (No.) 5,133 5,067 4,975 4,929
Market Value of Capital (` Crore) 6,214,941 6,839,084 6,164,157 3,086,076
Market Turnover Mumbai (` Crore) 1,667,498 1,105,027 1,378,809 1,100,074
BSE sensitive index 17,404 19,445 17,528 9,709
(closing) (1978–79 = 100)
Average Price/Earning Ratio 17.8 21.2 21.3 13.7
(BSE Sensex)
Capital issues (` Crore) 352,548 340,731 322,560 191,160
Capital Raised as % of gross 13.0 13.9 14.6 10.6
domestic Saving (%)
Amount raise by –22,023 –49,406 83,080 –28,297
Mutual Funds (` Crore)
FII investments ($ Min) 18,923 32,226 30,252 –9,837
Amount Raised through 597 2,049 3,328 1,162
GDRs/ADRs ($ Min)
Note: *Excluding four de-recognised stock exchanges.

Source: Statistical Outline of India 2012–2013, Tata Services Ltd.
about 200 per cent. Within three years. The market turnover also increased from ` 1,100,074
crores to 1,667,498 crores during the same period. The average earning ratio also increased
from 13.7 per cent during 2008–09 to 17.8 per cent during 2011–12. The capital raised as a
percentage of gross domestic savings also increased from 10.6 per cent to 13 per cent in these
three years. FII investments also increased from $ 9837 million to $ 18923 million. However,
the amount raised through ADRs/GDR’s declined from $ 1162 million during 2008–09 to
$597 million during 2011–12 due to the volatile situation in the international market.
Recently the Bombay stock exchange (BSE) Sensex scaled a high of 26000 mark in July
2014 due to change of guard in the central government and the development agenda of the
new administration.
Resources Raised by Corporate Sector

Table 6.2 shows the resources raised by corporate sector for the period 1995–96 to 2010–11.
The analysis of Table 6.2 reveals that the equity issues increased from 14,830 (during
the year 1995–96) to 58,157 during the year 2010–11. The increase is as huge as 392 per cent
during the last 15 years because of opening up of the Indian economy and the fast growth
prospects of the Indian markets. The debt issues increased from 57 per cent during the year
1995–96 to 83 per cent during the year 2010–11. The total resource mobilization increased
from ` 34,165 crores to ` 344,551 crores during the same period, registering a growth of
1008 per cent during the last 15 years.
Table 6.2
Resources Raised by
> (` Crore)
Corporate Sector Equity Debt Issues Total
Year Issues Public and Private Total Share(%) Resource
Right Issues Placements Mobilisation
1995–96 14,830 5,974 13,361 19,335 57 34,165
1996–97 7,853 6,286 15,066 21,352 73 29,205
1997–98 1,892 2,678 30,099 32,777 95 34,669
1998–99 935 4,652 49,679 54,331 98 55,266
1999–00 4,566 3,251 61,259 64,510 93 69,076
2000–01 3,368 2,740 67,836 70,576 95 73,944
2001–02 1,272 6,271 64,876 71,147 98 72,419
2002–03 1,457 2,613 66,948 69,561 98 71,018
2003–04 18,948 4,324 63,901 68,225 78 87,173
2004–05 24,388 3,867 83,405 87,272 78 111,660
2005–06 27,372 10 96,473 96,483 78 123,855
2006–07 32,901 605 145,865 146,470 82 179,371
2007–08 85,427 1,603 118,485 205,513 71 290,940
2008–09 14,721 1,500 173,281 189,502 93 204,223
2009–10 55,055 2,500 212,636 270,190 83 325,245
2010–11 58,157 9,451 218,785 286,394 83 344,551
Source: SEBI.
Resources Mobilized from Primary

Market (Equities)
Table 6.3 shows resources mobilized from primary market (equities) for the period 1994–95
to 2011–12.
The primary capital market growth was very high from 1994–95 to 2007–08 but declined
from 2008–09 due to the world financial crisis. The total amount raised through primary
market during 1994–95 was ` 27,632 crore, which increased to 87,609 crores during the year
2007–08, registering a growth of 317 per cent during the 13 year period. The number of is-
sues and amount raised in the primary market declined during the years 2008–09 to 2011–12
because of the financial crisis worldwide. The Indian primary market is gaining momentum
after the change of guard and the developmental agenda of the new government at the centre.
Total Sector Wise

< Table 6.3
Resources Mobilised
Year Number Amount Private* Public from Primary Market
(` Crore) (` Crore) (` Crore) (Equity)
1994–95 1,692 27,632 26,270 1,362
1995–96 1,725 20,804 16,639 4,165
1996–97 884 14,284 10,249 4,035
1997–98 111 4,570 3,852 718
1998–99 58 5,586 5,516 70
1999–00 93 7,817 7,617 200
2000–01 151 6,108 5,893 215
2001–02 35 7,543 6,601 942
2002–03 26 4,070 1,897 2,173
2003–04 57 23,272 4,612 18,660
2004–05 60 28,256 17,162 11,094
2005–06 139 27,382 20,199 7,183
2006–07 124 33,507 31,728 1,779
2007–08 124 87,029 67,311 19,718
2008–09 47 16,220 16,220 0
2009–10 76 57,555 26,438 31,117
2010–11 91 67,609 29,385 38,224
2011–12 71 48,468 19,874 28,594
Note: *Joint sector issues if any are clubbed with private sector issues.
Source: SEBI.
Resources Mobilized by Corporate through

ADRs/GDRs and ECBs
Table 6.4 shows the resources mobilized by corporate through ADRs/GDRs and ECBs for the
period 1992–93 to 2011–12.
Table 6.4
Resources Mobilised
> (US $ mn)
by Corporate through Year ADRs/GDRs ECB (Net)
ADRs/GDRs and ECBs
for the Period 1992–93 1992–93 240 –358
to 2011–12 1993–94 1,597 607
1994–95 2,080 1,030
1995–96 683 1,275
1996–97 1,366 2,848
1997–98 645 3,999
1998–99 270 4,362
1999–00 768 313
2000–01 831 3,732
2001–02 477 1,579
2002–03 600 –2,353
2003–04 459 –1,856
2004–05 613 5,194
2005–06 2,552 2,508
2006–07 3,776 16,103
2007–08 6,645 22,640
2008–09 1,162 6,647
2009–10 3,328 2,531
2010–11 2,049 12,179
2011–12 597 9,140
Note: ADR: American depository Receipt.

GDR: Global depository Deposit.
ECB: External Commercial Borrowings.
Source: RBI.
Trends in Foreign Institutional Investors (FII)

Investment in the Capital Markets
Table 6.5 shows trends in Foreign Institutional Investors (FII) investment in the capital
markets for the period 1992–93 to 2011–12.
Table 6.5
Trends in Foreign
> Gross Gross Sales Net Investment Cumulative Net
Year Purchases ` Crore Investment
Institutional Investors ` Crore US $ mn
` Crore US $ mn
(FII0 Investment in the
Capital Markets) 1992–93 17 4 13 4 4
1993–94 5,593 466 5,127 1,634 1,638
1994–95 7,631 2,835 4,796 1,528 3,166
1995–96 9,694 2,752 6,942 2,036 5,202
1996–97 15,554 6,979 8,575 2,432 7,634
(Continued)
Gross Gross Sales Net Investment Cumulative Net < Table 6.5
(Continued)
Year Purchases ` Crore Investment
` Crore ` Crore US $ mn US $ mn
1997–98 18,695 12,737 5,958 1,650 9,284
1998–99 16,115 17,699 –1,584 –386 8,898
1999–00 56,856 46,737 10,119 2,339 11,237
2000–01 74,051 64,116 9,935 2,159 13,396
2001–02 49,920 41,165 8,755 1,846 15,242
2002–03 47,061 44,373 2,688 562 15,804
2003–04 144,858 99,094 45,764 9,950 25,754
2004–05 216,951 171,071 45,880 10,352 36,106
2005–06 346,976 305,509 41,467 9,363 45,469
2006–07 520,506 489,665 30,841 6,821 52,290
2007–08 948,018 881,839 66,179 16,442 68,732
2008–09 614,579 660,389 –45,810 –9,838 58,894
2009–10 846,438 703,780 142,658 30,253 89,147
2010–11 992,599 846,161 146,438 32,226 121,373
2011–12 921,285 827,562 93,723 18,923 140,296
Source: SEBI.
Trend in Forex Transaction of Indian Corporate Sector

Table 6.6 shows trend in Forex Transaction of Indian Corporate Sector for the period 1982–83
to 2010–11.
(` Crore) < Table 6.6

Trends in Forex
Public Limited Companies
Transaction of Indian
1982–83 1990–91 2000–01 2010–11 Corporate Sector
Number of Companies 1,838 1,802 2,031 3,352
Expenditure in Foreign Currencies 2,382 8,068 69,025 731,282
% to Total Expenditure 6.9 8.4 20.2 27.6
Imports 1,980 7,077 57,469 601,335
Imports/Sales Ratio (%) 6 8 17.6 22.7
Raw Materials 1,409 5,587 47,776 496,037
% to Raw Materials 8.1 12.2 27.1 18.7
Earnings in Foreign Currencies 1,904 6,434 57,369 598,121
% of Total Income 5.5 6.7 46.8 22.5
Exports 16.1 5,569 44,281 442,792
Exports/Sales 4.8 6.3 13.6 17.7
Net Inflow (+)/Net Outflow (–) –478 –1,634 –11,656 –133,161
Note: The data given here is indicative only and not exhaustive as the number of companies included in
the study are limited.
Source: RBI.
II. The Price Policy

Price Movement Since Independence
A proper study of price movements and the value of rupee since 1950–51 requires the exist-
ence of wholesale price index (WPI) of all commodities with 1950–51 as the base year. The
Government of India started with such a price index. Unfortunately, the government gave
up the series in the middle of the 1960s and started a new series with 1960–61 as the base
year. In fact, in its anxiety to prevent people from making a real comparison of the continu-
ally rising price level and rapidly declining purchasing power of the rupee since 1950–51,
the government has been changing the base year every decade—from 1950–51 to 1960–61,
later to 1970–71, and finally to 1981–1982. The usual plea taken by the government is that
the new series has a considerably larger coverage of items, grades, and markets, and that it is
also based on a larger number of quotations. Whatever be the reasons, with the change in the
base every decade, however, we are not able to make any valid and broad comparison of price
movements since the economic planning was introduced in 1950–51.
Price Situation During 1951–71

One of the declared objectives of the First Plan was to combat inflationary pressures. Aided
by bumper crops, the First Plan largely succeeded in achieving this objective. At the end of
the First Plan period, the general price index number stood at 99 (with 1952–53 = 100) but
the index number of food articles had declined to about 95 and cereals and pulses stood lower
at 88 and 77, respectively. Thus, during the First Plan the price situation was very favourable.
The success of the First Plan The success of the First Plan and the favourable movement of prices encouraged the
and the favourable movement Government of India to launch still more elaborate plans and undertake still greater degree
of prices encouraged the Gov- of deficit financing. Throughout the Second Plan period, there was a gradual and steady
ernment of India to launch
still more elaborate plans and rise in prices; the price level rose by 20 per cent by 1960–65. The price position during the
undertake still greater degree Third Five-Year Plan deteriorated badly. The Chinese invasion of India towards the end of
of deficit financing. 1962, the Indo-Pakistan conflict in 1965, and the consequent increase in defence expenditure
and, above all, the serious famine conditions of 1965–66 were responsible for rapid rise in
prices. The price position became really difficult because of extensive hoarding and black
marketing in food grains and other essential goods. Between 1961 and 1966, the rise in the
prices of foodstuffs was over 40 per cent, in cereals it was over 45 per cent, and in pulses it
was 70 per cent. The next two years were years of acute inflation when the index number of
wholesale prices shot up by 14 per cent and 11 per cent, respectively. The country was on the
brink of a galloping inflation. Fortunately, the bumper harvest of 1967–68 saved the situation
and the inflationary rise in prices was completely arrested.
Price Situation During the 1970s

The upward movement of prices during the Fourth Plan (1969–74) was extremely significant.
The rise in the general price The rise in the general price level was rather slow in the beginning of the Fourth Plan but it
level was rather slow in the gathered momentum later. For instance, the rise in the price level during the first three years
beginning of the Fourth Plan but of the Fourth Plan ranged between 7 points and 9 points. In the fourth and the final years,
it gathered momentum later.
however, the price level rose by 19 points and 47 points, respectively. Large influx of refu-
gees from Bangladesh, heavy expenditure of the government on the refugees, the widespread
failure of Kharif crops in 1972–73, and the complete failure of the takeover of wholesale
trade in wheat resulted in an unprecedented rise in price level during 1973–74, with all the
c haracteristics of a galloping inflation. This was aggravated by a per cent rise in crude oil The worldwide inflation of this
prices towards the end of 1973 (refer to Box 6.4). The worldwide inflation of this period and period and the depreciation in
the depreciation in the external value of the rupee vis-a-vis many currencies of the world, the external value of the rupee
vis-a-vis many currencies of the
pushed up the costs of imports and aggravated the domestic price inflation. Reflecting the
world, pushed up the costs of
cumulative impact of these factors, the WPI of all commodities stood at an all-time high of imports and aggravated the
331 in September 1974 (with 1961–62 = 100). domestic price inflation.
Box 6.4 Impact of Crude Oil Price Increase on Global Commodity Prices
Crude oil prices affect the prices of other commodities in the following ways:
• Affect the prices of inputs which the primary commodities use, such as fertilizers and fuel.
• Affect the transport cost of commodities over long distances.
• Prices of commodities, which have energy-intensive production process, particularly metals, get affected
because of an increase in energy prices.
• Affect the prices of the products which could become substitutes for crude or could be used as bio-fuels (like
maize and sugar for ethanol production or rapeseed and other oils for bio-diesel production).
• Affect the prices of primary commodities which compete with the synthetic products made from crude (like
cotton with man-made fibres and natural rubber with synthetic rubber).
• Affect the prices of commodities which can be substituted for crude as sources of energy (like coal, electricity,
and gas).
• Based on the annual data from 1960 to 2005 and a simple econometric model, the Working Paper of the
World Bank (Policy Research Working Paper No. 4333—Oil Spills on Other Commodities by John Baffes—
August 2007) estimated the degree of pass due to crude oil price changes to the prices of 35 other interna-
tionally traded primary commodities. The elasticity for the non-energy commodity index was estimated at 0.16
indicating that 1 per cent pass through may impact the commodity prices by 16 basis points. No estimates
are available for India.
Source: Working Paper No. 4333, World Bank, August 2007.
This order of inflation created a veritable crisis in the country and an extreme lack of
public confidence in the ability of the government to manage the price situation. To check To check the rise in prices, the
the rise in prices, the government took a number of fiscal and monetary measures like the use government took a number of
of compulsory deposit scheme (CDS) to impound part of the income of people, imposition fiscal and monetary measures
of limits on declaration of dividends and credit squeeze by the RBI. At the same time, the like the use of compulsory de-
posit scheme (CDS) to impound
use of MISA (Maintenance of Internal Security Act) against smugglers, hoarders, and black- part of the income of people,
marketers also had a favourable impact on the situation. There has been a dramatic change in imposition of limits on decla-
the price front since September 1974 when the prices started falling. The fall in the price level ration of dividends and credit
during this period was as follows: squeeze by the RBI.
The steep decline in prices during this period was of considerable significance to the
economy in that it created an environment of stability and confidence, gave relief to the pub-
lic that had been squeezed by inflation in the preceding two years, and helped greatly to
dampen the psychology of scarcity. The credit for checking the rise in the price level was
given to the declaration of emergency in June 1975. The trend of declining prices was unfor-
tunately reversed by the third week of March 1976. Table 6.7 shows the price trend during
1975–76. The rise in prices since March 1976 till March 1977 completely wiped out the de-
cline in the prices of the previous two years. The level of prices in April 1977, for example, was
the same as that of in September 1974. The propaganda that emergency was a major factor for
controlling prices was thus exploded.
Table 6.7
Price Trend During
> Period WPI of All Commodities
1975–76 September 1974 331
(1961–62 = 100)
March 1975 309
March 1976 283
Source: RBI Bulletin (various issues).
Price Movement During Janata Rule (1977–79)

A review of price movement during 1977–78 and 1978–79 brings out the fact that the Janata
Party government was indeed successful in holding the price line and in fact, ‘the main-
tenance of price stability has been a positive achievement of the government’s short-term
demand and supply management policies’ (refer to Table 6.8).
Table 6.8
Price Situation During
> Period WPI of All Commodities
the Janata Rule 1970–71 = 100
(1970–71 = 100) March 1977 183
January 1978 184
January 1979 185
Source: Economic Survey 1981–82 and RBI Bulletin (various issues).
The conditions in the beginning of 1979 were highly suitable for the continuance of price
stability. The buffer stock of food grains had crossed over 20 million tonnes. The production
of food grains was a record 131 million tonnes. Industrial production had recorded a rise of
9.5 points in 1978 over the previous year. Availability of critical industrial raw materials like
cement, steel and other metals, and coal, the lack of which restrained industrial growth in the
past, was extremely satisfactory. At the same time, the country had over ` 5,000 crore worth
of foreign exchange reserves, which could be used effectively to import goods that were in
Despite these favourable fac- short supply within the country. Despite these favourable factors, the stability in price level
tors, the stability in price level which was managed with such a great effort was upset callously by an inflationary budget
which was managed with such
introduced in February 1979 by the then Finance Minister, Mr. Charan Singh. Besides the
a great effort was upset cal-
lously by an inflationary budget heavy dose of indirect taxation, the budget provided for an overall deficit of ` 1,365 crore, a
introduced in February 1979 record again at that time which exerted pressure on prices. Prices started rising almost the
by the then Finance Minister, day after the budget was presented in the Parliament. In February 1979 the index number of
Mr. Charan Singh.
wholesale prices stood at 185 (1970–71 = 100), but by January 1980 it had risen to 224.
Price Movement During the 1980s

The Congress Party which returned to power in January 1980 regarded inflation as its
‘number one’ problem. Initially, the price situation appeared to be hopeless. The poor agri-
cultural crop of 1979–80 and the consequent adverse effect on industrial production and the
hike in oil prices by 130 per cent in 1980 alone were responsible for boosting the price level
The WPI rose by 38 points in still further (refer to Table 6.9).
1980–81—an increase of 17.4 The WPI rose by 38 points in 1980–81—an increase of 17.4 per cent over the previous
per cent over the previous year. year. A vigorous anti-inflationary policy kept the rise in prices to moderate levels. The price
Year WPI of All Commodities % Variation over the Previous Year

< Table 6.9
Price Movement During
1979–80 218 _ the Sixth Plan
(1970–71 = 100)
1980–81 256 17.8
1981–82 281 9.8
1982–83 289 2.9
1983–84 316 9.4
1984–85 338 7.0
Source: Compiled from Economic Survey 1988–89, the Government of India.
level was remarkably steady during 1982–83, though at a slightly higher level. This price
stability was achieved partly through credit restraint and also through an increase in the
supply of essential goods via the public distribution system. Unfortunately, this price stabil-
ity was only short-lived as the price level began to rise from the middle of January 1983. The
re-emergence of inflationary pressure since January 1983 was the result of the increase in
the prices of certain items, such as pulses, oilseeds, and other foodstuffs and an increase
in the administered prices of a number of goods like coal, electricity, cement, iron, steel and
ferro-alloys, and so on.
The government was prompt in taking anti-inflationary measures during 1983–84 on The government was prompt in
both demand and supply side. On the demand side, the government made a series of adjust- taking anti-inflationary meas-
ments in the cash reserve ratio (CRR) of the commercial banks to check the growth of liquid- ures during 1983–84 on both
demand and supply side.
ity in the banking system. The commercial banks were also asked to confine their lending
operations within certain limits. In January 1984, the government announced its decision to
curtail the public expenditure by 3 per cent to 5 per cent, imposed a temporary ban on fresh
government recruitment, and so on. The objective of these monetary and fiscal measures
was to check the increase in the volume of money supply in the country and also to check
effective demand.
On the supply side, the government attempted to increase the supply of goods and
services through both short and long-term measures. Short-term measures included larger
releases of wheat, rice, sugar, and edible oils through the public distribution system and im- To some extent, the demand
ports of food grains and edible oils to augment the domestic availability. Long-term measures and supply management of the
included steps taken to increase production in critical areas. To some extent, the demand and government during the Sixth
supply management of the government during the Sixth Plan (1980–85) was largely success- Plan (1980–85) was largely suc-
cessful in containing the prices.
ful in containing the prices. The annual rate of increase in prices during this period ranked
around 7 per cent to 8 per cent.
During the Seventh Plan period (1985–90), the wholesale prices moved upward rather During the Seventh Plan pe-
steadily. The annual rate of inflation during this period ranged between 4.7 per cent (1985– riod (1985–90), the wholesale
86) and 9.4 per cent (1987–88) and averaged 7 per cent. The pressure on prices was due to the prices moved upward rather
shortfall in production of essential agricultural commodities in order to control inflationary steadily.
rise of prices, during the Seventh Plan period. RBI tightened the selective credit controls and
took certain measures to mop up excess liquidity. The availability of large stocks of rice and
wheat, built over many years, was effectively used to combat drought and inflation. The food
reserves were used to supply food grains through public distribution system, to special em-
ployment programmes, relief programmes, and so on. The government took recourse to large
imports of edible oils, pulses, rice, and sugar to maintain adequate supplies. For some essen-
tial commodities, appropriate price bands were determined and suitable market intervention
operations were undertaken to maintain stability of prices. By and large, the inflationary situ-
ation was under control during the 1980s.
Price Situation During the 1990s

The price rise since the beginning of 1990 was almost engineered by the government itself
through rise-administered prices and rise in indirect taxes. The increase in the prices of food
grains on mere political considerations and the Gulf surcharge, which raised the prices of pe-
troleum products to an unprecedented level in one single jump, were the other factors behind
the recent rise in prices (refer to Table 6.10). The inflationary pressure was concentrated on
The prices rose rapidly during primary commodities such as food grains, vegetables, sugar, and edible oils. The prices rose
1990–91 and 1991–92 and rapidly during 1990–91 and 1991–92 and the average annual rates of inflation were 10.3 per
the average annual rates of in- cent and 13.7 per cent, respectively. The inflation rate was controlled since then because of a
flation were 10.3 per cent and
13.7 per cent, respectively. better performance by the agricultural sector as also because of the macro-economic correc-
tions adopted by the government, including reduction in the fiscal deficit and the resultant
control in the expansion of money supply. The improvement in the price situation was, par-
ticularly welcome to the poorer sections of the society, as some items of mass consumption
like cereals, pulses, and edible oils actually registered a drop in their prices during 1992–93
and 1993–94.
Table 6.10
Price Movement During
> WPI Annual Rate WPI Annual Rate
the 1990s Year (1981–82 = 100) of Inflation (1993–94 = 100) of Inflation
(1981–82 = 100) (1993–94 = 100)
1990–91 183 10.3
1991–92 208 13.7
1992–93 229 10.1
1993–94 248 8.4 100
1994–95 275 10.9 113 10.9
1995–96 296 7.6 122 7.7
1996–97 315 6.9 127 4.6
1997–98 330 4.9 133 4.4
1998–99 353 7.0 141 6.9
1999–2000 366 3.7 145 3.3
2000–01 – – 154 6.2
Source: RBI Handbook of Statistics on Indian Economy, Table 29, Chapter 5, Economic Survey
2000–01, the Government of India.
The price situation, however, The price situation, however, took a severe turn from August 1993. The annual rate of
took a severe turn from August inflation started rising mainly because of heavy fiscal deficit resulting in the expansion of
1993. The annual rate of infla-
money supply with the people. To this was added the rise in administering prices of inflation-
tion started rising mainly
because of heavy fiscal deficit sensitive goods. The double-digit inflation continued for the better part of 1994–95. Since
resulting in the expansion of then, the inflationary situation came under control with a noticeable decline in the prices of
money supply with the people. primary food articles as well as manufactured food products. During 1999–2000, the average
annual rate of inflation was the lowest of about 3.3 per cent (with 1993–94 = 100). It may be
observed from the previous table that the Government of India has changed the base period
of the WPI from 1981–82 to 1993–94, thus making it difficult to compare the movement of
prices over the years.
Objectives of Price Policy

We may set out the important objectives of price policy suitable for India during the Tenth
Plan period:
(a) The price policy should attain and maintain price stability primarily in respect of
food articles, but, to the extent possible, in all prices.
(b) Aggregate demand should be made equal to aggregate supply; monetary and fiscal
measures have an important role to play in this sphere.
(c) The price policy should provide necessary incentives to stimulate production of all
essential consumer goods.
(d) It should protect the vulnerable section of the community, by effectively checking the
rate of increase of food grain prices (but this should not reduce incentives to greater
production in agriculture).
(e) Price policies should be such as to establish some consistent relationship between
agricultural prices, prices of manufactures, and the prices of various services.
Prices of Industrial Products

Till now, the policy framework for determining the prices of industrial products was not fully
prepared. In the case of fertilizers, prices were fixed separately for each producer but in the
case of sugar and cement, prices were product-specific and varied between regions. The gen-
eral approach was to fix prices on a cost-plus basis but the details of the procedure varied. In
the case of coal, the price was fixed on the basis of actual costs. In many cases, certain stand-
ards of efficiency and capacity utilisation were taken into account while fixing standard costs.
The basis on which a return to capital was allowed also varied. In the case of energy sector,
there could be substitution between different products and, hence, prices of such products as
kerosene, soft coke, electricity, and LPG were fixed after paying due regard to the impact on
the demand for related goods and their consistency with development strategy. Likewise, the
pricing of different metals and other materials took into account the substitution possibili-
ties, which need to be encouraged or discouraged.
Finally, the prices of the most industrial products did not contain an element of subsidy.
However, in the case of fertilizers, the final prices paid by the farmers were very much below
the average cost of production and a huge budgetary provision had to be made year after year
(between ` 5,000 crore and ` 6,000 crore a year). Even though fertilizer subsidy was justified
from the point of view of agricultural growth, the burden of subsidy had grown with the in-
crease in the domestic production of fertilizers. In the recent years, every government which
assumed power at the Centre has announced its intention to phase out fertilizer subsidy but
none had the guts to implement it because of the opposition of the farmers’ lobby.
Control of Expenditure
The price policy designed to promote economic growth includes measures for controlling the
volume of public and private expenditures. The aim is to reduce any undue pressure in the
limited supply of consumption goods. Besides, the consumer goods should be available at
The price policy designed to prices regarded reasonable from the point of view of the low-income groups. Non-essential
promote economic growth in- and non-productive expenditure in both the public and private sectors must be reduced and,
cludes measures for controlling if possible, eliminated.
the volume of public and pri-
vate expenditures. The aim is to
In this connection, particular emphasis should be laid on the reduction of non-plan ex-
reduce any undue pressure in penditure or the government. Ultimately, without government cutting down its expenditure
the limited supply of consump- it is impossible to control inflation. The maximum economy in the Central government non-
tion goods. plan expenditure can be effected through (a) cutting down subsidies of all types, (b) mak-
ing government enterprises to earn profits, (c) closing down all or most of the economic
ministries, and (d) reducing the size of bureaucracy. The state governments are also guilty of
wasting precious resources by way of heavy losses of their enterprises and undertakings. In
practice, however, the governments both at the Centre and at the State level are not serious
about reducing the public expenditure.
The problem of a suitable price The problem of a suitable price policy in a developing economy arises largely owing
policy in a developing economy to the existence of persistent pressure of inflation. Price stability need not mean freezing
arises largely owing to the exist-
ence of persistent pressure of
the price at a given level. The slow and steady rise in the price level has all the virtues of a
inflation. constant price level and has, in addition, the power to infuse some amount of momentum to
the economy. This has been the position in India in the first three years of the Tenth Plan. A
cumulative but a very slow rise in general price level is, therefore, not only permissible but
also, indeed, desirable. However, the prices should not be allowed to go out of control, as was
our experience during 1973 and 1974, between 1980 and 1981, and between 1990 and 1992.
International Prices of Select Commodities

In an open economy, the move- In an open economy, the movement in the domestic prices of commodities depends on the
ment in the domestic prices of behaviour of their world prices. The pass through, however, is often incomplete and may
commodities depends on the be influenced by administrative and fiscal interventions. International and domestic trends
behaviour of their world prices.
of inflation in respect of 12 commodity groups indicate that domestic inflation for compa-
rable groups has been significantly lower than the increase in the global commodity group
indices.
Overall, four factors contributed to a global increase in the prices of commodities. Firstly
demand for food crops and edible oils increased because of a rapid rise in income in the
developing countries. A strong demand from the oil-exporting countries and increased use
of these crops/commodities in bio-fuels also pushed up their demand. The World Bank in
its Global Economic Prospects 2008 has indicated that, in 2006, bio-fuels accounted for
5 per cent to 10 per cent of the global production of primary bio-fuel feed stocks. The United
States used 20 per cent of its maize production for bio-fuels, Brazil used 50 per cent of sug-
arcane for bio-fuels, and the European Union used 68 per cent of its vegetable oil production
for bio-fuels. Such large uses, by reducing the availability of these products for food and feed,
exerted pressure on prices.
Inflationary Trends
Table 6.11 shows inflationary trends for the period 1951–60 to 2011–12.
Challenges and Outlook

Overall, inflation is likely to remain moderate in the coming months, as the policy measures
taken during the course of the year, work their own way through the system. The behaviour
of agricultural prices, including essential consumption items, will be critical, given falling
poverty and rapidly rising per capita income. Global prices are having a more pronounced
Wholesale Prices Consumer Prices

< Table 6.11
Inflationary Trends
March over Average March over Average
March Basis Basis March Basis Basis
Decadal Growth (Average Annual Growth)
1951–60 1.7 1.7 5.0 2.3
1961–70 6.5 6.4 5.9 4.1
1971–80 9.7 9.0 8.0 7.2
1981–90 7.3 8.0 9.0 10.2
1991–00 8.6 8.1 9.4 9.5
2001–10 5.9 5.3 6.2 5.9
Annual Variation
2004–05 3.7 3.9
2005–06 4.2 4.5 5.3 4.3
2006–07 6.7 6.6 6.7 6.8
2007–08 7.7 4.7 7.9 6.4
2008–09 1.6 8.1 8.0 9.0
2009–10 10.4 3.8 14.9 12.4
2010–11 9.7 9.6 9.6 10.4
2011–12 7.7 8.9 8.9 8.3
Source: Office of the Economic advisor and Labour Bureau.
impact on domestic prices as the ability to meet shortfalls at affordable prices is being eroded
by global shortages and rising prices. Thus, we will continue to depend on enhancement of
supplies through higher productivity and efficient supply management to eliminate wastage.
Domestic supply management is, therefore, critical to stabilising inflation expectations, Domestic supply management
moderating pressures for upward revision of wages and prices, and containing pressures for is, therefore, critical to stabilis-
cost-push inflation through monetary and fiscal accommodation. ing inflation expectations, mod-
erating pressures for upward
The parts of the economy characterised by market competition, such as manufacturing, revision of wages and prices,
have responded to the increase in demand through higher investment and capacity creation. and containing pressures for
The supply-side pressures are likely to be in sectors like agriculture that suffer from struc- cost-push inflation through
tural problems, infrastructure sectors still characterised by a monopoly core that are heavily monetary and fiscal accommo-
dation.
dependent on government investment, and relatively slow, decision-making sectors such as
urban land. Monetary policy needs to address the inflationary expectations triggered by sub-
sectoral price flare-ups arising from mismatches in the demand and supply. The monetary Monetary policy needs to
policy also has to manage the stress arising from a continued increase in capital flows and the address the inflationary expec-
tations triggered by sub-sectoral
consequential changes in the exchange rate, exchange reserves, and liquidity. This is particu- price flare-ups arising from mis-
larly challenging in a period of stagnancy or decline in the production of durable consumer matches in the demand and
goods and deceleration in the global demand for our exports. supply.
Key W o r d s
● Capital Market ● Call Money Market ● Financial System
● Money Market ● Bill Market ● Indian Banking System
Q u est i o n s
1. Analyse the performance of commercial banks in 6. Discuss the objectives of price policy in India and
India. how the prices of industrial products are determined.
2. Analyse the progress of the regional rural banks in 7. Discuss the recent price policy trends in an open
India. Evaluate the achievements of RRBs. economy.
3. What do you mean by the Indian Money Market? Ana- 8. Write short notes on:
lyse the various constituents of the unorganized and i. Call Money Market
organised money market in India.
ii. Bill Market
4. Discuss the recent trends in the capital market in
India. iii. Structure of Financial System
5. What do you mean by price policy? Discuss the price iv. Expenditure Control
movements since independence.
r efe r e n ces
n Dewett, K. K. (2002). Modern Economic Theory. New n Paul, H. (2003). The Economic Way of Thinking, 10th ed.
Delhi: Sultan Chand. New Delhi: Pearson Education.
n Misra, S. K. and V. K. Puri (2000). Indian Economy. n Travedi, I. V. and R. Jatana (2004). Economic Environ-
Mumbai: Himalaya publishing House. ment in India. Jaipur: University Book House.
07
C hapter
Stock Exchanges in India

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• Concept and Meaning of Stock Exchange 187 • Regulatory Requirements Specified by SEBI
• Functions of Stock Exchange 188 for Corporate Debt Securities 199
• List of Stock Exchanges in India 188 • Broker and Sub-broker in the Secondary
Market 200
• Types of Financial Markets 189
• Participants in the Securities Market 191 • SEBI Risk Management System 202
• Listing of Security at Regulatory • Investor Protection Fund (IPF)/Customer
Protection Fund (CPF) at Stock
Stock Exchange 191 Exchanges 203
• Depository Services 192
• Foreign Institutional Investors (FIIs) 205
• Dematerialisation 192 • Growth of Stock Market in India 207
• Products Available in the • Key Words 210
Secondary Market 193
• SEBI and its Role in the • Questions 210
Secondary Market 194 • References 210
• Powers of Security Exchange
Board of India 196
CONCEPT AND MEANING OF

STOCK EXCHANGE
A stock exchange is a form of exchange which provides services for stock brokers and traders Stock exchange is an organised
to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue marketplace, either corporation
and redemption of securities and other financial instruments, and capital events including or mutual organisation, where
members of the organisation
the payment of income and dividends. Securities traded on a stock exchange include shares gather to trade company stocks
issued by companies, unit trusts, derivatives, pooled investment products, and bonds. or other securities.
Stock exchanges are market where securities that have been listed thereon may be sold
and brought for either investment or speculation.
Stock exchange means any body of individual constituted for the purpose of assisting,
regulating or controlling the business of buying, selling of securities
It’s an organised market place, either corporation or mutual organisation, where mem-
bers of the organisation gather to trade company stocks or other securities. The members
may act either as agents for their customers, or as principals for their own accounts. It is a
place where securities are featured by the centralisation of supply and demand for the trans-
action of orders by member brokers for institutional and individual investors. It is established
to facilitate the buying and selling of stocks.
Stock exchanges also facilitate the issue and redemption of securities and other financial
instruments, including the payment of income and dividends. The record-keeping is central
but trade is linked to such a physical place because modern markets are computerised. The
trade on an exchange is only by members and stockbrokers do have a seat on the exchange.
FUNCTIONS OF STOCK EXCHANGE

• Ensures liquidity of capital
• Continuous market for securities
• Evaluation of security
• Mobilising surplus savings
• Helpful in raising new capital
• Safety in dealing
• Listing of securities
• Platform for public debt
• Business information
LIST OF STOCK EXCHANGES IN INDIA

• Bombay Stock Exchange
• National Stock Exchange
• OTC Exchange of India
• Ahmedabad Stock Exchange
• Bangalore Stock Exchange
• Bhubaneshwar Stock Exchange
• Calcutta Stock Exchange
• Cochin Stock Exchange
• Coimbatore Stock Exchange
• Delhi Stock Exchange
• Guwahati Stock Exchange
• Hyderabad Stock Exchange
• Jaipur Stock Exchange
• Ludhiana Stock Exchange
• Madhya Pradesh Stock Exchange
• Madras Stock Exchange
Stock Exchanges in India | 189
• Magadh Stock Exchange

• Mangalore Stock Exchange
• Meerut Stock Exchange
• Pune Stock Exchange
• Saurashtra Kutch Stock Exchange
• Uttar Pradesh Stock Exchange
• Vadodara Stock Exchange
TYPES OF FINANCIAL MARKETS

The financial markets can be broadly divided into money market and capital market.
Money Market
Money market is a market for debt securities that pay off in the short term usually less than Money market is a market for
one year, for example, the market for 90-day treasury bills. This market encompasses the debt securities that pay off in
trading and issuance of short-term non-equity debt instruments, including treasury bills, the short term usually less than
one year.
commercial papers, bankers’ acceptance, certificates of deposits, and so on.
The money market consists of financial institutions and dealers in money or credit who
wish to either borrow or lend. Participants borrow and lend for short periods, typically up to
13 months. Money market trades in short-term financial instruments are commonly called
‘paper’.
The core of the money market consists of interbank lending—banks borrowing and lend-
ing to each other using commercial paper, repurchase agreements, and similar instruments.
These instruments are often priced with reference to London Interbank Offered Rate (LIBOR)
for the appropriate term and currency.
Functions of the Money Market

• Transfer of large sums of money
• Transfer from parties with surplus funds to parties with a deficit
• Allow governments to raise funds
• Help to implement monetary policy
• Determine short-term interest rates
Capital Market
Capital markets are financial markets for the buying and selling of long-term debt- or equity- Capital market is a market
backed securities. These markets channel the wealth of savers to those who can put it to long- for long-term debt and equity
term productive use, such as companies or governments making long-term investments. shares. In this market, the capi-
tal funds comprising of both
It’s a market for long-term debt and equity shares. In this market, the capital funds com-
equity and debt are issued and
prising of both equity and debt are issued and traded. This also includes private placement traded.
sources of debt and equity as well as organized markets like stock exchanges. Capital market
can be further divided into primary and secondary markets.
Primary Market
The primary market is that part of the capital markets that deals with the issuance of new
securities. Companies, governments, or public sector institutions can obtain bonds through
the sale of a new stock or bond issue. Primary markets create long-term instruments through
which corporate entities borrow from capital market.
Features of Primary Markets

• This is the market for new long term equity capital. The primary market is the market
where the securities are sold for the first time. Therefore, it is also called the new issue
market (NIM).
• In a primary issue, the securities are issued by the company directly to investors.
• The company receives the money and issues new security certificates to the investors.
• Primary issues are used by companies for the purpose of setting up new business or
for expanding or modernizing the existing business.
• The primary market performs the crucial function of facilitating capital formation in
the economy.
• The new issue market does not include certain other sources of new long term exter-
nal finance, such as loans from financial institutions.
Methods of Floating New Issue

• Initial public offer or public issue
• Offer of sale
• Private placement
• Right issues
• Preferential issue
Secondary Market
Secondary market refers to a market where securities are traded after being initially offered to
Secondary market refers to
a market where securities the public in the primary market, and/or listed on the stock exchange. Majority of the trad-
are traded after being initially ing is done in the secondary market. Secondary market comprises of equity markets and the
offered to the public in the pri- debt markets. For the general investor, the secondary market provides an efficient platform
mary market, and/or listed on for trading of his securities. For the management of the company, secondary equity markets
the stock exchange.
serve as a monitoring and control conduit—by facilitating value-enhancing control activities,
enabling implementation of incentive-based management contracts, and aggregating infor-
mation (via price discovery) that guides management decisions.
The Difference between Primary Market and Secondary Market

In the primary market, securities are offered to public for subscription, for the purpose of
raising new capital or fund. On the other hand, the secondary market is an equity-trading
avenue in which the already existing/pre-issued securities are traded among investors. The
secondary market could be either auction or dealer market. While stock exchange is the part
of an auction market, over-the counter (OTC) is a part of the dealer market.
PARTICIPANTS IN THE SECURITIES MARKET

• Regulators
Reserve Bank of India, Security and Exchange Board of India, Department of
Economic Affairs, Security Exchange Commission, and Federal Reserve Bank
• Stock exchanges
• Listed securities
• Depositories
• Brokers
• Foreign institutional investors
• Merchant bankers or investment bankers
• Mutual funds
• Custodians
• Registrars
• Underwriters
• Bankers to an issue
• Debenture trustees
• Venture capital funds
• Credit rating agencies
LISTING OF SECURITY AT REGULATORY

STOCK EXCHANGE
Listing of securities means permission to quote shares and debentures officially on the trad-
ing floor of the stock exchange. It is admission of securities of an issuer to buying and selling
rights (dealings) on a stock exchange by way of a formal agreement. The main aim of admis-
sion to dealings on the exchange is to give liquidity and also marketability to securities, as
also to give a mechanism for efficient control and supervision of trading. The securities may
be of any public limited company, central or state government.
Merits of Listing
• Liquidity
• Best price
• Regular information
• Periodic report
• Transferability
• Income tax benefits
• Wide publicity
Demerits
• Various measures of stock exchange and SEBI
• Disclosure of essential information to stock exchange
• Cost increased due to meeting and annual report to share holders
• Cost of adding public offer and subscription
DEPOSITORY SERVICES
It is a system whereby the transfer and settlement of scripts take place not through the tra-
ditional method of transfer deeds and physical delivery of scripts but through the modern
system of effecting transfer of ownership of securities by means of book entry on the ledger
or the depository without the physical movement of scripts. Till 1996, securities were in
physical form, i.e., holding of securities, issue of shares, transfer of shares, trading, settle-
ment, etc. were in physical form.
Depositories resolved the biggest market risks, i.e., bad deliveries, delayed transfers, fake
certificates, loss/theft of certificates.
DEMATERIALIZATION
Dematerialization is a process wherein share certificates or other securities held on physi-
cal form are converted into electronic form and credited to demat account of an investor
opened with a depository participant (broker/agent). SEBI has introduced demat w.e.f.
15 January,1998. Further, SEBI has made compulsory trading of shares of all companies listed
in stock exchange in demat form with effect from 2 January, 2002.
Calculating Sensex
Sensex is calculated using the ‘free-float market capitalization’ methodology. As per this
methodology, the level of index at any point of time reflects the free-float market value of
stocks relative to a base period. The market capitalization of a company is determined by
multiplying the price of its stock by the number of shares issued by the company. This market
capitalization is further multiplied by the free-float factor to determine the free-float market
capitalization.
Free-float Methodology
Free-float methodology refers to an index construction methodology that takes into consid-
eration only the free-float market capitalization of a company for the purpose of index calcu-
lation and assigning weight to stocks in index. Free-float market capitalization is defined as
that proportion of total shares issued by the company that are readily available for trading in
the market. It generally excludes promoters’ holding, government holding, strategic holding,
and other locked-in shares that will not come to the market for trading in the normal course.
In other words, the market capitalization of each company in a free-float index is reduced to
the extent of its readily available shares in the market.
PRODUCTS AVAILABLE IN THE

SECONDARY MARKET
Following are the main financial products/instruments dealt in the secondary market:
Equity
The ownership interest in a company of holders of its common and preferred stock.
Equity Shares
An equity share, commonly referred to as an ordinary share, also represents the form of An equity share, commonly
fractional ownership in which a shareholder, as a fractional owner, undertakes the maxi- referred to as an ordinary share,
also represents the form of
mum entrepreneurial risk associated with a business venture. The holders of such shares are fractional ownership in which
members of the company and have voting rights. A company may issue such shares with a shareholder, as a fractional
differential rights as to voting, payment of dividend, and so on. The various kinds of equity owner, undertakes the maxi-
shares are as follows: mum entrepreneurial risk asso-
ciated with a business venture.
• Rights issue/Rights shares: The issue of new securities to the existing shareholders at
a ratio to those securities already held.
• Bonus shares: The shares issued by the companies to their shareholders, free of cost,
by capitalization of accumulated reserves from the profits earned in the earlier years.
• Preferred stock/Preference shares: The owners of these kinds of shares are entitled to a
fixed dividend or a dividend calculated at a fixed rate to be paid regularly before a divi-
dend can be paid in respect of an equity share. They also enjoy priority over the equity
shareholders in payment of a surplus. However, in the event of liquidation, their claims
rank below the claims of the company’s creditors, bondholders, or debenture holders.
• Cumulative preference shares: A type of preference shares on which dividend
accumulates, if remains unpaid. All arrears of preference dividend have to be paid
out before paying dividend on the equity shares.
• Cumulative convertible preference shares: A type of preference shares where the divi-
dend payable on the same accumulates, if not paid. After a specified date, these shares
will be converted as the equity capital of the company.
• Participating preference share: The right of certain preference shareholders to
participate in profits after a specified fixed dividend that was contracted for is paid.
Participation right is linked with the quantum of dividend paid on the equity shares,
over and above a particular specified level.
• Security receipts: Security receipt means a receipt or other security, issued by a
securitization or a reconstruction company to any qualified institutional buyer
pursuant to a scheme, evidencing the purchase or acquisition by the holder thereof,
of an undivided right, title, or interest in the financial asset involved in securitization.
• Government securities (G-Secs): These are sovereign (credit risk-free) coupon-
bearing instruments, which are issued by the Reserve Bank of India (RBI) on behalf
of Government of India, in lieu of the central government’s market-borrowing pro-
gramme. These securities have a fixed coupon that is paid on specific dates on half-
yearly basis. These securities are available in a wide range of maturity dates, from
short dated (less than one year) to long dated (up to 20 years).
• Debentures: Bonds issued by a company, bearing a fixed rate of interest, usually

payable half-yearly on specific dates, and principal amount repayable on a particu-
lar date on redemption of the debentures. Debentures are normally secured/charged
against the asset of the company in favour of a debenture holder.
• Bond: A negotiable certificate evidencing indebtedness. It is normally unsecured.
A debt security is generally issued by a company, a municipality, or a government
agency. A bond investor lends money to the issuer and, in exchange, the issuer prom-
ises to repay the loan amount on a specified maturity date. The issuer usually pays the
bond holder, periodic interest payments over the life of the loan. The various types of
bonds are as follows:
• Zero coupon bond: Bond issued at a discount and repaid at a face value. No
periodic interest is paid. The difference between the issue price and redemption
price represents the return to the holder. The buyer of these bonds receives only
one payment at the maturity of the bond.
• Convertible bond: A bond giving the investor the option to convert the bond into
equity at a fixed conversion price.
• Commercial paper: A short-term promise to repay a fixed amount that is placed on
the market, either directly or through a specialized intermediary. It is usually issued
by companies with a high credit, standing in the form of a promissory note, redeem-
able at par to the holder on maturity and, therefore, does not require any guarantee.
Commercial paper is a money market instrument issued normally for a tenure of 90
days.
• Treasury bills: Short-term (up to 91 days) bearer discount security issued by the
government as a means of financing its cash requirements.
Derivatives
The derivatives market is the financial market for derivatives, financial instruments like
futures contracts or options, which are derived from other forms of assets. The market can be
divided into two, that for exchange-traded derivatives and that for over-the-counter deriva-
tives. The legal nature of these products is very different as well as the way they are traded,
though many market participants are active in both.
SEBI AND ITS ROLE IN THE SECONDARY

MARKET
Security Exchange Board of India
The SEBI is the regulatory The SEBI is the regulatory authority established under Section 3 of SEBI Act, 1992, to protect
authority established under the interests of the investors in securities and to promote the development of, and to regulate,
Section 3 of SEBI Act, 1992,
to protect the interests of the
the securities market and for matters connected, therewith, and incidental, thereto.
investors in securities and to
promote the development of, Objectives
and to regulate, the securities
market and for matters con- • Regulating the business in stock markets and other securities market
nected, therewith, and inciden-
tal, thereto. • Registering and regulating the working of stock brokers
• Registering and regulating the working of investment schemes

• Promoting and regulating the self-regulatory organizations
• Prohibiting fraudulent and unfair trade practices relating to securities market
• Regulating substantial acquisition of shares and take over of the companies
Functions of SEBI
• Regulating the business in stock exchanges and any other securities market
• Registering and regulating the working of collective investment schemes
• Promoting and regulating self-regulatory organizations
• Registering and regulating the working of stock brokers, sub-brokers, share transfer
agents, merchant bankers, underwriters, portfolio managers, investment advisors,
and such other intermediaries who are associated with securities in any manner
• Promoting of investors education and training of intermediaries in securities market
• Prohibiting insider trading in securities
• Regulating substantial acquisition of shares and take over of companies
• Calling information, undertaking inspection, conducting enquiries and audits of the
stock exchanges, intermediaries, and self-regulatory organizations
• Performing such functions and exercising such powers under the provisions of the
Capital Issues ACT 1947, Securities Contracts (Regulation) Act 1956, as may be del-
egated by the central Govt.
• Performing such other functions as may be prescribed by the Govt.
Role of SEBI in Regulating Trading in the

Secondary Market
The following departments of SEBI take care of the activities in the secondary market:
S. No. Name of the Department Major Activities

1. Market Intermediaries Registration, supervision, compliance registration and
supervision monitoring, and inspections of all market
department (MIRSD) intermediaries in respect of all
segments of the markets, viz., equity, equity derivatives,
debt, and debt-related derivatives
2. Market Regulation Department Formulating new policies and supervising the functioning
and operations (except relating to derivatives)
of securities exchanges, their subsidiaries, and
market institutions, such as clearing and settlement
organizations and depositories (collectively referred to as
‘Market SROs’)
3. Derivatives and New Products Supervising trading at derivatives segments of stock
Departments (DNPD) exchanges, introducing new products to be traded, and
consequent policy changes
POWERS OF SECURITY EXCHANGE

BOARD OF INDIA
Save as, otherwise, provided in Section 11, if after making or causing to be made an enquiry,
the Board is satisfied that it is necessary
1. In the interest of investors or orderly development of securities market; or
2. To prevent the affairs of any intermediary or other persons referred to in Section 12, being
conducted in a manner detrimental to the interest of investors or securities market; or
3. To secure the proper management of any such intermediary or person, it may issue
such directions:
(i) to any person or class of persons referred to in Section 12, or associated with the
securities market; or
(ii) to any company in respect of matters specified in Section 11A, as may be appro-
priate in the interests of investors in securities and the securities market.
Investigation
1. Where the Board has a reasonable ground to believe that
(i) the transactions in securities are being dealt with in a manner detrimental to the
investors or the securities market; or
(ii) any intermediary or a person associated with the securities market has violated
any of the provisions of this Act or the rules or the regulations made or direc-
tions issued by the Board there under,
It may, at any time, by an order in writing, direct any person (hereafter in
this section referred to as the Investigating Authority) specified in the order,
to investigate the affairs of such intermediaries or persons associated with the
securities market and to report, thereon, to the Board.
2. Without prejudice to the provisions of Sections 235–241 of the Companies Act, 1956
(1 of 1956), it shall be the duty of every manager, managing director, officer, and other
employee of the company, and every intermediary referred to in Section 12, or every
person associated with the securities market to preserve and to produce to the inves-
tigating authority or any person authorized by it in this behalf, all the books, registers,
other documents, and record of, or relating to, the company or, as the case may be, of
or relating to, the intermediary or such person, which are in their custody or power.
3. The investigating authority may require any intermediary or person associated with
securities market, in any manner, to furnish such information to, or produce such
books, or registers, or other documents, or record before it, or any person authorized
by it in this behalf, as it may consider necessary, if the furnishing of such informa-
tion or the production of such books, or registers, or other documents, or record is
relevant or necessary for the purposes of its investigation.
4. The investigating authority may keep in his or her custody any books, registers, other
documents, and record produced under sub-section (2) or sub-section (3) for six
months and, thereafter, shall return the same to any intermediary or person, who is
associated with securities market by whom or on whose behalf the books, the regis-
ters, the other documents, and the record are produced,
(i) provided that the investigating authority may call for any book, register, other
document, and record, if they are needed again; and
(ii) provided further that if the person on whose behalf the books, registers, other
documents, and record are produced requires certified copies of the books, reg-
isters, other documents, and record produced before the investigating author-
ity. It shall give certified copies of such books, registers, other documents, and
record to such person or on whose behalf the books, the registers, the other
documents, and the record were produced.
5. Any person, directed to make an investigation under sub-section (1) may examine
on oath, any manager, managing director, officer, and other employee of any inter-
mediary or a person associated with securities market, in any manner, in relation to
the affairs of his/her business and may administer an oath accordingly and, for that
purpose, may require any of those persons to appear before it personally.
6. If any person fails without a reasonable cause, or refuses
(i) to produce to the investigating authority or any person authorized by it in this
behalf any book, register, other document, and record, which it is his/her duty
under sub-section (2) or sub-section (3) to produce; or
(ii) to furnish any information which is his/her duty under sub-section (3) to
furnish; or
(iii) to appear before the investigating authority personally when required to do so
under sub-section (5), or to answer any question which is put to him/her by the
investigating authority in pursuance of that sub-section; or
(iv) to sign the notes of any examination referred to in sub-section (7).
He/she shall be punishable with an imprisonment for a term, which may extend to
one year, or with fine, which may extend to ` 1 crore, or with both, and also with a
further fine, which may extend to ` 5 lakh, for every day after the first year during
which the failure or refusal continues.
7. The notes of any examination under sub-section (5) shall be taken down in writ-
ing and shall be read over to, or by, and signed by, the person examined, and may,
thereafter, be used as an evidence against him/her.
8. In the course of investigation, the investigating authority has a reasonable ground
to believe that the books, the registers, the other documents, and the record of, or
relating to, any intermediary or any person associated with securities market, in any
manner, may be destroyed, mutilated, altered, falsified, or secreted. In that case, The
investigating authority may make an application to the judicial magistrate of the first
class, having jurisdiction for an order for the seizure of such books, registers, other
documents, and record.
9. After considering the application and hearing the investigating authority’s appeal, if
necessary, the magistrate may, by order, authorize the investigating authority
(i) to enter, with such assistance, as may be required, the place or places where such
books, registers, other documents, and the record are kept;
(ii) to search that place or those places in the manner specified in the order; and
(iii) to seize books, registers, other documents, and the record, it considers necessary
for the purposes of the investigation,
a. provided that the magistrate shall not authorize seizure of books, registers,
other documents, and record, of any listed public company or a public
company (not being the intermediaries specified under Section 12), which
intends to get its securities listed on any recognized stock exchange, unless
such company indulges in an insider trading or market manipulation.
10. The investigating authority shall keep in its custody the books, the registers, the other
documents, and the record seized under this section, for such period not later than
the conclusion of the investigation it considers necessary and, thereafter, shall return
the same to the company or the other body corporate, or, as the case may be, to the
managing director or the manager or any other person, from whose custody or power
they were seized, and inform the magistrate of such return:
(i) provided that the investigating authority may, before returning such books, reg-
isters, other documents, and record, as aforesaid, place identification marks on
them or any part, thereof.
11. Save as, otherwise, provided in this section, every search or seizure made under this
section shall be carried out in accordance with the provisions of the Code of Crimi-
nal Procedure, 1973 (2 of 1974), relating to searches or seizures made under that
code.
Cease and Desist Proceedings

If the Board finds, after causing an enquiry to be made, that any person has violated, or is
likely to violate, any provisions of this Act, or any rules or regulations made there under, it
may pass an order requiring such person to cease and desist from committing or causing
such violation:
(i) provided that the Board shall not pass such order in respect of any listed public com-
pany or a public company (other than the intermediaries specified under Section 12),
which intends to get its securities listed on any recognized stock exchange, unless
the Board has reasonable grounds to believe that such company has indulged in an
insider trading or market manipulation.
The Securities and Exchange Board of India

Act of 1992
The Securities and Exchange Board of India Act, 1992 (hereinafter referred as ‘The SEBI
The Securities and Exchange
Board of India Act, 1992 (here- Act’) is having retrospective effect, and is deemed to have come into force on 30 January,
inafter referred as ‘The SEBI 1992. Relatively, a brief Act containing only 35 sections, the SEBI Act governs all the stock
Act’) is having retrospective exchanges and the securities transactions in India.
effect, and is deemed to have
come into force on January 30,
A Board by the name of the Securities and Exchange Board of India (SEBI) consisting of
1992. one chairman and five members, one each from the Department of Finance and Law of the
Central Government, one from the RBI, and two other persons; and having its head office in
Section 11 of the SEBI Act pro- Bombay and regional offices in Delhi, Calcutta, and Chennai, has been constituted under the
vides that it shall be the duty of SEBI Act to administer its provisions. The central government has the right to terminate the
the Board to protect the inter- services of the chairman or any member of the Board. The Board decides all questions in its
est of investors in securities, to
meeting by a majority vote, with the chairman having a second or a casting vote.
promote the development of,
and to regulate, the securities Section 11 of the SEBI Act provides that it shall be the duty of the Board to protect the
market by such measures, as it interest of investors in securities, to promote the development of, and to regulate, the securi-
thinks fit. ties market by such measures, as it thinks fit. It empowers the Board to regulate the business
in stock exchanges, to register and regulate the working of stockbrokers, sub-brokers, share-
transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant
bankers, underwriters, portfolio managers, investment advisors, and so on, to register and
regulate the working of collective investment schemes, including mutual funds, to prohibit
fraudulent and unfair trade practices and insider trading, to regulate takeovers, to conduct
enquiries and audits of the stock exchanges, and so on.
As all stock exchanges are required to be registered with SEBI under the provisions of As all stock exchanges are
the Act, under Section 12 of the SEBI Act, all the stockbrokers, sub-brokers, share-transfer required to be registered with
agents, bankers to an issue, trustees of trust deed, registrars to an issue, merchant bankers, SEBI under the provisions of
the Act.
underwriters, portfolio managers, investment advisors, and such other intermediary, who
may be associated with the securities markets, are obliged to register with the Board, and
the Board has the power to suspend or cancel such registration. The Board is bound by the
directions given by the central government, from time to time, on questions of policy, and the
central government has the right to supersede the Board. The Board is also obliged to submit
a report to the central government every year, giving true and full account of its activities,
policies, and programmes. Any one aggrieved by the Board’s decision is entitled to appeal to
the central government.
REGULATORY REQUIREMENTS SPECIFIED BY

SEBI FOR CORPORATE DEBT SECURITIES
The issue of debt securities having a maturity period of more than 365 days by listed com-
panies (i.e., which have any of their securities, either equity or debt, offered through an offer
document, and listed on a recognized stock exchange; and also includes public sector under-
takings, whose securities are listed on a recognized stock exchange), on a private placement
basis, must comply with the conditions prescribed by SEBI, from time to time, for getting
them listed on the stock exchanges. Further, unlisted companies/statutory corporations/
stock exchanges in India other entities, if they desire so, may get their privately placed debt
securities listed on the stock exchanges, by complying with the relevant conditions. Briefly,
these conditions are as follows:
1. Compliance with the disclosure requirements under Chapter VI of the SEBI
(Disclosure and Investor Protection) Guidelines, 2000, and listing agreements with
the exchanges and provisions of the Companies Act, 1956.
2. Such disclosures may be made through the website of the stock exchanges where the
debt securities are sought to be listed, if the privately placed debt securities are issued
in the standard denomination of ` 10 lakh.
3. The company shall sign a separate listing agreement with the exchange in respect of
debt securities.
4. The debt securities shall carry a credit rating from a credit rating agency registered
with SEBI.
5. The company shall appoint a debenture trustee, who is registered with SEBI, in
respect of the issue of the debt securities.
6. The debt securities shall be issued and traded in demat form.
7. All trades with the exception of spot transactions, in a listed debt security, shall be
executed only on the trading platform of a stock exchange.
BROKER AND SUB-BROKER IN THE

SECONDARY MARKET
Broker
A broker is a member of a recog-
A broker is a member of a recognized stock exchange, who is permitted to do trades on the
nised stock exchange, who is screen-based trading system of different stock exchanges. He/she is enrolled as a member
permitted to do trades on the with the concerned exchange and is registered with SEBI.
screen-based trading system of Following are the types of brokers.
different stock exchanges.
Full Service Broker

This broker is the most costly. They do research and give recommendations on which stocks you
should invest in. A lot of times the recommendations that they give are stocks of which their
own company specializes in. The company makes all this information public. In a full service
firm you get a personal broker that gets a commission for selling the investment to you. They
can also give you a lot of very important information that you do not have any other access to.
Discount Broker
This broker is discounted by giving you a list of stocks they recommend, but you are to do
your own research on these stocks.
Online Broker
This broker, the newest type of broker, is run online. They give you research to do, charts
to look over, and news on investments to help you in completing your own research. It is
not usual for this broker to recommend any stocks to research, but it happens sometimes.
The online brokers are a very cheap way to invest, but you are required to learn the basics of
investments before you are able to use their services.
Sub-broker
A sub-broker is a person who

A sub-broker is a person who is registered with SEBI as such and is affiliated to a member of
is registered with SEBI as such a recognized stock exchange. You can contact a broker or a sub-broker registered with SEBI
and is affiliated to a member of for carrying out your transactions pertaining to the capital market.
a recognized stock exchange.
Agreement with the Broker or Sub-broker

For the purpose of engaging a broker to execute trades on your behalf, from time to time, and
furnish details relating to yourself, for enabling the broker to maintain a client registration form,
you have to sign the ‘member–client agreement’, if you are dealing directly with a broker. In case
you are dealing through a sub-broker, then you have to sign a ‘broker–sub-broker–client’—a
tripartite agreement. The ‘model tripartite agreement’ between broker–sub-broker–client and
know-your-client form can be viewed from SEBI website at www.sebi.gov.in. The model tripar-
tite agreement between broker–sub-broker and clients is applicable only for the cash segment.
The model agreement has to be executed on a non-judicial stamp paper. The agree-
ment contains clauses defining the rights and responsibilities of client vis-à-vis broker/sub-
broker. The documents prescribed are model formats. The stock exchanges/stockbroker may
incorporate any additional clauses in these documents, provided the clauses are not in con-
flict with any of the clauses in the model document, as also the rules, regulations, articles,
byelaws, circulars, directives, and guidelines.
Risk Disclosure Document

In order to acquaint the investors in the markets of the various risks involved in trading in the
stock market, the members of the exchange have been required to sign a risk disclosure docu-
ment with their clients, informing them of the various risks like risks of volatility, risks of lower
liquidity, risks of higher spreads, risks of new announcements, risks of rumours, and so on.
Placing Orders with the Broker or Sub-broker

You can either go to the broker’s/sub-broker’s office or place an order over the phone/Internet
or as defined in the model agreement given above. The stock exchanges assign a unique order
code number to each transaction, which is intimated by the broker to his/her client and once
the order is executed, this order code number is printed on the contract note. The broker
member has also to maintain the record of time when the client has placed order and should
reflect the same in the contract note, along with the time of execution of the order.
Brokerage that a Broker or Sub-broker Can Charge

The maximum brokerage that can be charged by a broker has been specified in the stock The maximum brokerage that
exchange regulations and, hence, it may differ from across various exchanges. As per the can be charged by a broker
BSE and NSE byelaws, a broker cannot charge more than 2.5 per cent brokerage from his/ has been specified in the stock
exchange regulations and,
her clients. This maximum brokerage is inclusive of the brokerage charged by the sub-broker. hence, it may differ from across
Further, SEBI (stockbrokers and sub-brokers) Regulations, 1992 stipulates that a sub-broker various exchanges.
cannot charge from his/her clients, a commission which is more than 1.5 per cent of the value
mentioned in the respective purchase or sale note.
Charges Levied on the Investor by a

Stockbroker/Sub-broker
The trading member can charge as follows:
1. Brokerage charged by a member broker.
2. Penalties arising on a specific default on behalf of a client (investor).
3. Service tax as stipulated.
4. Securities transaction tax (STT) as applicable.
The brokerage, service tax, and STT are indicated separately in the contract note.
Securities Transaction Tax

Securities transaction tax (STT) is a tax being levied on all transactions done on the stock Securities transaction tax (STT)
exchanges, at rates prescribed by the central government from time to time. Pursuant to the is a tax being levied on all
enactment of the Finance (No. 2) Act, 2004, the Government of India notified the STT Rules, transactions done on the stock
exchanges, at rates prescribed
2004, and, thus, STT came into effect from 1 October, 2004. by the central government from
time to time.
Rolling Settlement
In a rolling settlement, the trades executed during the day are settled based on the net obli- In a rolling settlement, the
gations for the day. Presently, the trades pertaining to the rolling settlement are settled on a trades executed during the day
are settled based on the net
T+2-day basis where T stands for the trade day. Hence, trades executed on a Monday are typi-
obligations for the day.
cally settled on the following Wednesday (considering two working days from the trade day).
The pay-in and pay-out of funds and securities are carried out on T+2 day.
Heads Activity Day

Trading Rolling settlement trading T
Clearing Custodial confirmation T+1 working days
Delivery generation T+1 working days
Settlement Securities and funds pay-in T+2 working days
Securities and funds pay-out T+2 working days
Post settlement Valuation debit T+2 working days
Auction T+3 working days
Bad delivery reporting T+4 working days
Auction settlement T+5 working days
Close out T+5 working days
Rectified bad delivery pay-in and pay-out T+6 working days
Re-bad delivery reporting and pickup T+8 working days
Close out of re-bad delivery T+9 working days
Note: The above is a typical settlement cycle for normal (regular) market segment. The days prescribed
for the above activities may change in case of factors like holidays, bank closing, and so on. You may
refer to scheduled dates of pay-in/pay-out, notified by the exchange for each settlement from time to
time.
SEBI RISK MANAGEMENT SYSTEM

SEBI’s primary focus is always to address the market risks, operational risks, and systematic
risk. SEBI is regularly and continuously reviewing its policies and drafting risk management
policies to control the above risks, to enhance the level of investors’ protection, and to cater
to the need of market development.
The key risk management measures initiated by SEBI includes the following:
1. Value at risk (VAR) based margining system
2. Specification of mark-to-market margins
3. Specification of intra-day trading limits and gross exposure limits
4. Real-time monitoring of the intra-day trading limits and gross exposure limits by the
stock exchanges
5. Specification of time limits for payment of margins
6. Collection of margins on T+1 basis
7. Index-based market-wide circuit breakers
8. Automatic deactivation of trading terminals, in case of breach of exposure limits
9. VAR-based margining system has been put in place, based on the categorization of
stocks, which, in turn, based on the liquidity of stocks, depending on its impact on
cost and volatility. It addresses 99 per cent of the risks in the market.
10. Additional margins have also been specified to address the balance 1 per cent cases.
From time to time, SEBI has issued circulars modifying the present risk management frame-
work to move to upfront a collection of VAR margins (instead of margin collection on T+1
basis). As per SEBI’s revised framework (SEBI circular MRD/DOP/SE/Cir-07/2005), the
liquid assets deposited by the broker with the exchange should be sufficient to cover up-
front VAR margins, extreme loss margin, and MTM (mark to market losses). It has also been
stated clearly by SEBI that the exchanges would monitor the position of the brokers online
on real-time basis, and there would be an automatic deactivation of terminal on any shortfall
of margin.
Redressing Investor Grievances

Office of Investor Assistance and Education (OIAE): You can lodge a complaint with OIAE You can lodge a complaint
department of SEBI against companies for delay, non-receipt of shares, refund orders, and with OIAE department of SEBI
so on, and with stock exchanges against brokers on certain trade disputes or non-receipt of against companies for delay,
non-receipt of shares, refund
payment/securities. orders, and so on, and with
stock exchanges against bro-
1. Arbitration: If no amicable settlement could be reached, then you can make an appli- kers on certain trade disputes
cation for reference to arbitration under the byelaws of the concerned stock exchange. or non-receipt of payment/
securities.
2. Court of Law.
Arbitration
Arbitration is an alternative, dispute resolution mechanism provided by a stock exchange for
resolving disputes between the trading members and their clients, in respect of trades done
on the exchange.
Process for Preferring Arbitration

The byelaws of the exchange provide the procedure for arbitration. You can procure a form
for filing arbitration from the concerned stock exchange. The arbitral tribunal has to make
the arbitral award within three months from the date of entering upon the reference. The
time taken to make an award cannot be extended beyond a maximum period of six months
from the date of entering upon the reference.
Appointment of the Arbitrators

Every exchange maintains a panel of arbitrators. Investors may choose the arbitrator of their
choice from the panel. The broker also has an option to choose an arbitrator. The name(s)
would be forwarded to the member for acceptance. In case of disagreement, the exchange
shall decide upon the name of arbitrators.
INVESTOR PROTECTION FUND (IPF)/

CUSTOMER PROTECTION FUND (CPF)
AT STOCK EXCHANGES
Investor protection fund (IPF) is the fund set up by the stock exchanges, to meet the legiti-
mate investment claims of the clients, of the defaulting members who are not of speculative
nature. SEBI has prescribed guidelines for the utilization of IPF at the stock exchanges. The
stock exchanges have been permitted to fix suitable compensation limits, in consultation
Investor protection fund (IPF) with the IPF/CPF Trust. It has been provided that the amount of compensation available
is the fund set up by the stock against a single claim of an investor, arising out of a default by a member broker of a stock
exchanges, to meet the legiti- exchange, shall not be less than ` 1 lakh in case of major stock exchanges, viz., BSE and NSE,
mate investment claims of the
and ` 50,000/- in case of other stock exchanges.
clients, of the defaulting mem-
bers who are not of speculative
nature.
Acts Governing Securities Transactions in India
In India, two Acts mainly govern securities transactions at present. They are as follows:
1. The Securities Contracts (Regulation) Act, 1956 and
2. The Securities & Exchange Board of India Act, 1992.
The paper-based ownership and transfer of securities have been a major drawback of the
Indian securities markets, since it often results in delay in settlement and transfers of securi-
ties and also leads to ‘bad delivery’, theft, forgery, and so on. The Depositories Act, 1996 was,
therefore, enacted to pave the way for smooth and free transfer of securities.
The other relevant laws, which affect the capital market, are:
1. The Depositories Act, 1996
2. The Foreign Exchange Regulations Act, 1973
3. Arbitration and Conciliation Act, 1996
4. Companies Act, 1956
5. Debt Recovery Act (Bank and Financial Institutions Recovery of Dues Act, 1993)
6. Banking Regulation Act
7. Benami Prohibition Act
8. Indian Penal Code
9. Indian Evidence Act, 1872, and
10. Indian Telegraph Act, 1885.
The Securities Contracts (Regulation)

Act of 1956
The Securities Contracts (Regulation) Act, 1956 (hereinafter referred to as the Act), con-
taining a mere 31 sections, keeps a tight vigil over all the stock exchanges of India since
20 February, 1957. The provisions of the Act were formerly administered by the central
government. However, since the enactment of The Securities and Exchange Board of India
Act, 1992, the Board established under it (SEBI), concurrently, has powers to administer
almost all the provisions of the Act.
By virtue of the provisions of the By virtue of the provisions of the Act, the business of dealing in securities cannot be
Act, the business of dealing in carried out without a license from SEBI. Any stock exchange, which is desirous of being rec-
securities cannot be carried out ognized, has to make an application under Section 3 of the Act to SEBI, which is empowered
without a license from SEBI. to grant recognition and prescribe conditions, including that of having SEBI’s representa-
tion (maximum three persons) on the stock exchange and prohibiting the stock exchange
from amending its rules without SEBI’s prior approval. This recognition can be withdrawn in
the interest of the trade or the public. SEBI is authorized to call for periodical returns from
the recognized stock exchanges and make enquiries in relation to their affairs. Every stock
e xchange is obliged to furnish annual reports to SEBI. Stock exchanges are allowed to make
rules only with the prior approval of SEBI. The central government and SEBI can direct stock
exchanges to frame rules. The recognized stock exchanges are allowed to make bylaws for
the regulation and control of contracts, subject to the previous approval of SEBI, and SEBI
has the power to amend the aforesaid bylaws. The central government and SEBI have the
power to supersede the governing body of any recognized stock exchange and to suspend its
business.
A public limited company has no obligation to have its shares listed on a recognized A public limited company has
stock exchange. However, if a company intends to offer its shares or debentures to the public no obligation to have its shares
for subscription by issue of a prospectus, it must, before issuing such prospectus, apply to listed on a recognized stock
exchange.
one or more recognized stock exchanges for permission—to have the shares or debentures,
intended to be so, offered to the public, to be dealt with in each of such stock exchange in
terms of Section 73 of the Companies Act, 1956. SEBI can, however, under the provisions of
Section 21 of the Securities Contracts (Regulation) Act, 1956 compel the listing of securities
by public companies, if it is of the opinion that it is necessary or expedient in the interest of
the trade or the public. In the event of the stock exchange refusing to list the securities of any A company as per the present
public company, an appeal to SEBI is provided under the Act. A company as per the present provisions of law is obliged
provisions of law is obliged to get listed on the regional exchange, in addition to other ex- to get listed on the regional
exchange, in addition to other
changes. (There has been a recommendation that this restriction be removed.)
exchanges.
FOREIGN INSTITUTIONAL INVESTORS (FIIs)

Foreign institutional investors (FIIs) including institutions such as pension funds, mutual
funds, investment trusts, asset management, or their power of attorney holders (providing
discretionary and non-discretionary portfolio management services), are invited to invest
in all the securities traded on the primary and secondary markets, including the equity
and other securities/instruments of companies, which are listed/to be listed on the stock
exchanges in India—including the OTC Exchange of India. These would include shares,
debentures, warrants, and the schemes floated by domestic mutual funds. To be eligible to
do so, the FIIs would be required to obtain registration with SEBI. FIIs are also required to
file with SEBI and another application addressed to RBI, for seeking various permissions
under FERA. SEBI shall be granting regis-
SEBI shall be granting registration to the FII, taking into account the track record of tration to the FII, taking into
the FII, its professional competence, financial soundness, experience, and such other rel- account the track record of
the FII, its professional com-
evant criteria. FIIs seeking registration with SEBI should hold a registration from the Securi-
petence, financial soundness,
ties Commission, or the regulatory organization for the stock market, in its own country of experience, and such other rel-
domicile/incorporation. evant criteria.
SEBI’s registration and RBI’s general permission under FERA to an FII will be for five
years, renewable for similar five-year periods later on. RBI’s general permission under FERA SEBI’s registration and RBI’s
would enable the registered FII to buy, sell, and realise capital gains on investments, made general permission under FERA
to an FII will be for five years,
through initial corpus remitted to India, subscribe/renounce rights offerings of shares, invest renewable for similar five-year
on all recognized stock exchanges through a designated bank branch, and to appoint a do- periods later on.
mestic custodian for the custody of investments held.
The general permission from RBI shall also enable the FII to
1. Open foreign currency denominated account(s) in a designated bank. (These can
even be more than one account in the same bank branch, each designated in different
foreign currencies, if it is required so by FII for its operational purposes.)
2. Open a special non-resident rupee account to which could be credited all receipts
from the capital inflows, sale proceeds of shares, dividends, and interests.
3. Transfer sums from the foreign currency accounts to the rupee account and vice
versa, at the market rates of exchange.
4. Make investments in the securities in India out of the balances in the rupee
account.
5. Transfer repatriatable (after tax) proceeds from the rupee account to the foreign
currency accounts.
6. Repatriate the capital, capital gains, dividends, incomes received by way of interest,
and so on, and any compensation received towards sale/renouncement of rights off
earings of shares, subject to the designated branch of a bank/the custodian being
authorized to deduct withholding tax on capital gains, and arranging to pay such tax
and remitting the net proceeds at market rates of exchange.
7. Register FII’s holdings without any further clearance under FERA.
There is no restriction on the There is no restriction on the volume of investment, either minimum or maximum, for the
volume of investment, either
purpose of entry of FIIs, in the primary/secondary market. Also, there is no lock-in period
minimum or maximum, for the
purpose of entry of FIIs, in the for the purpose of such investments made by FIIs.
primary/secondary market. The portfolio investments in primary or secondary markets will be subject to a ceil-
ing of 24 per cent of issued share capital, for the total holdings of all registered FIIs, in any
The portfolio investments in pri- one company. The ceiling would apply to all holdings, taking into account the conversions,
mary or secondary markets will out of the fully and partly convertible debentures issued by the company. The holding of a
be subject to a ceiling of 24 per single FII in any company would also be subject to a ceiling of 5 per cent of the total issued
cent of issued share capital, for
the total holdings of all regis-
capital. For this purpose, the holdings of a FII ground will be counted as holdings of a sin-
tered FIIs, in any one company. gle FII.
The maximum holding of 24 per cent for all non-resident portfolio investments, includ-
ing those of the registered FIIs, will also include NRI corporate and non-corporate invest-
ments, but will not include the following:
1. Foreign investments under financial collaborations (direct foreign investments),
which are permitted up to 51 per cent in all priority areas and
2. Investments by FIIs through the following alternative routes:
(i) Off shore single/regional funds,
(ii) Global depository receipts, and
(iii) Euroconvertibles.
The disinvestment will be allowed only through stock exchanges in India, including the OTC
Exchange. In exceptional cases, SEBI may permit sales, other than through stock exchanges,
provided the sale price is not significantly different from the stock market quotations, where
available. All secondary market operations would be only through the recognized intermedi-
A registered FII will not engage
in any short-selling in securities aries on the Indian Stock Exchange, including the OTC Exchange of India. A registered FII
but will take a delivery of the will not engage in any shortselling in securities but will take a delivery of the purchased and
purchased and give a delivery give a delivery of the sold securities.
of the sold securities. A registered FII can appoint an agency approved by SEBI, to act as a custodian of securi-
ties and for confirmation of transactions in securities, settlement of purchase and sale, and
for reporting information. Such custodian shall establish separate accounts for detailing on
a daily basis the investment capital utilization and securities held by each FII for which it is
acting as a custodian. The custodian will report to the RBI and SEBI, semi-annually, as part
of its disclosure and reporting guidelines.
The RBI shall make available to the designated bank branches, a list of companies where
no investment will be allowed on the basis of the upper-prescribed ceiling of 24 per cent, hav-
ing been reached under the portfolio investment scheme. The RBI may, at any time, request FIIs investing under this scheme
by an order a registered FII, to submit information regarding the records of utilisation of the will benefit from a concessional
inward remittances of investment capital and the statement of securities transactions. RBI tax regime of a flat rate tax of
and/or SEBI may also, at any time, conduct a direct inspection of the records and accounting 20 per cent on dividend and
interest income and a tax rate
books of a registered FII. FIIs investing under this scheme will benefit from a concessional of 10 per cent on long term
tax regime of a flat rate tax of 20 per cent on dividend and interest income and a tax rate of (one year of more) capital gains.
10 per cent on long term (one year of more) capital gains.
GROWTH OF STOCK MARKET IN INDIA

Indian stock market has regained the trillion-dollar level after remaining out of this elite The Indian stock market has
league due to global integration, the widening and intensifying of links between high- emerged as one of the worst
income and developing countries which has accelerated over the years. Over the past few performers globally in the first
three months this calendar
years, the financial markets have become increasingly global. The Indian market has gained year, with concerns of a pos-
from foreign inflows through the investment of FIIs. Following the implementation of re- sible slowdown in the US econ-
forms in the securities industry in the past few years, Indian stock markets have stood out omy and a surge in commodity
prices, impacting sentiments of
in the world ranking. As may be seen from Table 7.1, India posted a turnover ratio of 75.6
emerging and developed equity
per cent, which was comparable to that of the other developed markets. As per Standard and markets, a report says.
Poor’s Fact Book 2011, India ranked 7th in terms of market capitalization (11th in 2009), 10th
in terms of total value traded in stock exchanges, and 22nd in terms of turnover ratio, as of
December 2010.
There is a phenomenal increase in trading members to 10,203 registered with SEBI at
the end of March 2011. The market capitalization has grown over the period, indicating that
more companies are using the trading platform of the stock exchange. The market capitali-
zation across India was around `68,430,493 million (US $ 1,532,598 million) at the end of
March 2011. Market capitalization ratio is defined as the market capitalization of stocks di-
vided by the GDP. It is used as a measure that denotes the importance of equity markets
relative to the GDP. It is of economic significance since the market is positively correlated
with the ability to mobilize capital and diversify risk. The all-India market capitalization ratio
decreased to 86.89 per cent in 2010–2011 from 94.2 per cent in 2009–2010.
The trading volumes on the stock exchanges have been witnessing phenomenal
growth over the past few years. Trading volume, which peaked at `55,168,330 million (US
$ 1,222,161 million) in 2009–2010, posted a fall of 15.12 per cent to `46,824,370 million
(US $ 1,048,698 million) in 2010–2011. The trading volumes had picked up from 2002–
2003 onwards. It stood at `9,689,098 million (US $ 203,981 million) in 2002–2003, and
witnessed a year-on-year increase of 67.29 percent in 2003–2004, standing at `16,209,326
million (US $ 373,573 million). The upsurge continued for the next few years, and in 2006–
2007, the turnover showed an increase of 21.40 per cent, reaching `29,014,715 million (US
$ 665,628 million) from `23,901,030 million (US $ 535,777 million) in 2005–2006. (refer to
Table 7.2)
Stock Markets
Comparison of Global
International
Table 7.1
>
International Market Capitalisation Turnover Turnover Ratio Market Capitalisation Ratio No. of listed Comparies
Comparison (US $ mn) (US $ mn) (in %) (in %)
Markets 2008 2009 2010 2008 2009 2010 2008 2009 2010 2008 2009 2010 2008 2009 2010
Developed 26,533,854 34,907,166 39,309,690 67,795,950 64,458,380 50,306,541 26,375 24,635 27,024
Market
Australia 675,619 1,258,456 1,454,547 1,017,705 761,820 1,221,900 103.10 78.80 79.40 65.00 136.07 153.14 1,924 1,882 1,913
France 1,492,327 1,972,040 1,926,488 3,265,494 1,365,807 828,032 152.40 78.80 42.50 52.28 74.43 75.25 966 941 901
Germany 1,107,957 1,297,568 1,429,707 3,105,288 1,288,867 1,405,037 191.50 107.20 103.00 30.31 38.77 43.20 638 601 571
Hongkong 1,328,837 2,291,578 1,079,640 1,626,143 1,489,635 1,597,543 81.80 82.30 63.90 617.04 1,064.09 481.00 1,017 1,308 1,396
Japan 3,220,485 3,377,892 4,099,591 5,879,439 4,192,624 4,280,423 153.20 128.80 114.50 65.90 66.66 74.57 3,299 3,208 3,553
Korea 494,631 836,462 1,089,217 1,465,999 1,581,487 1,626,604 181.20 237.60 168.90 53.11 100.47 107.37 1,798 1,778 1,781
Singapore 180,021 310,766 370,091 270,909 252,266 282,142 101.30 102.80 82.90 93.11 170.53 166.18 455 459 461
UK 1,851,954 2,796,444 3,107,038 6,486,959 3,402,496 3,006,680 226.90 146.40 101.90 69.55 128.60 138.33 2,415 2,179 2,056
USA 11,737,646 15,077,286 17,138,978 36,467,431 46,735,935 30,454,798 232.30 348.60 189.10 81.69 105.76 117.53 5,603 4,401 4,279
Emerging 9,227,306 13,806,558 15,231,251 12,720,872 15,959,679 13,668,167 – – – – – – 22,795 24,033 21,631
Markets
China 2,793,613 5,007,646 4,762,837 5,470,529 8,956,188 8,029,969 121.30 229.60 164.40 61.63 100.46 81.02 1,604 1,700 2,063
India 645,478 1,179,235 1,615,860 1,049,748 1,088,889 1,056,808 85.20 119.30 75.60 53.16 90.01 93.46 4,921 4,955 4,987
Russia 397,183 861,424 1,004,525 562,230 682,540 799,688 75.00 108.50 85.70 23.82 69.99 67.88 314 279 345
Brazil 589,384 1,167,335 1,545,566 727,793 649,187 901,105 74.30 73.90 66.40 35.97 74.26 74.03 432 377 373
Indonesia 98,761 178,191 360,388 110,678 115,310 129,546 71.30 83.30 48.10 19.35 32.98 51.01 396 398 420
Malaysia 187,066 255,952 410,534 85,214 72,970 90,198 33.20 32.90 27.10 84.58 133.59 172.64 977 953 957
Mexico 232,581 340,565 454,345 108,202 77,059 108,530 34.30 26.90 27.30 21.34 38.93 43.70 125 125 130
World Total 34,887,452 48,713,724 54,540,941 80,516,822 80,418,059 63,974,708 – – – – – – 48,936 48,668 48,655
USA as 33.64 30.95 31.42 45.29 58.12 47.60 – – – – – – 11.45 9.04 8.79
% of World
India as % 1.85 2.42 2.96 1.30 1.35 1.65 – – – – – – 10.06 10.18 10.25
of World
Note:
Listed companies in India pertain to BSE
Market Capitalisation ratio is computed as a percentage of CDP.
Turover Ratio is calculated by dividing the total 2011 US$ value traded by average US$ market capitalization for preceding year and the current year under consideration
Source: S&P Global Stock Market Factbook, 2011 and World Development Indicators, World Bank
Capital Market Segment of Stock Exchanges Non-Repo Government Sec Turnover Derivatives
At the No. of Nifty 50 Sensex Market Market Market Turnover Turnover Turnover On WDM On SGL On WDM On SGL Turnover Turnover
End of Brokers Capitalisation Capitalisation Capitalisation (` mn) (US $ mn) Ratio Segment of (` mn) Segment (US $ (` mn) (US $ mn)
Financial (` mn) (US $ mn) Ratio (%) (%) NSE (` mn) of NSE mn)
Year (US $
mn)
2000-01 9,782 1148.20 3604.38 7,688,630 164,851 54.50 28,809,900 617,708 374.71 4,124,958 5,721,456 88,442 122,673 40,180 861
2001-02 9,687 1129.55 3469.35 7,492,480 153,534 36.36 8,958,180 183,569 119,56 9,269,955 12,119,658 189,958 248,354 1,038,480 21,280
2002-03 9,519 978.20 3048.72 6,319,212 133,036 28.49 9,689,098 203.981 153.33 10,305,497 13,923,834 216,958 293,133 4,423,333 93,123
2003-04 9,368 1771.90 5590.60 13,187,953 303,940 52.25 16,209,326 373,573 122.91 12,741,190 17,013,632 293,643 392,110 21,422,690 493,724
2004-05 9,128 2035.65 6492.82 16,984,280 388,212 54.41 16,668,960 381,005 98.14 8,493,250 12,608,667 194,131 288,198 25,641,269 586,086
2005–06 9,335 3402.55 11280.00 30,221,900 677,469 85.58 23,901,030 535,777 79.09 4,508,016 7,080,147 101,054 158,712 48,242,590 1,081,430
2006-07 9,443 3821.55 13,072.10 35,488,081 814,134 86.02 29,014,715 665,628 81.76 2,053,237 3,982,988 47,103 91,374 74,152,780 1,701,142
2007–08 9,487 4734.50 15644.44 51,497,010 1,288,392 109.3 51,308,160 1,283,667 99.63 2,604,088 5,003,047 65,151 125,170 133,327,869 3,335,698
2008-09 9,628 3020.95 9708.50 30,929,738 607,061 55.40 38,520,970 756,054 124.54 2,911,124 6,645,488 57,137 130,432 110,277,501 2,302,643
2009–10 9,772 5249.10 17527.80 61,704,205 1,366,952 94.20 55,168,330 1,222,161 89.41 4,217,022 9,018,385 93,421 199,787 176,638,990 3,921,825
2010-11 10,203 5833.80 19445.20 68,430,493 1,532,598 86.89 46,824,370 1,048,698 68.43 4,035,492 7,083,067 90,381 158,635 292,483,750 6,550,588
April-Sep 10,248 4943.25 16453.80 59,579,280 1,217,760 75.65 17,405,910 355,765 29.21 2,029,354 3,510,823 41,479 71,759 157,600,280 3,221,243
2011
Source: SEBI, CMIE Prowess, and NSE

< Table 7.2
Secondary Market–
Selected Indicators
Key W o r d s
● Stock Exchange ● Money Market ● Security Exchange Board of India
● Corporatisation of Stock Exchanges ● Capital Market (SEBI)
● Demutualisation of Stock Exchanges ● Secondary Market
Q u est i o n s
1. How does the traditional structure of stock exchang- 8. Explain free float methodology.
es in India differ from modern structure? 9. Explain the reasons of stock market volatality.
2. Explain the role of SEBI in regulating financial markets Suggest measures you will adopt for protection of
in India. interest of investors.
3. Describe the process of demutualisation of stock 10. Write short notes on
exchanges. (a) Powers of Security Exchange
4. List down the names of stock exchanges in India. (b) Security Contract Act
5. Discuss the growth of stock market in India. (c) Dematerialization
6. Enumerate the various functions of stock exchange.
7. What is the role of depository services in security
market?
r efe r e n ces
n Agarwal, S. and H. Mohtadi (2004). ‘Financial Markets n Lall, S. (1982). ‘The Emergence of Third World Multina-
and the Financing Choice of Firms: Evidence from Devel- tionals: Indian Joint Ventures Overseas’, World Develop-
oping Countries’, Global Finance Journal, 15(1): 57–70. ment, 10(2): 127–146.
n Bombay Stock Exchange, Annual Reports, 1991–92. n Levine, R. and S. Zervos (1998). ‘Capital Control Liberal-
n Darrat, A. F. and T. K. Mukherjee (1986). ‘The Behavior ization and Stock Market Development’, World Develop-
of the Stock Market in a Developing Economy’, Econom- ment, 26(7): 1169–1183.
ics Letters, 22(2–3): 273–278. n Machiraju, H. R. (2005). The Working of Stock Exchang-
n Daveri, F. (1995). ‘Costs of Entry and Exit from Finan- es in India, 2nd ed. New Delhi: New Age International.
cial Markets and Capital Flows to Developing Countries’, n Narsimham, M. (1992). Financial Sector Reform and
World Development, 23(8): 1375–1385. the Capital Markets, The fourth phirozze, Jeejeebhoy’s
n Friedmann, E. (1976). ‘Financing Energy in Developing Lecture.
Countries’, Energy Policy, 4(1): 37–49. n Raghunathan, V. (1992). Stock Exchanges in Invest-
n Hale, D. D. (1994). ‘Stock Markets in the New World ments. New Delhi: Tata McGraw Hill.
Order’, The Columbia Journal of World Business, 29(2): n Securities and Exchange Board of India, www.sebi.com.
14–28. n Teweles, R. J., E. Bradley, and T. Teweles (1992). The
n Henry, P. B. (2000). ‘Do Stock Market Liberaliza- Stock Market, 6th ed. New York: Wiley.
tions Cause Investment Booms?’, Journal of Financial n Mody, A. and A. P. Murshid (2005). ‘Growing up with
Economics, 58(1–2): 301–334. Capital Flows’, Journal of International Economics,
n Kenny, C. J. and T. J. Moss (1998). ‘Stock Markets in 65(1): 249–266.
Africa: Emerging Lions or White Elephants?’, World De- n Alfaro, L. and E. Hammel (2007). ‘Capital Flows and
velopment, 26(5): 829–843. Capital Goods’, Journal of International Economics,
n Kim, Y. (2000). ‘Causes of Capital Flows in Developing 72(1): 128–150.
Countries’, Journal of International Money and Finance, n Www.nseindia.com
19(2): 235–253.
08
C hapter
National Income
>>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>>
• Meaning and Definition of National Income 211 • Major Features of National
• Concepts of National Income 212 Income in India 232
• National Income Estimates in India 214 • Difficulties or Limitations in the
Estimation of National Income in India 233
• Methodology of National Income
Estimation in India 216 • Key Words 234
• Causes for the Slow Growth of National • Questions 234
Income in India 229 • References 234
• Suggestions to Raise the Level and Growth
Rate of National Income in India 230
Meaning and Definition of National

Income
Keynes’ concept of ‘national income’ is somewhere between gross national product (GNP)
and net national product (NNP) (as discussed below). From GNP he subtracts only the ‘user
cost’, that is, reduction in the value of capital equipment actually used and not full depre-
ciation. According to present ideas, national income may be defined as the aggregate factor According to present ideas,
income (i.e., earning of labour and property), which arises from the current production of national income may be defined
as the aggregate factor income
goods and services (G&S) by the nation’s economy. The nation’s economy refers to the factors
(i.e., earning of labour and prop-
of production (i.e., labour and property) supplied by the normal residents of the national erty), which arises from the cur-
territory. rent production of goods and
To explain the above idea let us take an economy, where there are only two sectors: services (G&S) by the nation’s
economy.
households and firms. Firms are required to produce goods. To produce them, they require
services of the factors of production. Thus, the incomes of these factors arise in the course of
production. The sales value of net production must equal the sum total of payments made by
the firms to the factors of production, in the form of wages, rents, interest, and profits. These
incomes in turn become the sources of expenditure. Therefore, income flows from firms to
households in exchange for productive services, while products flow in return when expendi-
ture by the households takes place. The total of income flows, net
Thus, there are three measures of national income of a country which are as follows: outputs, and final expenditures
will be the same, but the sig-
1. As the sum of all incomes, in cash and kind, accruing to factors of production in a nificance of each of them arises
given time period, that is, the total of income flows; from the fact that they reflect
the total operations of the na-
2. As the sum of net outputs arising in several sectors of the nation’s production; and tion’s economy, at the level of
three basic economic functions,
3. As the sum of consumers’ expenditure, government expenditure on G&S, and net such as, production, distribu-
expenditure on capital goods. tion, and expenditure.
The total of income flows, net outputs, and final expenditures will be the same, but the signifi-
cance of each of them arises from the fact that they reflect the total operations of the nation’s
economy, at the level of three basic economic functions, such as, production, distribution,
and expenditure. The discussion of the various concepts of national income will make the
meaning of national income clear.
Concepts of National Income

We study below the five important concepts of national income, viz., the gross national prod-
uct (GNP), net national product (NNP), national income, personal income (PI), and dispos-
able income (DI). This is the basic, social accounting measure of the total output or aggregate
GNP is defined as the total supply of G&S. GNP is defined as the total market value of all final G&S produced in a year.
market value of all final G&S It is a measure of the current output of economic activity in the country.
produced in a year. It is a meas- Two things must be noted in regard to GNP. They are as follows:
ure of the current output of eco-
nomic activity in the country. 1. It measures the market value of the annual output. In other words, GNP is a monetary
measure. There is no other way of adding up the different sorts of G&S produced in a
year, except with their money prices. But in order to know accurately the changes in
physical output, the figure for GNP is adjusted for price changes by comparing to a
base year as we do when we prepare index numbers.
2. For calculating GNP accurately, all G&S produced in any given year must be counted
once, but not more than once. Most of the goods go through a series of production
stages before reaching a market. As a result, parts or components of many goods are
bought and sold many times. Hence, to avoid counting several times the parts of
goods that are sold and resold, GNP only includes the market value of final goods and
ignores transactions involving intermediate goods.
Final goods are those goods,

What do we mean by ‘final goods’? Final goods are those goods, which are being purchased
which are being purchased for for final use and not for resale or further processing. Intermediate goods, on the other hand,
final use and not for resale or are those goods, which are purchased for further processing or for resale. The sale of final
further processing. Intermedi- goods is included in GNP, while the sale of intermediate goods is excluded from GNP, why?
ate goods, on the other hand,
are those goods, which are pur- Because the value of final goods includes the value of all intermediate goods used in their
chased for further processing production. For instance, the value of cloth includes the value of cotton used in the making of
or for resale. cloth. The inclusion of intermediate goods would involve double counting and will, therefore,
give an exaggerated estimate of GNP.
Another important thing to be borne in mind while calculating the GNP is that non-
productive transactions should be excluded. These are purely financial transactions or trans-
fer payments like old-age pensions or unemployment doles which are merely grants or gifts
or transactions relating to existing shares or second-hand shares.
Net National Product (NNP)

The second important concept of national income is that of NNP. In the production of GNP
of a year, we consume or use up some capital, that is, equipment, machinery, and so on. The
NNP, means the market value of capital goods, like machinery, wear out or depreciate in value, as a result of its consump-
all final G&S after providing for tion or use in the production process. This consumption of fixed capital or fall in value of
depreciation. Net National Prod- capital due to ‘wear and tear’ is called ‘depreciation’. When charges for depreciation are de-
uct (NNP) or National Income at
Market Prices = Gross National
ducted from the GNP, we get NNP, which means the market value of all final G&S after
Product−Depreciation. providing for depreciation. Therefore, it is called ‘national income at market prices’. Thus,
National Income | 213
Net National Product (NNP) or National Income at Market Prices = Gross National Product−
Depreciation.
National Income or National Income at

Factor Cost (NI)
The difference between ‘national income at market prices’ and ‘national income at factor National income at factor cost
cost’ may be clearly understood. National income at factor cost means the sum of all incomes means the sum of all incomes
earned by resource suppliers for their contribution of labour, capital, and entrepreneurial earned by resource suppliers
for their contribution of labour,
ability, which go into the year’s net production. In other words, national income (or national capital, and entrepreneurial
income at factor cost) shows how much it costs society, in terms of economic resources, to ability, which go into the year’s
produce the net output. It is really the national income at factor cost for which we use the net production.
term ‘National Income’. The difference between national income (or national income at fac-
tor cost) and NNP (national income at market prices) arises from the fact that indirect taxes
and subsidies cause market prices of output to be different from the factor incomes that are
resulting from it.
Suppose a metre of mill cloth sold for ` 5 includes 25p on account of the excise and sales
tax. In this case, while the market price of the cloth is ` 5 per metre, the factors engaged in its
production and distribution would receive only ` 4.75p a metre. The value of cloth at factor
cost would thus be equal to its value at market price less the indirect taxes on it. On the other
hand, a subsidy causes the market price to be less than the factor cost. Suppose a handloom
cloth is subsidised at the rate of 20p a metre and it is sold at ` 2.80. Then, while the consumer
pays ` 2.80 per metre, the factors engaged in the production and distribution of such cloth
receive ` 3 per metre. The value of the handloom cloth at factor cost would thus be equal to National Income or National
Income at Factor Cost =
its market price plus the subsidies paid on it. Thus, national income (or national income at
Net National Product (NNP)
factor cost) is equal to NNP minus indirect taxes plus subsidies. National Income or National (National Income at Market
Income at Factor Cost = Net National Product (NNP) (National Income at Market prices) − prices) − Indirect Taxes + Sub-
Indirect Taxes + Subsidies. sidies.
Personal Income (PI)

‘Personal Income’ (PI) is the sum of all incomes actually received by all individuals or house- ‘Personal Income’ (PI) is the
holds during a given year. National income, that is income received, must be different for sum of all incomes actually
the simple reason that some income which is earned through social security contributions, received by all individuals or
households during a given year.
corporate income taxes, and undistributed corporate profits is not actually received by
households and, conversely, some income which is received through transfer payments is
not currently earned. (Transfer payments are old-age pensions, unemployment doles, relief
payments, interest payment on the public debt, etc.)
Obviously, in moving from national income, as an indicator of income earned, to PI, as Personal Income = National
an indicator of income actually received, we must subtract from national income these three Income, Social Security Con-
tributions, Corporate Income
types of incomes which are earned but not received, and add incomes received but not cur- Taxes, Undistributed Corporate
rently earned. Therefore, Personal Income = National Income, Social Security Contributions, Profits + Transfer Payments.
Corporate Income Taxes, Undistributed Corporate Profits + Transfer Payments.
After a good part of PI is paid

to government in the form of
Disposable Income (DI) personal taxes like income tax,
personal property taxes, and so
After a good part of PI is paid to government in the form of personal taxes like income tax,
on, what remains of PI is called
personal property taxes, and so on, what remains of PI is called the ‘disposable income’. the ‘disposable income’.
National Income Estimates in India

The National Income Committee (NIC) in its first report wrote,
A national income estimate

A national income estimate measures the volume of commodities and services turned
measures the volume of com- out during a given period, without duplication. The estimates of national income
modities and services turned depict a clear picture about the standard of living of the community. The national
out during a given period, with- income statistics diagnose the economic ills of the country and at the same 1 time
out duplication.
suggest remedies. The rate of savings and investment in an economy also depend on
the national income of the country. Moreover, the national income measures the flow
of all commodities and services produced in as economy. Thus the national income is
not a stock bat a flow. It measures the total productive power of the community during
given period.
Further, the NIC has rightly observed, ‘National income statistics enable an overall view to be
taken of the whole economy and of the relative positions and inter-relations among its $ vari-
ous parts’. Thus, the computation of national income and its analysis has been considered as
an important exercise in economic literature.
National Income After Independence

After independence, the Government of India appointed the NIC in August 1949, with Prof.
P. C. Mahalanobis as its Chairman and Prof. D. R. Gadgil and Dr. V. K. R. V. Rao as its two
members, so as to compile national income estimates, rationally, on a scientific basis. The first
In its first report, the total national report of this Committee was prepared in 1951. In its first report, the total national income
income of the year 1948–49 of the year 1948–49 was estimated at ` 8,830 crore and the per capita income of the year was
was estimated at ` 8,830 crore calculated at ` 265 per annum.
and the per capita income of the
year was calculated at ` 265 per
The Committee continued its estimation works for another three years and the final
annum. report was published in 1954. The report of this NIC provided complete statistics on the
national income of the whole country. The following were the main features of the NIC
report.
1. Agriculture including forestry, animal husbandry, and fishery contributed about one-
half of the national income of the country during 1950–51.
2. Mining, manufacturing, and hand trades contributed nearly one-sixth of the national
income of India.
3. Commerce, transport, and communication also contributed a little more than one-
sixth of the total national income of the country.
4. Income earned from other services, such as professions and liberal arts, house pro
perty, and administrative and domestic services contributed nearly 15 per cent of the
total national income of the country.
5. Commodity production constituted nearly two-thirds share of the national income,
whereas it contributed to the remaining one-third of the national income of India.
6. In 1950–51, the share of the government sector contributed about 7.6 per cent of the
net domestic.
7. In the computation of national income estimates, the margin of error was estimated
at about 10 per cent.
NIC and CSO Estimates

During the post-independence period, the estimate of national income was primarily con- During the post-independence
ducted by the NIC. Later on, it was carried over by the Central Statistical Organisation period, the estimate of national
(CSO). For the estimation of national income in India, the NIC applied a mixture of ‘product income was primarily conduct-
ed by the NIC. Later on, it was
method’ and ‘income method’. This Committee divided the entire economy into 13 sectors, carried over by the Central Sta-
from the six sectors, viz., agriculture, animal husbandry, forestry, fishery, mining, and factory tistical Organisation (CSO).
establishments, estimated by the output method. But the income from the remaining seven
sectors consisting of small enterprises, commerce, transport and communications, banking
and insurance, professions, liberal arts, domestic services, house property, public authorities,
and the rest of the world is estimated by the income methods.
The National Income Unit (NIU) of the CSO is nowadays entrusted with the measure-
ment of national income. This unit of CSO estimated the major part of national income from
the various sectors like agriculture, forestry, animal husbandry, fishing, mining, and factory
establishments with the help of product method. It is also applying the income method for
the estimation of the remaining part of national income raised from the other sectors. Till Till now, we have three dif-
now, we have three different series in the national income estimates of India. They include ferent series in the national
income estimates of India. They
conventional series, revised series, and new series. include conventional series,
revised series, and new series.
Conventional Series
The conventional series revealed national income data both at current prices and at 1948–49 The conventional series re-
prices, covering the period from 1948–49 to 1964–65. Here, the contribution of all the 13 vealed national income data
sectors were added for obtaining an estimate of the net domestic product at factor cost, both at current prices and
at 1948–49 prices, covering
through the application of both net-output method and net-income method. To arrive at the period from 1948–49 to
the estimate of net national income, the net income, from abroad, and net indirect taxes are 1964–65.
added to the estimate of net domestic product at factor cost. Moreover, for obtaining a series
of national income at constant prices, this estimate is deflated at the prices of the base year
chosen.
The Revised Series

The revised series show the national income data both at current prices and at 1960–61 The revised series show the
prices, for the period from 1960–61 to 1975–76. Later on, a new series was also started national income data both at
current prices and at 1960–
with 1970–71 as the base year. Due to this difference in the base year and differences in 61 prices, for the period from
weights used for the two series, the estimates of national income revealed differences in its 1960–61 to 1975–76.
magnitudes.
CSO’s New Series

The NIU of CSO has prepared a new series on national income with 1980–81 as the base year, The NIU of CSO has prepared a
as against the existing series with 1970–71 as the base year. This national income estimates new series on national income
with 1980–81 as the base year,
have also been projected backwards to prepare a total series of national income from 1950–51 as against the existing series
onwards for the sake of comparison. Taking this new series into consideration, the estimates with 1970–71 as the base year.
of national income aggregates have registered an increase in the new series as against 1970–
71 series. Again the CSO has prepared another new series on national income with 1993–94
as the base year, as against the existing series with 1980–81 as the base year. Although the
total national income has registered an increase in the new series, the estimates of gross
domestic savings (GDS) have revised downwards.
Methodology of National Income

Estimation in India
In India, the estimation of In India, the estimation of national income is being done by two methods, that is, product
national income is being done method and income method.
by two methods, that is, product
method and income method.
Net-product Method
While estimating the gross
While estimating the gross domestic product (GDP) of the country, the contribution to GDP
domestic product (GDP) of the from various sectors, like agriculture, livestock, fishery, forestry and logging, and mining and
country, the contribution to quarrying is estimated with the adoption of product method. In this method, it is important
GDP from various sectors, like to estimate the gross value of product, bi-products, and ancillary activities and, then, steps
agriculture, livestock, fishery,
forestry and logging, and min-
are taken to deduct the value of inputs, raw materials, and services from such gross value as
ing and quarrying is estimated follows:
with the adoption of product
method. 1. In respect of other sub-sectors like animal husbandry, fishery, forestry, mining, and
factory establishments, the gross value of their output is obtained by multiplying the
estimated output with their market price. From such gross value of output, deduc-
tions are made, for the cost of materials used and depreciation charges are levied, so
as to obtain net value added in each sector.
2. In respect of secondary activities, the computation of GDP is done by the produc-
tion approach only for the manufacturing industrials units (both registered and
unregistered).
3. In respect of constructions activity, the estimates of the value of pucca construction
are made by the commodity-flow approach and that of the Kachcha construction are
made by the expenditure method.
Net-income Method
In India, the income from rest of
In India, the income from rest of the sectors, that is, small enterprises, commerce, transport
the sectors, that is, small enter- and communications, banking and insurance, professions, liberal arts, domestic activities,
prises, commerce, transport house property, public authorities, and the rest of the world is estimated by the income
and communications, banking method. Here, the income approach is adopted to estimate the value added from these
and insurance, professions,
liberal arts, domestic activities, aforesaid remaining sectors. Here, the process involves the measurement of aggregate factor
house property, public authori- incomes in the shape of compensation of employees (wages and salaries) and operating
ties, and the rest of the world surpluses in the form of rent, interest, profits, and dividends. Following are the processes:
is estimated by the income
method. 1. In order to measure the contribution of small enterprises, it is essential to make an
estimation of the total number of workers, employed in different occupations under
small enterprises, through sample surveys and also to estimate the per capita aver-
age earnings of such workers. After multiplying the total number of such workers
employed by their average earning, the contribution of small enterprises to national
product is estimated.
2. In order to obtain the contribution of banking and insurance sector, necessary in-
formation is collected from their balance sheets, so as to add the wages, salaries,
directors’ fees, and dividends.
3. In order to derive the contributions of transport and communication, trade and
commerce, professions, and liberal arts, the same procedure as adopted by the small
enterprises is followed.
4. Regarding the contribution of the public sector, the amounts related to wages, salaries,
pensions, other benefits, dividend or surpluses, and so on, are all added up to derive
the same.
5. Again the contribution of house property to the national income is obtained by esti-
mating the imputed value of net rental of all houses, situated in both urban and rural
areas.
6. Finally, by adding up the contribution of all different sectors to national income of the In order to derive the net
country, it is necessary to obtain the net domestic product at factor cost. In order to national income at the current
prices, it is necessary to add
derive the net national income at the current prices, it is necessary to add the net in-
the net income from abroad
come from abroad and net indirect taxes with the net domestic product at factor cost. and net indirect taxes with the
This same estimate is then deflated at the prices of the base year selected, to derive a net domestic product at factor
series of national income at constant prices. cost.
National Income Growth

The growth witnessed in the post reform era has helped India’s per capita income to cross the
$1,000 mark a few years ago to graduate to the lower middle-income status by international
comparisons. It is now recognized that going by the total size, India is steadily progressing
onto the path to becoming a major economy in the world. India occupies the ninth position
by size in global rankings at $1.7 trillion in nominal terms and fourth position at $4.2 trillion
in purchasing power parity (PPP) terms. It is, however, important to remember that India
still has a long way to go to meet the world average living standard. When compared to the
global average, its per capita income is a way below at one-seventh in nominal dollar terms
and one third in PPP terms. India continues to face challenges of mass poverty, high illiteracy
and lack of basic health care for a large section of its population. An important implication of
the inclusion of India in the lower middle income category in global ranking is that most of
the poor in the world now live in middle income countries instead of low income countries.
With China’s impressive record on the poverty reduction front, about a third of the world’s
poor now live in India.
The global financial crisis did have its effect on the Indian economy as was reflected in
reduced growth in 2008–09. The economy revived partially in the next two years, but dropped
again in 2011–12. The government is currently attempting to revive business sentiments to
induce private investors to raise activity levels.
Table 8.1 shows the average annual growth in India’s real GDP by three broad sectors-
Agriculture, Industry and Services as well as the total for various decades since the 1950s.
Period Agriculture Industry Services GDP

< Table 8.1
Growth in Real GDP
1950s 2.7 5.6 3.9 3.6 (% per annum)
1960s 2.5 6.3 4.8 4.0
1970s 1.3 3.6 4.4 2.9
1980s 4.4 5.9 6.5 5.6
1990s 3.2 5.7 7.3 5.8
2000s 2.5 7.7 8.6 7.2
X Plan (2002–07) 2.4 9.2 8.8 7.6
XI Plan (2007–12) 3.3 6.7 9.9 7.9
Source: Central Statistics Organisation.

Triggered by an expansionary fiscal policy and limited reforms, the Indian economy moved
to a higher growth path of 5.6 per cent during the 1980s from an average rate of 3–4 per cent
per annum during the three decades prior to 1980. Although there was a high growth phase
with annual growth rates ranging between 6.4 and 8.1 per cent during 1994–97, GDO growth
on an average basis during the first decade after the initiation of economic reforms was only
slightly higher than those during the 1980s. A breakthrough occurred in the decade 2002–12,
when annual GDP growth averaged above 7.5 per cent. On a medium term basis, the best per-
formance in national income growth was witnessed during 2003–04 to 2007–08 when it aver-
aged 8.7 per cent and was rated as the second highest in the world, next only to that of China.
A major feature of growth during the last three decades is that the fluctuations have nar-
rowed down considerably. The year to year variations in GDP were very large till the 1970s
ranging between –5 to +10 per cent. It is important to note that the annual growth rate has not
been negative since 1980–81 and infect has exceeded 4 per cent since 1992–93, clearly reflect-
ing a new growth path of the economy. This has been largely due to the underlying changing
structure of the economy away from agriculture to non-agriculture as is now discussed.
The most important feature of the pattern of India’s growth story is that it is mostly
driven by the steady expansion of the services sector during the last three decades. It grew
by 9–10 per cent during the Tenth and Eleventh Five Year Plan periods (refer to Table 8.2).
Agricultural growth was generally low at about 3 per cent per annum on a decadal basis
except during the 1980s when the average growth stood above 4 per cent. The performance
of industry has been moderate since the 1970s, growing at a rate close to that of GDP.
Recent Trends in National Income

Growth and Structure
State of the Economy
India has achieved much in the last two decades of the reform period. The country is now a
$1.8 trillion economy, the fourth largest in the world. However, a lot remains to be done for
achieving all the economic, social and environmental goals of the nation. In the post-reform
period, India has done well in some indicators such as economic growth, exports, balance of
payments, and resilience to external shocks, service sector growth, significant accumulation
of foreign exchange, information technology (IT), the stock market, and improvements in
telecommunications.
The trend rate of GDP growth in the last 20 year period has been more than 6 per cent
per annum. The growth rate was nearly 9 per cent per annum during 2003–04 to 2007–08
and 9.3 per cent per annum during 2005–08. All the three sectors (agriculture, industry and
services) contributed to growth. The acceleration in growth was more due to the perform-
ance of manufacturing and agriculture during this period.
The pre-global financial crisis period was characterised by high GDP growth of more
than 9 per cent per annum, low inflation, low fiscal deficit and higher trade and capital flows.
In other words, all the macroeconomic fundamentals were in good shape and all the econo-
my was buoyant.
The global financial crisis that originated in the US in 2008 transmitted to other countries.
India is more globally integrated now as compared to 1991 when reforms started. Due to a
slowdown in external and domestic demand, GDP growth in India declined from 9.3 per cent
in 2007–08 to 6.7 per cent in 2008–09. To address the negative fallout of the global slowdown
on the Indian economy, the government responded by adopting policy measures such as fis-
cal stimulus and an easy monetary policy. It may be noted that India’s counter-cyclical fiscal
stimulus began much before the dramatic deterioration of the global financial markets. In fact,
Annual Rates 2003–04 2004–05 2005–06 2006–07 2007–08 2008–09 2009–10 2010–11 2011–12 2012–13
P QE Rev. Proj Proj
Agriculture and allied 10.0 0.0 5.1 4.2 5.8 0.1 1.0 7.0 2.8 0.5
activities
Manufacturing 6.6 8.7 10.1 14.3 10.3 4.3 9.7 7.6 2.5 4.5
Industry 7.4 10.3 9.7 12.2 9.7 4.4 8.4 7.2 3.4 5.3
Services 8.5 9.1 10.9 10.1 10.3 10.0 10.5 9.3 8.9 8.9
Non-agriculture 8.1 9.5 10.5 10.8 10.1 8.1 9.8 8.6 7.1 7.7
GDP (factor cost) 8.5 7.5 9.5 9.6 9.3 6.7 8.4 8.4 6.5 6.7
Source: Reports of the Economic advisory council to the prime minister, July 2008, October 2009, and August 2012, New Delhi.
< Table 8.2
Sectors: 2003–04 to
GDP Growth Rates by
2012–13 (% per annum)

it started in February 2008, six months before the start of the crisis. This included the payout
of a part of the arrears to government employees, following sixth pay commission report and
the debt relief (farm loan waiver) package to alleviate the debt burden of distressed farmers. The
vote on account budget has not announced further fiscal stimulus but increased expenditure
on the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNERGS).
The Indian economy recovered quickly after the 2008–09 crisis period. The growth rate
increased significantly from 6.7 per cent in 2008–09 to 8.4 per cent in 2009–10 in spite of a
drought. Despite global integration, GDP growth in India is largely depends on the domestic
economy (on domestic consumption). It gives some resilience to external factors although
one does not subscribe to the decoupling theory. Monetary policy, fiscal policy, export poli-
cies, and some of the structural advantages, including a calibrated approach to capital con-
vertibility etc. helped in the quick recovery and reliance. The manufacturing sectors growth
rate was 9.7 per cent in 2009–10 as compared to 4.4 per cent in 2007–08. The GDP growth
rate was 8.4 per cent in 2010–11 with a growth of 7 per cent and 7.6 per cent respectively in
the agriculture and manufacturing sectors.
Global factors like Euro zone debt crisis and the rise in oil prices affected the Indian
economy in 2011–12 and 2012–13. High interest rates due to the increase in inflation also
reduced the investment rate and GDP growth declined from 8.4 per cent in 2010–11 to
6.5 per cent in 2011–12. The manufacturing sector recorded only a 2.5 per cent growth rate
in 2011–12.
Both global and domestic factors have been responsible for a decline in economic growth
in 2011–12 and 2012–13. For example, high interest rates are partly responsible for the de-
cline in the growth in investments. Uncertainty in policies due to coalition governments is
also responsible for the reduction in investment rates. However, as pointed out by Subbarao
(2012), India in 2012 is different from India in 1991 as the country is more resilient now. In
spite of short run problems, our medium-term prospects of achieving more than 8 per cent
GDP growth are still high.
Inclusive Growth
India has done well on many indicators of progress in the post-reform period. However,
exclusion has continued in terms of low agriculture growth, low-quality employment growth,
low human development, rural-urban divides, gender and social inequalities and regional
disparities. Social exclusion is taking place in terms of regions, social and marginal groups,
women, minorities and children. The eleventh five year plan and the approach to the twelfth
five year plan also highlight these exclusions and argue for more inclusive growth.
There have been some improvements in agricultural growth and poverty reduction since
the mid-2000s. Agriculture growth was around 3.3 per cent per annum during the eleventh
plan period. This was due to increase in investment in agriculture and other policies.
If we use the methodology of the Tendulkar Committee, poverty declined by 1.5 percent-
age points per annum between 2004–05 and 2009–10. It is the fastest decline compared to the
earlier periods 1993–4 to 2004–5 and 1983–4 to 1993–4. Provisional estimates for 2011–12
(68th National sample survey round) also reveal significant growth in the average monthly per
capita expenditure (MPCE). Average MPCE grew at an annual rate of 3.7 per cent in rural areas
and 4 per cent in urban areas (refer to Table 8.3). This growth is much higher than the earlier
periods. Both higher GDP growth and public interventions in schemes like NREGS could be
responsible for the rise in average MPCE and faster decline in poverty in both rural and urban
areas. Real wages of agricultural labourers also increased significantly partly due to MGNREGS.
However, Inequalities have increased in the post reform period in consumption across
social groups and states although there is a debate on rising inequalities. For example, the
2009–10 consumption data shows that poverty declined faster among the Scheduled tribes
NSS Round/Year Rural Urban Ratio of Urban

< Table 8.3
Average Monthly per
to Rural Capita Expenditure
61st round 2004–05 558.8 1052.4 1.9 (URP) in ` at 2004–05
Prices
68th round 2011–12 707.2 1359.8 1.9
Growth rate per annum 2011–12 over 3.7 4.2 —
2004–05 (%)
Note: URP: Uniform reference period of 30 day

Source: Computed based on press release 1 August 2012, NSSO, Ministry of Statistics and Programme
Implementation.
than it did among others. Although there have been achievements in the social sector during
the reform period, the progress has been very slow. India has had a success in growth, but
there is an extreme failure to progress in social indicators. For example, malnutrition among
children is stubborn at 45 per cent in spite of high GDP growth in the post 1991 period. It is
known as that we are not only behind China but the progress is slower than in Bangladesh
and some other south Asian countries. These are severe governance problems.
There is a perception among many people that we should have some flagship protec-
tion programmes like MGNREGS and others to achieve inclusive growth. No doubt these
programmes are important for protecting the poor. But, inclusive growth is much broader
than this and productive inclusion in terms of quality employment should be the focus of the
twelfth plan. Jobless growth is a concern but on the other hand we should not have growth
less jobs. In other words, generating employment per se without growth should not be the
policy prescription. We should generate productive jobs. The government should have a
strategy and framework to achieve this objective.
Sectoral Growth
In this section, we examine the Sectoral issues. These cover agriculture, industry and trade,
finance, energy and urban sectors.
Agriculture
Agriculture remains a very crucial sector for inclusive and sustainable growth of the Indian
economy as it employs 51 per cent of the total work force and 46 per cent of the total
geographical area. Though the share of agriculture and allied sectors in GDP has declined
steadily from 38.8 per cent in 1980–1 to 14.2 per cent in 2010–11 the fact that approximately
41.8 per cent of the rural population lived below the poverty line in 2004–05 emphasizes the
need for high growth in the Agriculture sector.
The overall performance of agriculture and its allied sectors was not up to the mark dur-
ing 2000–01 to 2010–11, considering the fact that much emphasis was laid on this sector from
2005 onwards. The trend suggests that the growth rate of this sector was only 2.79 per cent
during this period. However, Indian agriculture has been showing signs of revival since the
mid-2000s due to different initiatives taken by the government. However, there are still sig-
nificant spatial and temporal differences in the performance of agriculture in different states.
The states which were doing very well before the reforms are showing signs of stagnation or
deceleration in the post reform period, especially Haryana, Punjab, Tamil Nadu and Andhra
Pradesh. However, Gujarat recorded a remarkable growth rate in the 2000s which may be
partly attributed to the development of good infrastructure. For achieving more inclusive,
faster and sustainable growth along with 4 per cent growth in agriculture sector during
the twelfth five year plan, there is a need to give more emphasis on issues related to land
and water management, rain fed agriculture, agricultural markets, new and improved tech-
nologies and investment in agriculture. Therefore, what is required is developing land lease
markets and widespread plans for developing degraded land, adopting integrated farming
systems, adopting best practices and rationalizing input subsidies. Nevertheless, to revitalize
rain fed agriculture, a comprehensive programme is required at the local level with active
participation of all the stake holders. For efficient and equitable management of water, water
users associations should be formed in line with participatory irrigation management. The
strategies so far have concentrated on rice and wheat in irrigated areas. Future growth will
need to rely on a dual strategy of diversification into non-cereal high value crops like pulses,
fruits, vegetables, milk and meat and focusing on rain fed areas, small farmers, and eastern
regions which have tremendous untapped potential.
Industry and Trade

A process of reorientation of India’s industrial policy framework began during the 1980’s,
which gained momentum during the 1990’s. The reforms were aimed at removing several
barriers to entry imparted by the controlled regime. The policy changes included the dis-
mantlement of the industrial licensing system, dereservation of industries for the public
sector, relaxing of restrictions on industrial investment and expansion, disinvestment of gov-
ernment equity in public sector enterprises and opening up of industries for foreign direct
investment (FDI). The quantitative restrictions on importing capital goods continued, with
some exceptions, until the late 1990s.
It was held that industrial and trade reforms would stimulate a more competitive envi-
ronment leading to higher efficiency and growth in the industrial sector. India’s industrial
value added grew at a rate of 6 per cent per annum during the 1980s and 1990s and at a rate
of 8.8 per cent during 2000–10. Clearly, this performance is better as compared to India’s past
record but pales in comparison recorded by the East Asian Newly Industrialized Economies
(NIEs) and China.
It is well known that China followed the conventional pattern of growth shifting labour
from agriculture to labour intensive manufacturing. By contrast, India seems to be skipping
the intermediate stage of industrialization and directly moving to the final stage of services-
led growth. During the last two decades (1990–2010), the share of manufacturing in India’s
GDP has remained low in the range of 14–17 per cent as against 30–33 per cent in China.
International comparisons suggest that manufacturing’s actual share of GDP in India is lower
than what is predicted while the opposite is the case in China. Further, in contrast to employ-
ment intensive growth in China, India’s manufacturing growth followed a relatively capital
intensive path. Lack of dynamism in labour intensive manufacturing has considerably slowed
down the process of transferring the large pool of India’s surplus labour from agriculture into
the well played modern sectors. Thus, Indian growth has not been effective in reducing pov-
erty on the scale that was possible in China and in other industrialized countries in East-Asia.
Financial Sector
A well-functioning financial sector is essential for growth and macroeconomic stability.
India has undertaken some important financial reforms since 1991 with a view to reduce
‘financial repression’ and for promoting financial development which results in more ef-
ficient allocation of funds and connections between savers and investors. Wide-ranging
policy changes have been undertaken in the areas of banking, equity market, and the foreign
exchange market. Along with liberalization, a number of measures have also been under-
taken to develop a regulatory mechanism that will ensure the safety and solvency of the
financial sector in the deregulated environment. During the post reform period, there have
been noticeable improvements in competitiveness, efficiency and productivity of the Indian
Financial System.
However, the committee on financial sector reforms (formed in 2009), headed by
Raghuram Rajan, makes a strong case for a new generation of financial sector reforms. The
report submitted by the committee notes that ‘the financial sector is not able to meet the scale
or sophistication of the needs of corporate India, as well as of public infrastructure and does
not penetrate deeply enough to meet the needs of small and medium-sized enterprises in
much of the country.
Energy Sector Issues

Managing India’s energy situation is a critical challenge for sustaining the process of econom-
ic growth. It is important to reduce the energy intensity of GDP while simultaneously taking
steps to increase energy supply from both conventional and non-conventional sources.
Achieving these objectives requires important reforms in the area of energy pricing, regula-
tion and incentives. Reforms in these areas should be carried out in a phased manner while
at the same time minimizing the adverse impacts on vulnerable groups.
To achieve its objective of sustainable and equitable development, India needs to sub-
stantially expand the supply of modern affordable energy services to all its citizens while
at the same time maintaining environmental and social balance. The policies should aim at
improving accessibility and affordability of modern energy services to the poor. In India,
even as recently as 2010, only 65 per cent of the households had electricity connections and
70 per cent had no access to gaseous fuels for cooking. As many as 37 per cent of the total pri-
mary energy used by household sector comes from non-commercial fuels such as fuel-wood
and dung. Despite growing attention to energy access, investment in energy services in India
remains low.
The government should encourage local entrepreneurs on energy source delivery.
It should also try to cooperate with local authorities, local bodies in charge of energy devel-
opment, the private sector (in particular small and medium sized enterprises), local microfi-
nance institutions and civil society organisations. Access to modern energy services can thus
be provided through a micro-enterprise energy service delivery system with the government
providing the necessary infrastructure. This can result in reliable, high quality, sustainable
and continuous access to modern energy carriers.
Urban Sector Issues

Continuation of high economic growth implies that the urban percentage of India’s population
is expected to increase significantly during the coming decades. According to the 2011 census,
about 31 per cent of India’s population lives in urban areas. The urban percentage of India’s
population is expected to reach about 40 per cent by 2030, implying an increase in the urban
population from about 377 million today to around 600 million. Opportunities in urban areas
for employment, education, etc., have been pull factors attracting a large number of migrants
from rural to urban areas, which results in urban sprawls and increasing number of slums.
The existing urban infrastructure is quite inadequate to face the challenges posed by
the rising population in cities. The Jawaharlal Nehru National Urban Renewal Mission
(JNNURM) is a central government programme for transferring resources from centre to
the states on the condition that states and municipalities undertake specific reforms in urban
governance and finances. The programme aims to improve the coverage and supply of urban
infrastructure, tackle the problem of urban slums through resettlement and other measures
and provide basic services to the urban poor. To date, however, the programme has had
mixed results. There have been difficulties in the proper implementation of the programme
due to the lack of implementation capacities at the city level and due to reluctance on the part
of the states to undertake reforms.
Table 8.4 shows Gross domestic Product and Per Capita GDP* (at current prices in US$)
for the period from 1970–71 to 2011–12.
Table 8.4
Gross Domestic Product
> Gross Domestic Per Capita GDP Annual Average
and Per Capita GDP Product US$ Exchange Rate
US $ Bn. US$ = `
1970–71 59 108 7.56
1980–81 173 254 7.91
1990–91 296 353 17.94
1991–92 250 292 24.47
1992–93 229 263 30.65
1993–94 260 292 31.37
1994–95 304 334 31.4
1995–96 334 360 33.45
1996–97 366 387 35.5
1997–98 389 404 37.16
1998–99 396 403 42.07
1999–00 425 425 43.33
2000–01 435 426 45.68
2001–02 454 436 47.69
2002–03 482 456 48.4
2003–04 570 531 45.95
2004–05 660 606 44.93
2005–06 768 695 44.27
2006–07 870 776 45.28
2007–08 1,128 992 40.24
2008–09 1,150 997 45.92
2009–10 1,285 1,098 47.42
2010–11 1,570 1,324 45.58
2011–12 1,717 1,428 47.95
Note: *at factor cost at 2004–05 prices

The notable feature of the recent GDP growth has been a sharply rising trend in gross
domestic product and per capita GDP over a period of five years from 2007–08 to 2011–12.
The Gross domestic product which was 870 US$ bn. during the year 2006–07 increased to
US$ bn. 1717 during the year 2011–12 registering a sharp jump of 197 per cent during the
five year term. Similarly the Per capita GDP which was US$ 776 during 2006–07 increased to
US$ 1428 during the year 2011–12 registering a jump of 184 per cent during the five year term.
Table 8.5 shows national income and per capita income (at factor cost)
Gross National Net National Per Capita

< Table 8.5
National Income and
Income Income* GNI NNI Per capita Income
(GNI) (NNI)
` Crore `
At current Prices
1950–51 9,955 9,464 277 264
1960–61 16,977 16,169 391 373
1970–71 44,098 41,294 815 763
1980–81 137,183 125,761 2,020 1,852
1990–91 524,268 471,618 6,249 5,621
2000–01 1,969,249 1,762,358 19,325 17,295
2007–08 4,561,574 4,076,878 40,084 35,825
2008–09 5,270,644 4,705,447 45,673 40,775
2009–10 6,053,585 5,395,688 51,740 46,117
2010–11QE 7,078,512 6,325,039 59,684 53,331
2011–12RE 8,148,952 7,284,523 67,795 60,603
At 2004–05 prices
1950–51 278,677 255,405 7,763 7,114
1960–61 408,739 385,761 9,418 8,889
1970–71 585,672 541,867 10,826 10,016
1980–81 798,504 727,359 11,760 10,712
1990–91 1,331,040 1,202,305 15,865 14,330
2000–01 2,318,974 2,074,858 22,757 20,362
2007–08 3,879,457 3,451,829 34,090 30,332
2008–09 4,133,292 3,664,388 35,817 31,754
2009–10 4,479,973 3,959,653 38,290 33,843
2010–11QE 4,833,178 4,268,715 40,752 35,993
2011–12RE 5,150,686 4,549,652 42,851 37,851
Note: * National Income

QE: Quick Estimates
RE: Revised Estimates
The pace of economic improvement has moved up considerably during the last five years
from 2007–08 to 20011–12. The Gross National Income which was ` 4,561,574 during the
year 2007–08 at current prices increased to ` 8,148,952 during the year 2011–12 registering
a growth of 178 per cent in the fiver year term. Similarly Net National Income (NNI) which
was ` 4,076,878 crores during the year 2007–08 at current prices increased to ` 7,284,523
crores during the year 2011–12 registering a growth of 160 per cent during the five year
period.
The per capita GNI has also increased from ` 40,084 during the year 2007–08 to ` 67,795
during 2011–12, showing an increase of 170 per cent during the five year term. Similarly
NNI has also increased from ` 35,828 during the year 2007–08 to ` 60,603 during the year
2011–12 registering an increase of 170 per cent during the five years.
Table 8.6 shows national income and per capita income (at market prices)
Table 8.6
National Income and
> Gross National Net National Per Capita
Per Capita Income Income Income * GNI NNI
(at market prices) (GNI) (NNI)
` Crore `
At current Prices
1950–51 10,360 9,829 289 274
1960–61 17,870 17,062 412 393
1970–71 47,354 44,550 875 823
1980–81 149,987 138,565 2,209 2,041
1990–91 578,667 526,017 6,897 6,270
2000–01 2,145,919 1,939,028 21,059 19,029
2005–06 3,667,253 3,303,532 33,158 29,869
2007–08 4,966,578 4,481,882 43,643 39,384
2008–09 5,597,140 5,031,943 48,502 43,604
2009–10 6,419,452 5,761,555 54,867 49,244
2010–11PE 7,595,248 6,841,775 64,041 57,688
2011–12QE 8,772,097 7,907,668 72,979 65,788
At 2004–05 prices
1950–51 292,996 269,724 8,161 7,513
1960–61 434,497 411,519 10,011 9,482
1970–71 640,275 596,470 11,835 11,025
1980–81 866,338 795,193 12,759 11,711
1990–91 1,470,766 1,342,031 17,530 15,996
2000–01 2,530,204 2,286,088 24,830 22,435
2005–06 3,518,348 3,167,455 31,811 28,639
2007–08 4,233,768 3,806,140 37,204 33,446
2008–09 4,390,966 3,922,062 38,050 33,987
2009–10 4,752,515 4,232,195 40,620 36,173
2010–11PE 5,184,047 4,619,584 43,710 38,951
2011–12QE 5,544,028 4,942,994 46,123 41,123
Note: * National Income

QE: Quick Estimates
PE: Revised Estimates
Table 8.7 shows Domestic Savings (at current prices)
2010–11 2009–10 2008–09 2004–05

< Table 8.7
Domestic Savings
(QE) (PE)
` Crore
Household sector 1,749,311 1,639,038 1,330,873 763,685
Financial saving 767,691 835,558 571,026 327,956
Saving in physical 981,620 803,481 759,846 435,729
assets
Private corporate 602,464 532,136 417,467 212,519
sector
Joint stock 570,847 505,035 393,172 195,910
companies(@)
Co-op banks and 31,617 27,101 24,295 16,609
societies(#)
Public Sector 130,155 11,796 54,280 74,499
Govt. Administration and –99,212 –177,097 –133,413 –59,516
Departmental commercial
Enterprises
Govt. cos. and Statutory 229,367 188,893 187,693 134,015
Corporations
Total Gross Domestic 2,481,931 2,182,970 1,802,620 1,050,703
Saving
Consumption of Fixed 753,473 657,897 565,198 319,891
capital
Total Net Domestic 1,728,458 1,525,073 1,237,422 730,812
Saving
Note:
QE: Quick Estimates
@: Excludes reinvested earnings of foreign companies
#: Including quasi corporate bodies
The reforms of 1990 transformed the investment climate, improved the business confi-
dence and generated a wave of entrepreneurial optimism. This has led to a gradual improve-
ment in the competitiveness of the entire corporate sector, resurgence in the manufacturing
sector and acceleration in the rate of investment and savings. The Gross Domestic Savings
which was 23.7 per cent during the year 2000–01 increased to 32.3 per cent during the year
2011–12 registering a growth of 136 per cent during the last decade. Similarly Gross capital
formation which was 24.3 per cent during the year 2000–01 increased to 35.1 per cent dur-
ing the year 2011–12 registering an increase of 144 per cent during the last decade. The im-
proved investment climate and strong macroeconomic fundamentals also led to an upsurge
in foreign direct investment (FDI).
Table 8.8 shows the rate of savings and capital formation for the period from 1950–51 to
2010–11.
Table 8.8
Rate of Savings and
> Gross Gross Net Net Inflow Net
Capital Formation Domestic Domestic Domestic of Foreign Domestic
Savings Capital Savings Capital^ Capital
Formation Formation
As % of GDP* As % of NDP*
1950–51 8.9 8.7 5.5 –0.3 5.2
1960–61 11.6 14.4 6.4 3.0 9.4
1970–71 14.6 15.4 8.6 0.9 9.5
1980–81 18.9 20.3 11.3 1.6 12.9
1990–91 23.1 26.3 15.1 3.6 18.7
2000–01 23.7 24.3 15.6 0.7 16.3
2007–08 36.8 38.1 30.0 1.5 31.5
2008–09 32.0 34.3 24.4 2.6 27.0
2009–10PE 33.8 36.6 26.3 3.1 29.4
2010–11QE 32.3 35.1 25.0 3.0 28.0
Note:
QE: Quick Estimates
* Gross/net domestic product at current market prices
^ Figures are deduced
Table 8.9 shows the composition of GDP savings (as % of GDP)
Table 8.9
Composition of
> Private Sector Public Sector Total
GDP Savings Household Corporate
1950–51 5.7 0.9 2 8.6
1960–61 6.5 1.6 3.1 11.2
1970–71 9.5 1.5 3.3 14.3
1980–81 12.9 1.6 4 18.5
1990–91 18.4 2.7 1.8 22.9
2000–01 21.6 3.9 –1.8 23.7
2007–08 22.4 9.4 5 36.8
2008–09 23.6 7.4 1 32
2009–10 25.4 8.2 0.2 33.8
2010–11QE 22.8 7.9 1.7 32.4
Note: Figures are at current prices and up to 1999–00 are calculated with 1993–94 as base.
Figures between 1999–00 and 2004–05 are calculated with 1990–00 as base and the rest are
calculated with 2004–05 as base. Hence are not strictly comparable.
QE: Quick Estimates
Causes for the Slow Growth of

National Income in India
The following are some of the important causes of slow growth of national income in India:
• H
igh Growth Rate of Population: The rate of growth of population, being an im-
portant determinant of economic growth, is also responsible for the slow growth
of national income in India. Whatever increase in national income has been tak-
ing place, all these are eaten away by the growing population. Thus, the high rate of The high rate of growth of popu-
growth of population in India is retarding the growth process and is responsible for lation in India is retarding the
this slow growth of national income in India. growth process and is respon-
sible for this slow growth of
• E
xcessive Dependence on Agriculture: Indian economy is characterised by too national income in India.
much dependence on agriculture and thus, it is primary producing. The major share
of national income that is usually coming from the agriculture, which is contributing
nearly 34 per cent of the total national income, engages about 66 per cent of the total
working population of the country. Such excessive dependence on agriculture pre- Excessive dependence on agri-
vents a quick rise in the level of national income as well as the per capita income, as culture prevents a quick rise in
the level of national income as
the agriculture is not organised on commercial basis rather it is accepted as a way of well as the per capita income, as
life. Excessive dependence on agriculture and low land–man ratio, inferior soils, poor the agriculture is not organised
ratio of capital equipment, problems of land-holding and tenures, tenancy rights, and on commercial basis rather it is
so on, are also responsible for the slow growth of agricultural productivity which, in accepted as a way of life.
turn, is also responsible for the slow growth of national income.
• O
ccupational Structure: The peculiar occupational structure is also responsible for
the slow growth of national income in the country. At present, about 66 per cent of
the working force is engaged in agriculture and allied activities, 3 per cent in indus-
try and mining, and the remaining 31 per cent in the tertiary sector. Moreover, the Prevalence of high degree of
prevalence of high degree of underemployment among the agricultural labourers, underemployment among the
agricultural labourers, and also
and also among the work force engaged in other sectors, is also responsible for this among the work force engaged
slow growth of national income. in other sectors, is also respon-
sible for this slow growth of
• L
ow Level of Technology and its Poor Adoption: In India, the low level of tech- national income.
nology is also mostly responsible for its slow growth of national income. Moreover,
whatever technology has been developed in the country is not properly utilised Whatever technology has been
in its production process, leading to the slow growth of national income in the developed in the country is not
properly utilised in its produc-
country.
tion process, leading to the
• P
oor Industrial Development: Another important reason behind the slow growth slow growth of national income
in the country.
of national income in India is the poor rate of development of its industrial sec-
tor. The industrial sector in India has failed to maintain a consistent and sustain-
The development of the basic
able growth rate during the planned development period and, more particularly, in industry is also lacking in the
the recent years. Moreover, the development of the basic industry is also lacking in country. All these have resulted
the country. All these have resulted in a poor growth in the national income of the in a poor growth in the national
income of the country.
country.
• P
oor Development of Infrastructural Facilities: In India, the infrastructural facili-
ties, viz., transport, communication, power, irrigation, and so on, have not yet been
developed satisfactorily, as per their requirement throughout the country. This has
been causing major hurdles in the path of development of agriculture and industrial
sector of the country, leading to a poor growth of national income.
• P
oor Rate of Savings and Investment: The rate of savings and investment in India
is also quite poor as compared to that of the developed countries of the world. In
the recent times, that is, in 1996–97, the rate of GDS was restricted to 26.1 per cent
of GDP and that of investment was 27.3 per cent of GDP in the same year. Such low
rate of saving and investment has resulted in a poor growth of national income in the
country.
Socio-political conditions pre- • S

ocio-political Conditions: Socio-political conditions prevailing in the country are
vailing in the country are also also not very much conducive towards a rapid development. Peculiar social insti-
not very much conducive tutions like caste system, joint family system, fatalism, illiteracy, unstable political
towards a rapid development.
scenario, and so on, are all responsible for the slow growth of national income in the
country.
In the mean time, the government has taken various steps to attain a higher rate of growth
in its national income by introducing various measures of economic reforms and structural
measures. All these measures have started to create some impact on the raising growth of the
national income of the country.
Suggestions to Raise the Level and

Growth Rate of National Income in
India
In order to raise the level and growth rate of national income in India, the following sugges-
tions are worth mentioning:
Development of Agricultural Sector
As the agricultural sector is con- As the agricultural sector is contributing to the major portion of our national income, con-
tributing to the major portion of crete steps are to be taken for an all-round development of the agricultural sector, through-
our national income, concrete out the country at the earliest. New agricultural strategy to be adopted widely throughout
steps are to be taken for an all-
the country to raise its agricultural productivity by adopting better HYV seeds, fertilisers,
round development of the agri-
cultural sector, throughout the pesticides, better tools and equipments, and scientific rotation of crops and other scientific
country at the earliest. methods of cultivation. Immediate steps are to be taken to enhance the coverage of irrigation
facilities, along with the reclamation of waste land.
Development of Industrial Sector

In order to diversify the sectoral In order to diversify the sectoral contribution of national income, the industrial sector of
contribution of national income, the country should be developed to a considerable extent. Accordingly, the small, medium,
the industrial sector of the and large-scale industries should be developed simultaneously, which will pave the way for
country should be developed to
a considerable extent. attaining a higher level in income and employment.
Raising the Rate of Savings and Investment
For raising the level of national For raising the level of national income in the country, the rate of savings and investment
income in the country, the rate should be raised and maintained to a considerable extent. The capital output ratio should be
of savings and investment brought down within the manageable limit. In this respect, the Ninth Plan document has set
should be raised and main-
tained to a considerable extent.
its objectives to achieve 7 per cent rate of economic growth, to enhance the rate of investment
from 27 per cent to 28.3 per cent and to reduce the capital output ratio from 4.2 per cent to
about 4.0 per cent.
In order to raise the level of national income to a considerable height, the infra-structural In order to raise the level of
facilities of the country should be adequately developed. Those facilities include transport national income to a consider-
and communication network, banking and insurance facilities, and better education and able height, the infra-structural
health facilities, so as to improve the quality of human capital. facilities of the country should
be adequately developed.
Utilisation of Natural Resources

In order to raise the size and rate of growth of the national income in India, the country
should try to utilise the natural resources of the country in a most rational manner to the
maximum extent possible.
Removal of Inequality
The country should try to remove the inequality in the distribution of income and wealth by The country should try to
imposing progressive rates of taxation, on the richer sections, and also by redistribution of wealth remove the inequality in the dis-
through welfare and poverty-eradication programmes. Moreover, imposing higher rates of taxa- tribution of income and wealth.
tion on the richer sections can also collect sufficient revenue for implementation of the plan.
Containing the Growth of Population

As the higher rate of growth of population has been creating a negative impact on the level
of national income and per capita income of the country, positive steps have to be taken to
contain the growth rate of population by adopting a rational population policy, and also by
popularising the family-planning programmes, among the people in general.
Balanced Growth
In order to attain a higher rate of economic growth, different sectors of the country should
grow simultaneously, so as to attain an inter-sectoral balance in the country.
Higher Growth of Foreign Trade

Foreign trade can also contribute positively towards the growth of national income in the
country. Therefore, positive steps to be taken to attain a higher rate of growth in the foreign
trade of the country. Higher volume of export can also pave the way for the import of im- Higher volume of export can
proved and latest technologies that are required for the development of a country. also pave the way for the import
of improved and latest technol-
ogies that are required for the
Economic Liberalization development of a country.
In order to develop the different sectors of the country, the government should liberalise the
economy to a considerable extent, by removing the unnecessary hurdles and obstacles in the
path of development. This would improve the productivity of different productive sectors.
Under the liberalised regime, the entry of right kind of foreign capital and technical know- In order to rise the size and
growth rate of national income
how will become possible to a considerable extent, leading to modernisation of industrial, of the country, a rigorous and
infrastructural, and other sectors of the country. This economic liberalization of the country sincere attempt should be
in the right direction will ultimately lead the economy towards attaining a higher level of made by both public and pri-
national income within a reasonable time frame. vate sector to undertake devel-
opmental activities in a most
Therefore, in order to rise the size and growth rate of national income of the country, realistic path, and also to liber-
a rigorous and sincere attempt should be made by both public and private sector to under- alise and globalize the economy
take developmental activities in a most realistic path, and also to liberalise and globalize the for the best interest of the na-
tion as a whole.
economy for the best interest of the nation as a whole.
Major Features of National

Income in India
The trends and composition of national income estimates of India during post-independence
period shows the following major features:
Excessive Dependence on Agriculture

One striking feature of India’s national income is that a considerable proportion, that is, 27.8
per cent of the national income is now being contributed by the agricultural sector Naturally,
development of this sector is very important considering its employment potential, market-
able surplus, and necessary support to the industry sector.
Poor Growth Rate of GDP and Per Capita Income

Poor growth rate of GDP and per capita income is another important feature of national
income of the country.
Unequal Distribution and Poor Standard of Living

The distribution of national income in India is most unequal. Due to the highly skewed
pattern of distribution of income, the standard of living of the majority of population of our
country is very poor.
Growing Contribution of Tertiary Sector

Another striking feature of India’s national income is that the contribution of tertiary sector
has been increasing continuously over the years, that is, from 28.5 per cent of total national
income in 1950–51 to 54 per cent in 2006–07.
Unequal Growth of Different Sectors

In India different sectors are growing at unequal rates. During the period 1951–97, while the
primary sector has recorded a growth rate of 2.9 per cent the secondary and tertiary sectors
have recorded a growth rate of 6.3 per cent and 7.1 per cent, respectively.
Regional Disparity
Another striking feature of India’s national income is its regional disparity. Among all the
states, only six states of the country have recorded a higher per capita income over the
national figure. Out of this six states Punjab ranks the highest and Bihar ranks the lowest.
Urban and Rural Disparity

Urban and rural disparity of income is another important feature of our national income. The
All India Rural Household Survey shows that the level of income in urban areas is just twice
that of the rural areas, depicting a poor progress of rural economy.
Public and Private Sector

Another important feature of India’s national income is that the major portion of it is gen-
erated by the private sector (75.8 per cent) and the remaining 24.2 per cent of the national
income is contributed by the public sector.
Difficulties or Limitations in the

Estimation of National Income in India
National income estimation in India is subjected to various conceptual and practical difficul-
ties. These conceptual difficulties arise mostly in connection with personal and government
administrative service. In connection, the first report of the NIC mentioned:
Which part of the government’s general administration is service to business firms,
enters into the value of its product and hence should not be counted and which part is
service to the people as individuals and consumers and should be counted likewise, in
considering what is consumption in the process of production and what is net prod-
uct, the estimator merely, follows M judgment of society which views net product as
what is available either for consumption of individuals personally or collectively or for
additions to capital stock.
In addition to the conceptual difficulties, the estimation of national income in India is facing
a number of limitations or practical difficulties. These difficulties or limitations are as follows:
Non-monetized Output and its Transactions

In the estimation of national income or output, only those G&S, which are exchanged against In the estimation of national
money, are normally included. But in an under-developed country like India, a huge portion income or output, only those
of our total output is still either being consumed at home or being bartered away by the G&S, which are exchanged
against money, are normally
producers in exchange of other G&S, leading to the non-inclusion of huge non-monetized included.
output in the national income estimates of the country. This problem of non-monetized
transactions is very much in the rural areas, whose inclusion in NDP is really difficult. Till
now, no proper method has been developed to find out the total output of this farm output,
consumed at home, and also to derive the imputed value of this huge non-monetized output.
Non-availability of Information About Petty Income

The national income estimates in India are also facing another problem of non-availability The national income estimates
of information about the income of small producers and household enterprises. In India, a in India are also facing another
problem of non-availability of in-
very large number of producers are still carrying on production at a family level or are run- formation about the income of
ning household enterprises on a very small scale. Being illiterate, these small producers have small producers and household
no idea of maintaining accounts and do not feel it necessary to maintain regular accounts enterprises.
as well. Under such a situation it is really a difficult task to collect data. In this connection,
the NIC wrote, ‘An element of guess-work, therefore, invariably enters into the assessment
of output especially in the large sectors of the economy which are dominated by the small
producer or the household enterprise’.
Lack of Differentiation in Economic Functions

In India, the occupational classification is incomplete and, thus, there is lack of differentiation In India, the occupational clas-
in economic functions. As national income statistics are collected by industrial origin, classi- sification is incomplete and,
thus, there is lack of differentia-
fication of producers and workers into various occupational categories is very much essential. tion in economic functions.
Unreported Illegal Income

In India, the parallel economy is fully operational as hidden or sub-terrainean economy. In India, the parallel economy
is fully operational as hidden or
Thus, there is a huge, unreported illegal income earned by those people engaged in such
sub-terrainean economy.
parallel economy, which is not included in the national income estimates of our country.
In 1983–84, the National Institute of Public Finance and Policy made an estimate of black
income, which was to the extent of 18 per cent to 21 per cent of our national income.
Obviously, non-inclusion of such a huge illegal income makes the national income estimates
of the country as ‘underestimates’.
Lack of Reliable Statistical Data
The most important difficulty

The most important difficulty facing the national income estimation in India is the non-
facing the national income availability of reliable statistical information. In India, the national income data are collected
estimation in India is the non- by untrained and semiliterate persons like gram sevaks and, thus, the statistics are mostly
availability of reliable statistical unreliable. Although some statistical organisations like NSSO are organised by the govern-
information.
ment for this purpose, these are considered as inadequate. Thus, due to the dearth of reliable,
adequate statistical data, the national income estimates in India is still subjected to a high
degree of error.
Key W o r d s
● National Income ● National Income Estimates ● Revised Series
● Gross National Product (GNP) ● National Income Committee (NIC) ● New Series
● Net National Product (NNP) ● entral Statistical Organisation
C ● Primary Sector
(CSO) Secondary Sector
● User Cost ●
● Product Method Tertiary Sector
● Factors of Production ●
● Income Method
● Personal Income (PI)
● Conventional Series
● Disposable Income (DI)
Q u est i o n s
1. What do you mean by national income? Explain its 5. Write short notes on
concepts. a. Features of national income in India.
2. What do you mean by national income estimates? b. Difficulties in estimates of national income in
Explain national income estimates during pre- India.
independence and post-independence of India.
c. Methodology of national income estimates in
3. Explain trends in the national income growth and India.
structure.
4. What are the causes for slow growth of national
income in India? Explain suggestion measures to
raise the growth rate of national income in India.
r efe r e n ces
n Budget Documents, Government of India. n http://indiabudget.nic.in.
n Economic Survey of India 2007–08, Government of India n Plan Documents, Planning Commission of India.
Publication.
09
C hapter
Industrialisation and
Economic Development
>>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>>
• Concept and Meaning of Industrialisation 235 • Industries During the Plan Period 246
• The Pattern of Industrialisation 237 • Recent Industrial Growth 248
• Relative Roles of Public and • Micro and Small Enterprises (MSEs) 252
Private Sectors 240 • Challenges and Outlook 255
• Inadequacies of the Programme of • Key Words 255
Industrialisation 242
• Questions 256
• Role of Industries in the Economic • References 256
Development 244
Concept and Meaning of

Industrialisation
Industrialisation has a major role to play in the economic development of the underdeveloped Industrialisation has a major
countries. The gap in per capita incomes between the developed and underdeveloped coun- role to play in the economic
tries is largely reflected in the disparity in the structure of their economies; the former are development of the underdevel-
oped countries.
largely industrial economies, while in the latter the production is confined predominantly to
agriculture. Table 9.1 clearly reveals the positive relationship between the per capita income
and the share of manufacturing output (industry including construction). Undoubtedly,
some countries have achieved relatively high per capita incomes by virtue of their fortunate,
natural resource endowments. Petroleum exporting countries like Saudi Arabia, Kuwait, and
UAE have achieved higher per capita income by exploiting the strong advantage that they
enjoy in international trade. But these countries are rather a special case.
The pattern of ‘growth through trade’ in primary commodities was, however, realised in
the 19th century when industrialisation was closely linked with international trade, because
(1) countries previously isolated by high transport costs as well as other barriers came to spe-
cialise, and (2) economic development through trade was diffused in the outlying area as the
pattern of advance in the rising industrial countries happened to be such as to cause a rapidly
growing demand for crude products of the soils, which those areas were well fitted to supply.
This traditional pattern of growth through trade is out of place now. As rising levels of
per capita consumption have gradually transformed the composition of demand for goods
and services and as technological changes have resulted in the more economic use of new
materials or the creation of synthetic substitutes, the growth of import demand of the ad-
vanced countries for most primary products has lost the momentum of the earlier period
and, currently, it lags behind the growth in their domestic incomes and output. The volume
of exports from the underdeveloped countries expanded at a rate of 3.6 per cent per annum
while the exports from the developed countries rose at the rate of 6.2 per cent. This export
Table 9.1 shows the comparative sector wise growth rates from 1990 to 2010.
Table 9.1
Comparative Sector
> Average annual rate of growth of value additions in
Wise Growth Rates Agriculture Industry Services
2000–10 1990–00 2000–10 1990–00 2000–10 1990–00
World 2.5 2.0 2.5 2.4 2.8 3.1
Of which…
India 3.0 3.2 8.5 6.1 9.6 7.7
Pakistan 3.4 4.4 6.7 4.1 5.7 4.4
China 4.4 4.1 11.8 13.7 11.5 11.0
Iran 5.9 3.2 6.9 2.6 5.3 3.8
Brazil 3.6 3.6 2.8 2.4 3.9 3.8
Egypt 3.3 3.1 5.5 5.1 5.4 4.1
Australia 1.7 3.1 2.8 2.7 3.6 4.2
Denmark –0.7 4.6 –0.8 2.5 1.2 2.7
Bangladesh 3.5 2.9 7.7 7.3 6.1 4.5
Thailand 2.2 1.0 5.4 5.7 4.0 3.7
Korea rep 2.0 1.6 5.4 6.0 3.6 5.6
France 0.3 2.0 0.5 1.0 1.7 2.2
Sri Lanka 3.1 1.8 5.7 6.9 6.2 5.7
Mexico 1.7 1.5 1.3 3.8 2.5 2.9
Germany –0.2 0.1 0.1 –0.1 1.7 2.9
Italy –0.1 2.1 –0.8 1.0 1.0 1.6
Philippines 3.2 1.7 4.2 3.5 5.8 4.0
Kenya 1.9 2.2 4.9 1.3 4.5 3.2
Canada 1.5 1.1 0.1 3.2 3.0 3.1
South Africa 1.5 1.0 2.9 1.1 4.1 3.0
Malaysia 3.3 0.3 3.3 8.6 6.9 7.3
Singapore –3.2 –2.4 5.6 7.8 6.3 7.8
Hungary 3.4 –2.4 2.1 3.6 2.1 1.3
Japan –0.8 –1.3 0.5 –0.3 1.3 2.0
In view of the unfavourable lag is accompanied by a deterioration in their terms of trade. Thus, in view of the unfavour-
trends in the world trade of able trends in the world trade of primary commodities, industrialisation is the only effective
primary commodities, industri- answer to the problems of underdeveloped countries. They can no longer depend upon trade
alisation is the only effective
answer to the problems of un-
for their development but they have to activise the dynamic elements within their economies.
derdeveloped countries. Besides the limitation of ‘trade gap’, these countries are facing a relentless increase of
population, combined with a likelihood of diminishing returns in agriculture which is in-
strumental in creating the trap of poverty. The essential precondition for development (and
to break this vicious circle) is an all-round rise in all occupations right from low productivity
Industrialisation and Economic Development | 237
to high productivity. In general, the net value of output per person is higher in industry than As industrialisation proceeds,
in agriculture. In industry, the scope for internal as well as external economies is greater the economies of scale and
than in other sectors and, certainly greater than in agriculture. As industrialisation proceeds, inter-industrial linkages (com-
plementarily) become more pro-
the economies of scale and inter-industrial linkages (complementarily) become more pronounced.
nounced. It also leads to the creation of economic surplus in the hands of industrial produc-
ers for further investment.
The industrial sector, which possesses a relatively high marginal propensity to save and
invest, contributes significantly to the eventual achievement of a self-sustaining economy,
with continued high levels of investment and rapid rate of increase in income as well as
industrial employment. Besides, the process of industrialisation is associated with the devel-
opment of mechanical knowledge, attitudes, and skills of industrial work, with experience
of industrial management and with other attributes of a modern society, which in turn, are
beneficial to the growth of productivity in agriculture, trade, distribution, and other related
sectors of the economy. As a consequence of these factors, any successful transfer of labour
from agriculture to industry contributes to economic development. Industrialisation is, thus, Industrialisation is, thus, insep-
inseparable from substantial, sustained economic development, because it is both a conse- arable from substantial, sus-
quence of higher incomes and a means of higher productivity. With the rise in the income tained economic development,
levels, people tend to spend more on the manufactured goods than on food. The differential because it is both a conse-
quence of higher incomes and
income elasticity of demand confers an advantage on the manufacturing countries, in the a means of higher productivity.
form of providing and expanding higher productivity market and makes it an attractive oc-
cupation to effect population transfer so as to arrest the tendency of diminishing returns in
agriculture. Industrialisation acts as an instrument both in creating capacity to absorb excess
labour power and in catering for the diversification of the market that is required at the
higher stages of economic development.
In many cases, the diversion of underemployed rural labour to non-agricultural oc-
cupations is an urgent requirement for development. But it does not mean that industrial
development can be dissociated from progress in the agricultural sector. An improvement
in productivity in agriculture creates surplus, which can be utilised to support increasing
labour force in industries. Besides providing a large part of the sustenance for the growing
urban population, the agricultural sector supplies a market for the manufactured goods out
of higher real incomes and a source of foreign exchange to pay for the imported capital goods
for industry; it also provides a source of capital for industry through the medium of capital
accumulated by traders and leads to the growth of an exchange economy—all these factors
In fact, unless agriculture is
promote the growth of the manufacturing industry. In fact, unless agriculture is modernised modernised substantially, in-
substantially, industrial expansion is likely to proceed at a slow speed due to lack of purchas- dustrial expansion is likely to
ing power in the hands of the bulk of population. The problem facing the less-developed proceed at a slow speed due to
countries is, therefore, not the one of choosing between primary and secondary activities but lack of purchasing power in the
hands of the bulk of population.
rather the one of ensuring a balanced expansion of all appropriate sectors of the economy.
The Pattern of Industrialisation

Although there is now, almost, a universal agreement on the importance of industrialisation,
there is still much debate regarding the proper pattern of industrial development. Histori-
cally, industrial development has proceeded in three stages. In the first stage, the industry
is concerned with the processing of primary products: milling grain, extracting oil, tanning
leather, spinning vegetable fibres, preparing timber and smelting ores. The second stage
comprises the transformation of materials making bread and confectionery, footwear, metal
goods, cloth, furniture, and paper. The third stage consists of the manufacture of machines
and other capital equipments to be used not for the direct satisfaction of any immediate
Hoffmann classified all the want but in order to facilitate the future process of production. Hoffmann classified all the
industrial output into two cat- industrial output into two categories: consumer goods and capital goods output, and also
egories: consumer goods and classified various stages in terms of the ratio of consumer goods output to that of the capi-
capital goods output, and also
classified various stages in tal goods output as follows: ‘In stage I the consumer goods industries are of overwhelming
terms of the ratio of consumer importance, their net output being on the average five times as large as that of capital goods
goods output to that of the capi- industries’. This ratio is 2.5:1 in the second stage and falls to 1:1 in the third stage, and still
tal goods output. lower in the fourth stage. Both these types of classifications emphasise the increasing role of
the capital goods industries in the economy, as industrial development takes place.
Although the general development of industry itself has proceeded from consumer goods
to the capital goods, there are many variations of this pattern, both in terms of the time taken
to attain later stages and in terms of the relative importance of each of the stages. The Soviet
pattern of industrialisation involves a straight jump from the first to the third stage whereas
British pattern is that of a gradual evolution. Similarly, underdeveloped countries may also
It has been suggested that the evolve a different pattern of industrialisation suitable to their economic conditions. It has
pattern of industrialisation in been suggested that the pattern of industrialisation in the underdeveloped countries to be
the underdeveloped countries guided primarily, by considerations arising from the relative scarcity of capital. Since labour
to be guided primarily, by con- is relatively plentiful and capital is scarce, the development of labour-intensive consumer
siderations arising from the
relative scarcity of capital. goods seems quite legitimate. However, the basic premise of this approach is inappropriate.
The problem is not how to economise the use of capital (this has to be done as an inevitable
condition) but how to increase its supply. As most underdeveloped countries do not produce
these goods at home, the only alternative to increasing their supplies is through imports. This
depends upon the rate of growth in the exports of primary commodities and manufactured
goods. As it has been pointed above, the countries are facing an ‘export lag’ in their exports
of primary commodities. Consequently, primary commodity exports do not seem to be a
reliable source of foreign exchange earning, in order to increase the import of capital goods.
The alternative to the increase of exports of primary products from underdeveloped
countries would be to develop export-promoting, manufacturing industries. But the main
trouble is that in producing goods of this sort, say textiles, the advanced industrial countries
themselves are likely to have an overwhelming comparative advantage. This does not neces-
sarily mean that export-promoting, industries should not be developed, but it only means
that specialisation in a few industries for export is not a substitute for the growth of a di-
versified domestic industry. If, however, the growth in foreign exchange earnings cannot be
strengthened by the promotion of export industries, the spread of import-substituting, con-
sumer goods industries can release foreign exchange for imports of capital goods. Import
substitution is of two types:
1. the substitution of home-produced goods for imported goods, and
2. the substitution of capital goods imports for consumer goods imports.
Thus, if a country cannot increase its export earnings sufficiently, it can still increase its
import of capital equipment by cutting down its imports of consumer goods. This process of
import substitution itself creates import demand for certain ancillary goods, which are need-
ed for the production of those consumer manufactures. We are, thus, faced with a problem of
choice between expansion of export-oriented industries or of import-substitution industries.
The capital available for invest- The capital available for investment in an underdeveloped economy being limited, the alloca-
ment in an underdeveloped tion of funds to an export project reduces the scope of investment oriented towards import
economy being limited, the al-
substitution, If the export-oriented industries are successful in stimulating exports, they in-
location of funds to an export
project reduces the scope of crease the supply of foreign exchange and if import substitution is effective, it releases foreign
investment oriented towards exchange, so that the effect of these alternatives on the supply of foreign exchange is identical.
import substitution. How should we decide between these two alternatives?
Although the effect of the development of these two types of industries on foreign
exchange is similar, yet an import-substituting industry strengthens the economic independ-
ence of the country; whereas export-oriented prospect, on the contrary, increases its de-
pendence on the fluctuations of prices and volume of trade in foreign markets. Therefore, in
general, an import-substitution project should be preferred to an export-oriented project.
To sum up, the industrial development depends upon the rate of capital formation.
Supply of capital goods can be augmented either through imports or through domestic pro-
duction. An increase in the imports of capital goods depends upon the rate of growth of
exports. Since the scope for the expansion of the exports of primary commodities is limited,
export-promoting, manufacturing industries may be developed or, alternatively, certain
import-substituting, domestic industries may be developed, the effect of which will be to
release foreign exchange for the imports of capital goods. In addition, within the current
volume of imports, capital goods may be substituted in the place of consumer goods. Thus, Export-promoting industries,
export-promoting industries, import-substituting industries, and domestic capital goods in- import-substituting industries,
dustries are not mutually exclusive alternatives. A simultaneous development of all the three and domestic capital goods
industries are not mutually ex-
classes of industries will prove to be the most effective strategy of industrialisation. The rela- clusive alternatives. A simulta-
tive role of each is likely to vary with the particular economic circumstances of individual neous development of all the
countries as well as with their current phase of industrialisation. three classes of industries will
prove to be the most effective
strategy of industrialisation.
Structure of Effective Demand and Pattern
of Industrial Development
A disquieting feature is that the pattern of industrial development that has emerged in the A disquieting feature is that the
last five decades reflects the structure of effective demand, which is determined by the dis- pattern of industrial develop-
tribution of incomes. An unduly large share of resources is absorbed in production which ment that has emerged in the
last five decades reflects the
relates directly or indirectly to maintaining or improving the living standards of the higher-
structure of effective demand,
income groups. The demand of this relatively small class, not only for a few visible items of which is determined by the dis-
conspicuous consumption but also for the outlay on high-quality housing and urban ameni- tribution of incomes.
ties, aviation and superior travel facilities, telephone services, and so on, sustains a large
part of the existing industrial structure. This means that the further expansion of industry is
limited by the narrowness of the market.
Consumer durables like refrigerators, air-conditioners, televisions, cars and scooters,
and so on, go to satisfy the wants of the richer sections of the community while the con-
sumer non-durables like sugar, tea, cotton, cloth, vanaspati, matches, and so on, enter into
mass consumption. Between 1956 to 1991, the industries producing non-durables recorded
a very slow growth rate and this was an important factor for an inflationary rise in the price
level. It resulted in wiping out the increase in real wages and, consequently, ushered an era
of strikes, which again slowed down the production. On the other hand, the capitalist classes
were able to appropriate the gains of inflation and, thus, they boosted the demand for con-
sumer durables. All this led to a distortion in the emerging industrial structure which was
deleterious to social welfare. Commenting on this development, Raj writes:
If this continues, a pattern of industrial development based on high rates of growth of
demand for luxury and semi luxury products may well come to be regarded as the only
way of maintaining a high rate of growth of output in this sector. The situation contin- The growth rate of all groups of
ues to be similar during 1991 to 2000. It appeared the deceleration in consumer goods goods has been modest since
industries output, more especially of non-durable consumer goods. The growth rate of 2000 to 2010 except for con-
all groups of goods has been modest since 2000 to 2010 except for consumer durables sumer durables which has been
zooming forward.
which has been zooming forward.
Table 9.2 shows the sector wise growth rate % of industrial production from 1956 to 2010.
Table 9.2
Industrial Production:
> Year Index of Mining Manufacturing Electricity
Sector Wise Growth Industrial and
Rate % Production Quarrying
1956–60 (1956 = 100) 7.40 7.20 6.90 14.50
1961–70 (1960 = 100) 5.80 4.10 5.40 11.80
1971–80 (1970 = 100) 4.20 3.80 3.90 7.10
1981–90 (1980–81 = 100) 7.40 8.40 7.10 8.80
1991–00 (1993–94 = 100) 6.30 3.40 6.50 7.00
2000–10 (1993–94 = 100) 7.02 4.33 7.50 4.80
Note: Growth rate worked out by using calendar year averages for the years 1956–70 and then fiscal
year averages.
Source: Central Statistics office.
Relative Roles of Public and

Private Sectors
A noteworthy feature of the
A noteworthy feature of the changing industrial pattern in the planning era in India is the
changing industrial pattern in growth of the public sector in a big way in the heavy and basic industries, the machine goods
the planning era in India is the sector, engineering industries, and so on. In 1997–98, though the public sector units ac-
growth of the public sector in a counted for only 7.0 per cent of the number of factories in the country, they employed 32 per
big way in the heavy and basic
industries, the machine goods
cent of the productive capital. Only 56 per cent of the productive capital is employed by the
sector, engineering industries, private sector units, which account for 91 per cent of the total number of factories. The high
and so on. share of the public sector is accounted for by the fact that investment made in this sector is
largely heavy and basic industries are highly capital intensive.
However, if we judge the contribution of different sectors in terms of employment and
value added, then it is evident that nearly 69 per cent of employment and 60 per cent of value
added are contributed by the private sector. The share of the public sector in employment and
value added was only 24 per cent and 28 per cent, respectively. The joint sector which rep-
resents the participation of both private and public sectors in ownership, and management,
has not yet become significant although its contribution to the value added was 12 per cent
The private sector dominates
and employment 6.7 per cent. The conclusion is obvious: the private sector dominates the
the industrial scene in India. industrial scene in India (refer to Table 9.3).
Interestingly, the annual wages received by a worker in the public sector are nearly at par
with those in the joint sector—` 62,936 and ` 66,644, respectively. But the annual wages in
the private sector were ` 32,342, that is, 51 per cent of the wages received by the workers in
The rapid pace of industrial the public sector.
growth and the development
of productive capacity have
been marked by a remarkable, Growth of Infrastructure
though still inadequate, expan-
sion of infrastructural facilities The rapid pace of industrial growth and the development of productive capacity have been
in the country. marked by a remarkable, though still inadequate, expansion of infrastructural facilities in the
Partners No. of Productive Employees Net Value Wage Per

< Table 9.3
Ownership Pattern in
Factories Capital (‘000’) Added Worker (`) Indian Industries
(` crore) (` Crore) (1997–98)
Public sector 9,516 188,032 2,387 44,385 62,936
(7.0) (32.1) (24.0) (28.4)
Joint sector 2,479 71,637 669 18,819 66,644
(1.8) (12.2) (6.7) (12.1)
Private 123,106 325,889 6,838 92,503 32,342
sector
(90.8) (55.5) (68.9) (59.3)
Unspecified 450 972 31 267
(0.3) (0.2) (0.3) (0.2)
Total 135,551 586,530 9,925 155,947
(100.0) (100.0) (100.0) (100.0)
country, with expansion and modernisation of coal, which is India’s primary fuel source by
more than threefold, and notable success in the exploration of oil and gas both on shore and
offshore. The Sixth Plan summed up the success in the infrastructure admirably. An efficient
complex of refineries, pipelines, storage, and distribution has been developed and India has
entered the petrochemical age. A large infrastructure has been built to sustain this subcon-
tinental economy—a network of irrigation, storage works, and canals; hydro- and thermal
power generation; regional power grids; a largely electrified and dieselised railway system;
national and state highways on which a rapidly growing road transport fleet can operate;
and the telecommunications system covering most urban centres and linking India with
the world. The development of modern industry as well as of agriculture has stimulated the
growth of banking, insurance, and commerce, and required matching expansion and mod-
ernisation of ports, shipping, and internal and external air services. The major beneficiaries
of all these services, as pointed out already, however, have been the wealthier sections of the
population, both in urban and rural areas.
Science and Technology

A Significant progress has been recorded in the field of science and technology. India now A significant progress has been
ranks third in the world, in respect of technological talent and manpower. Indian scientists recorded in the field of science
and technologists are working in many areas on the frontiers of today’s knowledge, as in and technology. India now ranks
third in the world, in respect of
agriculture and industry, in the development of nuclear power and the use of space tech- technological talent and man-
nology for communications and resource development. For further industrial and scientific power.
advance, with growing competence in adaptive research and development, we need only a
selective import of technology. The country has been able to train a cadre of technical man-
power which can handle cement factories, chemical and fertilizer units, oil refineries, power
houses, steel plants, locomotive factories, engineering industries, and so on. More than a
lakh-and-a-half degree and diploma holders are turned out by the technical institutions.
Small and cottage industries,
Similarly, in-plant training and sending brilliant young men and women abroad for train- and other rural activities, have
ing in top skills has helped to generate skilled manpower and, thus, reduce the dependence not received the research and
on foreign technicians and experts. However, small and cottage industries, and other rural development support that they
activities, have not received the research and development support that they require. require.
Inadequacies of the Programme

of Industrialisation
Without underestimating the achievements of the process of industrial expansion initiated
during the planning era, it may be emphasised that much of the industrial growth is only ap-
parent and not real. Our reasons for this are as under: Firstly, the share of industry in the na-
tional income in 1948–49 was 17 per cent. In 1996–97, it was around 21 per cent, an increase
In the terms of contribution of
of just 4 per cent in 50 years. Thus, in the terms of contribution of national product, the share
national product, the share of of manufacturing industry sector continues to be low. In most of the developed nations, this
manufacturing industry sector share is between 30 per cent and 50 per cent.
continues to be low. In most Secondly, the process of industrialisation has not been able to make a dent on the prob-
of the developed nations, this
share is between 30 per cent
lem of unemployment. The high capital intensity of public sector investment generated a very
and 50 per cent. small amount of employment. Factory employment absorbed only 2 per cent of the labour
force. Myrdal studied the spited effects of industrialisation on employment and also its back-
wash effects in terms of unemployment on the traditional sector. After a careful examination
of the situation, Myrdal observed:
The employment effects of

The employment effects of industrialisation cannot be expected to be very large for
industrialisation cannot be several decades ahead, that is, until the region is much more industrialised. For a
expected to be very large for considerable time the net employment effects may even be negative. This dimension
several decades ahead, that is, of the problem, as well as the wider consequences for labour utilisation out side the
until the region is much more
industrialised.
modern sector, is overlooked in the vision that sees industrialisation as the remedy for
‘unemployment’ and ‘underemployment’.
Thirdly, the process of industrialisation’s rapid expansion of large sector resulted in a com-
parative neglect of the small and medium sector. This is evidenced by the data of factories
classified according to the value of plant and machinery by the Annual Survey of Industries.
The structure of factories on the basis of plant and machinery reveals that in 1997–98,
very large factories (642) accounted for about 43 per cent of productive capital, 32 per cent
of value added, but only 10 per cent of total factory employment. Large factories (5,369) ac-
counted for about 35 per cent of productive capital, 32 per cent of valued added, and nearly
27 per cent of employment. Taking these two groups together (large and very large factories)
accounted for 78 per cent of productive capital, 64 per cent of net value added, and about
37 per cent of employment. As against it, 59,131 tiny factories (43.6 per cent of the total)
accounted for only 1.4 per cent of productive capital, 4.0 per cent of net value added, and
16.1 per cent of the employment. Similarly, 56,496 small factories accounted for 41.7 per cent
of the total, contributed 6.8 per cent of productive capital and 12.1 per cent of value added,
There is a heavy concentration
but 24.7 per cent of employment. Thus, there is a heavy concentration of productive capital
of productive capital in large in large and very large factories, but their relative contribution to employment is much less.
and very large factories, but In comparison with this, small and tiny factories accounting for only 6 per cent of productive
their relative contribution to capital provide 34 per cent of total employment. The obvious conclusion is: Large and larger
employment is much less.
factories are capital intensive but small and tiny factories are employment intensive.
Although the government has been proclaiming the policy of developing new growth
‘The expansion of large-scale centres so as to diversify the industrial structure, its policies have only resulted in the con-
industries has failed to absorb centration of industrial development in the metropolitan areas, in the selected states, and
a significant proportion of the
among the top capitalists. Obviously, as a deliberate policy, the promotion of small-scale
increment to labour force and
led in some cases to a loss of sector in consumer goods, required for mass consumption, can reconcile the objectives of
income for the rural poor en- higher growth and higher employment. Sufficient attention has not been paid in this di-
gaged in cottage industries like rection during the last four decades of planning. In this connection, the Sixth Plan states:
textiles, leather, pottery, etc’.
‘The expansion of large-scale industries has failed to absorb a significant proportion of the
i ncrement to labour force and led in some cases to a loss of income for the rural poor engaged
in cottage industries like textiles, leather, pottery, etc’.
To sum up, the process of industrialisation has not generated sufficient growth poten-
tial, either in terms of contribution of output or in terms of employment; and what is really
serious is that the rate of growth of industrialisation has been declining with every decade.
The question of choice of technique has, therefore, to be examined anew with reference to
employment.
Table 9.4 shows the public sectors share in total industrial production.
Public Sector As % of National

< Table 9.4
Public Sectors* Share
Unit Production Production in Total Industrial
2010–11 1998–99 2010–11 1998–99 Production
Coal^ (Mn. tonnes) 432.7 260.7 81.2 87.6
Petroleum Products
Crude oil (Mn. tonnes) 27.9 29.7 74 90.8
Natural gas (BCM) 25.5 24.5 48.7 89.4
Refineries throughput (Mn. tonnes) 115.1 68.5 58.6 100.0
Power Generation
Thermal (Gwh) 273,775 135,423 41.2 38.3
Hydro (Gwh) 46,049 25,339 40.3 30.6
Nuclear (Gwh) 26,266 12,015 100.0 100.0
Fertilizers
Nitrogenous (Mn. tonnes) 31.7 31.8 26.1 31.5
Phosphatic (Mn. tonnes) 2.3 7.3 5.3 24.4
Note: * Central Public sector Enterprises

^ Includes cooking and non-cooking coal
Table 9.5 shows growth of central government enterprises.
Year 2010–11 2009–10 2008–09 1999–00

< Table 9.5
Growth of Central
Running enterprises (No.) 220 217 213 232 Government Enterprises
` Crore
Capital employed 949,449 908,007 792,232 302,947
Turnover 1,473,319 1,244,805 1,271,529 389,199
PBIT 170,625 160,017 142,395 42,270
Less: interest 38,998 36,060 39,300 20,233
Profit before Tax 131,627 123,957 103,095 22,037
Profit after Tax 86,324 83,939 69,267 14,331
PAT to turnover (%) 5.9 6.7 5.4 3.7
PAT to capital employed (%) 9.1 9.2 8.7 4.7

Table 9.6 shows sector wise turnover of central government enterprises.
Table 9.6
Sector Wise Turnover
> 2010–11 Share in 2009–10 Share in
of Central Government Total (%) Total (%)
Enterprises ` Crores
Agriculture 938 0.1 763 0.1
Mining 159,026 10.8 137,494 11.1
Coal and lignite 55,762 3.8 48,556 3.9
Crude oil 80,027 5.4 72,946 5.9
Other minerals and metals 23,237 1.6 15,992 1.3
Electricity 91,563 6.2 77,619 5.3
Manufacturing 938,833 63.7 777,962 52.8
Steel 59,532 4.0 55,522 3.8
Petroleum 776,905 52.7 629,817 42.7
Fertilisers 15,914 1.1 14,496 1.0
Chemicals and pharma 1,581 0.1 1,391 0.1
Heavy engineering 44,540 3.0 35,185 2.4
Consumer goods 5,234 0.4 4,920 0.3
Transport equipment 20,735 1.4 21,077 1.4
Services 282,959 19.2 241,223 16.4
Trading and marketing 187,387 12.7 151,592 10.3
Transportation service 29,119 2.0 27,441 1.9
Contracts and 12,319 0.8 11,862 0.8
Construction
Ind. development and 8,185 0.6 6,554 0.4
technical consultancy
Tourist services 1,174 0.1 1,021 0.1
Financial services 19,447 1.3 16,539 1.1
Telecommunication 25,289 1.7 26,212 1.8
Total (Inc. others) 1,473,319 100.0 1,235,060 100.0
Role of Industries in the Economic

Development
The industries in India can be broadly classified into (1) organised industries and (2) unor-
Both these organised and un-
organised industries are quite ganised industries. The organised industries of the country include steel, petroleum, textiles,
important for a large country cement, fertiliser, jute, tea, sugar, plywood, engineering, and so on. The unorganised indus-
with a huge size of population, tries of India include the small and cottage industries, khadi and village industries, and so
and are also playing an impor-
tant role in the economy of the
on. Both these organised and unorganised industries are quite important for a large country
country.
with a huge size of population, and are also playing an important role in the economy of the
country. Steel, petroleum, cement, fertiliser, engineering, and so on are some of the organised
industries which have been playing an important role to sustain the economic development
process of the country.
Utilisation of Natural Resources

The utilisation of a huge volume of natural resources has become possible with the develop-
ment of these various types of organised and unorganised industries in the country. The The country is still passing a
country is still passing a huge volume of various types of minerals, forests, and agro-based huge volume of various types
resources, which are mostly unutilised or underutilised. of minerals, forests, and agro-
based resources, which are
mostly unutilised or underuti-
Balanced Sectoral Development lised.
From the very beginning, the Indian economy has been depending too much on agri-
culture, as a major portion of the total population and capital are engaged in agricul-
ture, which is again mostly influenced by some uncertain factors. Flood and drought are
common occurrences in the country leading to a failure of crops in some or other areas of
the country regularly. Thus, the Indian economy has been facing an unbalanced sectoral the Indian economy has been
development, and the growing industrialisation in the country can attain balanced secto- facing an unbalanced sectoral
ral development and, thereby, can reduce the too-much dependence of the economy on development, and the growing
the agricultural sector. industrialisation in the country
can attain balanced sectoral
development and, thereby, can
Enhanced Capital Formation reduce the too-much depend-
ence of the economy on the
With the growing industrialisation of the economy, the volume and rate of capital formation agricultural sector.
in the country are gradually being enhanced due to an increase in the level of income and
saving capacity of the people in general.
Increase in National Income

Organised and unorganised industries are jointly contributing a good portion (i.e., around
24.7 per cent in 1997–98) of the total national income of the country.
Increase in Job Opportunities

Development of industrial sector would increase the job opportunities for a huge number of
population of the country. Setting up of new industrial units can create job opportunities for
millions of unemployed persons and, thereby, can lesser the burden of unemployment prob- In India, more than 19.4 mil-
lem. In India, more than 19.4 million persons are employed in the organised, public sector lion persons are employed in
industrial units and nearly, 8.4 million persons are employed in the organised, private sector the organised, public sector
industrial units and nearly, 8.4
industrial units. million persons are employed
in the organised, private sector
Lesser Pressure on Land industrial units.
Agricultural sector of the country is bearing the excessive pressure of population. About About 66 per cent of the total
66 per cent of the total working population of the country is depending on agriculture for working population of the coun-
its livelihood. Due to such excessive pressure of population, the agricultural sector remains try is depending on agriculture
backward. But the industrial development of the country can lessen the burden of the agri- for its livelihood.
cultural sector by diverting and engaging such excess population into the industrial sector
of the country.
Supplementing Export
The development of organised industries like tea, jute, and engineering, along with handi-
crafts industry, are supplementing a good volume of export requirement of the country. By
producing low-cost product, the industrial sector can diversify the market of their products
in different countries and thereby can promote foreign trade.
Attaining Economic Stability

Too much dependence on agriculture makes the Indian economy an unstable one as it is very
much prone to natural calamities like flood and drought.
Accumulation of Wealth
The development of industries helps the country to accumulate higher volume of wealth for
the welfare of the nations, as the per capita output in industry is much more higher than that of
agriculture. Moreover, the development of industries assists the economy to develop its trading
activities, transport, communication, banking, insurance, and other infrastructural facilities.
Support to Agriculture
Development of industries can Development of industries can provide necessary support towards the development of agri-
provide necessary support to- cultural sector of the country. Agro-based industries like tea, jute, cotton textile, sugar, paper,
wards the development of ag- and so on, collect their raw materials from agriculture and, therefore, provide a ready market
ricultural sector of the country.
for the agricultural implements and inputs like chemical fertilizers, pesticides, tools, equip-
ments, and so on, which are produced and marketed by the industrial sector of the country.
Industries have played a crucial role in this regard.
Development of Markets
Development of different industries has led to the development of markets for various raw
materials and finished products in the country.
Contribution Towards National Defence

Growing industrialisation in the country has facilitated the development of many strategic in-
dustries like iron and steel, aircraft building, shipbuilding, chemical, ordinance factories, and
so on. All these have enriched and strengthened the national defence system of the country.
Contribution to Government Exchequer
the public sector enterprises With the gradual industrialisation of the economy the contribution of government revenue
are contributing a good amount has also been widened extensively, due to increasing collection of corporate taxes, sales taxes,
of resources to the Central ex- and excise duties. Moreover, the public sector enterprises are contributing a good amount of
chequer in the form of dividend,
resources to the Central exchequer in the form of dividend, corporate taxes, excise duty, and
corporate taxes, excise duty,
and so on. so on. The amount of such contribution was ` 22,087 crore in 1992–93.
Industries During the Plan Period

During more than last four decades of planning, industrial pattern in India had undergone a
perceptible change. The following are some of these changes:
Infrastructural development is extremely essential for attaining a sound industrial develop- Infrastructural development is
ment. Thus, in the initial part of planning in the country, serious efforts were made for build- extremely essential for attain-
ing basic infrastructural facilities like power, transport, and communications along with the ing a sound industrial develop-
development of heavy engineering industries. ment.
Development of Heavy and Capital Goods Industries

Since the Second Plan onwards, the government put much emphasis on the development of
heavy machine-building industries and capital goods industries, with the sole intention to
strengthen the industrial base of the country. In the mean time, the country has developed
various heavy industries engaged in the products, engineering goods, and so on.
Enhanced Sectoral Contribution of the Industrial Sector in GDP

During the plan period, the sectoral contribution of industrial sector has gradually increased.
Accordingly, the share of industrial sector, in general (at 1980–81 prices), in GDP gradu-
ally increased from 15.05 per cent in 1950–51 to 18.74 per cent in 1960–61, 22.4 per cent in
1970–71, 24.4 per cent in 1980–81 and then, to 27.8 per cent in 1990–91, and finally, to 29.20
per cent in 1995–96.
Rapid Expansions of Consumer Durables Industry in the 1980s

Due to the pursuance of the policy of liberalization by the government during 1980s, the con-
sumer durables industries expanded at a faster rate leading to the significant increase in the
production of consumer durables. Accordingly, during the period from 1981–82 to 1998–89,
the annual average growth rate in the production of motorcycles and scooters increased by
about 19 per cent, that of televisions and other electronics increased by 28.7 per cent, and that
of air conditioners and refrigeration, and so on, increased by 12.2 per cent. Thus, the annual
growth rate of consumer durables increased gradually to 14.4 per cent during 1981–85 and
then, to 16.9 per cent during 1985–89, and finally, to 37.1 per cent in 1995–96.
Increasing Stress on Chemicals, Petro-chemicals,

and Allied Industries in the 1980s
Another notable change in the industrial pattern during the 1980s was the rapid expansion
of chemicals, petrochemicals, and allied industries. During the 1980s, the average annual
growth rate of chemical and chemical products industries was nearly 11.2 per cent.
Massive Expansion of Public Sector

Another perceptible change in the pattern of industrialisation in the country was the massive Another perceptible change in
expansion of public sector, during the post-independence period. During the planning year, the pattern of industrialisation
the total number of public sector units had increased from just 5 in 1951 to 241 in 1995 and in the country was the mas-
the total amount of capital invested, also increased considerably from a mere ` 29 crore to sive expansion of public sector,
during the post-independence
` 15,307 crore during the same period. Thus, the public sector enterprises have been playing period.
an important role in the growing industrialisation of the country and have led to the increase
in the production of basic metals, fuels, non-ferrous metals, fertilizers, equipment, transpor-
tation and communication services, and so on.
Industrial Development Under the Ninth Plan

The Ninth Plan (1997–2002) put an adequate stress on the development of the industrial
sector. The plan finally envisaged to achieve an annual growth rate of 8.5 per cent for the
industrial sector. But during the initial period of the Ninth Plan, that is, during 1997–98
and 1998–99, the annual growth rate attained in the industrial sector were 6.6 per cent and
3.5 per cent, supported by a growth rate of only 3.7 per cent in manufacturing, 6.6 per cent in
electricity, and a negative growth rate of (–) 1.1 per cent in mining.
Recent Industrial Growth

Tables 9.7–9.14 depict the industrial growth in India for the period from 2005–06 to
2011–12.
Table 9.7
Index of Industrial
> Year Index of Mining and Manufacturing Electricity
Production Industrial Quarrying
(Base 2004–05 = 100): Production
Sector Wise
Weight 100.0 14.2 75.5 10.3
Indices
2005–06 108.6 102.3 110.3 105.2
2006–07 122.6 107.5 126.8 112.8
2007–08 141.7 112.5 150.1 120.0
2008–09 145.2 115.4 153.8 123.3
2009–10 152.9 124.5 191.3 130.8
2010–11 165.5 131.0 175.7 138.0
2011–12 170.2 128.4 180.8 149.3
Growth Rates (Year on Year)
2005–06 8.6 2.3 10.3 5.2
2006–07 12.9 5.1 15.0 7.2
2007–08 15.6 4.7 18.4 6.4
2008–09 2.5 2.6 2.5 2.8
2009–10 5.3 7.9 4.9 6.1
2010–11 8.2 5.2 8.9 5.5
2011–12 2.8 – 2.0 2.9 8.2
Note: IIP with new base 2004–05 = 100 introduced with effect from June 10, 2011.
Year Basic Industries Capital Goods Intermediate Consumer

< Table 9.8
Industrial Production:
Industries Goods Goods Use Based
Industries Industries Classification
Weight 45.7 8.8 15.7 29.8
Indices
2005–06 106.1 118.1 106.6 110.7
2006–07 115.6 145.6 118.8 128.6
2007–08 125.9 216.2 127.5 151.2
2008–09 128.1 240.6 127.6 152.6
2009–10 134.1 243.0 135.3 164.3
2010–11 142.2 278.9 145.3 178.3
2011–12 150.0 267.5 143.9 186.1
Growth Rates (Year on Year)
2005–06 6.1 18.1 6.6 10.7
2006–07 8.9 23.3 11.4 16.2
2007–08 8.9 48.5 7.3 17.6
2008–09 1.7 11.3 0.1 0.9
2009–10 4.8 1.0 6.0 7.7
2010–11 6.0 14.8 7.4 8.5
2011–12 5.5 -4.1 -1.0 4.4
2,273 Companies
< Table 9.9
Financial Performance
2001–12 2010–11 % Change of the Indian Corporate
Sector
` Crores
Total income 2,576,600 2,165,470 19.0
Sales 2,524,800 2,128,836 18.6
Other income 51,800 36,634 41.4
Total expenditure 2,209,400 1,827,461 20.9
Operating profit 343,300 337,561 1.7
Depreciation 89,100 80,633 10.5
Gross profit 306,000 293,666 4.2
Interest 85,500 62,960 35.8
Profit before tax 220,500 230,649 –4.4
Profit after tax 159,800 181,179 –11.8
(Continued)
Table 9.9
(Continued)
> 2,273 Companies
2001–12 2010–11 % Change
` Crores
Profitability Ratios:
Operating margin (%) 13.6 15.9 –
Gross margin (%) 12.1 13.8 –
Net margin (%) 6.3 8.5 –
Interest cover (times) 3.6 4.7 –
Note: This and the next two tables are based on the RBI study of 2273 non-financial, non-government
public limited companies (Common Sample).
Operating Profit: Sales–Total Expenditure
Operating Margin: Operating Profit/Sales%
Gross Margin: Gross Profit/Sales%
Net Margin: Profit After Tax/Sales%
Interest Cover: Gross Profit/Interest
Table 9.10
Quarter Wise Financial
> Sales Total Interest PAT Gross Net
Performance of the Quarters Expenditure Margin Margin
Indian Corporate Sector % Growth %
2011–12
First (Apr–June) 22.6 23.0 22.3 6.9 13.0 7.5
(25.1) (29.6) (27.0) 5.5 (13.6) (8.6)
Second (Jul–Sept) 19.1 22.7 46.2 –15.6 11.3 6.1
(19.2) (20.3) (6.3) (9.6) (13.5) (8.6)
Third (Aug–Dec) 19.5 25.4 41.9 –32.2 11.0 4.8
(17.1) (19.0) (24.1) (8.9) (13.6) (8.4)
Fourth (Jan–Mar) 15.5 16.5 34.4 –7.7 12.2 6.9
(20.7) (22.9) (30.6) (13.2) (13.4) (8.6)
Note: Refer Note to Table 9.9.

Figures in bracket pertain to the growth in corresponding quarter of 2010–11.
Table 9.11
Industry Wise Financial
> Sales Total Interest PAT Operating Net
Performance of the Quarters Expenditure Margin Margin
Indian Corporate Sector % Growth %
2011–12
Iron, steel and 18.8 21.4 32.8 –29.8 16.1 5.2
allied products
Automobiles and 13.2 14.8 12.5 0.7 10.4 6.2
ancillaries
Chemicals and 18.7 19.7 48.6 –4.6 14.9 8.1
chemical prod.
(Continued)
Sales Total Interest PAT Operating Net

< Table 9.11
(Continued)
Quarters Expenditure Margin Margin
% Growth %
Cement 25.7 21.3 23.6 30.9 20.8 9.1
Textiles 13.2 15.8 39.1 –56.2 11.0 2.1
Information 18.7 19.6 58.3 18.1 22.1 17.5
technology
Real estate –0.8 –5.8 33.2 –46 30.1 11.9
Note: Refer Note to Table 9.9.

2010–11 2009–10 2008–09

< Table 9.12
Key Profitability Ratios
3485 of the Indian Corporate
Companies (No)* Sector
%
Profitability Ratios
GP/Sales 12.8 13.8 11.9
PAT/Sales 7.5 8.2 6.6
PAT/Net Worth 11.9 12.6 10.7
Tax/PBT 24.5 24.0 21.7
Retained profits/PAT 74.7 76.4 79.9
Equity dividend/equity capital 35.6 32.4 26.0
Liquidity Ratios
Debt to equity 41.4 44.2 46.3
Current assets/current liabilities 1.2 1.2 1.2
Sundry creditors/sundry assets 26.7 26.7 26.8
Asset Utilisation
Sales/gross fixed assets 144.3 133.5 124.4
Inventories/sales 16.1 15.5 15.2
Sundry debtors/sales 16.1 15.9 15.5
Funds (source and use) Ratio
External sources/total sources 63.7 49.1 68.4
Incremental bank borrowings/external sources 28.1 10.0 34.1
Gross savings/gross capital formation 96.4 96.4 67.3
Note: This and next two Tables cover data for the mentioned number of companies for the respective
years.
Table 9.13
Cost Structure of Indian
> 2010–11 2009–10 2008–09
Corporate Sector % To Sales
Raw materials, stores etc. 57.2 54.7 54.6
Raw materials 54.9 52.5 52.2
Stores and spares 2.3 2.2 2.4
Wages and salaries 7.4 7.5 8.2
Power and fuel 4.5 4.6 5.2
Other operating expenses 8.3 8.4 7.9
Depreciation 4.1 4.3 4.0
Insurance 0.2 0.2 0.2
Advertisement 0.9 1.0 0.9
Research and development 0.5 0.5 0.5
Note: Refer Note to Table 9.12

Table 9.14
Trends in Forex
> 2010–11 2009–10 2008–09
Transactions % Growth
Growth in Forex transactions
Total earning 19.1 2.5 18.2*
Exports 25.3 4.6 15.6*
Total spending 16.1 9.5 16.2*
Imports 16.9 13.5 14.1*
Exports/sales 17.7 17.1 18.4
Raw material imports/raw material 4.1 4.1 3.7
spendings
Imports/sales 24.1 24.8 24.6
Note: Refer Note to Table 9.12

Micro and Small Enterprises (MSEs)

The micro and small enterpris- The micro and small enterprises (MSEs) provide employment to an estimated 31.2 million
es (MSEs) provide employment persons in the rural and urban areas of the country. During 2001–2005, the MSE sector
to an estimated 31.2 million registered a continuous growth in the number of enterprises, production, employment, and
persons in the rural and urban
areas of the country. exports (refer to Table 9.15). It is estimated that there are about 128.44 lakh MSEs in the
country as on March 31, 2007, accounting for about 39 per cent of the gross value of output
in the manufacturing sector.
Under the micro, small, and medium enterprises development (MSMED) Act, 2006, the
definitions and coverage of the MSE sector were broadened, significantly. Further, the Act also
defined the medium enterprises for the first time. Informal estimates suggest the contribution
of the MSME sector to be much higher than those based on the third All India Census. To
capture the data for the MSME sector, the fourth census of MSME sector is being launched.
MSEs Fixed Production Employment Export

< Table 9.15
Performance of
(No. in Lakh) Investment (` Crs) (No. in Lakh) (` Crs) MSME’s
(` Crs)
2005–06 123 188,113 497,842 295 150,242
Growth % 4.0 5.3 15.8 4.4 20.8

2006–07 261 500,758 8 595 182,538
Growth % 111.5 166.2 42.5 101.6 21.5
2007–08 273 558,190 790,759 626 202,017
Growth % 4.5 11.5 11.5 5.3 10.7
2008–09 285 621,753 880,805 659 na
Growth % 4.5 11.4 11.4 5.4
2009–10 298 693,835 982,919 695 na
Growth % 4.5 11.6 11.6 5.5
2010–11 312 773,487 1,095,758 732 na
Growth % 4.5 11.5 11.5 5.3
Note: na = Not Available

Source: Ministry of Micro, Small and Medium Enterprises.
Recently, major initiatives have been taken by the government to revitalise the MSME Recently, major initiatives have
sector. They include: (1) Implementation of the (MSMED) Act, 2006 (refer to Box 9.1). been taken by the government
to revitalise the MSME sector.
(2) A ‘Package for Promotion of Micro and Small Enterprises’ was announced in Febru-
ary 2007. This includes measures addressing concerns of credit, fiscal support, cluster-based
development, infrastructure, technology, and marketing. Capacity building of MSME associ-
ations and support to women entrepreneurs are the other important features of this package.
Box 9.1 Implementation of the MSME Development Act, 2006

For implementation of the MSMED Act, 2006, which the entrepreneurs’ memorandum could be
notifications of rules were to be issued by the central filed by the medium enterprises.
and state governments. The central notifications are as • Notification in September 2006 for the form of mem-
follows: orandum to be filed by the enterprises, procedure of
• Principal notification in July 2006 that MSMED Act its filing, and other matters, incidental thereto.
becomes operational from October 2, 2006. • Notification in October 2006 for exclusion
• Notification in September 2006 for the Rules of items while calculating the investment in
for National Board for micro, small, and medium plant and machinery.
enterprises (NBMSMEs) to be constituted under • Notification in May 2007 for constitution of NBMSMEs.
the Act.
• Notification in May 2007 for dividing the country into
• Notification in September 2006 for the constitution six regions; and, notification in June 2007 for the
of the Advisory Committee. amendment of EM format.
• Notification in September 2006 for classifying • 28 states/UTs have notified the authority for filing of
enterprises. entrepreneurs’ memorandum, 17 states/UTs have
• Notifications in September and November 2006 notified rules for MSEFCs, and 15 states/UTs have
declaring DICs in the states/UTs as ‘Authority’ with notified the constitution of MSEFCs.
(3) To make the Credit Guarantee Scheme more attractive, the following modifications have
been made: (a) enhancing eligible loan limit from ` 25 lakh to ` 50 lakh; (b) raising the extent
of guarantee cover from 75 per cent to 80 per cent for (i) micro-enterprises for loans up to
` 5 lakh, (ii) MSEs operated or owned by women, and (iii) all loans in the north-east region;
and (c) reducing one-time guarantee fee from 1.5 per cent to 0.75 per cent for all loans in the
north-east region. (4) The phased deletion of products from the list of items reserved for ex-
clusive manufacture by micro and small enterprises is being continued. About 125 items were
de-reserved on March 13, 2007, reducing the number of items reserved for exclusive manu-
facturing in micro and small enterprise sector to 114. Further, 79 items were de-reserved
through a notification dated February 5, 2008.
The rate of growth of the tour- Tourism

ism sector of India has been
way above the world average Global tourism continued to move upward during 2011 with a number of international tour-
in the last few years. The year ist arrivals worldwide, reaching about 983 million (UNWTO [UN World tourism organisa-
2011 is the fourth consecutive tion] estimates) and international tourism receipts scaling US$ 1030 bn in the year. The rate
year of high growth in foreign
tourist arrivals and foreign ex- of growth of tourism sector of India has been way above the world average in the last few
change earnings from tourism. years. The year 2011 is the third consecutive year of high growth in foreign tourist arrivals
and foreign exchange earnings from tourism (refer to Table 9.16)
Table 9.16
India’s Share in
> World India % Share of India
World Tourism Tourist arrival (Mn.)
1980 284.8 0.8 0.28
1990 463.6 1.71 0.37
2000 701.9 2.65 0.38
2005 736.1 3.91 0.53
2006 850.8 4.45 0.52
2007 911.5 5.08 0.56
2008 927.8 5.28 0.57
2009 894 5.17 0.58
2010 940 5.78 0.61
2011 983 6.29 0.64
Earnings From Tourism (US$ Bn.)
1980 102.4 1.4 1.37
1990 265.1 1.51 0.57
2000 475.8 3.46 0.73
2005 787.3 7.49 0.95
2006 887.7 8.63 0.97
2007 904 10.72 1.19
2008 917 11.75 1.28
2009 882 11.39 1.29
2010 982 14.19 1.45
2011 1030 17.52 1.70

The prospects for growth of tourism in India are bright. The overall development of
tourism infrastructure coupled with other efforts by the government to promote tourism,
such as appropriately positioning India in the global tourism map through the ‘Incredible In-
dia’ campaign, according greater focus in the newly emerging markets, such as China, Latin
America and CIS (Commonwealth of Independent States) countries, and participating in
trade fairs and exhibitions will facilitate tourism growth.

There are a number of positive developments that brighten the industrial outlook in the The growth of textiles, with very
medium term. First, there has been a commendable growth in the capital goods sector, espe- low import intensity, may have
cially in industrial machinery, which, along with strong imports of capital goods, augurs well been affected adversely by the
for the much-required industrial capacity addition. Secondly, the inherent strength of indus- recent appreciation of the rupee
against the US dollar.
trial corporates, manifested in the increase in profits and profitability and strong investment
plans, confirms the strength of the growth prospects in the medium term. Thirdly, the high-
investment plans made for infrastructure during the Eleventh Five-Year Plan are expected to The slowdown, shown by the
gradually alleviate the infrastructural constraints to industrial development. Moreover, the available data on consumer du-
rables, may not, in itself, be a
burgeoning direct investment inflows in the liberalised-investment regime supplement the cause of serious concern in the
domestic investment to a great extent. long run, provided the overall
The real challenge lies in strengthening the foundations for a sustained industrial buoyancy in growth and income
is maintained.
growth. One of the biggest challenges to sustaining and stepping up the industrial growth
lies in removing the infrastructural impediments in road—both rural and urban—rail, air,
and sea transport and power. The growth in infrastructure not only alleviates the supply-side The real challenge lies in
constraints in industrial production, but also stimulates the additional, domestic demand strengthening the founda-
required for the industrial growth. Another issue in the industrial growth is the swiftness and tions for a sustained industrial
growth. One of the biggest chal-
efficacy with which the skill deficit felt in many areas of manufacturing is bridged. This will lenges to sustaining and step-
facilitate research and development and technological innovations, which are urgently called ping up the industrial growth
for, in important industries like chemicals, automotives, and pharmaceuticals. lies in removing the infrastruc-
tural impediments in road—
Further, there is an imperative need to facilitate the growth of labour-intensive indus-
both rural and urban—rail, air,
tries, especially by reviewing labour laws and labour market regulations. This is, particularly, and sea transport and power.
important in reversing the current, not-so-encouraging, manufacturing employment trends.
Besides, the growth in many industries is constrained by the acute scarcity/depleting reserves
of important raw materials like coal, iron ore, natural gas, and forest resources. The Eleventh Further, there is an imperative
Five-Year Plan has placed its focus on these challenges. While the strategies for the industrial need to facilitate the growth of
labour-intensive industries, es-
development set out by the Eleventh Five-Year Plan document are broadly tailored to address pecially by reviewing labour laws
these issues, sectorally differentiated initiatives may be required for skill upgradation, supply and labour market regulations.
augmentation of inputs, and promotion of research and development.
Key W o r d s
● Industrialisation ● Consumer Goods ● Gross Domestic Capital (GDC)
● Underdeveloped Countries ● Capital Goods ● Infrastructure
● Growth Through Trade ● Infrastructural Facilities ● Private sector
● Trade Gap ● Balanced Sectoral Development ● Joint sector
● Industrial Linkages ● Enhanced Capital Formation
● Primary Products ● Gross Domestic Saving (GDS)
Q u est i o n s
1. What do you mean by industrialisation? Explain the pat- 8. What role did the small-scale industry play for the
tern of industrialisation in India since independence. employment generation of the country.
2. Discuss the relative role of public and private sectors 9. State the initiatives taken by the government for the
in the industrial development in India. development of micro and small enterprises.
3. Explain the inadequacies of the programmes of 10. Discuss the FDI policy and its contribution for the
industrialisation in India and suggest the measures industrial development of the country.
to overcome these inadequacies. 11. Discuss the state of tourism industry in India. What
4. What role do industries play in the economic develop- initiatives are required from the government for its
ment of the country. development.
5. How did the planning in India contribute for the devel- 12. Write short notes on:
opment of industries in India. (a) Industrial Credit.
6. Discuss the recent industrial growth and its impact (b) Industrial Sickness.
on the economic development.
(c) Industry and Environment.
7. Discuss the contribution of PSUs in the economic
development of the country. (d) Performance of Corporate Sector.
r efe r e n ces
n Bala, I. (2003). Foreign Resources and Economic Devel- n Misra, S. N. (2004). Indian Economy and Socio-econom-
opment. New Delhi: Discovery. ic Transformation: Emerging Issues and Problems: Essays
n Budget Document, Government of India. in Honour of Professor Baidyanath Misra. New Delhi:
Deep and Deep Publications.
n Government of India. Economic Survey of India 2007–08.
n Travedi, I. V. and R. Jatana (2004). Economic
New Delhi: Ministry of Finance.
Environment of India. Jaipur: University Book House.
10
C hapter
Foreign Trade Policy and

Balance of Payments
>>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>>
• Foreign Trade Policy and Balance of • Balance of Payments 264
Payments 257 • Current Account Deficit 266
• Main Features of India’s Trade Policy 257 • Capital Account 268
• Phases of India’s Trade Policy 258 • Other Non-debt Flows 270
• India’s Foreign Trade Policy, 1991 259 • Disequilibrium of BoP 271
• Major Trade Reforms 260 • Key Words 272
• Highlights of Foreign Trade Policy 2009–14 • Questions 273
Annual Supplement 2013–14 261
• References 273
• Assessment of the New Trade Policy 264
FOREIGN TRADE POLICY AND BALANCE OF

PAYMENTS
Trade policy plays a vital role in achieving the objectives and boosting the economic growth
and works as a catalyst agent to promote trade. Advanced countries like Germany, the United
States, Japan, and others have used their trade policy to (a) restrict their imports by tariffs,
quotas and import substitution to provide a sheltered market for their own industries so that
they could develop rapidly and (b) promote their exports so that their expanding industries
could secure foreign markets. In other words, trade policy has played a significant role Trade policy has played a signifi-
in the development of the advanced countries. India, however, did not have a clear trade cant role in the development of
policy before independence, though some type of import restriction—known as discrim- the advanced countries.
inating protection—was adopted since 1923 to protect a few domestic industries against
foreign competition. It was only after independence that a trade policy, as part of the general It was only after independence
economic policy of development, was formulated by India. that a trade policy, as part of
the general economic policy of
development, was formulated
by India.
MAIN FEATURES OF INDIA’S TRADE POLICY
On the import side, India has been in a disadvantageous position vis-à-vis advanced coun-
tries, which are capable of producing and selling almost every commodity at low prices.
Since independence, the Gov-
This meant that India could not develop any industry without protecting it from any foreign ernment of India has broadly
competition. Import restriction, commonly known as protection, was thus essential to pro- restricted the foreign competi-
tect domestic industries and to promote industrial development. Since independence, the tion through a judicious use of
import licensing, import quotas,
Government of India has broadly restricted the foreign competition through a judicious use
import duties and, in extreme
of import licensing, import quotas, import duties and, in extreme cases, even banning the cases, even banning the import
import of specific goods. The Mahalanobis strategy of economic development through heavy of specific goods.
industries, which India adopted since the Second Five-Year Plan, called for (a) banning or
keeping to the minimum the import of nonessential consumer goods, (b) comprehensive
control of various items of imports, (c) liberal import of machinery, equipment, and other
developmental goods to support heavy industry-based economic growth, and (d) a favour-
able climate for the policy of import substitution.
On the export side, to pay for its essential imports and to minimize the dependence on
foreign countries, expansion of exports was very essential. It was also realized that the market
for many goods within India may not be adequate to absorb that entire domestic production
and, hence, a search for markets elsewhere was a necessity. The Indian government had to
play an important role to promote exports through setting up of trading institutions, and
Vigorous export promotion was through fiscal and other incentives. Vigorous export promotion was emphasised after the
emphasized after the Second Second Plan to earn foreign exchange, to overcome the acute foreign exchange crisis. In the
Plan to earn foreign exchange, 1970s, importance of export promotion was again emphasized because of mounting debt-
to overcome the acute foreign service obligations and the goal of self-reliance (with zero net aid).
exchange crisis.
PHASES OF INDIA’S TRADE POLICY

Five distinct phases in India’s
Five distinct phases in India’s trade policy can be noted as follows: the first phase pertains to
trade policy can be noted as the period from 1947–48 to 1951–52; the second phase covering the period from 1952–53 to
follows: the first phase pertains 1956–57; the third phase from 1957–58 to June 1966; the fourth phase started after devalua-
to the period from 1947–48 to tion of the rupee in June 1966; and the last phase after 1975–76.
1951–52; the second phase
covering the period from 1952–
During the first phase up to 1951–52, India could have liberalized imports, but on
53 to 1956–57; the third phase account of the restrictions placed by the United Kingdom on the utilization of the sterling
from 1957–58 to June 1966; balances, it had to continue wartime controls. Since our balance of payments (BoP) with the
the fourth phase started after dollar area was heavily adverse, an effort was made to screen imports from hard-currency
devaluation of the rupee in June
1966; and the last phase after areas and boost up exports to the above dollar area, so as to bridge the gap. This also neces-
1975–76. sitated India to devalue her currency in 1949. By and large, the import policy continued to be
restrictive during this period. Besides this, restrictions were also placed on exports in view of
The import policy continued to the domestic shortages.
be restrictive during this period. During the second phase (from 1952–53 to 1956–57), the liberalization of foreign trade
was adopted as the goal of trade policy. Import licences were granted in a liberal manner.
An effort was also made to encourage exports by relaxing export controls, reducing export
Liberalization led to a tremen-
duties, abolishing export quotas, and providing incentives to exports. Liberalization led to
dous increase in our imports, a tremendous increase in our imports, but exports did not rise appreciably. Consequently,
but exports did not rise appre- there was a fast deterioration in our foreign exchange reserves (FERs). This necessitated a
ciably. reversal of trade policy.
During the third phase, which began in 1956–57, the trade policy was re-oriented to
meet the requirements of the planned economic development. A very restrictive, import
policy was adopted, and the import controls further screened the list of imported goods. On
the other hand, a vigorous export promotion drive was launched. The trade policy assumed
The trade policy assumed that a
lasting solution to the BoP prob-
that a lasting solution to the BoP problem lies in the promotion and diversification of our
lem lies in the promotion and export trade. Not only should the export of traditional items be expanded, but also the export
diversification of our export trade. of newer items should be encouraged.
Similarly, import-substitution industries should also be encouraged so that dependence
on foreign countries be lessened. It was in this period that India’s trade policy was thoroughly
reviewed by the Mudaliar Committee (1962).
The fourth phase started after the devaluation of the rupee in June 1966. During this
period, the trade policy attempted to expand exports and strangely liberalised imports, too.
Actually, export promotion was given a big boost through the acceptance and implementation
Foreign Trade Policy and Balance of Payments | 259
of the recommendations of the Mudaliar Committee (1962). The major recommendations

included an increased allocation of raw materials to export-oriented industries, income-tax
relief on export earnings, export promotion through import entitlement, removal of disin-
centives, and setting up of Export Promotion Advisory Council, a Ministry of International
Trade, and so on. When these export-promotion measures did not succeed and adverse BoP
persisted, the Government of India undertook devaluation of the rupee in 1966, as a major
step to check imports and boost exports. Initially, devaluation was not successful and the
adverse BoP worsened during the annual plans. However, during the Fourth Plan, the trade
During the Fourth Plan, the trade
policy was quite successful in restricting imports and promoting exports. This period contin- policy was quite successful in
ued till 1975–76. restricting imports and promoting
During the last phase (1975–76 onwards), the government adopted a policy of import exports.
liberalization with a view to encourage export promotion. During the Janata rule (1977–79),
import liberalization was also adopted to augment domestic supply of essential goods and to
check rise in the price level. Import–Export Policy of the Indian government attempted to
achieve such objectives as: (i) to provide further impetus to exports, (ii) to provide support
to the growth of indigenous industry, (iii) to provide for optimum utilization of the coun-
try’s resource endowments, especially in manpower and agriculture, (iv) to facilitate tech-
nology upgradation with a special emphasis on export promotion and energy conservation,
(v) to provide a stimulus to those engaged in exports and, in particular, to manufacturing
units contributing, substantially, to the export efforts, and (vi) to effect all possible savings
in imports. Thus, it is clear that the purpose of trade policy has been to stimulate economic It is clear that the purpose of
growth and export promotion via import liberalization. trade policy has been to stim-
ulate economic growth and
Import liberalization, along with export promotion, at a time, when (a) prices of import- export promotion via import lib-
ed goods were rising much faster and (b) foreign markets for Indian goods were depressed, eralization.
has resulted in huge adverse balance of trade and payments from 1979–80 onwards. Instead of
curtailing imports, the Tendon Committee (1981) recommended a policy of vigorous export
promotion and further import liberalization, as a means of export promotion. The IMF Loan
(1981) had also stipulated that India should use export promotion and not import restric-
tion, as the strategy for controlling adverse BoP. Such a trade policy forced India almost into
a debt trap, and the Indian bureaucrats were knocking at the doors of Aid India Consortium
and other advanced countries tried to bail India out.
While framing the Export–Import Policy (1985), the government was guided by the While framing the Export–Import
recommendations of the Abid Hussain Committee. Whereas the committee emphasized the Policy (1985), the government
need for striking a balance between export promotion and import substitution, the govern- was guided by the recommen-
dations of the Abid Hussain
ment, in its wave of import liberalization, permitted a much greater quantum of imports Committee.
in the name of export promotion and capital goods imports for technological upgradation.
Thus, grave distortions appeared in the process of implementation of the recommendations
of the committee.
The first major attempt at liberalization was made by the Rajiv Gandhi government. As The first major attempt at liber-
a result, in the four years from 1985–86 to 1989–90, exports surged forward, and the period alization was made by the Rajiv
witnessed a recorded average annual growth of 17 per cent in dollar terms. Unfortunately, Gandhi government.
and unaccountably, the exports declined by 9 per cent in 1990–91.
INDIA’S FOREIGN TRADE POLICY, 1991

The Commerce Minister, Mr P. Chidambaram, announced a major overhaul of trade policy The then Commerce Minister,
on 4 July, 1991, entailing (i) suspension of cash-compensatory support, (ii) an enlarged and Mr. P. Chidambaram, announced
uniform REP (replenishment) rate of 30 per cent of FOB (free on board) value, (iii) aboli- a major overhaul of trade policy
on 4 July, 1991.
tion of all supplementary licences, except in the case of small-scale sector and producers
of life-saving drugs/equipments, (iv) abolition of unlisted OGL (open general licence), and
(v) removal of all import licensing for capital goods and raw materials, except for a small
negative list in three years.
Rationale of Foreign Trade Policy

Giving the rationale for the new policy, the Commerce Minister noted as follows: for sever-
al decades, trade policy in India has been formulated in a system of administrative controls
and licences. As a result, we have a bewildering number and a variety of lists, appendices, and
The government, decided that licences. This system has led to delays, wastage, inefficiency, and corruption. Human interven-
while all essential imports like tion, described as discretion at every stage, has stifled enterprise and spawned arbitrariness.
POL (petroleum, oil, and lubri-
cants), fertilizer, and edible oil The government, therefore, decided that while all essential imports like POL (petroleum,
should be protected, all other oil, and lubricants), fertilizer, and edible oil should be protected, all other imports should be
imports should be linked to linked to exports by enlarging and liberalizing the REP licence system. For this purpose, the
exports by enlarging and liber- following major reforms were announced.
alizing the REP licence system.
MAJOR TRADE REFORMS

1. REP will become the principal instrument for export-related imports. To describe
REP as a licence is a misnomer. Hence, it will now be called ‘exim scrip’ and can be
freely traded.
2. All exports will now have a uniform REP rate of 30 per cent of the FOB value. This is
a substantial increase from the present REP rates, which vary between 5 per cent and
20 per cent of FOB value.
3. The new REP scheme gives a maximum incentive to exporters whose import inten-
sity is low. For example, agricultural exports, which earlier had very a low REP rate of
5 per cent or 10 per cent, will now gain considerably.
4. All supplementary licences shall stand abolished except in the case of the small-scale
sector and for producers of life-saving drugs/equipment. These two categories will be
entitled to import both under OGL or through supplementary licences.
5. All additional licences granted to export houses shall stand abolished. However,
export houses will enjoy a REP rate of 30 per cent of FOB value, and will be granted
an additional REP rate of 5 per cent of FOB value.
6. All items now listed in the Limited Permissible List. OGL items would, hereafter, be
imported through the REP route.
7. The exim policy contains a category known as Unlisted OGL. This category stands
abolished and all items falling under this category may be imported only through the
REP scheme.
8. Advance licensing has been an alternative to the REP route for obtaining imports for
exporters. It is expected that many exporters will find the REP route more attractive
now. However, for exporters who wish to go through advance licensing, this route will
remain open. The REP rate for advance licence exports is being increased from 10 per
cent of NFE (net foreign exchange earnings) to 20 per cent of NFE.
9. In three years’ time, our objective will be to remove all import licensing for capital
goods and raw materials, except for a small negative list.
10. The goal of the government is to decanalise all items, except those that are essential.
11. In the light of the substantial liberalization of the trade regime, and also the recent
changes in exchange rates (after devaluation), cash-compensatory scheme (CCS) was
abolished from 3 July, 1991.
12. In order to make this system more transparent and free, it is proposed that financial
institutions may also be allowed to trade in exim scrips.
13. In 3 to 5 years, the Commerce Minister hoped that the rupee will become fully
convertible on the trade account.
On 3 August, 1991, the Commerce Minister announced a new package of incentives for On August 3, 1991, the Com-
export oriented units (EOUs) and export-promotion zones (EPZs) by granting higher rates merce Minister announced a
new package of incentives for
of exim scrips. The new package stated: export-oriented units (EOUs)
and export-promotion zones
1. The basic rate at which exim scrips would be issued against exports would be 30 per
(EPZs) by granting higher rates
cent of foe value. Exports to hard-currency areas will be eligible for exim scrips that of exim scrips.
are valid for hard-currency imports while exports to rupee-payment areas will be
issued exim scrips that are valid for imports from the latter areas only.
2. The basic rate of 30 per cent is inadequate for exports of certain products, such as
value added agricultural products, electronics, bulk drugs and marine products, for-
mulations, and certain categories of advanced engineering goods. These products will
be eligible for an additional exim-scrip entitlement of 10 percentage points, taking
the total exim-scrips rate to 40 per cent of FOB value.
3. The EOUs and EPZ units, and exim scrips at 3096 of NFE earnings would also be
available.
4. The 30 per cent of NFE rate of exim scrips would also be applicable to service exports,
including soft ware exports, which is a thrust area. The definition of services under
this category included other services, such as services of architects, textile designers,
artists, management consultants, lawyers, and so on. The benefit will be available to
services exported by resident Indians for which remittances are made to India.
HIGHLIGHTS OF FOREIGN TRADE POLICY

2009–14 ANNUAL SUPPLEMENT 2013–14
• Measures to revive investors’ interest in SEZs by reducing the minimum land area
requirement by half. To boost growth of I.T. sector and also to give a fillip to employ-
ment and growth in Tier-II and Tier-III cities.
• Zero duty EPCG for few sectors and 3 per cent duty EPCG for all sectors. Based on
the request of all stakeholders, government has decided to harmonize zero duty EPCG
and 3 per cent EPCG scheme into one scheme which will be a zero duty EPCG scheme
covering all sectors.
• At present, 2 per cent interest subvention scheme is available to certain specific sectors
like handicrafts, handlooms, carpets, readymade garments, processed agricultural
products, sports goods and toys. The scheme had been further widened to include
134 sub-sectors of engineering sector.
• Duty Credit Scrips issued under Focus Market Scheme, Focus Product Scheme, and
Vishesh Krishi Gramin Udyog Yojana (VKGUY) can be used for payment of service
tax on procurement of services within the legal framework of service tax exemption
notifications under the Finance Act, 1994. Holder of the scrip shall be entitled to avail
drawback or CENVAT credit of the service tax debited in the scrips as per Depart-
ment of Revenue rules.
• The total number of countries under Focus Market Scheme and Special Focus Market
Scheme has increased to 125 and 50, respectively.
• Norway has been added under Focus Market Scheme and Venezuela has been added
under Special Focus Market Scheme.
• Approximately, 126 new products have been added under Focus Product Scheme.
• Import of cars/vehicles is permitted through designated ports only. Now import of
cars/vehicles would also be allowed at ICD Faridabad and Ennore Port (TN).
• Government has announced Incremental Export Incentivization Scheme on 26.12.12
for the exports made during January 2013 to March 2013. This scheme is available for
exports made to USA, EU, and Asia.
• Government has also agreed to include additional countries under Incremental
E xports Incentivization Scheme. 53 countries of Latin America and Africa have
been added with the objective to increase India’s share in these markets. The present
exports to each of these markets is less than US$ 100 million.
Snapshots of Foreign Trade Policy Annual Supplement 2013–14

• Several benefits for exports of textile, • Import of cars/vehicles would be allowed
engineering, and sports products to ICD Faridabad and Ennore Port
• Zero duty EPCG Scheme extended • Government set up another task force
beyond March 2013, now all export to suggest steps to further reduce
sectors to get the benefit transaction cost for exporters
• To promote domestic manufacturing • Steps towards easing documentation and
of capital goods, specific export other procedural simplification
obligation reduced to 10%
• 134 sub-sectors of engineering • Sharma announced widening of items
included in 2% interest subvention eligible for import of handloom, made ups,
scheme and sports goods
• Certain type of duty credit scrips can • Government announces ‘package of
be used to pay service tax reforms’ for revival of investors’ interest
in SEZs
• Export to Norway and Venezuela to get • Minimum land area requirement to set up
duty benefit SEZ reduced by half
• 126 engineering, electronics, • Now no minimum land requirement for
chemicals, pharma and textile items IT’/ITES SEZs
included in Focused Product Scheme
• Export of Hi-tech products to be • Government permits transfer of ownership
incentivized of SEZ units, including sale
• Incremental Export Incentivization
Scheme for export to US, EU, and Asia
to be continued in FY’ 14
• Service providers are entitled to duty credit scrips under Served from India Scheme at
the rate of 10 per cent of free foreign exchange earned during a financial year. The
entitlement shall now be calculated on the basis of net free foreign exchange ear
ned (i.e., after deducting foreign exchange spent from the total foreign exchange
earned during the financial year).
• Utilization of recredited 4 per cent special additional duty (SAD) scrips shall be
allowed upto 30.09.13 as a trade facilitation measure. However, no further extension
shall be considered by government and this would be the last such opportunity.
• Anti-dumping duty and safeguard duty was exempted under Duty Free Import
Authorization scheme. Exemption from payment of anti-dumping duty and safeguard
duty shall henceforth not be available after endorsement of transferability of such
authorizations.
• Initiative been taken to improve quality and accuracy of foreign trade data. The
release of press note relating to quick estimates has been compressed to 15 days after
completion of the month to which it relates.
• Electronic Bank Realization Certificate (e-BRC) system has been made mandatory
with effect from 17 August, 2012 up to 16 April, 2013.
• System for online issuance of registration certificate for export of cotton, cotton yarn,
non-basmati rice, wheat, and sugar has been introduced. This will allow quick issu-
ance of registration certificates and easy monitoring.
• Submission of physical copies of IEC and Registration-cum-Membership Certificate
(RCMC) with individual application has been dispensed.
• Application fee can be paid either in cash or through demand draft or through EFT.
Now exporters/importers would be allowed shortly to utilize their credit card for pay-
ment of such application fee.
• As many as 5 additional items (embroidery/sewing threads/poly/quilted bedding
materials and printed bags) are included in the list of items which are allowed duty
free within the existing limits upto 5 per cent FOB value of exports of handloom
made ups in preceding year or within the existing limit of upto 1 per cent of FOB
value of exports of cotton/man-made ups in the preceding year.
Overview of the World Economic Outlook Projections (per cent change unless noted otherwise).
Growth in the world trade volume of goods and services nosedived from 6.0 in 2011 to 2.5 in
2012, and is projected to recover to 3.6 by 2013 (refer to Table 10.1). The world trade prices
Items Projections
< Table 10.1
External Environ-
2011 2012 2013 2014 ment (Annual
World Trade Volume (G and S) Per Cent Change
World Trade prices (in US$ terms) 6.0 2.5 3.6 5.3 Unless Otherwise
Noted)
Manufactures 6.7 –0.5 1.0 0.5
Oil 31.6 1.0 –2.3 –4.9
Non-fuel primary commodities 17.8 –9.8 –0.9 –4.3
Capital Flows
Emerging market and developing countries
Private capital flows (net) in US$ billion 495.3 144.9 336.3 413.2
Source: World Economic Outlook, April 2013, IMF.
fall drastically to the nadir for manufacturing , oil and non-fuel primary commodities. In the
context of Euro crises capital flow went down to 144.9 in 2012 from 495.3 in 2011, a sharp
decline by 70 per cent which will trigger capital scarcity for developing countries.
ASSESSMENT OF THE NEW TRADE POLICY

The New Trade Policy (NTP), 1991 aimed to cut down administrative controls and barriers,
The New Trade Policy (NTP), which act as obstacles to the free flow of exports and imports. The basic instrument developed
1991 aimed to cut down
administrative controls and bar-
by the policy is the exim scrip in place of REP licences. The purpose of this instrument is to
riers, which act as obstacles permit imports to the extent of 30 per cent on 100 per cent realization of export proceeds.
to the free flow of exports and Obviously, the purpose is to bridge the BoP gap. The trade policy has streamlined various pro-
imports. cedures for the grant of advance licences, as also permit imports, through exim scrips routes.
Moreover, during 1988–89, out of the total imports of the order of ` 34,202 crore, the imports
into government account were ` 16,775 crore, that is, 49 per cent of the total. These canalized
imports would not be affected by the exim scrips instrument. Thus, the exim scrips would
only affect half of the imports. This may be the probable reason for the Commerce Minister to
undertake decanalization of imports, so that the amenable area of the NTP could be enlarged.
Since the time of Mudaliar Committee in 1962, the country has been fed with the slo-
gan of export promotion through import entitlement. Various instruments have been forged,
there after, but a long-term view only underlines the fact that the country had failed to check
the faster growth of imports than that of exports during the last three decades. Under one pre-
There is a strong need to exer- text or another, the import window was opened much wider, and this has continued. There is a
cise extreme caution in liberaliz- strong need to exercise extreme caution in liberalising imports, more so, in essential imports.
ing imports, more so, in essential
imports.
To conclude, India’s trade policy since independence has been used as part of general
economic policy to develop the country and to diversify the economy. Initially, it took the
form of restricting the imports and boosting the exports. It also took the form of organizing
Formulated by bureaucrats
international trade and bilateral and multilateral trade agreements. In the later years, trade
under the influence and guid-
ance of Indian business houses policy has taken the form of export promotion through import liberalization. Formulated by
and multinational giants, India’s bureaucrats under the influence and guidance of Indian business houses and multinational
trade policy did have an impor- giants, India’s trade policy did have an important influence on the rapid development of the
tant influence on the rapid
development of the country,
country, but it is basically responsible for leading the country into the classical debt trap.
but it is basically responsible
for leading the country into the
classical debt trap. BALANCE OF PAYMENTS
The BoP of India is classified into (a) BoP on current account and (b) BoP on capital account.
The BoP of India is classified The current account of the BoP of India includes the following three items: (a) visible trade
into (a) BoP on current account relating to imports and exports, (b) invisible items, viz., receipts and payments for such serv-
and (b) BoP on capital account. ices as shipping, banking, insurance, travel, and so on, and (c) unilateral transfer such as
donations. The current account shows whether India has a favourable balance or deficit BoP
in any given year. The BoP on capital account shows the implications of current transactions
for the country’s international financial position. For instance, the surplus and the deficit
of the current account are reflected in the capital account, through changes in the FERs of
The current account has fol-
lowed an inverted ‘U-’ shaped country, which are an index of the current strength or weakness of a country’s international
pattern during the period from payments position (refer to Table 10.2).
2001–02 to 2006–07. The strength, resilience, and stability of the country’s external sector are reflected by
various indicators, which include a steady accretion to reserves, moderate levels of current
account deficit (CAD), changing composition of capital inflows, flexibility in exchange rates,
sustainable external debt levels with elongated maturity profile, and an increase in the capital
inflows. Figure 10.1 shows the industry balance of payment from 1990–91 to 2011–12.
<Table
Amount in US$ Million
10.2
Year Current A/C Capital A/C Overall Balance Balance of Payment
1990–91 –9680 7188 –2492
1991–92 –1178 3777 2599
1992–93 –3526 2936 –590
1993–94 –1159 9694 8535
1994–95 –3369 9156 5787
1995–96 –5912 4690 –1222
1996–97 –4619 11412 6793
1997–98 –5499 10010 4511
1998–99 –4038 8260 4222
1999–00 –4698 11100 6402
2000–01 –2666 8535 5868
2001–02 3400 8357 11757
2002–03 6345 10640 16985
2003–04 14083 17338 31421
2004–05 –2470 28629 26159
2005–06 –9902 24954 15052
2006–07 –9565 46171 36606
2007–08 –17034 109198 92164
2008–09 –29817 9737 –20080
2009–10 –38180 51638 13458
2010–11 –45945 61989 16044
2011–12 –78155 67756 –10399
Source: indiabudget.nic.in (Economic Surveys).
150000
< Figure 10.1
Figure Showing India’s
Balance of Payment
100000
50000 Current A/C
Capital A/C
0 Overall Balance
2 4 6 8 0 2 4 6 8 0 2
1–9 3–9 5–9 7–9 9–0 1–0 3–0 5–0 7–0 9–1 1–1
199 1 99 1 99 1 99 1 99 2 00 2 00 2 00 2 00 2 00 2 01
–50000
–100000
The current account has followed drastically during the period from 2004–05 to 2011–12, alarming the
trade deficit of US$ 78155.
The capital inflows on the other side have been on a clear uptrend during the 22 years (from 1991–92
to 2011–12).
CURRENT ACCOUNT DEFICIT

CAD mirrors the saving–investment gap in the national income accounts and, thus, consti-
The challenge before the
tutes foreign savings. The challenge before the emerging market economies is to leverage for-
emerging market economies is eign savings, and to promote domestic growth without having the long-term consequences
to leverage foreign savings, and of external payment imbalances. However, CADs, per se, need not necessarily enhance the
to promote domestic growth productive capacity and, thus, overall the GDP growth. This would depend on the underly-
without having the long-term
consequences of external pay-
ing component factors that are leading to the CAD. The distinction between gross capital
ment imbalances. inflow and net inflow is useful. As the latter must equal the CAD, there is no way in which
the net use of foreign savings can increase without an increase in the CAD. The gross inflow
can, however, increase to the extent, that it is offset by a gross outflow in the form of build-up
of FERs, a reduction in government external debt, or by an outward investment, by entre-
preneurs. Higher gross inflows have value even if the net flows do not increase to the same
extent, as they can improve the competition in the financial sector, the quality of interme-
diation, and the average productivity of investment, and, thus, raise the growth rate of the
economy. The challenge before the government is to maximize these benefits while minimiz-
ing the costs of exchange-rate management (refer to Table 10.3).
>
Amount in US$ Million
Table 10.3
Year Current A/C
Rise and Fall of
Current A/c Balance 1990–91 –9680
1991–92 –1178
1992–93 –3526
1993–94 –1159
1994–95 –3369
1995–96 –5912
1996–97 –4619
1997–98 –5499
1998–99 –4038
1999–00 –4698
2000–01 –2666
2001–02 3400
2002–03 6345
2003–04 14083
2004–05 –2470
2005–06 –9902
2006–07 –9565
2007–08 –17034
2008–09 –29817
2009–10 –38180
2010–11 –45945
2011–12 –78155
Source: Reserve Bank of India.
20000
Current A/C
< Figure 10.2
Rise and Fall of
Current A/c Balance
0
91 9
3 95 97 99 01 03 05 07 09 11
–20000 0– 92– 94– 96– 98– 00– 02– 04– 06– 08– 10–
9 9
19 1 19 19 19 20 20 20 20 20 20
–40000 Current A/C
–60000
–80000
–100000
Figure 10.2 shows the rise and fall of current account balance, during the period from
1990–91 to 2000–01 it was negative which is like a nightmare for which the economy have
been opened to get competitive advantage of cheap resources available with India, but
unfortunately the benefits have been reapen by other countries putting India on deficit side
of current account. From 2001–02 to 2003–04 it was improved, thereafter shifting towards
decline year on year.
Impact of Euro Zone Crisis on Current Account

The unfolding of euro zone crisis, the austerity measures in advanced economies, recession
in many euro zone countries, risk on/risk off behaviour of investors and the uncertainty
surrounding the future of euro zone have adversely affected the global economy. The fallout
for the Indian economy has been a sharp deceleration in exports and a slowdown in GDP
growth. Import demand however has remained resilient because of the continued high inter-
national oil prices that did not decline, unlike what happened after the Lehman meltdown of
September, 2008. The high value of gold imports, driven mainly by the ‘safe haven’ demand
for gold that has led to a sharp rise in prices, contributed to the high import bill and widening
of the trade deficit.
The trade deficit, as a result, increased to US$ 189.8 billion in 2011–12, which was
10.2 per cent of the GDP. With invisible surplus of US$ 111.6 billion (6.0 per cent of GDP),
the current account deficit widened to record 4.2 per cent of GDP. This is unlike the situa-
tion during the 2008 crisis, when the high trade deficit of 9.8 per cent of GDP in 2008–09,
was partly offset by an invisible surplus of 7.5 per cent, lowering CAD to 2.3 per cent of
GDP. The signs of strain on BoP continued in the first half of 2012–13 (April–September
2012) with the trade deficit of US$ 90.7 billion increasing to 10.8 per cent of GDP and
CAD of US$ 39.0 billion at 4.6 per cent of GDP. The high CAD has had implications for
rupee volatility and business confidence in the economy. A positive development is that
high CAD has lately been financed by capital inflows, which explains why the downhill
movement of rupee, witnessed till July 2012, has been largely arrested. There has, however,
been high dependence on volatile portfolio flows and external commercial borrowings.
This makes capital account vulnerable to a ‘reversal’ and ‘sudden stop’ of capital, especially
in times of stress.
BoP: Economic Survey 2013

• India’s CAD widened in Q2 of 2012–13 on account of a larger trade deficit.
• On a BoP basis, merchandise exports recorded a decline of 12.2 per cent (year-on-
year) during Q2 of 2012–13 as against an increase of 45.3 per cent during corre-
sponding quarter of 2011–12.
• Similarly, on a BoP basis, imports also registered a decline of 4.8 per cent (year-on-year)
during the quarter as against an increase of 38.1 per cent during same quarter last year.
• Steeper decline in the exports than that in imports led to the widening of trade deficit
to US$ 48.3 billion during Q2 from 44.5 billion during the corresponding quarter
previous year.
• During Q2, net services receipts recorded a rise of 11.4 per cent (year-on-year), led by
software, construction, information services, business services.
• Net receipts under secondary income (private transfers) recorded a moderate increase
of 2.9 per cent during the quarter and were partly offset by the net outflow under
primary income (investment income).
• Notwithstanding a reasonable increase in net services receipts, net invisibles earnings
could finance only a lower proportion of trade deficit as net ‘primary and secondary’
income flows were relatively smaller. Consequently, the CAD worsened to US$ 22.3
billion in Q2 of 2012–13 as compared to US$ 16.4 billion in the preceding quarter and
US$ 18.9 in Q2 of 2011–12.
• As a proportion of GDP, CAD during Q2 of 2012–13 worked out to 5.4 per cent as
compared with 4.2 in Q2 of the previous year.
• Despite the surge in net inflows under the financial account (excluding changes in
reserves) during Q2 of 2012–13 led by foreign direct investment (FDI) and portfolio
investment, there was a marginal drawdown of reserves by US $ 0.2 billion during the
quarter, mainly due to the higher level of current account deficit.
• In Q1 (April–September) of 2012–13, CAD was higher at US$ 38.7 billion as com-
pared to US$ 36.3 billion in the same period of the previous year. As a proportion of
GDP, CAD rose sharply to 4.6 per cent in Q1 of 2012–13 from 4.0 per cent in Q1 of
the previous year reflecting slowdown in GDP and a significant depreciation in rupee.
• Net inflows under the financial account were lower during April–September 2012
over the corresponding period of previous year mainly due to decline in FDI, external
commercial borrowings (ECBs) and banking capital.
• Moderation in capital inflows coupled with continued elevated level of CAD led to
only a marginal accretion of US$ 0.4 billion in the foreign exchange reserves during
April–September 2012.
CAPITAL ACCOUNT
Capital account is a national account that shows the net change in asset ownership for a
nation. The capital account is the net result of public and private international investments
flowing in and out of a country.
Capital inflows can be classified by instrument (debt or equity), duration (short term
or long term), and nature (stable or volatile) of flows. Such taxonomy helps to calibrate the
policy of liberalization of the capital account (refer to Table 10.4).
< Table
Amount in US $ Million
10.4
Year Capital A/C
Capital Flow
1990–91 7188
1991–92 3777
1992–93 2936
1993–94 9694
1994–95 9156
1995–96 4690
1996–97 11412
1997–98 10010
1998–99 8260
1999–00 11100
2000–01 8535
2001–02 8357
2002–03 10640
2003–04 17338
2004–05 28629
2005–06 24954
2006–07 46171
2007–08 109198
2008–09 9737
2009–10 51638
2010–11 61989
2011–12 67756
Source: RBI.
Figure 10.3 shows that foreign investment (net) has been a relatively growth component
of total capital flows, growing broadly since 1991–92 till 2011–12. However, it have reached
the pinnacle in the year 2008–09.
120000
Capital A/C
<Figure 10.3
Capital Flow
100000
80000
60000
40000 Capital A/C
20000
0
19 –92
19 –94
19 –96
19 –98
20 –00
20 –02
20 –04
20 –06
20 –08
20 –10
2
–1
91
93
95
97
99
01
03
05
07
09
11
19
Source: RBI.
Large inflows in the form of non-resident Indian (NRI) deposits, and portfolio investment
have been witnessed.
The World Economic Outlook (WEO) reported that many emerging markets and
developing countries similarly experienced historically high levels of NFE inflows. The accel-
eration in gross flows was sharper than the net flows. The net private capital flows to emerg-
ing market economies and developing countries.
OTHER NON-DEBT FLOWS

In the BoP system of accounts of the RBI, the head ‘other capital’ covers mainly the leads
and lags in export receipts (the difference between the custom data and the banking-channel
data), funds held abroad, and the residual item of other capital transactions not included
elsewhere, such as flows arising from cross-border financial derivative and commodity hedg-
In its Press Release dated ing transactions, migrant transfers, and sale of intangible assets, such as patents, copyrights,
29 December, 2007, reporting
trademarks, and so on. Other capital (net), including banking capital, payments transaction
the BoP developments for the
second quarter, the RBI had, like short-term credits, which were earlier not captured explicitly elsewhere, were accounted
among other things, indicated under this residual head, implicitly. In its press release dated 29 December, 2007, reporting
some accounting changes in the BoP developments for the second quarter, the RBI had, among other things, indicated
this head.
some accounting changes in this head. (refer to Box 10.1)
Box 10.1 Changes in the BoP System of Recording

The RBI, in conformity with the best international prac- ordinary (NRO) account were earlier included under other
tices and as per the provisions of Balance of Payments capital in the capital account. The RBI has, put in place,
Manual 5 (BPM5) of the IMF, made certain changes in the a reporting system and records these data separately. As
system of recording BoP flows. In the earlier system of such, transactions under the NRO account have now been
recording of international transactions between residents included under NRI deposits. Besides all these, the RBI,
and non-residents, trade credits or credits for financing taking cognisance of the importance of the services in
imports by Indian residents, extended by foreign suppli- the invisible account and the possibility of some overlap
ers up to 180 days, were not covered explicitly, and were between business services and software services of the
subsumed under the head ‘other capital’ or errors and ITES variety, had reviewed the data that were reported by
omissions. However, such credit beyond 180 days was authorised dealers, revised the data that were produced
recorded and reported. Usually, a very short-term credit, by the business services, and started providing greater
less than 180 days, get rolled over within a year and, as details of the non-software services.
such, they are recorded on a net basis only. However, As per the RBI’s revised data on the other capital, leads
using the internationally accepted methodology as recom- and lags in export payments, which were negative in
mended in BPM5, the RBI started recording these trans- 2005–06 and less than US$1 bn in 2006–07, shot up
actions for both BoP and external debt purposes. While in April–September 2007 and reached US$3.7 bn. In
in the case of BoP, where there was no change in the 2007–08, the advance that was received for effecting FDI
overall balance as other capital and errors and omissions (pending with authorized dealers) amounted to US$2 bn.
were lower to the extent that short-term credits were high- With other residual capital, of the order of US$2.1 bn, the
er, the total stock of outstanding external debt went up total net flows under other capital head was of the order
(details in the subsequent section on external debt). Trans- of US$6 bn.
actions by non-resident Indians (NRIs) in the non-resident
DISEQUILIBRIUM OF BoP
The credit and debit are written in the payment account. It may not remain balanced always.
Very often, debit exceeds the credit or the credit exceeds the debit causing an imbalance in
the balance of payment account. Such an imbalance is called the disequilibrium. Disequilib-
rium may take place either in the form of deficit or in the form of surplus.
Causes of Disequilibrium
• Economic Factors
• Development Disequilibrium
• Cyclical Disequilibrium
• Secular Disequilibrium (with high income country)
• Structural Disequilibrium
Development Disequilibrium
Large scale development expenditure usually increases the purchasing power, aggregate
demand and prices, resulting in substantial large imports. Development disequilibrium
is common in developing country, because the above factors and the large scale import of
capital goods are for carrying out the various development programs which give rise to a
deficit in their BoP.
Cyclical Disequilibrium
Cyclical fluctuation of general business activities is one of the prominent reason for BoP dis-
equilibrium. A country enjoying a boom all by itself will ordinarily experience a more rapid
growth in its imports than in its export, while the opposite will be true of the other country.
However, production in other country will be activated as a result of the increased export
to the former.
Secular Disequilibrium
Sometimes, the balance of payments disequilibrium persists for long periods due to certain
secular trends in the economy. For instance, in a developing country, the disposable income
is generally very high and , therefore , so is the aggregate demand. At the same time, the pro-
duction cost are also very high due to the higher wages.
This naturally results in higher prices. These two factors-higher aggregate demand and
higher domestic prices may result in the imports being much higher than the exports.
Structural Disequilibrium
Structural changes in the economy may also cause a balance of payment disequilibrium.
Such structural changes include development of alternative sources of supply, development
of better substitutes, exhaustion of productive resources or changes in routes and costs.
• Political Factors and Social Factors
Political factors viz. uncertainty, instability, internal disputes, wars, cold social factors
like taste, fashion and have a direct bearing on business and will adversely affect the
working of business.
Correction of BoP Disequilibrium
Automatic Correction Deliberate Measures
Monetary Measures Miscellaneous Measures

1. Monetary Contraction 1. Foreign Loan
2. Devaluation 2. Incentives for Foreign

Investment
3. Exchange Control
3. Tourism Development
4. Increase CRR and SLR
Trade Measures
Export Promotion Import Control

1. Abolishing of Export Duties 1. Import Duties
2. Export Subsidies 2. Import Quotas
3. Export Incentives 3. Import Prohibition
Automatic Measure
This method is the most common and omnipresent in all economies. Due to BoP deficit the
current devaluate and this makes export cheaper. Importers from other country are attracted
towards such country with lower exchange rate as they get more in fewer amounts. This will
lead that economy to the positive side of BoP and the cycle follows.
Deliberate Measures
Monetary contraction by devaluating, exchange control and increasing cash reserve ratio and
statutory liquidity ratio will trim the money under circulation and will restrict import due to
nonavailability of funds in the market.
Trade Measures
Promoting export by abolishing export duties, providing subsidies and incentives for export
will work as a catalyst to increase export and will motivate enterprise for export.
Restricting import will decrease shrinking of foreign currency reserve and will provide
opportunity to local players.
Key W o r d s
● Annual Growth Rate ● Organized Enterprises ● Call Money Market
● Primary Sector ● Unorganized Enterprises ● Financial System
● Secondary Sector ● Trade Policy ● Indian Banking System
● Tertiary Sector ● Balance of Payments (BoPs) ● Wholesale Price Index (WPI)
● Public Sector ● Money Market
Q u est i o n s
1. What do you mean by trade policy? Explain the main 9. What measures can be taken to achieve equilibrium
features of India’s trade policy. of BoP?
2. Explain India’s trade policy since independence. 10. What are the causes of disequilibrium of BoP?
3. What are the major trade reforms of India’s foreign 11. Write short notes on:
trade policy, 1991? (a) Current account deficit (CAD)
4. Critically analyse India’s NTP. (b) Capital account deficit
5. What do you mean by balance of payments, and how (c) Causes of deficit BoP
does it occur?
(d) Latest Trade Policy of India
6. How is the deficit or surplus in BoP known?
(e) Economic reforms and BoP
7. Analyse the latest BoP position of India.
8. Suggest the measures to overcome the huge deficit
in India’s BoPs.
r efe r e n ces
n Budget Document, Government of India. n Reddy, K. C. (2004). Indian Economic Reforms: An
n Government of India. Economic Survey 2012–13. New Assessment. New Delhi: Sterling Pub.
Delhi: Ministry of Finance. n Singh, R. K. (2004). Economic Reforms in India. Delhi:
n Mathur, B. L. (2001). Economic Policy and Performance. Abhijeet Pub.
New Delhi: Discovery.
n Nagarjuna, B. (2004). Economic Reform and Perspec-
tives: Recent Developments in Indian Economy. New
Delhi: Serials.
11
C hapter
Poverty in India
>>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>>
• Concept, Meaning, and Definition of • Controversy Over the Extent of Poverty
Poverty 274 Reduction 291
• People Living under Poverty Line 275 • McKinsey Global Institute (MGI) Report on
• Causes of Poverty in India 276 Poverty in India 291
• Historical Trends in Poverty Statistics 277 • Four Critical Elements are Key to
the Path of Inclusive Reforms 300
• Poverty and Inclusive Growth 278
• Factors Responsible for Poverty 284 • Case 302
• Measures to Reduce Poverty 285 • Key Words 304

• Poverty Alleviation Programmes 286 • Questions 305
• Poverty Alleviation Through Micro-credit 289 • References 305
• Outlook for Poverty Alleviation 290
Concept, Meaning, and Definition

of Poverty
Poverty is a social phenomenon Poverty is a social phenomenon in which a section of the society is unable to fulfil even the
in which a section of the society basic necessities of life. When a substantial segment of a society is deprived of the minimum
is unable to fulfil even the basic level of living and continues at a bare subsistence level, the society is said to be plagued
necessities of life. When a sub-
stantial segment of a society is with mass poverty. The countries of the Third World invariably exhibit the existence of mass
deprived of the minimum level poverty, although pockets of poverty exist even in the developed countries of Europe and
of living and continues at a bare America. The deprivation of minimum basic needs of a significant section of the society,
subsistence level, the society is in the face of luxurious lives for the elite classes, makes poverty more glaring.
said to be plagued with mass
poverty. Two types of standards are common in economic literature: the absolute and the relative. In
the absolute standard, minimum physical quantities of cereals, pulses, milk, butter, and so on are
determined for a subsistence level and, then, the price quotations convert the physical quantities
into monetary terms. The aggregation of all the quantities included determines the per capita
consumer expenditure. The population, whose level of income (or expenditure) is below the
figure, is considered to be below the poverty line (PL). According to the relative standard, in-
come distribution of the population in different fractile groups is estimated, and a comparison of
Even as the percentages of the ‘levels of living’ of the top 5 per cent to 10 per cent with the bottom 5 per cent to 10 per cent
people living in poverty are of the population, reflects the relative standards of poverty. The defect of this approach is that it
falling, the absolute number is indicates the relative position of different segments of the population in the income hierarchy.
rising. The World Bank defines
‘poverty’ as living on less than The world is in a race between economic growth and population growth, and, so far,
$2 a day, and ‘absolute or population growth is wining. Even as the percentages of people living in poverty are falling,
extreme poverty’ as living on the absolute number is rising. The World Bank defines ‘poverty’ as living on less than $2
less than $1 a day.
a day, and ‘absolute or extreme poverty’ as living on less than $1 a day.
Poverty in India | 275
In India, the subject of ‘defining poverty’ was first posed at the Indian Labour Conference
in 1957. The ‘Working Group’ of the Planning Commission recommended ` 25 per person
per month, for urban and ` 18 per person per month, for rural areas, at 1960–61 prices as
the minimum expenditure for providing the minimum nutritional diet of calories (2,100,
for urban and 2,400, for rural per person per day) intake, as well as to allow for a modest
expenditure on items other than food (barring health and education, which were expected
to be provided by the government). This became the cut-off amount and accordingly, people
having expenditure below this were bracketed as being ‘below the poverty line’. These figures
have since been revised from time to time.
People Living Under Poverty Line

Although the middle class has gained from the recent positive economic developments, India Although the middle class has
suffers from a substantial poverty. The Planning Commission has estimated that 27.5 per cent gained from the recent posi-
of the population was living below the PL in 2004–2005, down from 51.3 per cent in 1977– tive economic developments,
1978 and 36 per cent in 1993–1994 (refer to Figure 11.1). The source for this was the 61st India suffers from a substantial
poverty.
round of the National Sample Survey Organisation (NSSO), and the criterion used was the
monthly per capita consumption expenditure, below ` 356.35 for rural areas and ` 538.60 for
urban areas. Around 75 per cent of the poor are in rural areas, most of them are daily wagers,
The wealth distribution in India
self-employed householders, and landless labourers. Although the Indian economy has is fairly uneven, with the top 10
grown steadily over the last two decades, its growth has been uneven when compared with per cent of income groups earn-
different social groups, economic groups, geographic regions, and rural and urban areas. ing nearly 33 per cent of the
income. Despite a significant
The wealth distribution in India is fairly uneven, with the top 10 per cent of income
economic progress, one-fourth
groups earning nearly 33 per cent of the income. Despite a significant economic progress, of the nation’s population earns
one-fourth of the nation’s population earns less than the government-specified poverty less than the government-spec-
threshold of $0.40 per day. The official figures estimate that 27.5 per cent of Indians lived ified poverty threshold of $0.40
per day.
below the national PL in 2004–2005. A 2007 report by the State-run National Commission
60%
56.4% < Figure 11.1
Percentage of
53.1%
54.9% Population Below
50%
51.3% 45.7%
Poverty Line
49%
44.5% 39.1%
45.2% 38.9%
40% 37.3%
40.8% 36%
38.2%
30% 32.4% 27.1%

26.1%
23.6%
20%
10%
Rural Urban Total

0%
1973−74 1977−78 1983 1987−88 1993−94 1999−2000
for Enterprises in the Unorganised Sector (NCEUS) found that 25 per cent of Indians, or
236 million people, lived on less than ` 20 per day with most working in ‘informal labour
sector with no job or social security, living in abject poverty’. The income inequality in India
is increasing. In addition, India has a higher rate of malnutrition among children under the
age of three (46 per cent in year 2007) than any other country in the world.
Table 11.1 reveals the population below poverty line from 1973–74 to 2009–10.
Table 11.1
Population Below
> 2009–10 2004–05 1993–94 1987–88 1973–74
Poverty Line Number of Poor (Mn.)
Rural 278.2 325.8 244.0 231.9 261.3
Urban 76.5 81.4 76.3 75.2 60.0
Total 354.7 407.2 320.3 307.1 321.3
Poverty Ratio (%)
Rural 33.8 42.0 37.3 39.1 56.4
Urban 20.9 25.5 32.4 38.2 49.0
Total 29.8 37.2 36.0 38.9 54.9
* upto 1993–94, revised data based on the expert group headed by Dr. D. Lokhandwala, Planning
Commission, as accepted by the UF government in 1997. Figures for 2004–05 and 2009–10
based on Tendulkar methodology.
Source: Statistical outline of India 2012–13, Tata Services Limited.
Causes of Poverty in India

There are at least two main schools of thought regarding the causes of poverty in India. They
are as follows:
The Developmentalist View

Colonial Economic Restructuring
Pandit Nehru noted, ‘A significant fact which stands out is that those parts of India which
have been longest under British rule are the poorest today’. The Indian economy was pur-
posely and severely deindustrialised (especially in the areas of textiles and metal-working)
through colonial privatizations, regulations, tariffs on manufactured or refined Indian goods,
taxes, and direct seizures.
In 1830, India accounted for 17.6 per cent of global industrial production against Britain’s
9.5 per cent, but by 1900 India’s share was down to 1.7 per cent against Britain’s 18.5 per cent.
(The change in industrial production per capita is even more extreme due to Indian popula-
tion growth). Not only was Indian industry losing out, but also consumers who were forced
to rely on expensive, (open monopoly produced), British-manufactured goods, especially as
barter, local crafts, and subsistence agriculture was discouraged by law. The agricultural raw
materials exported by Indians were subject to massive price swings and declining terms of
trade.
Mass Hunger: British policies in India exacerbated the weather conditions to lead to mass
famines which, when taken together, led to a range of 30 million to 60 million deaths from
starvation, in the Indian colonies. Community grain banks were forcibly disabled, use of In summary, deindustrialisa-
land for foodcrops for local consumption was converted into cotton, opium, tea, and grain tion, declining terms of trade,
for export, largely for animal feed. In summary, deindustrialisation, declining terms of trade, and the periodic mass misery
of man-made famines are the
and the periodic mass misery of man-made famines are the major ways in which the colonial major ways in which the colo-
government destroyed development in India and held it back for centuries. nial government destroyed
development in India and held
it back for centuries.
The Neoliberal View
1. Unemployment and underemployment, arising in part from protectionist policies
and pursued till 1991, prevented high foreign investment. Poverty also decreased
from the early 1980s to 1990s significantly. However, there are some legal and eco-
nomic factors like
• Lack of property rights: The right to property is not a fundamental right in India.
• Over-reliance on agriculture: There is a surplus of labour in agriculture. Farm-
ers are a large vote bank and they use their votes to resist reallocation of land for
higher-income industrial projects. While services and industry have grown at
double-digit figures, the agriculture growth rate has dropped from 4.8 per cent
to 2 per cent. Neoliberals tend to view food security as an unnecessary goal when
compared to purely financial, economic growth.
2. There are also varieties of more direct technical factors like
• About 60 per cent of the population depends on agriculture whereas the contri-
bution of agriculture to the gross domestic product (GDP) is about 28 per cent
only.
• High population growth rate, though demographers generally agree that this is
just a symptom rather than a cause of poverty.
3. And a few cultural ones have been proposed like
• The caste system, under which hundreds of millions of Indians were kept away
from educational, ownership, and employment opportunities, and subjected to
violence for ‘getting out of line’. The British rulers encouraged caste privileges
and customs even before the 19th century.
Despite this, India currently adds 40 million people to its middle class every year. Analysts
such as the founder of ‘Forecasting International’, Marvin J. Cetron writes that an estimated
Cetron writes that an estimated
300 million Indians now belong to the middle class; one-third of them have emerged from 300 million Indians now belong
poverty in the last 10 years. At the current rate of growth, a majority of Indians will be in- to the middle class; one-third of
cluded in middle-class by 2025. Literacy rates have risen from 52 per cent to 65 per cent in them have emerged from pov-
erty in the last 10 years.
the same period.
Historical Trends in Poverty

Statistics
The proportion of India’s population below the PL has fluctuated widely in the past, but the The proportion of India’s popu-
overall trend has been downward. However, there have been roughly three periods of trends lation below the PL has fluctu-
in income poverty. ated widely in the past, but the
overall trend has been down-
ward.
n 1950 to mid-1970s: Income poverty reduction shows no discernible trend. In 1951,

47 per cent of India’s rural population was below the PL. Although the proportion
went up to 64 per cent in 1954–55 it came down to 45 per cent in 1960–61, but in
1977–78 it went up again to 51 per cent.
n Mid-1970s to 1990: Income poverty declined significantly between the mid-1970s
and the end of the 1980s. The decline was more pronounced between 1977–78 and
1986–87, with rural income poverty declining from 51 per cent to 39 per cent. It
went down further to 34 per cent by 1989–90. The urban income poverty went down
from 41 per cent in 1977–78 to 34 per cent in 1986–87, and further to 33 per cent in
1989–90.
n After 1991: This post-economic reform period evidenced both setbacks and progress.
The rural income poverty increased from 34 per cent in 1989–90 to 43 per cent in
1992 and then fell to 37 per cent in 1993–94. The urban income poverty went up
from 33.4 per cent in 1989–90 to 33.7 per cent in 1992 and declined to 32 per cent
in 1993–94. Also, NSS data for the period from 1994–95 to 1998 show little or no
poverty reduction, so that the evidence till 1999–2000 was that poverty, particularly
rural poverty, had increased post-reform. However, the official estimate of poverty
for 1999–2000 was 26.1 per cent, a dramatic decline that led to much debate and
analysis. This was because, for this year, the NSS had adopted a new survey meth-
odology that led to both higher-estimated mean consumption and also an estimated
distribution that was more equal than in the past NSS surveys. The latest NSS survey
for 2004–05 is fully comparable to the surveys before 1999–2000 and shows pov-
erty at 28.3 per cent in rural areas, 25.7 per cent in urban areas, and 27.5 per cent
for the country as a whole, using uniform recall period (URP) consumption. The
corresponding figures using the mixed recall period (MRP) consumption method
Poverty has declined after was 21.8 per cent, 21.7 per cent, and 21.8 per cent, respectively. Thus, poverty has
1998, though it is still being declined after 1998, though it is still being debated whether there was any significant
debated whether there was any poverty reduction between 1989–90 and 1999–2000. The latest NSS survey was so
significant poverty reduction
between 1989–90 and 1999–
designed as to also give estimates roughly, but not fully, comparable to the 1999–
2000. 2000 survey. These measures suggest that most of the decline in rural poverty over
the period between 1993–94 and 2004–05 actually occurred after 1999–2000.
Poverty and Inclusive Growth

‘Incidence of Poverty’ is estimated by the Planning Commission on the basis of quinquen-
nial ‘large sample’ surveys on household consumer expenditure conducted by the NSSO.
The URP consumption distribution data of NSS 61st Round yields a poverty ratio of 28.3
per cent in rural areas, 25.7 per cent in urban areas, and 27.5 per cent for the country as a
whole in 2004–05. The corresponding poverty ratios from the MRP consumption distribu-
tion data are 21.8 per cent for rural areas, 21.7 per cent for urban areas, and 21.8 per cent for
the country as a whole. While the former consumption data uses a 30-day recall/reference
period for all items of consumption, the latter uses a 365-day recall/reference period for five
infrequently purchased non-food items, viz., clothing, footwear, durable goods, education,
and institutional medical expenses, and a 30-day recall/reference period for the remaining
items. The percentage of poor in 2004–05, estimated from the URP consumption distribution
of NSS 61st Round of consumer expenditure data, are comparable with the poverty estimates
of 1993–94 (50th round), which was 36 per cent for the country as a whole. The percentage
of poor in 2004–05, estimated from the MRP consumption distribution of NSS 61st Round
The percentage of poor in
of consumer expenditure data, are roughly comparable with the poverty estimates of 1999– 2004–05, estimated from the
2000 (55th round), which was 26.1 per cent for the country as a whole. In summary the MRP consumption distribution
official poverty rates recorded by NSS are given in Table 11.2. of NSS 61st Round of consum-
er expenditure data, are roughly
comparable with the poverty es-
Consumption Patterns Below and Above PL timates of 1999–2000 (55th
round), which was 26.1 per
There are concerns about the vulnerability of people who have crossed the PL and are at cent for the country as a whole.
present above it. Vulnerability is a relative term and could be gauged from the consumption
patterns (refer to Table 11.3) (in the absence of a better available alternative). Given meagre
resources, the higher share of expenditure on food items, which is the most basic of all basic
needs, would be indicative of vulnerability to some extent. The average per capita consump-
tion expenditure for rural and urban population as per 61st Round (2004–05) is ` 558.78 The average per capita con-
sumption expenditure for
and ` 1,052.36, respectively. NSSO data also reveals that the rural population on an average rural and urban population as
spends about 55 per cent of its consumption on food and remaining 45 per cent on non-food per 61st Round (2004–05)
items (refer to Table 11.4). The rural population divided on the basis of their monthly per is ` 558.78 and ` 1,052.36,
capita expenditures (MPCEs) exhibit consumption patterns as follows: respectively.
Year Round Poverty Rate (%) Poverty Reduction

< Table 11.2
Poverty Ratios in
Per Year (%) Percentages
1977–78 32 51.3
1983 38 44.5 1.3
1987–88 43 38.9 1.2
1993–94 50 36.0 0.5
1999–00 55 (26.09) Not comparable
2004–05 61 27.5 0.8
S. No. Category 1993–1994 2004–2005

< Table 11.3
Poverty Ratios by URP
By URP Method and MRP (%)
1. Rural 37.3 28.3
2. Urban 32.4 25.7
3. All India 36.0 27.5
1999–2000 2004–2005
By MRP Method
4. Rural 27.1 21.8
5. Urban 23.6 21.7
6. All India 26.1 21.8
Source: Planning Commission.
Table 11.4
Consumption Pattern
> MPCE Classes of Population—Rural Food (55.05) Non-food (44.95)
Across Different MPCE Poor (roughly below PL)
Classes of Population,
Rural (%) 0–235 68.45 31.55
235–270 67.16 32.84
270–320 66.35 33.65
320–365 a
64.78 35.22
Roughly between PL and 2PL
365–410 63.99 36.01
410–455 62.93 37.06
455–510 61.61 38.39
510–580b 60.11 39.88
580–690 58.02 41.98
690–890 c
53.92 46.08
Roughly above 2PL
890–1155 49.80 50.20
Source: N
SSO: Estimated from Table 5R of NSS Report No. 508: Level and Pattern of Consumer
Expenditure, 2004–05.
Notes:
a
MPCE class having PL at ` 356.30.
b
MPCE class having 1.5 times the PL (1.5PL) at ` 534.45.
c
MPCE class having twice the PL (2PL) at ` 712.60.
• Rural poor (below PL) are spending about 31 per cent to 35 per cent of their total
consumption expenditure on non-food items and remaining on food items.
• In the group of population between PL and 1.5PL, non-food items take up between
36 per cent and 40 per cent of the total consumption expenditure.
• For rural population between PL and 2PL, non-food items take up between 36 per cent
and 46 per cent of the total consumption expenditure.
A similar classification of urban population indicates a consumption pattern as in Table 11.5.
While about 43 per cent of the total consumption on an average is spent on food items
and the remaining 57 per cent is spent on the non-food items, the urban poor (below PL)
are spending. About 35 per cent to 43 per cent of their total consumption expenditure on
non-food items.
• In the group of population between PL and 1.5 PL, non-food items take up between
45 per cent and 50 per cent of the total consumption expenditure.
• However, in the group of population between PL, and 2 PL, non-food items take up
between 45 per cent and 53 per cent of the total consumption expenditure.
• It is noticeable that on expected lines, the average consumption pattern of urban
population, in general, is more skewed in favour of non-food items.
MPCE Classes of Population—Urban Food 42.51 Non-food 57.48 < Table 11.5
Consumption Pattern
Poor (roughly below PL) Across Different MPCE
0–335 64.86 35.14 Classes of Population,
335–395 63.11 36.89
Urban (%)
395–485 60.04 39.96
485–580a 57.30 42.70
Roughly between PL and 2PL
580–675 55.35 44.65
675–790 52.37 47.62
790–930 b
49.69 50.31
930–1100c 46.61 53.39
Roughly above 2PL
1100–1380 44.44 55.56
1380–1880 40.17 59.83
Source: NSSO: Estimated from Table 5U of NSS Report No. 508: Level and Pattern of Consumer
Expenditure, 2004–05.
Notes:
a
MPCE class having PL at ` 538.60.
b
MPCE class having 1.5 times the PL (1.5PL) at ` 807.90.
c
MPCE class having twice the PL (2PL) at ` 1077.20.
Trends in Consumption Growth

(Rural–Urban Disparity)
The compound annual growth rate (CAGR) of consumption for the rural as well as urban
population for different percentile groups of population over the period between 1993–94
and 2004–05 based on NSSO data, on monthly per capita consumption for various rounds at
constant prices (refer to Table 11.6) indicate the following:
S. No. Percentile Rural Rural Rural Urban Urban Urban

< Table 11.6
Growth in MPCEs
Group of 1993–94 2004–05 CAGR 1993–94 2004–05 CAGR Between 1993–1994
Population (`) (`) (%) (`) (`) (%) and 2004–2005
1. 0%–10% 115.5 129.5 1.05 154.5 163.5 0.52
2. 10%–20% 153 169 0.91 211 223 0.50
3. 20%–30% 178 195 0.83 248 269 0.74
4. 30%–40% 200 221 0.91 287 316 0.88
5. 40%–50% 222 246 0.94 332 368 0.94
6. 50%–60% 249 275 0.91 381 433 1.17
7. 60%–70% 282 310 0.86 448 512 1.22
8. 70%–80% 325 359 0.91 543 619 1.20
9. 80%–90% 398 442 0.96 698 804 1.29
10. 90%–100% 686 843 1.89 1283 1612.5 2.10
11. All classes 281 319 1.16 458 531 1.35
Source: NSSO: Estimated from Table No. P7: Comparison of average MPCE at constant prices over
rounds. NSS Report No. 508: Level and Pattern of Consumer Expenditure, 2004–2005.
• While, on an average, the growth in consumption expenditures over this period may
not appear too different for rural (CAGR—1.16 per cent) and urban (CAGR—1.35
per cent) population, the differences are noticeable if different MPCE-based percen-
tile groups of population are taken into consideration.
• For all percentile groups, except top 10 per cent in rural population between 1993–94
and 2004–05, CAGR has been around 1 per cent.
At the same time, the CAGR of the upper 50 percentile group in the urban population is con-
sistently above 1 per cent and higher when compared with those of the lower 50 percentile
urban population. It is also noticeable that while in urban population, a CAGR of more than
1 per cent is for the entire upper 50 percentile, only the uppermost 10 percentile group is
registering a CAGR of consumption (MPCE) above 1 per cent for rural population (refer to
Table 11.6). Further, the growth in consumption of the lower 40 percentile urban population
is consistently lower than its counterpart rural population.
Hence, the changes in MPCEs over this period within the urban population may have
been less uniform than in the rural population. (Rural–urban migration may be behind this
phenomenon as the influx of migrant population may be neutralising the rise in the average
incomes of the lower half of the urban population. At the same time, the migrant workers
may be sending back funds to support their poor families back home, thus raising the con-
sumption levels). This also signals the importance of programmes that improve the supply of
public goods and services to the urban poor (refer to Tables 11.7 and 11.8).
Table 11.7
Monthly Private
> Rural Urban
Consumption NSS Rounds 66th 64th 55th 66th 64th 55th
Expenditure (Percentage Average monthly per capita expenditure as % of total MPCE*
Distribution)
Consumption Items
Food 53.60 52.30 59.40 40.70 39.60 48.10
Cereals 15.60 16.10 22.20 9.10 8.90 12.40
Gram 0.20 0.10 0.10 0.10 0.10 0.10
Cereal Subsidies 0.10 0.10 0.10 0.05 0.03 0.04
Pulses and 3.70 3.10 3.80 2.70 2.10 2.80
Products
Milk and Products 8.60 7.80 8.80 7.80 7.20 8.70
Edible Oil 3.70 4.30 3.70 2.60 3.20 3.10
Meat, Egg and Fish 3.50 3.40 3.30 2.70 2.70 3.10
Vegetables 6.20 6.30 6.20 4.30 4.40 5.10
Fruits and Nuts 1.60 1.80 1.70 2.10 2.10 2.40
Sugar 2.40 1.60 2.40 1.50 1.00 1.60
Salt and Spices 2.40 2.30 3.00 1.50 1.50 2.20
Beverages, etc. 5.60 5.60 4.20 6.30 6.40 6.30
Non Food 46.40 47.70 40.60 59.30 60.40 51.90
Pan, Tobacco and 2.20 2.50 2.90 1.20 1.30 1.90
Intoxicants
(Continued)
Rural Urban < Table 11.7

(Continued)
NSS Rounds 66th 64th 55th 66th 64th 55th
Average monthly per capita expenditure as % of total MPCE*
Fuel and Light 9.50 9.70 7.50 8.00 8.50 7.80
Clothing 4.90 6.30 6.80 4.70 5.40 6.10
Footwear 1.00 0.90 1.10 0.90 1.00 1.20
Education 2.90 3.60 n.a 5.20 7.10 n.a
Medical 5.70 6.30 n.a 5.00 5.20 n.a
Conveyance 4.00 3.90 n.a 6.50 6.40 n.a
Durable Goods 4.80 3.60 2.60 6.70 4.20 3.60
Total 100.0 100.0 100 100.0 100.0 100.0
Total Expenditure 927.7 772.4 486.2 1,785.8 1,471.5 854.9
(`)
Note: 66th Round 2009–10; 64th Round 2007–08, 55th Round 1999–00
*MPCE: Monthly Per capita Income
Unit 2011 2001 1991 1981 1971 < Table 11.8

Rural Urban
Demography Disparity
Total National Mn 1,210 1,029 846 683 548
Population
Rural Population Mn 833 742 629 524 439
Proportion % 68.80 72.10 74.30 76.70 80.10
of Rural
Population
Literacy Rate
National % 74.00 64.80 52.20 43.57 34.45
Average
Male % 82.10 75.30 64.13 56.38 45.96
Female % 65.50 53.70 39.29 29.76 21.97
Rural % 68.90 59.40 44.70 36.00 27.90
Male % 78.60 71.40 57.90 49.60 48.60
Female % 58.80 46.70 30.60 21.70 15.50
Urban % 85.00 80.30 73.10 67.20 60.20
Male % 89.70 86.70 81.10 76.70 69.80
Female % 79.90 73.20 64.00 56.30 48.80
Income 2004–05 1999–00 1980–81 1970–71
NDP at Factor ` Crs 2,646,370 1,600,933 110,340 36,787
Cost at
Current Prices
(Continued)
Table 11.8
(Continued)
> Unit 2011 2001 1991 1981 1971
Rural ` Crs 1,269,717 769,967 65,004 22,937
Share of Rural % 48.00 48.10 58.90 62.40
Wages per 2009–10 2007–08 2005–06 2001–02
Worker
Rural `’000/Pa 66 54 45 42
Urban `’000/Pa 82 69 59 53
Banking 2011 2001 1979 1969
Benefits
Share of Rural % 9.20 14.70 11.30 6.40
in Total
Deposits
Share of Rural % 7.30 10.10 9.40 3.30
in Total Credit
Factors Responsible for Poverty

Poverty is widespread in India. The main factors responsible for this problem are stated as
follows:
Rapidly Rising Population

The population during the last 50 years has increased at the rate of 2.2 per cent per annum.
On average, 17 million people are added every year to its population which raises the demand
for consumption goods considerably.
Low Productivity in Agriculture

The level of productivity in agriculture is low due to subdivided and fragmented holding,
lack of capital, use of traditional methods of cultivation, illiteracy, and so on. This is the main
cause of poverty in the country.
Under-utilised Resources
The existence of underemployment and disguised unemployment of human resources and
low production in the agricultural sector. This brought down a fall in their standard of living.
Low Rate of Economic Development

The rate of economic development in India has been below the required level. Therefore,
there persists a gap between the levels of availability and the requirements of goods and
services. The net result is poverty.
Price Rise
The continuous and steep price rise has added to the miseries of the poor. It has benefitted
a few people in the society, and the persons in the lower-income group find it difficult to get
their minimum needs.
Unemployment
The continuously expanding army of unemployed is another cause of poverty. The job
seekers are increasing in number at a higher rate than the expansion in the employment
opportunities.
Shortage of Capital and Able Entrepreneurship

Capital and able entrepreneurship have an important role in accelerating the growth. But
these are in short supply making it difficult to increase the production significantly.
Social Factors
The social set up is still backward and is not conducive to faster development. Laws of inher-
itance, caste system, and traditions and customs are putting hindrances in the way of faster
development, and have aggravated the problem of poverty.
Political Factors
The Britishers started a lop-sided development in India and reduced the Indian economy to
a colonial state. They exploited the natural resources to suit their interests and, in turn, weak-
ened the industrial base of the Indian economy. In independent India, the development plans
have been guided by political interests. Hence, the planning is a failure to tackle the problems
of poverty and unemployment.
Measures to Reduce Poverty

Pandit Nehru has correctly observed, ‘In a poor country there is only poverty to redistribute’.
The following measures can go a long way to reduce poverty.
More Employment Opportunities

Poverty can be eliminated by providing more employment opportunities so that people may
be able to meet their basic needs. For this purpose, labour-intensive rather than capital-
intensive techniques can help to solve the problem to a greater extent. During the Sixth and
Seventh Five-Year Plan, the programmes like Integrated Rural Development Programme
(IRDP), Jawahar Rozgar Yojana, and Rural Landless Employment Guarantee Programme,
and so on have been started with a view to eliminate poverty in the rural sector.
Minimum Needs Programme

The programme of minimum needs can help to reduce poverty. This fact was realised in the
early 1970s as benefits of growth do not percolate to poor people, and less-developed coun-
tries (LDC) are left with no other choice except to pay a direct attention to the basic needs of
the lower strata of the society. In the Fifth Five-Year Plan, the Minimum Needs Programme
was introduced for the first time.
Social Security Programmes

The various social security schemes like Workmen’s Compensation Act, Maternity Benefit
Act, Provident Fund Act, Employees State Insurance Act, and other benefits in case of death,
disability, or disease while on duty can make a frontal attack on poverty.
Establishment of Small-scale Industries

The policy of encouraging cottage and small industries can help to create employment in
rural areas, especially in the backward regions. Moreover, this will transfer resources from
surplus areas to deficit areas, without creating much problem of urbanisation.
Upliftment of Rural Masses

As it is mentioned that India lives in villages, thus, various schemes for upliftment of the rural
poor may be started. The poor living in rural areas, generally, belong to the families of land-
less agricultural labourers, small and marginal farmers, village artisans, scheduled castes,
and scheduled tribes. However, it must be remembered that the Government of India has
introduced many schemes from time to time for the upliftment of the poor.
Land Reforms
Land reforms has the motto, ‘land belongs to the tiller’. Thus, legislature measures were
undertaken to abolish the Zamindari System. Intermediaries and ceiling on holdings were
fixed. But it is a bad luck that these land reforms lack a proper implementation. Even then,
it is expected that if these reforms were implemented seriously, it would yield better results,
which will be helpful to reduce the income of the affluent section.
Spread of Education
Education helps to bring out the best in human body, mind, and spirit. Therefore, it is urgent
to provide education facilities to all. The poor should be given special facilities of stipend, free
books, contingency allowance, and so on. Education will help to bring an awakening among
the poor and raise their mental faculty.
Social and Political Atmosphere

Without the active cooperation of citizens and political leaders, poverty cannot be eradicated
from India. A conducive, social and political atmosphere is a necessary condition for eradi-
cating the poverty from its root.
To Provide Minimum Requirements

Ensuring the supply of minimum needs to the poor sections of society can help in solving
the problem of poverty. For this, the public procurement and distribution system should be
improved and strengthened.
Poverty Alleviation Programmes

After the dawn of freedom, India got wedded to the goal of democratic set-up in the country.
Under the Directive Principles, it has been laid down that the State strives to promote the
Under the Directive Principles,
it has been laid down that the welfare of the people by securing and protecting, as effectively as it may, the social order in
State strives to promote the which justice, social, economic, and political—shall inform all the institutions of national
welfare of the people by secur- life. With this motto, the strategy of direct assault on poverty and inequality through rural
ing and protecting, as effective-
ly as it may, the social order in
development and rural employment programme has been adopted.
which justice, social, economic, The launching of the Community Development Programme (CDP) in 1952 was a land-
and political—shall inform all mark in the history of India, which ushered in an era of development with the participation
the institutions of national life. of people. It adopted a systematic integrated approach to rural development, with a hierarchy
of village-level workers and block-level workers drawn from various fields to enrich the rural
life. About 5,000 National Extension Service (NES) Blocks were created under the CDP by
the end of the Second Five-Year Plan. During the Third Five-Year Plan, the momentum was
maintained through a series of development schemes through allocations under the NES
programmes. This was succeeded by the Small Farmer’s Development Agencies followed by
Marginal Farmer’s Development Agencies, Crash Schemes for Rural Employment, Food-
for-Work Programme, Drought-Prone Areas Programme (DPAP), and Desert Development
Programme (DDP) in the early 1970s. Panchyati Raj for decentralised administration was
evolved by the Balwant Roy Mehta Committee in 1957. However, employment generation
and poverty alleviation programmes as follows are also implmented:
n Jawahar Gram Samridhi Yojana (JGSY): JGSY was introduced in April 1999 by
restructuring the Jawaliar Roazgar Yojana and is being implemented as a Centrally
sponsored scheme on a cost-sharing ratio of 75:25 between the Centre and the states.
The programme is implemented by Gram Panchayats, and works which result in cre-
ation of durable, productive community assets are taken up. The secondary, however,
is the generation of wage employment for the rural unemployed pool.
n Swarnjayanti Gram Swarozgar Yojana (SGSY): SGSY was launched with effect from
April 1, 1999, as a result of amalgamating certain erstwhile programmes, viz., IRDP,
Development of Women and Children in Rural areas (DVCRA), Training of Rural
Youth for Self-Employment (TRYSEM), Million Wells Scheme (MWS), and so on,
into a single self-employment programme. It aims at promoting micro-enterprises
and helping the rural poor into self-help groups (SHG). This scheme covers all
aspects of self-employment like organisation of rural poor into SHG and their
capacity-building, training, planning of activity clusters, infrastructure development,
financial assistance through bank credit, subsidy, and marketing support, and so on.
The scheme is being implemented as a Centrally sponsored scheme on a cost-sharing
ratio of 75:25 between the Centre and the states.
n Employment Assurance Scheme (EAS): EAS was started in October 1993 for imple-
mentation in 1778-identified, backward Panchayat Samitis of 257 districts situated in
dought-prone areas, desert areas, tribal areas, and hill areas in which the revamped
public distribution system was in operation. It was, subsequently, expanded by
1997–98 to all the 5,448 rural panchayat samitis of our country. It was restructured in
1999–2000 to make it a single-wage employment programme and implemented as a
Centrally sponsored scheme on a cost-sharing ratio of 75:25.
n Sampoorna Grameen Rozgar Yojana (SGRY): Launched with effect from September
2001, the scheme aims at providing wage employment in rural areas as also food
security, along with the creation of durable community, with social and economic
assets. The scheme is being implemented on a cost-sharing ratio of 75:25 between the
Centre and the states. The EAS and JGSY have been integrated within the scheme,
with effect from April 1, 2002.
n National Social Assistance Programme (NSAP): NSAP was introduced on 15 August,
1995 as a 100-per cent Centrally sponsored scheme for social assistance benefit to
poor households that are affected by old age, death of primary bread earner, and ma-
ternity care. The programme has three components, that is, National Old Age Pension
Scheme (NOAPS), National Family Benefit Scheme (NFBS), and National Maternity
Benefit Scheme (NMBS).
n Pradhan Mantri Gramodaya Yojana (PMGY): PMGY was introduced in 2000–01

with the objective of focusing on village-level development in five critical areas, that
is, Health, primary education, drinking water, housing and rural roads, with the over-
all objective of improving the quality of life of people in the rural areas.
n Pradhan Mantri Gram Sadak Yojana (PMGSY): PMGSY was launched on December
25, 2000, with the objective of providing road connectivity through good, all-weather
roads to all rural habitations with a population of more than 1,000 persons by the
year 2003 and those with a population of more than 500 persons by the year 2007. An
allocation of ` 2,500 crore has been provided for the scheme in 2001–02.
n Pradhan Mantri Gramodaya Yojana (Gramin Awas): This scheme is to be implement-
ed on the pattern of Indira Awas Yojana with the objective of a sustainable habitat
development at the village level and to meet the growing housing needs of the rural
poor.
n Pradhan Mantri Gramodaya Yojana—Rural Drinking Water Project: Under this pro-
gramme, a minimum 25 per cent of the total allocation is to be utilised by the respec-
tive states/union territories (UTs) on projects/schemes for water conservation, water
harvesting, water recharge, and sustainability of the drinking water sources in respect
of areas under DDP and DPAP.
n Swarna Jayanti Shahari Rozgar Yojana (SJSRY): The urban self-employment pro-
gramme and the urban wage-employment programme are two special schemes of the
SJSRY. Initiated in December 1997, it replaced various programmes operated earlier
for urban poverty alleviation. This is funded on a 75:25 basis between the Centre and
the states. During 2001–02, an allocation of ` 168 crore has been provided for various
components of this programme.
n Indira Awaas Yojana (IAV): This is a major scheme for construction of houses to be
given to the poor, free of cost. An additional component for conversion of unservice-
able kutcha houses to semi-pucca house has also been added. From 1999–2000, the
criteria for allocation of funds to states/UTs have been changed from poverty ratio to
equally reflect the poverty ratio and the housing shortage in the state. Similarly, the
criteria for allocation of funds to a district have been changed to equally relied SC/ST
population and the housing shortage.
n Samagra Awaas Yojana: This has been launched as a comprehensive housing scheme
in 1999–2000 on a pilot-project basis in one block, in each of 25 districts of 24 states
and in one UT, with a view to ensuring integrated provision of shelter, sanitation,
and drinking water. The underlying philosophy is to provide for convergence of the
existing housing, sanitation, and water-supply schemes with a special emphasis on
technology transfer, human resource development, and habitat improvement with
people’s participation.
n Food-for-Work Programme: This programme was initially launched with effect from
February 2001 for live months and was further extended. The programme aims at
augmenting food security through wage employment in the drought-affected rural
areas in eight states, that is Gujarat, Chattisgarh, Himachal Pradesh, Madhya Pradesh,
Maharashtra, Orissa, Rajasthan, and Uttranchal. The Centre makes available appro-
priate of food grains, free of cost, to each of the drought-affected states as an addition-
ality under the programme. Wages by the State government can be paid partly in kind
(up to 5 kg of food grains per man-day) and partly in cash. The workers are paid the
balance of wages in cash, such that they are assured of the notified minimum wages.
This programme stands extended up to March 31, 2001 in respect of notified ‘natural
calamity-affected districts’.
n Annapurna: This scheme came into effect from April 1, 2000 as a 100-per cent
Centrally sponsored one. It aims at providing food security to meet the requirement
of those senior citizens who, though eligible for pensions under theNOAPS, are not
getting the same. Food grains are provided to the beneficiaries at subsidised rates
of ` 2 per kg of wheat and ` 3 per kg of rice. The scheme is operational in 25 states
and 5 UTs. More than 6.08 lakh families have been identified and the benefits of the
scheme are passing on to them.
n Krishi Shramik Samajik Suraksha Yojana: The scheme was launched in July 2001 for
giving social security benefit to agricultural labourers on hire, in the age group of
18–60 years.
n Shiksha Sahayog Yojana: The scheme has been finalised for providing an educational
allowance of ` 100 per month to the children, of parents living below the PL, for their
education in classes from 9th Standard to 12th standard.
Poverty Alleviation Through

Micro-credit
All over the world, micro-credit is being recognised as an instrument of poverty alleviation. All over the world, micro-credit
About 30 years ago, the concept of micro-credit was unknown. Since then, its role in pov- is being recognised as an in-
erty alleviation and empowerment of the weaker sections has gained recognition in many strument of poverty alleviation.
About 30 years ago, the concept
developing countries and even in a few developed ones. Today, it is active in more than 100 of micro-credit was unknown.
countries and is said to have helped more than 100 million people to take steps to reduce
poverty.
In the recent years, the World Bank and the International Finance Corporation (IFC)
have also participated in the promotion of micro-finance. Of course, the Bank’s role has
been much bigger in this endeavour. It has targeted the firms, financial and social protection
sectors, in many developing countries. The World Bank Group’s portfolio in micro-finance The World Bank Group’s port-
initiatives has risen to over $1 bn in recent years. folio in micro-finance initiatives
has risen to over $1 bn in re-
cent years.
Indian Experience
A significant feature of the micro-finance movement in India is that it has relied heavily on A significant feature of the
the existing banking infrastructure, in the process, obviating the need for a new institutional micro-finance movement in
set-up. Most of the leading practitioners of micro-finance activities follow the Grameen India is that it has relied heav-
model. Banks lend micro-credit through SHGs to local micro-finance institutions (MFIs) ily on the existing banking
infrastructure, in the process,
that have contacts in small villages. obviating the need for a new
India’s bank–SHG link programme is now the biggest in the world. According to the institutional set-up.
RBI Annual Report 2005–06, the cumulative number of SHGs linked to banks stood at
2.2 million, with total bank credit to these SHGs at ` 11,398 crore. The 2006–07 Budget envis-
ages the banking industry to credit link another 385,000 SHGs in 2006–07. Some 30 million
women have reportedly formed 2.2 million small businesses so far, and another four lakh are
expected to be in place by March 2007, according to the National Bank of Agriculture and
Rural Development (NABARD).
Of late, some of the leading Of late, some of the leading commercial banks, such as ICICI Bank, HDFC Bank, UTI
commercial banks, such as ICI- Bank, and the State Bank of India, have begun focusing on this sector, rather aggressive-
CI Bank, HDFC Bank, UTI Bank, ly. Even some of the multinational banks operating in India, such as ABN Amro, Standard
and the State Bank of India,
have begun focusing on this
Chartered, HSBC, and Citibank, have moved into the sector. There is a growing realisation
sector, rather aggressively. among the commercial banks that micro-finance is a bankable proposition.
The award of the Nobel Peace Prize to Prof. Yunus and Grameen Bank is expected to
The award of the Nobel Peace provide a big boost to micro-finance activities in India. ICICI Bank, which has emerged as
Prize to Prof. Yunus and Gra- an active and innovative player in the micro-finance segment, has now joined hands with
meen Bank is expected to
provide a big boost to micro- Grameen Foundations, the United States and ITCOT Consulting to set up Grameen Capital
finance activities in India. India (GCI). It has already approached the Reserve Bank of India, seeking a licence for a non-
banking finance company (NBFC).
Suggestions
Clearly, a multi-pronged approach is required to solve the pervasive imbalances in the bank-
ing services.
Firstly, banks especially the 1. Firstly, banks especially the PSBs, must be constantly encouraged to extend
PSBs, must be constantly small loans to the poor. Many private and foreign banks are rapidly increasing
encouraged to extend small their rural banking activities. For instance, ICICI Bank has doubled the size of its
loans to the poor.
rural banking activities to about ` 157 crore and has outstanding micro-loans of
` 2,475 crore. ABN Amro began its micro-finance operations in September 2003
and has 24 Indian partners and ` 10.3 crore as outstanding loans in this sector.
What is more, banks view micro-credit operations as a lucrative business opportu-
nity. They believe that the sheer volumes of the micro-loans market will, in the long
term, make up for the low interest charges (9.5 per cent is the lending cap for loans
up to ` 2 lakh).
Secondly, banks must also be 2. Secondly, banks must also be actively encouraged to lend to the poor through
actively encouraged to lend to intermediaries such as MFIs and SHGs. This has been a huge success in neighbouring
the poor through intermediaries Bangladesh, and there is no reason why the same would not hold true for India as
such as MFIs and SHGs. well. This approach is all the more important as it entails an average default rate of a
mere 3 per cent.
Thirdly, and most importantly,
all such measures must be 3. Thirdly, and most importantly, all such measures must be complemented by a large
complemented by a large gov- government intervention in the form of land reforms, provision of irrigation facilities,
ernment intervention in the
form of land reforms, provision crop insurance, and better physical infrastructure.
of irrigation facilities, crop in-
surance, and better physical
infrastructure.
Outlook for Poverty Alleviation
Eradication of poverty in India can only be a long-term goal. Poverty alleviation is expected
to make a better progress in the next 50 years than in the past, as a trickle-down effect of the
Increasing stress on education, growing middle class. Increasing stress on education, reservation of seats in the government
reservation of seats in the gov- jobs, and the increasing empowerment of women and the economically weaker sections of
ernment jobs, and the increas-
society, are also expected to contribute to the alleviation of poverty. It is incorrect to say that
ing empowerment of women
and the economically weaker all poverty-reduction programmes have failed. The growth of the middle class (which was
sections of society, are also virtually non-existent when India became a free nation in August 1947) indicates that eco-
expected to contribute to the nomic prosperity has, indeed, been very impressive in India, but the distribution of wealth
alleviation of poverty.
is not at all even.
After the liberalization process and moving away from the socialist model, India is After the liberalization process
adding 60 million to 70 million people to its middle class every year. Analysts such as, the and moving away from the
founder of ‘Forecasting International’, Marvin J. Cetron writes that an estimated 390 million socialist model, India is adding
60 million to 70 million people
Indians now belong to the middle class where one-third of them have emerged from poverty to its middle class every year.
in the last 10 years. At the current rate of growth, a majority of Indians will be middle-class
by 2025. Literacy rates have risen from 52 per cent to 65 per cent during the initial decade of
liberalization (1991–2001).
Controversy over the Extent of

Poverty Reduction
While the total overall poverty in India has declined, the extent of poverty reduction is often
debated. While there is a consensus that there has not been an increase in poverty between
1993–94 and 2004–05, the picture is not so clear if one considers other non-pecuniary di-
mensions (such as health, education, crime, and access to infrastructure). With the rapid With the rapid economic growth
economic growth that India is experiencing, it is likely that a significant fraction of the rural that India is experiencing, it
population will continue to migrate towards cities, making the issue of urban poverty more is likely that a significant frac-
tion of the rural population will
significant in the long run. continue to migrate towards cit-
Economist Pravin Visaria has defended the validity of many of the statistics that dem- ies, making the issue of urban
onstrated the reduction in the overall poverty in India, as well as the declaration made by poverty more significant in the
India’s former Finance Minister Yashwant Sinha that poverty in India has reduced signifi- long run.
cantly. He insisted that the 1999–2000 survey was well-designed and supervised and felt that,
just because they did not appear to fit the preconceived notions about poverty in India, they
should not be dismissed outright. Nicholas Stern, the Vice President of the World Bank, has
published defenses of the poverty-reduction statistics. He argues that increasing globalisa-
tion and investment opportunities have contributed significantly to the reduction of poverty
in the country. India, together with China, has shown the clearest trends of globalisation with
the accelerated rise in the per-capita income.
A 2007 report by the State-run
A 2007 report by the State-run NCEUS found that 77 per cent of Indians, or 836 million NCEUS found that 77 per cent
people, lived on less than ` 20 per day (US$ 0.50 nominal, US$ 2.0 in PPP), with most work- of Indians, or 836 million peo-
ing in ‘informal labour sector with no job or social security, living in abject poverty’. ple, lived on less than ` 20 per
day (US$ 0.50 nominal, US$ 2.0
in PPP), with most working in
‘informal labour sector with no
Mckinsey Global Institute (MGI) job or social security, living in
abject poverty’.
Report on poverty in India
McKinsey & Company in India
McKinsey & Company is a management consulting firm that helps leading corpora-
tions and organizations make distinctive, lasting, and substantial improvements in their
performance. Over the past eight decades, the firm’s primary objective has remained con-
stant: to serve as an organization’s most trusted external adviser on critical issues facing
senior management.
McKinsey advises companies on strategic, operational, organizational, and technological
issues. The firm has extensive experience in all major industry sectors and primary function-
al areas as well as in-depth expertise in high priority areas for today’s business. McKinsey &
Company was established in 1926 and has 102 offices in more than 60 countries.
Report
• 680 million Indians cannot meet their essential needs.

• 580 million people can be economically empowered by 2022.
• 115 million additional non-farm jobs needed over the next decade.
• ¾ of the potential impact will come from jobs and productivity growth.
• 46% of basic services are not within reach for the average household.
• ~50% of public spending on basic services does not reach the people.
• 70% increase needed in agricultural yields over the next decade.
• 50% of public social spending is needed for healthcare, water, and sanitation, up from
20% today.
Long considered an immutable fact of life in India, extreme poverty is finally in retreat. India
launched its first wave of economic reforms in the early 1990s, resulting in a decline in the
official poverty ratio from 45 per cent in 1994 to 37 per cent in 2005. Over the next seven
years, a period in which India achieved the fastest rate of economic growth in its history and
also implemented a number of policies aimed at helping the poor, extreme poverty declined
rapidly to 22 per cent of the population, or some 270 million people.
This is an achievement to be celebrated—and yet now is an opportune time to set higher
aspirations. The government’s poverty line sets a fair benchmark for extreme poverty, but it
counts only those living in the most abject conditions. Even a cursory scan of India’s human
development indicators suggests more widespread deprivation in terms of quality of life and
access to basic services. Above and beyond the goal of eradicating extreme poverty, India
can address these issues and create a new national vision for helping more than half a billion
people build a more economically empowered life.
This topic has been the subject of a national debate that has stretched well beyond aca-
demic and policy circles. To advance the thinking around this issue, the McKinsey Global
Institute (MGI) has created a new analytical framework—one rooted in sound economic
methodology and utilizing published government data—to define a minimum acceptable
standard of living. The result is the Empowerment Line, a holistic measure of income-based
deprivation, which this report applies to the Indian context.
While India’s official poverty line focuses on extreme poverty, the Empowerment Line
poses an entirely different question: what is the level of consumption required for an indi-
vidual to meet the necessities of human development? To answer this, we estimate the cost
of fulfilling eight basic household needs (food, energy, housing, drinking water, sanitation,
health care, education, and social security) at a level sufficient to achieve a decent, if modest,
standard of living rather than just bare subsistence.
In applying this metric for 2011–12, we find that 56 per cent of India’s population lacks
the means to meet their essential needs. By this measure, some 680 million Indians are
deprived—more than 2.5 times the population of 270 million below the official poverty line.
Hundreds of millions have exited extreme poverty, but their lives are still marked by a con-
tinuous struggle to achieve a modicum of dignity, comfort, and security. The Empowerment
Gap, or the additional consumption required to bring these 680 million people to the level of
the Empowerment Line, equates to 4 per cent of GDP. The cost of bridging this gap is seven
times higher than the cost of eliminating poverty based on the official poverty line.
The Empowerment Line is a measure of individual consumption, yet the ability or
willingness to spend money is not wholly sufficient to guarantee a decent quality of life.
In addition to having sufficient income, households need physical access to affordable basic
services of acceptable quality. Their own purchasing power can meet some needs, such as
food and energy, but they also require access to community-level social infrastructure such
as health clinics and schools. Therefore, to complement the Empowerment Line, we intro-
duce a second parameter to measure this: the Access Deprivation Score (ADS), which cap-
tures the availability of basic services at the national, state, or even the district level. The ADS
metric reveals that, on average, Indian households lack access to 46 per cent of the basic
services they need.
In seeking solutions, a look at the past is revealing. Three-quarters of the reduction in
the Empowerment Gap achieved from 2005 to 2012 was due to rising incomes, while one-
quarter was due to increased government spending on basic services. The contribution of
rising incomes could have been even higher, however, if India had created non-farm jobs at
a faster pace and boosted agricultural productivity—and the recent economic slowdown has
stalled further progress on these fronts. Although government spending on basic services
increased rapidly during this period, its impact was also dampened by inefficient programme
delivery. In fact, by our estimates, half of what was spent did not produce better outcomes for
the poor. India’s ability to further increase social spending is also coming under pressure, as
slowing economic growth limits the available fiscal resources.
If India’s recent weak economic momentum persists in the coming decade, in what we
have termed the ‘stalled reforms scenario’, some 470 million people, or 36 per cent of India’s
population, would remain below the Empowerment Line in 2022 and as much as 12 per cent
would remain below the official poverty line.
But our research outlines a more ambitious yet economically sound path of ‘inclusive
reforms’—one based on a vision for delivering a better life to the average Indian citizen by
2022. This scenario can be achieved by launching a virtuous cycle of job creation and pro-
ductivity growth that raises incomes and generates resources for public spending; it also in-
volves making the delivery of basic services more effective. This has the potential to leave
100 million people (7 per cent of the population) below the Empowerment Line in 2022,
and just 17 million (1 per cent of the population) below the official poverty line. All told,
more than half a billion Indians could cross the threshold of consumption required for an
economically empowered life. Access to basic services, too, would vastly improve, with access
deprivation falling from 46 per cent in 2012 to just 17 per cent in 2022.
Merely increasing government subsidies can achieve only a fraction of this goal, however.
Our estimates indicate that as in the past, almost three-quarters of the potential impact of
raising people above the level of the Empowerment Line depends on unlocking investment,
job growth, and productivity. More public spending alone, without addressing issues of waste
and inefficiency, is likely to deliver at most 8 per cent of total potential impact.
The importance of this message cannot be overstated. Government spending is criti-
cal to ensure access to basic services, but simply channelling more money into the same
programmes without addressing their operations and outcomes will deliver very little. It is
within India’s grasp to bring the share of the population below the Empowerment Line to
single-digit levels and virtually eradicate extreme poverty by 2022—but doing so will require
policy makers at all levels of government to focus on an agenda that emphasises job creation,
growth oriented investment, farm sector productivity, and more innovative delivery of social
programmes.
While the framework and funding would fall to the central government, many of the
specific initiatives that would make this agenda a reality can be implemented at the state level.
The only requirements are political will and a relentless focus on results—and with these
building blocks in place, India could realise its long-held goal of providing all its citizens with
basic dignity and economic opportunity.
The Empowerment Line Reveals that 56 per cent of India’s Population

Lacks the Means for a Minimum Acceptable Standard of Living
A new and more holistic measure of income deprivation, the Empowerment Line is an esti-
mate of the minimum economic cost for a household to fulfil eight basic needs: food, energy,
housing, drinking water, sanitation, health care, education, and social security (Exhibit E1).
This research calculates the level of consumption required to meet these needs in India, as-
suming that infrastructure and access points are available at an efficient cost. This measure-
ment can form the basis for a new national vision of a better standard of living for all citizens.
In looking at what constitutes an acceptable living standard, the Empowerment Line
considers human development and applies externally defined norms to set the standards for
each basic need. Overall, the Empowerment Line’s minimum standards of consumption are
approximately 1.5 times higher than those implicit in the official poverty line. Consumption
requirements for health (including drinking water and sanitation) and education are 5.5 and
3.8 times higher, respectively, reflecting the minimum cost of meeting these essential needs.
After taking into account the value of government spending on basic services that already
reaches the people, we calculate India’s Empowerment Line at ` 1,336 per capita per month,
or almost ` 6,700 for a family of five per month. As of 2012, the consumption levels of almost
680 million people across both urban and rural areas of the country fell short of this mark.
This far outstrips the 270 million Indians below the official poverty line.
At a more detailed level, the Empowerment Line is set some 38 per cent higher for
urban India than for rural India. Based on this benchmark, 171 million urban residents (or
44 per cent of the urban population) were below the Empowerment Line, compared with
509 million rural residents (or 61 per cent of the rural population).
The Empowerment Line reveals that the challenge of improving people’s lives in a fun-
damental and more lasting way is much greater than the challenge of eradicating official
poverty. The Empowerment Gap, or the difference between each person’s current consump-
tion and the levels called for in the Empowerment Line, is about ` 332,000 crore ($69 billion)
Exhibit E1
Eight Basic Services
> Insurance to cover income
loss based on 2%
2,100 (urban) or 2,400 (rural)
calories, including 60 grams protein
premium-to-coverage ratio and 40 grams fat, per capita per day1
Contribute to a
Minimum Acceptable
Standard of Living Access to primary education Social
Food Access to clean cooking
and secondary education security
fuel and electricity for
(substitutable with lighting needs, based on
vocational training) for all minimum energy
children based on Education Energy
consumption levels
accepted norms
Basic
services
Access to an essential Health care Housing 215 (rural) or 275 (urban)

basket of primary, secondary, square feet of acceptable
and tertiary health-care housing
services Drinking
Sanitation
water
Sanitary latrine in rural households, 70 (rural) or 135 (urban)

and underground sewerage with litres per capita per day of
wastewater treatment in urban households piped water supply2
1. Protein and fat norms for adults.
2. Drinking water encompasses water for household uses as well as for personal consumption.
Source: McKinsey Global Institute analysis.
Average monthly consumption expenditure

INR per capita per month, 2011–12, in 2011–12 prices < Exhibit E2
The Empowerment Gap,
3,000 at ` 332,000 Crore
($69 billion), is Seven
2,500 Times Larger than the
Poverty Gap
2,000
Empowerment gap1
1,500 INR 332,000 crore ($69 billion)2
Empowerment line
Below empowerment line 1,336
1,000 56% (680 million people)
Official poverty line
874
500 Below poverty line
Poverty gap1
INR 50,000 crore ($10 billion)2 22% (267 million people)
0
0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90
Percentile of population (%)
1. T he Empowerment Gap and the poverty gap are defined as the aggregate differential between actual
private consumption expenditure and the consumption requirements of the Empowerment Line and
the poverty line, respectively.
2. Using average exchange rate of $1 = INR 48.0769 for April 2011–March 2012.
Source: National Sample Survey Office survey, 68th round; McKinsey Global Institute analysis.
per year, or 4 per cent of GDP. This is seven times larger than the ` 50,000 crore ($10 billion)
poverty gap (that is, the difference between the current consumption of India’s officially poor
and the level implicit in the government’s poverty line, shown in Exhibit E2).
But the challenge of bridging the Empowerment Gap is more complex than simply rais-
ing public spending by an additional 4 per cent of GDP. In reality, it will require investing
substantially more in order to fill gaps in infrastructure and access to basic services over a
sustained period of time—and these basic services will have to be operated more effectively
to extend their benefits to the maximum number of people. We estimate that on average,
Indians lack access to 46 per cent of the services they need and that just 50 per cent of govern-
ment spending actually reaches the people.
Rising Incomes Drove Three-Quarters of India’s Past Reduction in the

Empowerment Gap, While More Government Spending Drove the Rest
From 2005 to 2012, the head count of people below the Empowerment Line fell by 183 million,
as India’s economy grew at a rapid pace of 8.5 per cent per year. Rising personal incomes
associated with economic growth produced three quarters of the drop in the Empowerment
Gap. The remaining one-fourth was driven by an expansion of public spending on basic
services. Even for those below the official poverty line, who typically reap greater benefit
from public spending, rising incomes drove 66 per cent of the reduction in the Empower-
ment Gap. However, both of these trends could have delivered much more impact.
Despite rapid GDP growth, the majority of India’s labour force remains engaged in low-
productivity activities. Almost 60 per cent of those who live below the Empowerment Line
derive most of their livelihood from agriculture, but India’s land productivity is just half
that of other emerging Asian countries. A faster shift of labour from farm to non-farm jobs
(matching China’s pace) could have lifted 100 million more people above the Empowerment
Line from 2005 to 2012. Today there are too few job opportunities outside the farm sector, a
factor that limits the economic opportunities available to women in particular. In fact, just
Exhibit E3
India’s Manufacturing
> Share of manufacturing employment by firm size, 2009
%
200+ employees 11
Sector is Characterised 50–199 employees 6 23 29
by a Glut of Sub- 42
52
8
Scale, Low-Productivity 6
Enterprises
13
1–49 employees 84
70 65 23
46
25
India Philippines Indonesia Thailand China
Value add per worker, 20051

$ thousand per year
Businesses with 13.1 14.0 12.4 13.1 31.1
200+ employees
Businesses with 1.5 3.2 2.3 5.7 15.1
5–49 employees2
1. Both manufacturing and services businesses.

2. Productivity data is only for small enterprises (i.e., 5–49 employees) and does not include micro
enterprises (i.e., 1–4 employees).
Note: Numbers may not sum due to rounding.
57 per cent of India’s working-age population participates in the labour force—well below the
norm of 65 to 70 per cent in other developing countries.
India’s labour productivity also lags due to the high prevalence of unorganized and
sub-scale businesses. Enterprises with fewer than 49 workers accounted for 84 per cent of
India’s manufacturing employment in 2009, compared with 70 per cent in the Philippines,
46 per cent in Thailand, and a mere 25 per cent in China. Tiny enterprises in India, across
both manufacturing and services, typically have just one-eighth the productivity of larger
enterprises with more than 200 workers (Exhibit E3).
Meanwhile, government spending on basic services rose at 11 per cent per year in real
terms, faster than GDP, from 2005 to 2012, but it did not fully translate into benefits for the
poor. Our estimates, based on published government data, indicate that approximately half
of India’s total public spending on basic services did not produce the desired results, with
much of it lost to inefficiency or corruption (Exhibit E4). Some 35 per cent of India’s food
subsidy, for instance, did not reach consumers, and the poorest population segments received
less than 40 per cent of the subsidy intended for them despite the fact that they account for
80 per cent of the hunger gap.
Apart from leakage and waste, the quality of services is also lacking. State-run schools
and health centres produce weak learning and health outcomes—in fact, our analysis of
relative efficiency across India’s states indicates that the same outcomes could have been
achieved with half the level of spending on education and about one-third of the spending
on health. These inefficiencies represent a tragically lost opportunity: if subsidies and social
programmes had been 75 per cent effective in reaching the poor, approximately matching
the level of effectiveness already achieved in India’s best-performing states, an additional
85 million people (7 per cent of the population) could have moved out of extreme poverty
from 2005 to 2012.
Public spending on basic services, 2012

100% = INR 570,000 crore
Estimated efficiency/effectiveness of government spending
% of spending that typically reaches the people
< Exhibit E4
Currently, Some
Spending
reaching
50 per cent of Public
Food1 64 Spending on Basic
the people
50 Services does not Reach
MNREGA2 52 the People Because
of Inefficiencies in
Education
(until secondary)
51 Governance and
Execution
50 Fuel 47
Inefficiencies Health, family welfare,

and leakages drinking water, 36
and sanitation
INR 285,000 crore not reaching
the intended beneficiaries
1. F or people below official poverty line, only 36% of food subsidy reached the intended beneficiaries in
2009–10.
2. Mahatma Gandhi National Rural Employment Guarantee Act.
Source: National Sample Survey Office; government fiscal statistics; McKinsey Global Institute analysis.
While Health Care is a Critical Gap Across the Board, Hunger is a Dominant
Issue for the Poorest and Housing is a Growing Need in Urban Areas
Because the poor cannot be painted with a single brush, the Empowerment Line offers a more
nuanced view of how deprivation is experienced. We define three segments of the population
according to their depth of poverty (Exhibit E5). Some 57 million Indians are classified as
‘excluded’; they are the poorest of the poor, unable to afford minimal food, shelter, and fuel.
India’s population and empowerment gap by segment, 2011–121

%
< Exhibit E5
There are Three Distinct
INR 332,000 cr. Ratio of empowerment Segments below the
100% = 1.2 billion ($69 billion2) line to average MPCE3 Empowerment Line
0
38 1.4x
Empowered 44
Vulnerable 34 46 1.9x
Impoverished 17
17 2.6x
Excluded 5
Population below the Empowerment gap1
empowerment line
1. T he Empowerment Gap is defined as the aggregate differential between actual private consumption
expenditure and the Empowerment Line.
2. Using average exchange rate of $1 = INR 48.0769 for April 2011–March 2012.
3. Monthly per capita expenditure.
Source: National Sample Survey Office survey, 68th round; Oanda; McKinsey Global Institute analysis.
An additional 210 million are ‘impoverished’, with consumption above bare subsistence levels
but still below the official poverty line. Just above the official poverty line, some 413 million
Indians are ‘vulnerable’. They have only a tenuous grip on a better standard of living; shocks
such as a lost job or a bout of illness can easily push them back into extreme poverty.
The needs of all three segments are critical to address. The excluded are in desperate
circumstances and require immediate help. The impoverished, who represent almost half of
India’s Empowerment Gap, would benefit from better management of existing programmes
targeted to those below the official poverty line. Finally, designing policies to address the
needs of the vulnerable segment will become increasingly important over time, as more
people exit extreme poverty but find themselves stuck in the ranks of the vulnerable.
Health care, clean drinking water, and sanitation are critical gaps for all of these groups,
whether in urban or rural India. These basic services make up the largest share (39 per cent)
of the cumulative Empowerment Gap of ` 332,000 crore ($69 billion). However, the pattern
of needs varies by segment. The most urgent unmet needs of the excluded and impoverished
are hunger and health, while health, education, and housing are major issues for the vulner-
able. Urban Indians, while less prone to being impoverished or excluded, are almost as likely
to fall into the vulnerable category as rural residents, and affordable housing is a significant
unmet need for them.
Apart from Income-Based Deprivation, India’s People also Lack Access to

46 per cent of the Basic Services they Require
When it comes to the availability of social services, geography is destiny for those below the
Empowerment Line. Patterns of deprivation are more complex and multi-dimensional than
what is implied by income or consumption measures alone. Even for households of similar
income levels, the actual experience of poverty varies dramatically based on where they live.
The availability of well-run social infrastructure and free or low-cost services in the vicinity
of the poor is a crucial determinant of their quality of life. MGI has constructed the Access
Deprivation Score (ADS) to capture this factor. It supplements the income-based measure of
the Empowerment Line by highlighting geographical gaps in access to basic services.
Using the ADS, we map India’s 640 districts into five distinct archetypes based on their
relative levels of access to schools, health centres, drinking water, sanitation, and improved
energy sources (Exhibit E6). The ADS for each district measures the extent to which these
basic services are absent relative to the aspired levels of coverage. Nationwide, the gap is
46 per cent, but the range is wide: people living in the Most Deprived Districts may lack
access to almost 60 per cent of basic services, while those in the Least Deprived Districts
lack access to about 34 per cent.
Based on cross-sectional data for 640 districts in 2010, we find that residents of India’s
more prosperous districts are more likely to be able to afford household level services that
they can purchase themselves (by building toilets in their homes, drilling tube wells, or us-
ing liquefied petroleum gas-based cooking stoves, for instance). However, the positive effect
of income is muted when it comes to education and health care. In India’s largest and most
crowded cities (which are classified as Community Services–Deprived Districts), residents
have higher purchasing power, but that does not mitigate the difficulty of obtaining afford-
able medical care and quality education. The expansion of social infrastructure has not kept
pace with growing population density.
The utilisation of health and education services, as measured in the ADS, seems to go
hand in hand with greater levels of grassroots community involvement, especially by women.
In fact, some of the poorest districts by income fare significantly better on access to health
care and education than would be expected at their income levels if they also post stronger
indicators for women’s empowerment.
2011
< Exhibit E6
Each of India’s Districts
Most Deprived
126 districts
Falls into One of Five
27% population share Categories Based on
Average ADS1: 59 per cent the Extent and Pattern
of Deprivation Found
Household Services Deprived There 2011
177 districts
18% population share
Average ADS: 49 per cent
Moderately Deprived
127 districts
Community Services Deprived

59 districts
Least Deprived
151 districts
1. Access Deprivation Score: distance of each district from the point of no deprivation.
Source: Census 2011; District-level Health Survey, 2007–08; District Information System for Education,
2009–10; National Sample Survey Office survey, 2011–12; India state of forest report 2011, Ministry of
Environment and Forests; McKinsey Global Institute analysis.
India Can Bring More than 90 per cent of its People above the
Empowerment Line in Just a Decade by Implementing Inclusive Reforms
We have developed two scenarios to see how rapidly India can raise people to the standards
of living implied by the Empowerment Line. The first, which we call ‘stalled reforms’, assumes
that no bold policy measures are taken and that slow economic growth continues. The second
considers an alternative path of ‘inclusive reforms’.
In the stalled reforms scenario, poverty is likely to maintain its grip on a large share of
India’s population. India’s economic engine has been sputtering since 2011, and there has
been a growing sense of legislative and administrative paralysis. In the absence of major
reforms, the scenario assumes that India’s GDP grows at just 5.5 per cent from 2012 to 2022
and that the effectiveness of social spending remains unchanged.
In such a scenario, some 470 million Indians (36 per cent of the population) would re-
main below the Empowerment Line in 2022, and 12 per cent of the population would still be
trapped below the official poverty line. At this rate, the goal of eliminating extreme poverty
would not be reached until the mid-2030s. The lack of decisive reforms also makes it unlikely
that India would convincingly address gaps in access to social infrastructure. Lower GDP
growth implies lower fiscal resources, limiting public spending for basic services. As a result,
India’s access deprivation would only come down to 26 per cent by 2022.
The path of inclusive reforms envisages a far more positive alternative, one in which the
nation takes steps to stimulate investment, job creation, and farm productivity, as well as
dramatically improve the delivery of basic services. These reforms could potentially allow
India to achieve an average GDP growth rate of 7.8 per cent between 2012 and 2022. This
could lift 580 million people above the Empowerment Line, leaving 100 million (7 per cent
of the population) below it in 2022 and 17 million (just 1 per cent) below the official poverty
line—virtually eliminating extreme poverty in just a decade.
The higher GDP growth inherent in the inclusive reforms scenario generates more tax
revenue that can be ploughed back into spending for basic services—and it simultaneously
ensures that India meets its fiscal objectives more quickly. To achieve this goal, India will
need to increase its investment rate from nearly 36 per cent of GDP since 2005 to an average
of 38 per cent over the next ten years. The combination of higher investment, faster economic
growth, and increased tax revenue could allow India to bring its fiscal deficit to 6 per cent of
GDP from 2017 onward while enabling a moderate but steady increase in social spending,
in line with GDP growth, that could bring access deprivation in basic services down from
46 per cent to just 17 per cent. Although these goals are aspirational, they are feasible based
on successes already demonstrated by India’s better-performing states.
FOUR CRITICAL ELEMENTS ARE KEY TO THE

PATH OF INCLUSIVE REFORMS
The inclusive reforms scenario hinges on four key elements (Exhibit E7):
• Accelerating job creation. India needs reforms that unlock the economy’s potential
to add 115 million non-farm jobs by 2022 (about 40 million more than the stalled re-
forms scenario would generate). This would absorb the expected growth of 69 million
in the working-age population, raise the labour force participation rate by some 2
to 3 percentage points, and reduce the share of farm jobs from 49 per cent of total
employment in 2012 to 37 per cent in 2022. Construction will need to be the big-
gest contributor, adding some 50 million jobs. The manufacturing sector will need to
accelerate growth to create some 21 million to 27 million jobs, while some 35 million
to 40 million jobs will need to come from the services sector.
• Raising farm productivity. Increasing investment in agricultural infrastructure,
research, and extension services can help raise the average farm yield per hectare
from 2.3 tonnes in 2012 to about 4.0 tonnes in 2022. This would bring India’s yields in
line with those in other emerging Asian countries. Gains in agricultural productivity
would also accelerate the transition of labour to more productive non-farm jobs.
• Increasing public spending on basic services. India cannot fully realize the poten-
tial of its human capital until its population has wider access to affordable basic serv-
ices. In absolute, real terms, public spending on social services needs to nearly double
from ` 570,000 crore ($118 billion) in 2012 to ` 1,088,000 crore ($226 billion) in 2022
to fill critical gaps in social infrastructure. This entails an annual real growth rate
of about 6.7 per cent in public spending for basic services (which is actually lower
than the 11 per cent annual rate of increase from 2005 to 2012). If India can achieve
the higher rates of economic growth assumed in the inclusive reforms scenario, this
would continue to represent about 6 per cent of GDP. The share allocated to health,
water, and sanitation services, however, needs to increase from 21 per cent in 2012
to nearly 50 per cent of total social spending in 2022. Just as expanding access to
primary education was given top priority in the past decade, India needs a concerted
push to build more extensive health-care infrastructure in the decade ahead.
• Making basic services more effective. The impact of higher public spending on
basic services is magnified if more of that spending reaches its intended beneficiaries.
Four areas of reform 2012 2022E Stalled reforms 2022E Inclusive reforms < Exhibit E7
Pursuing Inclusive
Create new non-farm jobs Increase farm productivity
Reforms in Four Key
Million Yield (tonnes per hectare) 5.5%
+115 Areas can Achieve
352 p.a. 3.9
+75
312 2.0%
Faster GDP Growth and
p.a. 2.8 Unprecedented Poverty
237
2.3 Reduction
Increase public spending on basic services Improve effectiveness of public spending

INR thousand crore, 2012 rupees %
6.7% 25
p.a. 1,088 p.p. 75
3.1%
p.a. 771 50 50
570
Faster poverty reduction and GDP growth

Head-count ratio BEL1 GDP growth rate Compound annual
% of population BPL2 % growth rate
56 10 Inclusive
9 reforms
36 8 7.8%
22 7
12 6 Stalled
7 reforms
1 5
2012 2022E Stalled 2022E Inclusive 0 5.5%
reforms reforms 20133 2017 2022E
1. Below Empowerment Line.

2. Below official poverty line.
3. GDP growth of 5% in 2012–13 based on provisional estimates.
The inclusive reforms scenario assumes that the nation as a whole can raise the effec-
tiveness of social spending from 50 per cent to at least 75 per cent by 2022, matching
the levels already demonstrated by India’s best-performing states. If India increases
funding for basic services but does not improve on this current performance, nearly
` 545,000 crore ($113 billion) of social service spending will fail to reach intended
beneficiaries in 2022, up from about ` 285,000 crore ($59 billion) today. Best prac-
tices and innovative examples from around the world (and from pilot programmes
within India itself) show how this can be done. Some of the most promising strategies
include forming partnerships with the private and social sectors, mobilising commu-
nity participation, and using technology to streamline and monitor operations.
While all four of the levers are essential, a surge in job creation would make the larg-
est potential contribution to poverty reduction. In fact, job growth in non-farm sectors
Exhibit E8
Productivity
> % of population Contribution to
poverty reduction
Improve
Improvements and Increase public effectiveness
Public Provision of Basic Population Create new Increase farm spending on of public Population
Services Contribute in share, 2012 non-farm jobs productivity basic services spending share, 2022E
Different Proportions 22 8
Impoverished
Based on the Poverty and excluded 4
Segment below the official 3
5
poverty line 1
59% 41%
34 18
Vulnerable 6
above the official 1 4
poverty line but 6
below the
empowerment
line 84% 16%
56
Overall 25
below the
empowerment
line 10
4
9 7
74% 26%

Source: National Sample Survey Office, 68th round; McKinsey Global Institute analysis.
c ombined with productivity growth in agriculture would directly contribute to lifting more
than 400 million people above the Empowerment Line, or more than 70 per cent of the
total impact in the inclusive reforms scenario. The impact is even more pronounced for the
vulnerable segment, but even for the impoverished and the excluded, jobs and productivity
growth are the most powerful drivers of higher living standards (Exhibit E8). Raising public
spending alone, without improving the effectiveness of delivery, would contribute less than
10 per cent of the potential impact across segments.
C ase
ICT and Rural Poverty Alleviation
Poverty alleviation is not the responsibility of the NGOs alone, as corporate sector also can
play a very important role in it, especially in India. If the corporate is able to link their cor-
porate social responsibility with poverty alleviation in India, it will really help to a greater
extent. But how many business organisations are aware about their role in poverty alleviation
in India? Very few like Tata Steel spends about 5 per cent to 7 per cent of its profit-after-tax
on several CSR initiatives. Tatas have signed an MoU (memorandum of understanding) with
the Jharkhand government in August 2005, to pay ` 25 crore every year, for the next 30 years,
for medical insurance of people living below the PL.
JRD Tata, Chairman of the Tata Group from 1938 to 1993, had said: ‘Let industry
established in the countryside adopt [adopts] the villages in the neighbourhood… it is also
clearly in the interests of industry that surrounding areas should be healthy, prosperous and
peaceful’. The House of Tatas has, in fact, ensured that no stone is left unturned in its en-
deavour to meet the expectations of the community and the environment within which it
exists. An innovative approach for the poverty alleviation by Tata is Jamsetji Tata National
Virtual Academy for Rural Prosperity (NVA).The NVA has become the umbrella for MSS-
RF’s (M.S. Swaminathan Research Foundation) initiatives in ICT-led development.
From small beginnings as an experimental information village project started in
Pondicherry in 1998, MSSRF’s initiative in the use of ICT (information and communication
technology) for information and poverty alleviation in rural areas has evolved and expanded
over the years. By December 2004, 12 VKCs (Village Knowledge Centres) were in opera-
tion in Pondicherry. VKC initiatives are also being attempted at other field sites, and differ-
ent models are emerging in response to local needs. As a need was felt for network-linking
experts and grassroot-level communities, the NVA was launched in August 2003, with the
generous support of Sir Dorabji Tata Social Welfare Trust. The State-level hub, located at
MSSRF, is the knowledge resource that creates and maintains websites and databases for
the local hubs, in close collaboration with national and international agencies. It is linked to
Village Resource Centres (VRCs), which in turn are linked to VKCs for a cluster of villages.
It is an information system that establishes lab-to-lab, lab-to-land, land-to-lab, and land-to-
land linkages.
The NVA aims to provide information and knowledge related to drought, climate man-
agement, augmentation of water, maximising crop yield (more cropper drop) and markets,
and build skills and capacities of the rural poor, with a view to enhancing livelihood oppor-
tunities, and empowering vulnerable people to make better choices and have better control
of their own development.
A State-level hub in Chennai and four block-level hubs in Tamil Nadu at Thiruvaiyaru
(Thanjavur District), Sempatti (Dindigul District), Annavasal (Pudukkottai District), and
Thangatchimadam (Ramanathapuram District) have been set up. In October 2004, ISRO
(Indian Space Research Organisation) provided satellite connectivity for three block-level
information centres (Thiruvaiyaru, Sempatti, and Thangatchimadam) under the VRC pro-
gramme. The Prime Minister of India inaugurated this programme through video conferenc-
ing in October 2004. In his inaugural speech, he said, ‘Community-based vulnerability and
risk-related information, provision of timely, early warning and dissemination of weather
related information can lead to reliable disaster management support at the village level’.
This network provides the services of tele-education, tele-medicine, online decision
support, interactive farmers’ advisory services, tele-fishery, weather services, and water man-
agement. This programme covers both farm and fishing families, based on the motto ‘food,
water, health, literacy, and work for all and for ever’.
Under the VRC programme, a spatial database for Thiruvaiyaru has been prepared by
ISRO. It reveals the land-use pattern of crops grown, such as paddy, sugarcane, and oil seeds.
It also includes fallow lands, sandy areas, built-up land, water bodies, and a detailed soil
survey. The database helps farmers to plan their activities. TNAU (Tamil Nadu Agricultural
University) has developed a software called DSSIFER (Decision Support System for Inte-
grated Fertilizer Recommendation) which gives a district-wise cropping pattern. The TN
Rice Research Institute has suggested that it could include the land and water resource plan.
Under the Microsoft Unlimited Potential Programme (MUPP), 100 Community Tech-
nology Learning Centres (CTLC) are to be set up. A series of need-based training programmes
was facilitated through networking with various research centres, NGO, and government
agencies. The hub at MSSRF has a good satellite bandwidth under the ISRO VRC programme.
All the centres regularly hold video conferences between the rural communities and experts,
between farmers, between SHGs and between farmers and manufacturers. They promote
lateral learning among rural families. Interactive programmes were held during the year for
diverse groups. About 40 audio programmes on different topics were created by knowledge
workers and relayed every Saturday through All India Radio (AIR), Pondicherry. This pro-
gramme produced under the Open Knowledge Network (OKN) collects and disseminates
information in the local language on various matters.
The aim of the NVA in reaching frontier technology to the resource-poor rural women
and men, and enabling them to become masters of their own destiny will help to create large
numbers of knowledge managers in our villages. This cadre of grass-root workers, both men
and women, are to be elected as Fellows of the NVA for ‘rural prosperity’ and trained to be
master trainers for spearheading the knowledge revolution in rural India. In 2004, six Fellows
were selected through a rigorous selection process as the first Fellows of the NVA. About 137
grass-root workers were inducted as Fellows of the NVA at the Second National Convention
of Mission 2007, and the Convocation of the NVA was inaugurated by the President of India
in July 2005.
Case Questions
1. Comment on the application of ICT in poverty alleviation in the rural sector.
2. Do you think so such kind of experiments should be done in all parts of India?
3. What kind of prior planning will be required for using ICT in alleviation of rural
poverty?
Key W o r d s
● Absolute Standard ● nemployment and
U ● Drought-prone Areas
Underemployment esert Development Programme
D
● Below the Poverty Line ●
● Lack of Property Rights (DDP)
● Relative Standard
● Over-reliance on Agriculture ● Integrated Rural Development
● Cut-off Amount
● Uniform Recall Period (URP) Programme (IRDP)
● Substantial Poverty
● Mixed Recall Period (MRP) ● ural Youth For Self-employment
R
● ational Sample Survey
N (RYSEM)
● hortage of Capital and Able
S
Organisation (NSSO)
Entrepreneurship ● Self-help Groups (SHGS)
● Wealth Distribution
● Inheritance ● Micro-finance Institutions (MFIS)
● Malnutrition
● Land Belong to the Tiller ● ational Bank of Agriculture
N
● Mass Hunger ● Zamindari System and Rural Development
● Deindustrialisation (NABARD)
● ommunity Development
C
● Declining Terms of Trade Programme ● Grameen Capital India (GCI)
● The Periodic Mass Misery ● Food-for-Work Programme ● Non-banking Finance Company
Q u est i o n s
1. What do you mean by the term ‘poverty’? Give its 5. Discuss the various poverty alleviation programmes
extent. adopted by the Government of India from time to
2. Highlight the factors responsible for poverty? time?
3. Discuss the phases in poverty reduction? 6. Discuss the impact of economic reforms on poverty
reduction?
4. Explain the ‘Incidence of Poverty’ and suggest suit-
able measures to overcome the situation?
r efe r e n ces
n Government of India. Economic Survey 2007–2008. New n www.wikipedia.com (the free encyclopedia).
Delhi: Ministry of Finance. n McKinsey report: From poverty to empowerment: India’s
n Ten Five-Year Plan Document, Government of India. imperative for jobs, growth and effective basic services.
n The Economic Times, Pune, October 10, 2006.
n The Economic Times, Pune, October 12, 2006.
12
C hapter
Unemployment in India
>>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>>
• Concept, Meaning, and Types of • Overview of Unemployment and
Unemployment 306 Underemployment 319
• Nature of Unemployment in India 307 • McKinsey Report 324
• Magnitude of Unemployment 308 • Case 327
• Factors Responsible for Unemployment 314 • Key Words 329
• Steps to Reduce Unemployment 316 • Questions 329
• Government Policy Measures to Reduce • References 329
Unemployment 318
Concept, Meaning, and Types of

Unemployment
Concept of Unemployment
The ugly calamity that can affect The ugly calamity that can affect the life of a nation is the ‘problem of unemployment’. The
the life of a nation is the ‘prob- unemployment in our country is quite different from that of advanced countries of the world.
lem of unemployment’. The
unemployment in our coun- The well-developed countries like the United States and England usually suffer from a fric-
try is quite different from that tional or cyclical unemployment, but in the case of India it is a permanent feature. In fact, it
of advanced countries of the has become a multi-dimensional phenomenon and in recent years, it has assumed alarming
world.
proportions. In the opinion of late President V. V. Giri, ‘unemployment’ is the ‘problem of
problems’. Unemployment has made our youths ‘nexalites’. Educated youth are deprived of
all deserving comforts and their growing discontent has given scope for the speedy growth
of ‘nexalism’. Unemployment in India is of a complex nature. In a sense, it is a colossal waste
of human resources which further hurdles the tempo of economic development of a country.
It, thus, calls for a remedial action at the earliest possible.
Meaning of Unemployment
In a common sense, unem- In a common sense, unemployment is a situation characterised when any one is not gain-
ployment is a situation char- fully employed in a productive activity. It means that an unemployed person is the one who
acterised when any one is not is seeking any work for wages but is unable to find any job suited to his capacity. From this
gainfully employed in a produc-
tive activity.
view, one can easily make an idea of voluntarily and involuntarily unemployed. Obviously,
in an economy, there is a section of working population who are not interested in any gain-
ful job and, still, others who are interested in employment at wage rates higher than those
prevailing in the labour market. Professor Keynes calls this type of labour force as voluntarily
unemployed. According to him, involuntary unemployment refers to a situation in which
though people are ready to accept work at prevailing wage rate they fail to get the same wage.
Unemployment in India | 307
Types of Unemployment
Broadly, unemployment is of many types like (i) cyclical, (ii) frictional, (iii) technological,
(iv) seasonal, (v) structural, (vi) voluntary, (vii) involuntary, (viii) disguised, and (ix) casual.
But in most of the underdeveloped countries, unemployment can be of three main forms. They
are (a) open, (b) disguised, and (c) under.
Let us see each of them in detail as follows:
(a) Open Unemployment: Under this category, unemployment refers to a situation Open unemployment refers to a
wherein a large labour force does not get employment opportunities that may yield situation wherein a large labour
a regular income. In a sense, workers are willing to work and able to work, but they force does not get employment
are not getting any job. This type of unemployment is the result of a lack of comple- opportunities that may yield a
regular income.
mentary resources, especially capital. The rate of capital accumulation lags behind the
rate of population growth. This type of unemployment can be identified as ‘structural
unemployment’.
(b) Disguised Unemployment: Basically, disguised unemployment is associated with

Disguised unemployment is as-
the agricultural, underdeveloped countries like India. Still, it is also suitable to in- sociated with the agricultural,
dustrially developed countries which are hit by cyclical unemployment. However, it underdeveloped countries like
implies to that unemployment that is not open for everyone and remains concealed. India.
In fact, such employment is a work-sharing device, that is, existing work is shared by
a large number of workers. In such a situation, even if many workers are withdrawn
the same work can be continued by few workers. The contribution of such labourers
to production is zero or near to zero. In Indian villages, this form of unemployment
is a common feature.
(c) Underemployment: This form of unemployment can be defined in two ways. They
are (a) a situation in which a labourer does not get the type of work he is capable of
A situation in which a labourer
doing though he has the abilities and can yield larger income; but he is denied the does not get the type of work he
opportunity due to lack of suitable jobs and (b) a situation in which a labourer does is capable of doing though he
not get sufficient work to absorb him for the total length of working hours a day. has the abilities and can yield
Some time, the second form of unemployment is known as ‘seasonal unemployment’. larger income; but he is denied
the opportunity due to lack of
The first form of underemployment can be explained with the help of an example. suitable jobs.
Suppose a degree-holding engineer wants an appropriate job, but he starts as an op-
erator, then, he may be said as ‘underemployed’. He may be deemed as working and
earning in a production activity but, in reality, he is not working to his full capability.
Thus, he is in the state of underemployment.
Nature of Unemployment in India

The Indian experience of the relationship between employment and development is vastly
different from that in the developed countries. The unemployment in those countries is basi-
cally temporary and every one gets the employment in the course of time. This happens due
to technological improvements or cyclical fluctuations. But, here, the tale of unemployment
is chronic rather than temporary, which can be called ‘structural’. It is mainly due to the slow
growth of capital formation when compared to the increase in labour force. A close analysis In rural areas, about 70 per cent
explains that there is a negligible change in the occupational structure of the country. Agri- of the population are directly
culture and allied occupations were occupying the same position in 2008 as they did in 1931 or indirectly dependent on the
agricultural sector. This situ-
or even in 1911. In rural areas, about 70 per cent of the population are directly or indirectly ation leads to the problem of
dependent on the agricultural sector. This situation leads to the problem of disguised as well disguised as well as rural unem-
as rural unemployment. For convenience, we shall classify unemployment as ployment.
(a) Disguised unemployment or Rural unemployment.

(b) Industrial unemployment or Urban unemployment.
(c) Educated unemployment or White-collar unemployment.
Disguised Unemployment or Rural Unemployment

Both unemployment and underemployment exist side by side in the rural sector and it is dif-
ficult to make a distinction between the two. In rural areas, it exhibits in seasonal and peren-
nial apart from chronic and disguised unemployment. It is due to increasing heavy pressure
on land, decline of handicrafts and village and cottage industries, backward nature of cultiva-
tion, and absence of alternative occupations. This has largely contributed to the problem of
unutilised labour or disguised unemployment in the agricultural sector. In the recent years,
the introduction of agricultural machinery has tended to add more rural unemployed force.
Moreover, a large number of labourers accumulate around primary occupations, and inelas-
Seasonal unemployment is ticity of the occupational structure prevents any movement away from that position in the
closely associated with the
period of slack demand. This further leads to seasonal unemployment and its incidence var-
problem of underemployment of
manpower. This type of unem- ies from region to region and even, within the region over different seasons, depending on
ployment is estimated between climate, cropping pattern, and socio-economic factors. Therefore, seasonal unemployment is
20 per cent and 30 per cent. closely associated with the problem of underemployment of manpower. This type of unem-
ployment is estimated between 20 per cent and 30 per cent.
Industrial Unemployment or Urban Unemployment

Industrial unemployment is largely the offshoot of rural unemployment. In the face of in-
Industrial unemployment is
largely the offshoot of rural creasing pressure of population on land, a mass exodus of population from rural areas has
unemployment. migrated to the urban areas in search of employment. They are uneducated and unskilled.
This type of migration swells the size of labour force in urban areas and, in turn, adds to the
number of unemployed army of labour.
Educated Unemployment or White-collar

Unemployment
In the urban areas, this is the special class that emerged due to mere educational facilities in
towns. The rate of unemployment is higher among the educated than among the uneducated
persons. This is also, perhaps, due to the reason that tertiary sector could not grow speedily to
The educational system is ill-
that extent to which the people are being educated in the urban areas. The educational system
planned which provides very is ill-planned which provides very little scope to cater the needs of the nation. In 1971, the
little scope to cater the needs total educated unemployed was recorded as 22.9 lakh against its number 5.79 lakh in 1961.
of the nation. In August 1983, the number of persons registered on the employment exchange was 211 lakh
and further, on December 31, 1985, its number had increased to 262 lakh. They all hanker
after ‘white-collar jobs’, which result in a great scramble for ‘clerical jobs’.
Magnitude of Unemployment
The Economic Survey 2006–07 had given estimates of employment and unemployment on
usual principal status (UPS) basis from various rounds of NSSO (National Sample Sur-
vey Organisation) survey. In the meantime, the Eleventh Five-Year Plan has largely used
the Current Daily status (CDS) basis of estimation of employment and unemployment in
the country. It has also been observed that the estimates based on daily status are the most
inclusive rate of unemployment, giving the average level of unemployment on a day during
the survey year. It captures the unemployed days of the chronically unemployed; the unem-
ployed days of the usually employed, who become intermittently unemployed during the
reference week; and the unemployed days of those classified as ‘employed’ according to the
criterion of a current weekly status. The estimates presented earlier also need revisiting so as
to be based on population projections released by National Commission on Population. The
The estimates on employment
estimates on employment and unemployment on CDS basis (refer to Table 12.1) indicate that and unemployment on CDS
employment growth between 1999–2000 and 2004–05 had accelerated significantly when basis (refer to Table 12.1) indi-
compared to the growth witnessed between 1993–94 and 1999–2000. During the period cate that employment growth
from 1999–2000 to 2004–05, about 47 million work opportunities were created when com- between 1999–2000 and
2004–05 had accelerated sig-
pared to only 24 million in the period between 1993–94 and 1999–2000. The employment nificantly when compared to
growth accelerated from 1.25 per cent per annum to 2.62 per cent per annum. However, since the growth witnessed between
the labour force grew at a faster rate of 2.84 per cent than the workforce, the unemployment 1993–94 and 1999–2000.
rate also rose. The incidence of unemployment on CDS basis increased from 7.31 per cent in
1999–2000 to 8.28 per cent in 2004–05. Table 12.2 shows sectoral employment shares on CDS
basis from a survey by NSSO for the Planning Commission.
Heads Million Million Million Million Growth p.a. (%) < Table 12.1
Employment and
1983 1993– 1999– 2004–05 1983 1993–94 1999– Unemployment in
94 2000 to to 2000 Million/Person/Year
1993– 1999– to (on CDS basis)
94 2000 2004–05
Population 718.10 893.68 1,005.05 1,092.83 2.11 1.98 1.69
Labour Force 263.82 334.20 364.88 419.65 2.28 1.47 2.84
Workforce 239.49 313.93 338.19 384.91 2.61 1.25 2.62
Unemployment
Rate (%) 9.22 6.06 7.31 8.28
No. of
Unemployed 24.34 20.27 26.68 34.74
Source: Various rounds of NSSO survey on employment and unemployment for Planning Commission.
Industry 1983 1993–94 1999–2000 2004–05

< Table 12.2
Sectoral Employment
Agriculture 65.42 61.03 56.64 52.06 Shares on Current Daily
Mining and Quarrying 0.66 0.78 0.67 0.83
Status (CDS) Basis
Manufacturing 11.27 11.10 12.13 12.90
Electricity, Water, etc. 0.34 0.41 0.34 0.35
Construction 2.56 3.63 4.44 5.57
Trade, Hotel, and Restaurant 6.98 8.26 11.20 12.62
Transport, Storage, and Communication 2.88 3.22 4.06 4.61
Finance, Insurance, Real Estate, 0.78 1.08 1.36 2.00
and Business Services
Community, Social, and 9.10 10.50 9.16 9.24
Personal Services
Total 100.0 100.0 100.0 100.0
The decline in the overall growth of employment during the period from 1993–94 to
1999–2000 was largely due to the lower absorption in agriculture. The share of agriculture
in the total employment dropped from 61 per cent to 57 per cent. This trend continued and
the share of agriculture in the total employment further dropped to 52 per cent in 2004–05.
While the manufacturing sector’s share increased marginally during this period, trade, hotel,
and restaurant sector contributed significantly higher to the overall employment than in the
earlier years. The other important sectors whose shares in employment have increased are
transport, storage, and communications apart from financial, insurance, real estate, business
and community, and social and personal services (refer to Table 12.2).
Male participation remained higher both in labour and workforce, throughout the pe-
riod between 1983 and 2004–05. Female participation per se in rural areas was much higher
than in the urban areas. The urban male participation rates (both labour force and work-
force) were higher than the rural male participation in 1999–2000 and 2004–05 (refer to
Table 12.3).
In urban India, in 2004–05, ‘trade, hotel, and restaurant’ sector had engaged about
28 per cent of the male workers while ‘manufacturing’ and ‘other services’ sectors accounted
for nearly 24 per cent and 21 per cent, respectively, of the usually employed males. On the
other hand, for urban females, ‘services’ sector accounted for the highest proportion (36 per
cent) of the total usually employed, followed by ‘manufacturing’ (28 per cent) and ‘agriculture’
(18 per cent). Work opportunities for women in urban services and manufacturing sector,
probably, exist but there is a need for facilitating and improving their WPR (work participa-
tion rate) through better education, skill development, and removal of gender-associated
hurdles like lack of crèches, and so on.
Unemployment Rates by
Level of Education
The unemployment rate of grad-
uate-and-above female popu- The NSSO data indicates that when compared to 1993–94, the unemployment rates for per-
lation is much higher in rural sons of higher education level has declined in rural areas, both for males and females in
areas than in the urban areas,
which is indicative of lack of 1999–2000, and it has further declined in 2004–05 when compared to 1999–2000. The unem-
opportunities in rural India com- ployment rate of graduate-and-above female population is much higher in rural areas than
bined with lack of mobility of in the urban areas, which is indicative of lack of opportunities in rural India combined with
this population segment.
lack of mobility of this population segment.
Table 12.3
Labour-force and
> Heads 1983 1993–94 1999–2000 2004–05
Workforce Participation Labour-force Participation Rates (LFPR)
Rates (CDS basis) (%)
Rural Male 52.7 53.4 51.5 53.1
Rural Female 21.9 23.2 22.0 23.7
Urban Male 52.7 53.2 52.8 56.1
Urban Female 12.1 13.2 12.3 15.0
Workforce Participation Rates (WFPR)
Rural Male 48.2 50.4 47.8 48.8
Rural Female 19.8 21.9 20.4 21.6
Urban Male 47.3 49.6 49.0 51.9
Urban Female 10.6 12.0 11.1 13.3
NSS 62nd Round on Employment and

Unemployment
Subsequent to the 61st round in 2004–05, which was a quinqennial round, NSSO conducted
an All India Survey (62nd Round) of moderately large sample size on the situation of em-
ployment and unemployment in India during the period from July 2005 to June 2006 as part
of the annual series of rounds. The main findings of this survey are as follows:
The overall unemployment rate for rural areas according to the usual-status approach The unemployment rate, obtained
was around 2 per cent (3 per cent for males and 2 per cent for females). The urban rates were by any of the approaches, was
higher than the rural rates except for the CDS approach in which the unemployment rates for higher for females than that for
males in the urban areas, but it
rural and urban areas were almost equal (nearly 8 per cent).
was lower than that for males in
The unemployment rate, obtained by any of the approaches, was higher for females than the rural areas.
that for males in the urban areas, but it was lower than that for males in the rural areas.
Employment in Organised Sector

The employment growth in the organised sector, public and private combined, had declined
The employment growth in the
during the period between 1994 and 2005. This had primarily happened due to the decline organised sector, public and
of employment in the public-organised sector. The employment in establishments covered private combined, had declined
by Employment Market Information System of the Ministry of Labour grew at 1.20 per cent during the period between
per annum during 1983–94, but decelerated to –0.31 per cent per annum during 1994–2004. 1994 and 2005.
However, the latter decline was mainly due to a decrease in employment in public sector es-
tablishments, whereas the private sector had shown an acceleration in the pace of growth in
the employment from 0.44 per cent to 0.58 per cent per annum (refer to Table 12.4).
As per the National Commission for Enterprises in the Unorganised Sector (NCEUS),
which uses a different classification of organised/unorganised sector, the organised sector
employment had increased from 54.12 million in 1999–2000 to 62.57 million in 2004–05.
However, the increase had been accounted for by an increase in the unorganised worker
in the organised enterprises from 20.46 million in 1999–2000 to 29.14 million in 2004–05.
Thus, the increase in employment in the organised sector had been on account of the infor-
mal employment of workers.
Employment in the Eleventh Plan

The Eleventh Plan envisages a rapid growth in employment opportunities while ensuring
improvement in the quality of employment. It recognises the need to increase the share of The Eleventh Plan envisages
a rapid growth in employment
regular employees in total employment and a corresponding reduction in the casual employ- opportunities while ensuring
ment. The employment-generation strategy of the Eleventh Plan is also predicated on the improvement in the quality of
reduction of underemployment and the movement of surplus labour in agriculture sector employment.
to higher wage and more gainful employment in non-agricultural sector. The agriculture
sector is projected to generate no increase in employment during the Eleventh Plan period.
The employment in manufacturing is expected to grow at 4 per cent while construction
and transport and communication are expected to grow at 8.2 per cent and 7.6 per cent,
respectively. The projected increase in the total labour force during the Eleventh Plan is
Heads 1983–1994 1994–2005 < Table 12.4

Rate of Growth
Public Sector 1.53 –0.70 of Employment in
Organised Sector
Private Sector 0.44 0.58
(% per annum)
Total Organised 1.20 –0.31
Source: Eleventh Plan Document.
45 million. As against this, 58 million employment opportunities would be created in the

Eleventh Plan. This would be greater than the projected increase in the labour force leading
to a reduction in the unemployment rate to below 5 per cent.
Table 12.5 depicts the employment in organized sector from 1981 to 2010.
Table 12.5
Employment in
> End March Public Sector Private Grand
Central State Quasi Total* Sector Total
Organized Sector
Govt. Govts. Govt.
Employment (Mn.)
1981 3.2 5.7 4.6 15.5 7.4 22.9
1991 3.4 7.1 6.2 19.1 7.7 26.8
2001 3.3 7.4 6.2 19.1 8.7 27.8
2005 2.9 7.2 5.8 18.0 8.5 26.5
2006 2.9 7.3 5.9 18.2 8.8 27.0
2007 2.9 7.2 5.9 18.0 9.2 27.2
2008 2.7 7.2 5.8 17.7 9.8 27.5
2009 2.7 7.2 5.8 17.8 10.3 28.1
2010 2.6 7.4 5.9 17.9 10.8 28.7
Share in Employment (%)
1981 14.0 24.8 20.0 67.7 32.3 100.0
1991 12.8 26.6 23.3 71.3 28.7 100.0
2001 11.5 26.5 22.9 68.9 31.1 100.0
2005 11.6 27.3 21.9 68.8 32.1 100.0
2006 10.7 27.0 21.9 67.4 32.6 100.0
2007 10.3 26.4 21.6 65.9 33.9 100.0
2008 9.9 26.0 21.0 64.2 35.7 100.0
2009 9.4 25.7 20.7 63.2 36.5 100.0
2010 8.9 25.6 20.4 62.2 37.6 100.0
Annual Growth (%)
1981 0.5 3.6 5.4 2.7 2.3 2.6
1991 0.4 1.9 0.8 1.3 1.3 1.4
2001 –1.5 –0.4 –1.2 0.7 0.7 –0.3
2005 –3.0 –0.2 –1.2 3.0 3.0 0.2
2006 –1.3 1.4 2.6 3.6 3.6 1.9
2007 –3.5 –1.4 0.0 5.0 5.0 1.1
2008 –2.2 –0.4 –1.8 6.5 6.5 0.9
2009 –2.9 0.9 0.8 4.6 4.6 2.3
2010 –4.1 1.6 0.4 4.8 4.8 1.9
Note: Data in this table and the next cover all establishments in public sector and all non-agricultural
establishments in private sector employing 10 or more persons. Figures are rounded off. Growth rates
and share are worked on full figures.
* including local bodies
Table 12.6 depicts the employment in organized sector by industry division from 1981
to 2010.
End March 2010 2009 2001 1991 1981

< Table 12.6
Employment in
‘000s Organized Sector by
Industry Division
Public Sector 17,862 17,795 19,138 19,058 15,484
Agriculture, etc. 478 477 502 556 463
Mining and Quarrying 1,103 1,112 875 999 818
Manufacturing 1,066 1,060 1,430 1,852 1,502
Electricity, Gas and 835 839 935 905 683
Water, etc.
Construction 859 845 1,081 1,149 1,089
Wholesale and Retail 171 174 163 150 117
Trade, etc.
Transport, Storage and 2,529 2,601 3,042 3,026 2,709
Communications
Services* 10,464 10,367 11,111 10,421 8,103
Private Sector 10,787 10,291 8,652 7,677 7,395
Agriculture, etc. 923 896 931 891 858
Mining and Quarrying 161 115 79 100 130
Manufacturing 5,184 5,198 5,013 4,481 4,545
Water, etc.
Construction 91 80 57 73 72
Trade, etc.
Transport, Storage and 166 132 76 53 60
Communications
Services* 3,692 3,334 2,104 1,739 1,418
Total Employment 28,649 28,286 27,790 26,735 22,879
Agriculture, etc. 1,401 1,373 1,433 1,447 1,321
Mining and Quarrying 1,264 1,227 954 1,099 948
Manufacturing 6,250 6,258 6,443 6,333 6,047
Water, etc.
Construction 950 925 1,138 1,222 1,161
Trade, etc.
Transport, Storage and 2,695 2,733 3,118 3,079 2,769
Communications
Services* 14,156 13,701 13,215 12,160 9,521
Refer note to previous table.

*Including Financing, Insurance, Real Estate, etc. and Community, Social and Personal Services.
Table 12.7 depicts the employment in selected industries from 1990 to 2010
Table 12.7
Employment in Selected
> 2009–10 2008–09 2005–06 1999–00 1990
Industries ‘000s
Food Products and Beverages 1,606 1,564 1,392 1,347 1,181
Tobacco 420 452 474 472 131
Cotton Textiles, Other Textile 2,250 2,198 1,879 1,580 1,809
Products
Wood and Products 76 68 56 50 179
Paper and Products, Printing etc. 229 231 178 176 327
Leather and Products 255 251 174 122 86
Rubber, Plastics, Petroleum and 600 544 317 344 282
Coke Products
Chemicals and Products 589 581 825 817 605
Non-metallic Mineral Products 800 780 579 451 606
Basic Metals and Alloys 894 899 644 630 643
Metal Products 560 508 373 280 328
Other Machinery 1,006 1,095 878 733 954
Transport Equipment 842 728 559 474 484
Other Manufacturing Industries 203 225 177 129 109
Others 1,462 1,203 607 568 707
Total 11,792 11,327 9,112 8,173 8,431
Note: T his Table shows the average daily number of workers at work, and not the total number on
payroll.
Factors Responsible For

Unemployment
Apparently, the widespread unemployment in the urban as the well as the rural India is a
complex problem caused by many factors. The major causes can be discussed as follows:
Slow Pace of Growth

The foremost cause of unem- The foremost cause of unemployment is the slow pace of growth. The size of employment,
ployment is the slow pace of generally, depends on the level of development to a large extent. During the phase of plan-
growth.
ning, our country has made tremendous development in all sectors but the rate of growth is
comparatively very low than the targeted rate. Thus, employment in adequate number could
not be created.
The appalling nature of under-
development and unemploy-
ment in India is the backward Backward Agriculture
agriculture. Methods of tech-
niques and organisation of The appalling nature of underdevelopment and unemployment in India is the backward
agriculture is primitive and out- agriculture. Methods of techniques and organisation of agriculture is primitive and outdated.
dated.
As a result, agricultural productivity is low per worker and per unit of labour. Nearly,
70 per cent population is directly or indirectly dependent on agriculture. Land-holding

is uneconomic. Further, agriculture is a seasonal occupation. Absence of supplementary
employment opportunities is evident. In mid-1960s, India witnessed green revolution but
it benefitted the rich farmers and widened the gulf between the poor and rich farmers. The
institutional reforms like land reforms, consolidation, and ceiling of land-holding and ten-
ancy reforms had not been in a true spirit due to political and administrative inefficiency and
further non-cooperative attitude of the farmers.
Explosive Population Growth

India is experiencing an explosive population growth since 1951. In fact, the population in- India is experiencing an explo-
creased at a rate of 2.5 per cent annually. Therefore, employment situation has been adversely sive population growth since
affected in two ways. Firstly, increasing the number of labour force and secondly, reducing the 1951. In fact, the population
available resources for capital formation. About 90 lakh of new entrants were recorded in the increased at a rate of 2.5 per
cent annually.
First Plan, 118 lakh in the Second Plan, 170 lakh in the Third Plan, and 230 lakh in the Fourth
Plan. New additions of 650 lakh and 340 lakh were estimated in the Fifth and Sixth Five-Year
Plans, respectively. Again, it was estimated to add 390 lakh of labour force in the Seventh Plan.
Inadequate and Defective Employment Planning

Still, another cause to the higher growth of job opportunities in the country is the inadequate
and defective job planning. Although the planning is in operation since 1951, it has not con- Although the planning is in
tributed to the solution of the problem. It has absolutely neglected the employment problem operation since 1951, it has
and the underrating of human resources. Employment, till recent times, has not become the not contributed to the solution
integral part of the planning strategy. In fact, very little has been done to utilise the Nurksian of the problem.
variety of surplus labour in the rural sector.
Poverty
It is a condition where a person is poor. Underdeveloped countries are in the grip of a vicious Underdeveloped countries are in
circle of poverty, which in turn, greatly influences the pattern of employment opportunities the grip of a vicious circle of pov-
in the country. Being poor, a person does not make any gainful use of the existing resources. erty, which in turn, greatly influ-
ences the pattern of employment
opportunities in the country.
More Emphasis on Capital-intensive Techniques
In India, capital is scarce and labour is available in surplus quantity. Under these circumstances, In India, capital is scarce and
the country should adopt labour-intensive techniques of production. But it has been observed labour is available in surplus
that not only in the industrial sector but also in the agricultural sector, there is a substantial quantity. Under these circum-
stances, the country should
increase of capital rather than labour. In the case of Western countries, where the capital is in adopt labour-intensive tech-
abundant supply, the use of automatic machines and other sophisticated equipment is justified, niques of production.
whereas in our country the abundant labour results in a large number of unemployment.
Defective Education System

The education system in our country too has failed to respond to the existing inter-genera-
tion gap. It is the same old system, which Macaulay had introduced during the colonial pe-
riod. It simply imparts general and literary education, devoid of any practical content, in fact;
and no sincere efforts have been made to develop the educational system in accordance to the
manpower requirements of the economy. India’s education policy merely produces clerks and India’s education policy merely
lower-cadre executives for the government and private concerns. The open-door policy at the produces clerks and lower-
secondary and university level has increased manifold unemployment among the educated, cadre executives for the govern-
who are fit only for white-collar jobs. ment and private concerns.
Slow Growth of Tertiary Sector

When the expansion of tertiary sector comprising commerce, trade and transportation, and
so on, is limited, which could not provide employment even to the existing labour force, then
There is a wide scale of unem-
the new entrants’ position stands a question. As a result of this, there is a wide scale of un-
ployment among engineers, employment among engineers, doctors, technically trained persons, and other technocrats.
doctors, technically trained per-
sons, and other technocrats.
Decay of Cottage and Small-scale Industries
The traditional handicraft has a glorious past and was the main source of employment, es-
pecially to the village craftsman, artisans, as well as non-agricultural workers. Unfortunately,
most of the rural, traditional crafts have been ruined or faded, partly, due to the unfavourable
policy of the foreign rulers and, partly, due to the tough competition from the machine-
made goods. Consequently, these labourers were out of job. Most of them turned as landless
labourers.
Lack of Vocational Guidance and Training Facilities

As, already discussed, our education system is defective as it provides purely academic and
The need of the hour is that bookish knowledge which is not job oriented. The need of the hour is that there must be a
there must be a sufficient num- sufficient number of technical-training institutions and other job-oriented courses at the vil-
ber of technical-training insti- lage level. Most of the students in rural areas remain ignorant of possible venues of employ-
tutions and other job-oriented
courses at the village level.
ment and choice of occupation.
Less Means for Self-employment
Another hurdle in generation of Another hurdle in generation of more employment opportunities is that there are inappro-
more employment opportunities priate means for self-employment in rural and semi-urban areas of the country. Like other
is that there are inappropriate developed countries, most of our engineers, technocrats, and other well-qualified persons do
means for self-employment in
rural and semi-urban areas of
not possess ample means for self-employment. They go about in search of paid jobs.
the country.
Defective Social System
The defective social systems of The defective social systems of the country also add fuel for the seriousness of the problem.
the country also add fuel for the People are still superstitious and illiterate, who still believe that family planning is a great sin,
seriousness of the problem. with the result—population is increasing at a very high speed. It is equally difficult rather im-
possible to feed them with food, clothes, and shelter. Then, where is the question of making
a provision of employment?
Steps to Reduce Unemployment

The problem of unemployment in the country is alarming. It has adversely affected the social
life of many individuals. Thus, keeping in view the different aspects of the problem, some
steps are suggested which will be helpful to solve the problem of rural unemployment and
other types of urban unemployment, as follows:
Indian agriculture is a mode
of living rather than a profit- Reconstruction of Agriculture
able occupation. It is a tale of
woe to tell. Therefore, it needs Indian agriculture is a mode of living rather than a profitable occupation. It is a tale of woe
overhauling and reconstruction, to tell. Therefore, it needs overhauling and reconstruction, making it an economic pursuit.
making it an economic pursuit.
Methods of cultivation should undergo a radical change according to the condition of local
needs. Irrigation facilities should be improved so that agriculture should not be at the mercy
of monsoons. Institutional framework and agrarian relations should vigorously be adopted
to provide social justice and economic equality.
Adoption of Labour-intensive Techniques

Despite the usage of the strategy of Prof. Mahalanobis for basic and key industries, which
are based on the capital-intensive techniques, our government should try to adopt labour-
intensive techniques for new fields of production.
Rapid Industrialisation
To solve the problem of industrial unemployment, stepping up of industrial efficiency is the To solve the problem of indus-
remedy. It means the expansion of the existing and the development of new industries are ur- trial unemployment, stepping
gently required. Some basic industries like iron and steel industries, defence, chemicals, power up of industrial efficiency is the
remedy.
generation, atomic, and so on, should be set up. At the same time, to improve the defective and
uneconomic centralisation, it is a pre-requisite to introduce rationalisation on scientific grounds.
Population Control
There is no second opinion to say that population in India is rising at a very high speed. There is no second opinion to
Unless this problem is not checked, the problem of unemployment cannot be solved properly. say that population in India
Efforts should be made to raise the agricultural and industrial production. Therefore, a special is rising at a very high speed.
drive should be made to make the programme of family planning a good success, especially in Unless this problem is not
checked, the problem of unem-
the rural and backward regions of the country. ployment cannot be solved
properly.
Reorientation of Education System
As regards the problem of educated unemployment in urban areas, India should reconstruct
As regards the problem of edu-
the education system and overhaul according to the changing environment of the country. cated unemployment in urban
There must be vocationalisation of education. Proper education should be imparted to the areas, India should reconstruct
younger men, who will be in a position to start certain cottage and small-scale industries of the education system and over-
haul according to the changing
their own choice, especially at the village level.
environment of the country.
Extension of Social Services

India is still lagging behind in the sphere of education, medical science, and other services,
when compared to the advanced countries of the West. Therefore, efforts should be made to
extend these services to rural folks and to the backward regions of the country. It will go a
long way to impart awakening among the common masses.
Decentralisation
Experience shows that lack of gainful opportunities of employment in villages and small It is advisable to encourage
towns has led to the migration of people to metropolitan cities in search of alternative jobs. industries around small towns,
preferably, according to the
This has created the problem of overcrowdedness and urbanisation. Under these circum-
local endowments.
stances, it is advisable to encourage industries around small towns, preferably, according to
the local endowments.
Encouragement of Small Enterprises To provide the opportunities for

self-employment, small-scale
To provide the opportunities for self-employment, small-scale industries should be given industries should be given top
top priority. They should be provided with liberal loans, training, facilities of raw material priority.
and infrastructures, and market facilities, and so on. It is fortunate that the Sixth Five-Year
Plan (1980–85) had given due consideration to dispel these facilities under the scheme of
self-employment. Similar steps had been proposed in the Eighth Five-Year Plan and in the
successive plans, these steps were carried out and small-scale industry development has been
given encouragement to provide opportunity for self-employment.
Guiding Centres and more Employment Exchanges

The economists are of a unanimous view that more employment exchanges should be opened
in both rural as well as urban areas to give guidance to the people to search for employment.
They should also be motivated for self-employment proposals.
Rural Development Schemes
As rural sector is dominated and As rural sector is dominated and agriculture is the basic occupation of the people, the urgent
agriculture is the basic occupa- need of the hour is to introduce rural development schemes. It is correctly believed that there
tion of the people, urgent need is no other remedy than a massive programme of investment, in rural development and mas-
of the hour is to introduce rural sive injection of science and technology, into the methods of production followed in the rural
development schemes.
areas, in their agricultural and non-agricultural activities.
Government Policy Measures to

Reduce Unemployment
National Rural Employment Programme
The National Rural Employment Programme was started as a part of the Sixth Plan and
remained continued under the Seventh Five-Year Plan. It envisages to create employment
It aims to provide employment
opportunities of the order of 300 million to 400 million man-days every year. It aims to pro-
in the lean agricultural season. vide employment in the lean agricultural season. During the Seventh Plan, the outlay for this
programme was targeted at ` 3,092 crore and it created 1,477 million man-days.
Rural Landless Employment Guarantee Programme

The basic objective of the pro- Rural Landless Employment Guarantee Programme (RLEGP) was started in 1983. The basic
gramme was to improve and objective of the programme was (a) to improve and expand employment opportunities for ru-
expand employment opportuni- ral landless workers and (b) to strengthen the rural infrastructure. During the Seventh Five-
ties for rural landless workers.
Year Plan, about 1,154 million man-days of employment were created under this programme.
Integrated Rural Development Programme
The Integrated Rural Develop- The Integrated Rural Development Programme aims at to raise the poor people above the
ment Programme aims at to poverty line. It was expected to cover 18 million families in all the blocks of the country dur-
raise the poor people above the ing the Seventh Plan. On an average, about 3,000 families in a block were provided assistance
poverty line.
through this programme.
Food-for-work Programme
Its objectives were to generate This programme was started in 1977. Its objectives were to generate employment, have im-
employment, have improvement provement in income, create durable community assets, and strengthen the rural infrastruc-
in income, create durable com-
munity assets, and strengthen
ture. This scheme was directly beneficial to the poor people. According to an estimate, the
the rural infrastructure. scheme was to generate an additional employment of 40 crore man-days in a year.
Training Rural Youth for Self-employment

The TRYSEM or Training Rural Youth for Self-employment was started in 1979 with the
The TRYSEM or Training Rural
objective of removing unemployment among the rural youth. It aimed to provide training to Youth for Self-employment was
about two lakh rural youth every year, so that they may be self-employed. Under this scheme, started in 1979 with the objec-
40 youths were selected from each block. In the selection process, selection, members of tive of removing unemployment
among the rural youth.
SC/ST were given preference. Under the scheme, a minimum of 331/3 per cent of rural youth
trained were to be women. During the Seventh Plan 10 lakh rural youth received training
under TRYSEM.
Operation Flood II
This programme is expected to benefit eight million milk-producing families. The other
Dairy Development Schemes would benefit about five million additional families.
Employment Guarantee Scheme

This scheme was started by the Government of Maharashtra in 1972–73. It provides gain-
It provides gainful and produc-
ful and productive employment to the rural unskilled labour by raising durable commu- tive employment to the rural un-
nity assets like roads, canals, and so on. The scheme provides right to work at a wage of skilled labour by raising durable
` 6 per day. Similar schemes have been started in Tamil Nadu, Gujarat, Andhra Pradesh, community assets like roads,
canals, and so on.
Madhya Pradesh, and Karnataka.
Jawahar Rozgar Yojana

Jawahar Rozgar Yojana (JRY) was started in 1989–90. Its aims are to generate additional Its aims are to generate addi-
employment by taking up productive works in rural areas. During the Seventh Plan, it had tional employment by taking up
generated 3,497 million man-days of employment. productive works in rural areas.
Nehru Rozgar Yojana

Nehru Rozgar Yojana was started in October 1989. It consists of three sub-schemes, viz.,
Scheme of Urban Micro-Entreprises (SUME), Scheme of Urban Wage Employment (SUWE),
and Scheme of Housing and Shelter Upgradation (SHASU). In 1991–92, 1.59 lakh families
were assisted under SUME and 13 million man-day of employment were generated under
SUME and SHASU.
Minimum Needs Programme

The various components of the minimum needs programme are meant to create substantial
additional employment in the infrastructure and social services in the rural areas.
Overview of Unemployment and

Underemployment
Unemployment
The economic reforms may
The economic reforms may have given a boost to industrial productivity and brought in have given a boost to industrial
foreign investment in the capital-intensive areas. But the boom has not created jobs. This was productivity and brought in for-
eign investment in the capital-
not unexpected. According to a report by the Washington-based Institute of Policy Studies intensive areas. But the boom
(IPS), the combined sales of the world’s top 200 MNCs is now greater than the combined has not created jobs.
GDP of all but the world’s nine largest national economies. Yet, the total direct employment
generated by these multinationals is a mere 18.8 million—one-hundredth of one per cent of
the global workforce.
• India’s Ninth Five-Year Plan projects a generation of 54 million new jobs during the
Plan period (1997–2002). But the performance has always fallen short of the target in
the past, and few believe that the current Plan will be able to meet its target.
• India’s labour force is growing at a rate of 2.5 per cent annually, but employment is
growing at only 2.3 per cent. Thus, the country is faced with the challenge of not only
absorbing new entrants to the job market (estimated at seven million people every
year), but also clearing the backlog.
• About 60 per cent of India’s workforce is self-employed, many of whom remain very
poor. Nearly 30 per cent are casual workers (i.e., they work only when they are able
to get jobs and remain unpaid for the rest of the days). Only about 10 per cent are
regular employees, of which two-fifths are employed by the public sector.
• More than 90 per cent of the labour force is employed in the ‘unorganised sector’, that
is, sectors which do not provide the social security and other benefits of employment
in the ‘organised sector’.
• In the rural areas, agricultural workers form the bulk of the unorganised sector. In
urban India, contract and sub-contract as well as migratory, agricultural labourers
make up for most of the unorganised labour force.
• The unorganised sector is made up of jobs in which the Minimum Wage Act is
neither, or only marginally, implemented. The absence of unions in the unorganised
sector does not provide any opportunity for collective bargaining.
• Over 70 per cent of the labour force in all sector combined (organised and unorgan-
ised) is either illiterate or educated below the primary level.
• The Ninth Plan projects a decline in the population growth rate to 1.59 per cent
per annum by the end of the Ninth Plan, from over 2 per cent in the last three dec-
ades. However, it expects the growth rate of the labour force to reach a peak level of
2.54 per cent per annum over this period; the highest it has ever been and is ever likely
to attain. This is because of the change in age structure, with the highest growth oc-
curring in the age group of 15–19 years in the Ninth Plan period (refer to Table 12.8).
• The addition to the labour force during the Plan period is estimated to be 53 millions
on the usual-status concept. The acceleration in the economy’s growth rate to
7 per cent per annum, with a special emphasis on the agriculture sector, is expect-
ed to help in creating 54 million work opportunities over the period. This would
lead to a reduction in the open unemployment rate from 1.9 per cent in 1996–97 to
1.47 per cent in the Plan’s terminal year, that is, by about a million persons—from
7.5 million to 6.63 million.
Table 12.8
Age Structure of
> Age group 1997 (%) 2002 (%)
Population: 0–14 37.23 33.59
1997–2002 15–59 56.07 59.41
60+ 6.70 7.00
• In other words, if the economy maintains an annual growth of 7 per cent, it would
be just sufficient to absorb the new additions to the labour force as shown in the fol-
lowing table. If the economy could grow at around 8 per cent per annum during the
Plan period, the incidence of open unemployment could be brought down by two
million persons, thus attaining nearly full employment by the end of the Plan period,
according to the Plan. The trends in the labour-force participation rates are shown in
Table 12.9.
Sector-wise Absorption of Labour (%)

Agriculture 62
Manufacturing and construction 16
Services 10
Sundry/miscellaneous jobs 12
Male Female
< Table 12.9
Trends in Labour-force
Age Group Period Rural Urban Rural Urban Participation Rates (per
thousand of population)
1977–78 879 746 515 257
15–29 1987–88 824 710 478 211
1993–94 804 684 455 204
1977–78 990 990 619 324
30–44 1987–88 988 987 603 301
1993–94 990 986 600 300
1977–78 963 940 538 291
45–59 1987–88 964 933 538 275
1993–94 968 937 543 283
1977–78 667 517 221 130
60+ 1987–88 670 482 220 123
1993–94 699 443 241 114
1977–78 904 831 517 269
All (15+) 1987–88 879 810 496 239
1993–94 877 811 491 238
Notes: Constituent shares in labour force in 1993–94 are rural Male, 0.499; rural female, 0.270;
urban male, 0.182; and urban female, 0.049.
• However, there appears to be some confusion about the figure of open unemploy-
ment. The unemployment figure given in the executive summary of the Ninth Plan,
gives the figure of open unemployment at 7.5 million, while the annual report of the
Labour Ministry, for 1995–96, puts the figure for 1995 at 18.7 million. An internal
government paper prepared in 1997 put the unemployment figure at the beginning of
the Eighth Plan at 17 million and at 18.7 million at the end of 1994–95. Perhaps, the
Planning Commission referred to the current figure while the Labour Ministry figure
referred to the accumulated unemployment backlog.
Underemployment
• Open unemployment is not a true indicator of the gravity of the unemployment
problem in an economy such as India, characterised, as it is, by large-scale underem-
ployment and poor employment quality in the unorganised sector, which accounts
for over 90 per cent of the total employment. The organised sector contributes only
about 9 per cent to the total employment.
• Underemployment in various segments of the labour force is quite high. For instance,
though open unemployment was only 2 per cent in 1993–94, the incidence of under-
employment and unemployment taken together was as much as 10 per cent that year.
This is in spite of the fact that the incidence of underemployment was reduced sub-
stantially in the decade ending 1993–94.
• According to the Planning Commission, the states which faced the prospect of in-
creased unemployment in the post-Ninth Plan period (2002–2007) were Bihar,
Rajasthan, Uttar Pradesh, Kerala, and Punjab.
For a picture of participation in labour force on the basis of age group and sex, Table 12.10
is evident. Table 12.11 shows details on labour-force projections by age groups. Whereas
Table 12.12 details on population and labour force between 1997 and 2012, Table 12.13
projects on the work opportunities between 1997 and 2002. Finally, Table 12.14 explains
population, labour force, and employment between 1978 and 2007.
Table 12.10
Participation in Labour-
> Age Male Female
force by Age Group and 1997 2002 2007 2012 1997 2002 2007 2012
Sex: 1997–2012 (per
thousand of population) 15–19 517 482 447 412 302 282 261 241
20–24 871 408
25–29 975 454
30–34 988 505
35–39 996 526
40–44 986 (a) 538 (a)
45–49 981 524
50–54 961 476
55–59 914 411
60+ 637 205
Note: (a) No change in labour-force participation in the age groups above 20 years.
Table 12.11
Labour-force Projections
> Age Group 1997 (million) 2002 Growth (% p.a.)
by Age Groups. 15–19 40.31 45.03 2.24
20–24 55.45 62.91 2.55
25–29 56.89 61.47 1.56
30–34 52.64 58.88 2.26
(Continued)
Age Group 1997 (million) 2002 Growth (% p.a.)

< Table 12.11
(Continued)
35–39 46.60 52.80 2.53
40–44 39.56 46.04 3.08
45–49 32.90 38.13 2.99
50–54 25.86 30.27 3.20
55–59 18.86 22.45 3.55
60+ 28.15 31.64 2.37
Total
15+ 397.22 449.62 2.51
Heads 1997 2002 2007 2012

< Table 12.12
Population and Labour-
Population 951.18 1,028.93 1,112.86 1,196.41 force: 1997–2012
(million—April 1)
Labour Force 397.22 449.62 507.94 562.91
Sector GDP Growth Work

< Table 12.13
Projections of Work
(% p.a.) (million) Opportunities Opportunities,
1997–02 1997 2002 1997–2002
Agriculture 3.9 238.32 262.48
Mining and Quarrying 7.2 2.87 3.54
Manufacturing 8.2 43.56 48.22
Electricity 9.3 1.54 1.93
Construction 4.9 14.74 17.03
Wholesale and Retail Trade 6.7 34.78 41.67
Transport, Storage, and
Communication 7.3 11.96 14.57
Financing, Real Estate,
Insurance, and Business Services 8.5 4.55 5.68
Community, Social, and
Personal Services 7.1 38.98 46.41
All Sectors 6.5 391.30 441.52
Heads 1978a 1983b 1994a 8th Plan 9th Plan 10th Plan
< Table 12.14
Population,
(1992–97)f (1997–02)f (2002–07)f Labour-force, and
Populationc 637.6 718.2 895.0 951.2 1028.9 1112.9 Employment (million)
(2.19) (2.12) (1.89) (1.58) (1.58)
Labour-force 255.8 286.6 368.5 374.2 423.4 478.8
(2.09) (2.42)
(Continued)
Table 12.14
(Continued)
> Heads 1978a 1983b 1994a 8th Plan 9th Plan 10th Plan
(1992–97)f (1997–02)f (2002–07)f
Employment 249.1 281.2 361.5 367.2 416.4 474.7d

(2.23) (2.42)
Unemployment 6.7 5.4 7.0 7.0 7.0 4.1e
Rate (%) 2.63 1.89 1.89 1.87 1.66 0.86e
Notes:
1. Estimates of labour force and employment are on usual-status concept and pertain to 15 years and
above.
2. Figures in brackets are compound growth rates in the preceding period.
a
As on January 1.
b
As on July 1.
c
Population at the terminal year of the plan.
d
Required to attain near full employment.
e
Unemployment reduces to negligible level by the year 2007.
f
Labour-force, employment, and unemployment are stated as annual averages during the Plan period.
Finally Table 12.15 depicts the projected age distribution of population from 2006 to
2026.
Table 12.15
Projected Age
> Age Group 2026 2021 2016 2006
Distribution of Mn.
Population 0–14 327 337 340 360
(23.40) (25.10) (26.80) (32.30)
15–64 957 908 850 702
(68.30) (67.80) (67.00) (63.00)
65+ 116 95 78 52
(8.30) (7.10) (6.20) (4.70)
All Age Groups Population 1,400 1,340 1,269 1,114
(100.0) (100.0) (100.0) (100.0)
Note: Figures in brackets are % share in total.

McKinsey Report
India Needs to Create 115 Million Non-Farm Jobs through Cross-Cutting
Reforms and Targeted Public Investment
India needs 115 million new non-farm jobs over the next decade to accommodate a growing
population and to reduce the share of agriculture in employment. The manufacturing and
construction sectors can form the backbone of this effort, as these sectors are well-suited
to absorbing lower-skilled labour moving out of farm jobs (Exhibit E1). Labour-intensive
services—such as tourism, hospitality, retail trade, and transportation—will also need to add
35 million to 40 million jobs.
Incremental job creation in inclusive reforms scenario, 2012–22E

Head count, million
Compound annual
growth rate < Exhibit E1
India’s Industrial
Sector will Need to
80
Industry 75–80 5.6%1 Others1,2 3 3.8%
Lead the Way on Job
Creation, Especially
in Construction and
Manufacturing1 27 3.9%
Manufacturing
Services 35–40 2.4%1
Agriculture 20 –0.9%
Total 95 0.9% Construction1 50 7.4%
1. Calculated assuming 80 million new industry and 35 million new services jobs.
2. Includes mining and quarrying, electricity, gas, and water supply.
The government can catalyse job creation by rebalancing its spending pattern to increase
public investment in the economy. The subsequent uptick in growth and investor sentiment
would crowd in private investment. Put together, the overall investment rate would rise from
an average of 36 per cent since 2005 to an average of 38 per cent over the next decade in the
inclusive reforms scenario.
Almost half of the required jobs will need to be generated for the workforce in states
with particularly difficult starting conditions (including challenges with the quality of educa-
tion, which exacerbates skills shortages, as well as low levels of urbanisation). Uttar Pradesh’s
labour force, for example, will need some 23 million non-farm jobs (approximately one-fifth
of the national requirement), although the state is largely rural and organised enterprises ac-
count for only 9 per cent of its employment. Some 11 million workers from Bihar will need
to be absorbed into the non-farm sector in an even less advantageous climate. India’s job-
creation strategy must provide broad-based reforms that invigorate job growth both in these
regions and across the entire country.
As China moves up the value chain, India and other emerging economies with low
labour costs have an opportunity to capture a larger share of labour-intensive industries by
integrating domestic manufacturing with global supply chains.
But today an array of barriers limits the ability of Indian businesses—both large and
small—to invest and become more competitive, scale up, and create jobs. Revitalising India’s
job-creation engine will require decisive reforms and a laser focus on implementation in six
high-priority areas:
• Accelerate critical infrastructure for power and logistics. Infrastructure gaps,
especially in power and transportation, hinder economic growth, particularly in
manufacturing. For the better execution of projects, the government could establish a
high-level National Infrastructure Delivery Unit in the prime minister’s office to build
an integrated view of the country’s infrastructure needs, coordinate across ministries

and functions, set and monitor schedules, and address bottlenecks. This unit could
work with the Cabinet Committee on Investment to expedite infrastructure projects.
A State Chief Minister’s Office could also set up a State Infrastructure Delivery Unit
for the same purpose.
• Reduce the administrative burden on businesses. Complex and archaic regulations
pose a significant cost, especially for micro-, small, and medium sized businesses,
discouraging both investment and their move into the formal economy. India can
reduce this burden in a phased manner, starting with quick wins that require simple
changes in administrative rules and procedures rather than new legislation. In the
medium term, the rollout of e-government platforms and ‘one-stop shops’ supported
by automated government processes can be accelerated, with more fundamental im-
provements such as selective outsourcing to private-sector providers and extending
the Right to Public Services laws to business services as the third phase.
• Remove tax and product-market distortions. India’s many taxes result in high com-
pliance costs, and differences across states and sectors balkanize the national market,
harming the ability of businesses to achieve economies of scale. If implemented, the
proposed goods and services tax, a harmonized consumption tax across nearly all
goods and services, represents a step towards reducing complexity and lowering the
tax burden. In addition to cross-cutting tax reform, India can spur growth by remov-
ing tax and duty distortions in individual sectors—especially those that will be the
most significant sources of non-farm job creation, such as garment manufacturing
and tourism.
• Rationalise land markets. In 2013, India enacted the Land Acquisition, Rehabilita-
tion and Resettlement Bill, which was intended to create a framework to deal fairly
with the displaced. However, inefficient land markets remain a major impediment to
economic growth, as property rights are sometimes unclear and the process for land
acquisition is time-consuming. India can reinforce property rights by demarcating
land holdings through geospatial surveys and providing standardised title to land-
owners through digitising records, as Karnataka has done. Similarly, restrictions on
monetizing land can be loosened or eliminated to facilitate private transactions for
major projects and encourage the farm to non-farm shift.
• Take phased steps to make labour markets more flexible. At least 43 national
laws—and many more state laws—create rigid operating conditions and discourage
growth in labour-intensive industries. But ironically, they secure rights for only a
tiny minority of workers. India can make its labour market more flexible in a phased
manner, and states that have begun this process have higher job-creation rates on
average than those that have not. A multitude of rules that restrict terms of work and
work conditions can be simplified or eliminated. In the medium term, India could
rationalise laws governing dismissal, pairing this with measures to reinforce income
security for the unemployed.
• Help poor workers build skills with government-funded mechanisms. Vocational
education is needed most acutely by the poorest workers—those with little or no
education and those who live in rural areas. There are 278 million Indians of working
age in these segments, but they are underserved. Providers such as IL&FS Skills have
built effective models that focus on providing low-cost delivery, fostering interac-
tive learning, and teaching skills that are in demand. The government can scale up
this approach by giving poor workers vouchers that can be redeemed for vocational
training with accredited providers that are subject to monitoring and certification.
Workers in informal sectors and the self-employed (for example, caregivers, cooks,
nursing aides, hairdressers, shop assistants, plumbers, and electricians) can raise their
incomes through skill building. Short training courses of a few months’ duration,
along with certification systems, could help.
Investment in ‘Job-Creation Engines’ Can Promote More Geographically

Balanced Growth and be Selfsustaining
Along with making broad-based reforms to improve the business environment, India can
invest in stimulating specific ‘job-creation engines’. Our research finds that investing in 70 to
100 sites, such as industrial townships or service hubs, tourism circuits, and food-processing
parks, can add 11 million incremental jobs within a decade, and many more as these sites
grow in scale. To be successful, they would need to be located in areas with potentially high
competitive advantages (where natural endowments, traditional skills, and some base of
entrepreneurs already exist, for example)—and there are hundreds of such locations in India
across most states.
These job-creation engines would need to be seeded by public investment in infrastruc-
ture and services, including reliable and low-cost power, road and rail connections, and
affordable housing and schools for workers’ families. By our estimates, launching 35 indus-
trial townships over a decade could require capital expenditure for infrastructure averaging
some ` 30,000 crore ($6 billion) annually for the first eight years, after which cash flows turn
positive. (Launching tourism circuits or food-processing zones is significantly less capital-
intensive.) Such investments can be self-sustaining, yielding internal rates of return to the
government in excess of 25 per cent per year and generating funds for additional investment.
Creating thriving new job centres across the country would encourage more geographically
balanced economic growth, raising the share of population in small and medium-sized cities.
This could alleviate some of the pressures on basic services in India’s largest cities.
C ase
Literate State with the Highest Unemployment
The state with the highest literacy rate—almost 97 per cent—has the highest unemployment rate
too, when compared to the other states in India. That state is none but our neighbour, Kerala.
Kerala is known for a large-scale migration of skilled labour to other states and countries.
What ails the state that has such a high literacy rate and is also blessed by vast natural
resources to have the highest unemployment rate in the country?
No industrialist wants to set up any industry in Kerala due to labour problems. The state is
bankrupt, besides being corrupt and largely politicised. Trade unionism is still alive in Kerala.
One important feature of the Kerala economy, which makes it different from the rest
of the country, is the net out-migration of the labour force, particularly, to Gulf and the in-
flow of huge remittances into the economy. The Centre for Development Studies (CDS) has
been doing an interesting work on emigration and the impact of NRI remittances on Kerala’s
economy. Kerala vitally depends on the transfers only—$5.8 bn in 2007 or 20.2 per cent of
net state domestic product—from its Diaspora overseas. CDS has now scaled up its efforts
statewide through its regular Migration Monitoring Studies (MMS).
The latest MMS 2007 round data indicated stability in Kerala’s migration pattern.
The number of emigrants (18.5 lakh), return emigrants (8.9 lakh), non-resident Keralites
(27.3 lakh), and the proportion of households with a non-resident Keralite (25.8 per cent) has
remained virtually the same since 2003.
Emigration has had a major impact on the labour market of a state that has, perhaps, the
highest unemployment rate (12.2 per cent) in India. If among the unemployed, the emigration
rate is as high as 43.5 per cent, the process of going abroad for work lowers Kerala’s unemploy-
ment rate than it would otherwise have been. Inspite of the fact that a large section of the popu-
lation has migrated out to Gulf, and elsewhere, for jobs, the rate of unemployment here is way
above the all-India average. Instead of migrating to other states for jobs, Keralites should use
their knowledge and expertise in establishing new productive activity on their own. Many of
them should look at self-employment for overcoming the serious problem of unemployment.
As on September 30, 2006, there were close to 40 lakh registered job seekers in the Live
Register of Employment Exchanges in Kerala. This constituted about 46 per cent of the state’s
population in the age group of 19–29. Of the total number registered, 58 per cent are females.
There are few illiterates among Kerala’s unemployed, while the largest number of job seekers
boasted academic qualification up to the matriculation level.
Kerala’s unemployment problem is not only a serious problem of educated unemploy-
ment but also a substantial portion of this problem is simple unemployment of low-skilled
workers. The population in the productive age group (15–29 years) in Kerala was 201.83 lakh
(2001 Census) and they are the work seekers. The problem of unemployment in Kerala is
very acute and has been worsening over time. The worsening unemployment situation is ob-
viously related to the inability of the economy of the state to generate any fresh employment
during the last decade or so, particularly, after the advent of liberalization in the country.
While this phenomenon of ‘jobless growth’ is observable in all the states in the country, the
situation in Kerala appears to be particularly distressing in this regard. The growth rate in
employment during the period 1993–94 and 1999–2000 in Kerala was a meagre number of
0.07 per cent per annum.
The problem of ‘simple unemployment’ (unemployment of simple, low-skilled labour)
is also quite significant in Kerala. The National Rural Employment Guarantee Scheme, un-
der the NREG Act, 2005, is aimed at enhancing the livelihood security in the rural areas.
National Rural Employment Guarantee Act (NREGA) is being implemented in Wayanad and
Pallakad districts of Kerala, which is a right-based constitutional approach. The Registration
of rural unemployed has already begun in Wayanad and Palakkad districts under the scheme.
It is clear that the problem of unemployment is not just one of unemployment among the
educated youth. The unemployment and underemployment among workers in the traditional
sectors like agriculture and household industries are indeed major concerns. One of the most
important groups of such workers is the traditional agricultural workers. According to the
2001 Census, the number of agricultural workers in Kerala was around 16.20 lakh and this is
more than twice, the number of cultivators (7.20 lakh) and more than four times, the number
in the household industry (3.70 lakh). About three-fourth of workers in the household indus-
try are in rural areas and close to half of them are female workers. The unemployment rate
among the youth and females is also found to be high.
The Department of Employment operates about 96 institutions and they provide
placement service, vocational guidance, employment-market information, self-employment
guidance, unemployment assistance, and self-employment scheme for the registered
unemployed. But these services have been considered inadequate to tackle the problem of
unemployment in the state, since most of the unemployed do not possess marketable skills,
and this reduces their employability. This would call for a convergent action by the Employ-
ment Department and Industrial Training Department.
Internal migration has also made a difference to the overall joblessness. Simultaneously,
employment also had significantly increased by over 3 lakh persons during 2003–2007, with
a 100 per cent increase in the private sector employment and a 20 per cent increase in the
self-employment.
But the biggest message of MMS 2007 is the shift from remittance-based consumption to
remittance-based investments as the key driver of Kerala’s growth. In the early years of large-
scale emigration, Gulf remittances went into subsistence, children’s education, and housing.
The return emigrants, then, also lacked the educational background or the know-how to start
any businesses. But times are changing, as more than a million emigrants have returned with
their accumulated savings and are ready to invest. Note that only less than 2 per cent of the
surveyed households used remittances for starting a business.
Much, of course, depends on the investment environment in the state, which determines
how productively resources can be used. Unfortunately, Kerala is a laggard on this, in con-
trast to the experience of investment-friendly states like Tamil Nadu and Karnataka, which
have harnessed resources from their non-residents and returned emigrants rather well.
Case Questions
1. What are the reasons for unemployment in Kerala inspite of having a 97-per cent
literacy?
2. Do you think emigration is a major reason for the unemployment in Kerala?
3. Migration of labour force is the highest in Kerala, to Gulf or any other state of the
country. How can this feature of Kerala economy be used positively for generating
employment in Kerala?
Key W o r d s
● Cyclical Unemployment ● ational Commission for
N ● Capital-intensive Techniques
Enterprises in the Unorganised
● Open Unemployment ● Labour-intensive Techniques
Sector (NCEUS)
● Disguised Unemployment ● Population Control
● Organised Sector Employment
● Underemployment ● Decentralisation
● Explosive Population Growth
● Usual Principal Status (UPS)
● Inadequate and Defective
● Current Daily Status (CDS) Employment Planning
Q u est i o n s
1. Discuss the nature and extent of unemployment in 4. Economic planning has not been able to solve the
India. problem of unemployment. Explain?
2. Unemployment problem in India is primarily a prob- 5. Unemployment is a chronic problem, which needs
lem of structural unemployment. Do you agree? structural transformation of the economy. To what ex-
3. What are the causes of unemployment in India? tent do economic reforms help to solve the problem?
What measures would you recommend to solve the
problem?
r efe r e n ces
n Government of India. Economic Survey 2007–2008. New n NSS surveys’ various rounds.
Delhi: Ministry of Finance. n www.wikipedia.com (the free encylopedia).
n Eleventh Plan Document of Planning Commission of India.
13
C hapter
Inflation
>>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>>
• Meaning and Definition of Inflation 330 • Effects of Inflation 352
• Features of Inflationary Economy 331 • Global Inflation and India 358
• Measures of Inflation 332 • Case 361
• Inflation and Developing Economies 345 • Key Words 363
• Demand-Pull vs Cost-Push Inflation 348 • Questions 363
• Causes of Inflation 350 • References 364
MEANING AND DEFINITION OF INFLATION

‘Inflation’ is commonly under-
‘Inflation’ is commonly understood as a situation of substantial and rapid general increase in
stood as a situation of substan- the level of prices and consequent deterioration in the value of money over a period of time.
tial and rapid general increase The behaviour of general prices is measured through price indices. The trend of price indices
in the level of prices and conse- reveals the course of inflation or deflation in the economy. As Lerner says, ‘a price rise which
quent deterioration in the value
of money over a period.
is unforeseen and uncorrected is inflationary.’
In economics, inflation is a rise in the general level of prices of goods and services in
an economy over a period of time. When the general price level rises, each unit of currency
buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing
power per unit of money—a loss of real value in the medium of exchange and unit of account
within the economy. A chief measure of price inflation is the inflation rate, the annualized
percentage change in a general price index (whole sale price index/consumer price index)
over time.
Inflation’s effects on an economy are various and can be simultaneously positive and
negative. Negative effects of inflation include an increase in the opportunity cost of holding
money, uncertainty over future inflation which may discourage investment and savings, and
if inflation is rapid enough, shortages of goods as consumers begin hoarding out of concern
that prices will increase in the future. Positive effects include ensuring that central banks can
adjust real interest rates (intended to mitigate recessions) and encouraging investment in
non-monetary capital projects.
Economists generally agree that high rates of inflation and hyperinflation are caused by
an excessive growth of the money supply. Views on which factors determine low to moderate
rates of inflation are more varied. Low or moderate inflation may be attributed to fluctua-
tions in real demand for goods and services, or changes in available supplies such as dur-
ing scarcities, as well as to changes in the velocity of money supply measures; in particular
the MZM (‘money zero maturity’) supply velocity. However, the consensus view is that a
long sustained period of inflation is caused by money supply growing faster than the rate of
economic growth.
Inflation | 331
Thus, inflation is statistically measured in terms of percentage increase in the price index,
as a rate per cent per unit of time—usually a year or a month. Generally, the wholesale price
index (WPI) numbers are used to measure inflation. Alternatively, the consumer price index
(CPI) or the cost of living index number can be adopted in measuring the rate of inflation.
Inflation is like an elephant to the blind men. Different economists have defined inflation dif-
ferently. We may, thus, enlist a few important definitions of inflation as follows, which would
give us a comprehensive idea about this intricate problem.
Harry Johnson defines inflation as a ‘sustained rise in prices.’ Crowther, similarly,
defines inflation as ‘a state in which the value of money is falling, that is, prices are rising.’
The common feature of infla-
The common feature of inflation is a price rise, the degree of which may be measured by tion is a price rise, the degree
price indices. Edward Shapiro puts it thus: ‘Recognising the ambiguities our words contain, of which may be measured by
we will define inflation simply as a persistent and appreciable rise in the general level of price indices.
prices.’ Prof. Samuelson puts it thus: ‘Inflation occurs when the general level of prices and
costs is rising.’ Authors like Thorp and Quandt, however, opine that it is of great help to de-
fine inflation in terms of observable phenomenon and, for this reason, the process of rising
prices should be considered as inflation. There are, at least, two distinct views on the concept
of inflation. To some economists, inflation is a pure monetary phenomenon, while to others
it is a post-full-employment phenomenon.
FEATURES OF INFLATIONARY ECONOMY

The following are the strategic features of an inflationary economy:
1. There is a continuously rising price trend, whether it is measured through WPI or CPI.
2. The money supply is in excess of the requisite production and exchange needs of the
economy. There is an undeserving excess of monetary liquidity adding fuel to the fire.
3. There is an over-expansion of credit by the banks.
4. A good part of the flow of credit is supplied to unproductive channels, speculative
activities, and sick and non-viable units of production. In many cases, there is no
direct relation between the bank loans and the physical capacities of the enterprises.
5. There is a lack of financial discipline on the part of the government. The budget is
usually large with huge deficits on the revenue and capital account.
6. A large number of commodities are in short supply paving ways for the sectoral price
disequilibrium.
7. Artificial scarcity is commonly caused by hoarding activities and has become
conspicuous for traders, producers, and consumers.
8. The rate of return of speculative hoarding of commodities, precious metals like gold
and silver, and investments in immovable properties—land, buildings, flats, and
so on, are much high and fascinating than the rate of returns on the shares and bonds
in an inflationary economy.
9. Interest rates in the unaccounted and unorganized sectors tend to be higher than the
organized sectors of the money market.
10. Labour unrest, strikes, lock-outs, and so on, are common. Organized labour force
successfully resists any reduction in the real wages and pushes up the money-wages,
thereby, accelerating the process of cost-push inflation.
11. In an inflationary economy, the government is trapped in the cobweb of an ever-

increasing public expenditure, larger budgets, higher taxes, larger public debts, huge
deficit financing, and a large number of controls, which, in turn, encourage black
money and dual accounting system, black marketing, smuggling, and other antiso-
cial activities on account of the deterioration of the community’s morals, in general,
caused by the inflationary impact.
In short, an economy is inflationary because it is inflationary. There tends to be a vicious
circle of inflation when it is curbed immediately. In the long period, the state of unchecked
inflation becomes a built-in feature of the economy and people expect the rate of inflation to
accelerate further.
Deflation
Deflation is a decrease in the general price level of goods and services. Deflation occurs when
the inflation rate falls below 0 per cent (a negative inflation rate). This should not be confused
with disinflation, a slow-down in the inflation rate (i.e., when inflation declines to lower
levels). Inflation reduces the real value of money over time; conversely, deflation increases the
real value of money—the currency of a national or regional economy. This allows one to buy
more goods with the same amount of money over time.
Declining prices, if they persist, generally create a vicious spiral of negatives such as fall-
ing profits, closing factories, shrinking employment and incomes, and increasing defaults on
loans by companies and individuals. To counter deflation, the Federal Reserve can use mon-
etary policy to increase the money supply and deliberately induce rising prices, causing infla-
tion. Rising prices provide an essential lubricant for any sustained recovery because businesses
increase profits and take some of the depressive pressures off wages and debtors of every kind.
Stagflation
A condition of slow economic growth and relatively high unemployment—a time of
stagnation—accompanied by a rise in prices, or inflation.
Stagflation occurs when the economy is not growing but prices are, which is not a good
situation for a country to be in. This happened to a great extent during the 1970s, when world
oil prices rose dramatically, fueling sharp inflation in developed countries.
MEASURES OF INFLATION
Prices as Measures of Inflation
It is well recognized that inflation in India is a structural as well as a monetary phenomenon.
In the short term, the localized demand–supply imbalances in wage goods, often due to sea-
sonal variations in production—coupled with market rigidities and regulatory failures have
supported inflationary expectations that have resulted in a more widespread impact, than
the initial inflationary impulse, on the consumers. In the medium to long term, the move-
ment and outcome of monetary aggregates, such as the money supply and reference interest
rates of the financial systems, have influenced aggregate demand and consequently, changes
in the price levels in the economy. The latter considerations and the influence of global com-
modity prices on the domestic prices have become more important with the opening and
growing integration of the Indian economy with the rest of the world. Indeed, the fiscal year
(FY) 2007–08 has demonstrated this facet of the economy more than ever before. With a
Inflation | 333
huge surge in capital inflows, the liquidity management with its underlying implications for
inflation has been a major challenge for the policymakers.
WPI and CPI

The WPI is the price of a representative basket of wholesale goods (primary articles, fuel and
power, and manufactured goods). Some countries use WPI changes as a central measure of
inflation. The WPI focuses on the price of goods traded between corporations, rather than
goods bought by consumers, which is measured by the consumer price index. The purpose of
the WPI is to monitor price movements that reflect supply and demand in industry, manufac-
turing, and construction. This helps in analyzing both macroeconomic and microeconomic
conditions.
A CPI measures changes in the price level of a market basket of consumer goods and
services purchased by households. The CPI in the United States is defined by the Bureau of
Labor Statistics as ‘a measure of the average change over time in the prices paid by urban
consumers for a market basket of consumer goods and services.’
India uses the WPI to calculate and then decide the inflation rate in the economy. A total
of 435 commodities data on price level is tracked through WPI which is an indicator of
movement in prices of commodities in all trade and transactions.
WPI was first published in 1902, and was one of the more economic indicators available
to policy makers until it was replaced by most developed countries by the CPI in the 1970s.
The WPI, which is available on a weekly basis, continues to be the most popular
measure of headline inflation in India. There are, however, four CPIs that are specific to The WPI, which is available on
different groups of consumers. The commodity basket for these indices is derived on the a weekly basis, continues to
basis of group-specific consumer expenditure surveys, and weights to each commodity are be the most popular measure
proportionate to its expenditure. WPI is an economy-wide index covering 435 commodi- of headline inflation in India.
There are, however, four CPIs
ties. Weights of the commodities are derived based on the value of quantities traded in the that are specific to different
domestic market. groups of consumers.
Characteristics of WPI
• WPI uses a sample set of 435 commodities for inflation calculation
• The price from wholesale market is taken for the calculation
• WPI is available for every week
• It has a time lag of two weeks
It is, therefore, the most comprehensive measure of economy-wide inflation available with
high frequency. The four CPIs are as follows: CPI-IW for industrial workers; CPI-UNME
for urban non-manual employees; CPIAL for agricultural labourers; and, CPI-RL for rural
labourers. CPIIW is the most well known of these indices as it is used for wage indexation
in the government and organized sectors. CPIs are compiled in terms of general standards
and guidelines set by the International Labour Organization (ILO) for its member countries.
Calculation of Inflation Rate Over a

Specific Time
The inflation rate is widely calculated by calculating the movement or change in a price
index. The inflation rate is the percentage rate of change of a price index over time.
To illustrate the method of calculation, Let us consider the price of sugar is ` 38 at present,
April 2013. We need to calculate inflation for last five years hence will consider sugar price
as ` 22 in the year 2008 as base year (100). The formula for calculating the annual percentage
rate inflation over the course is
P1 – P0/P0 × 100
where
P1 = Current year price
P0 = Base year price
Hence, inflation = 38 – 22/22 × 100 = 72.72 per cent.
The resulting inflation rate in the year 2013 72.72 per cent, means the price level of prices
for sugar rose by 72.72 per cent in 2013.
Inflation-Broad Trends
The financial year 2012–13 started with a headline WPI inflation of 7.50 per cent. It has
remained in the 7.18 to 8.07 per cent range in the nine months up to December 2012.
Consumer price inflation for the major indices, which had declined to the range of 4.92 to
7.65 per cent in January 2011, however, started witnessing an increase since then.
For most of the current year, inflation measured in terms of CPI for industrial workers
(CPIIW) and the new series of CPI has remained in double digits. CPIs for agricultural
and rural labourers have also inched up to double digit level in the last two months (refer
to Table 13.1).
WPI Inflation Trend at the Level of Broad

Commodity Groups
Headline WPI inflation which averaged 9.56 per cent in 2010–11 and 8.94 per cent in 2011–
2012 decelerated to 7.55 per cent in the first nine months of 2012–13 (Apr.–Dec.). Although
in December 2012, inflation was at a three year low of 7.18 per cent, it has been in the range
of 7–8 per cent in the last 13 months. Relative importance of different commodity groups
contributing to this persistent inflation, however, changed over time.
The persistently elevated prices for animal products (eggs, meat, and fish), the rise in the
prices of cereals and vegetables, along with the increase in international prices of fertilizers
(non-urea) and the increase in administered prices of diesel have contributed to inflation
in differing degrees over time. The build-up in price pressures seems to have tapered off in
recent months, as headline WPI has remained steady.
Month-over-month price changes in most commodity groups have been small, indicat-
ing that the pressure on generalized inflation has fallen, as has the momentum of inflation, as
measured by the seasonally adjusted annualized rate of inflation (SAAR) of the WPI index.
Quarterly Inflation in Major Group (%)

The level of inflation and its movement across three major commodity groups varied signifi-
cantly. Inflation of primary articles having a weight of 20.12 per cent in the WPI, after declin-
ing to 6.7 per cent in Q4 of 2011–12, increased in first three quarters of the current year and
was 10.6 per cent in December 2012.
Inflation for commodities in the group ‘fuel and power’, with a weight of 14.91 per cent
in the WPI witnessed some moderation in the current year. Apart from the base effect,
Month WPI CPI-IW CPI-NS CPI-AL CPI-RL
2011–12 2012–13 2011–12 2012–13 2011–12 2012–13 2011–12 2012–13 2011–12 2012–13
Apr 9.74 7.50 9.41 10.22 – 10.26 9.11 7.84 9.11 8.01
May 9.56 7.55 8.72 10.16 – 10.36 9.63 7.77 9.63 8.11
Jun 9.51 7.58 8.62 10.05 – 9.93 9.32 8.03 9.14 8.54
Jul 9.36 7.52 8.43 9.84 – 9.86 9.03 8.61 9.03 8.94
Aug 9.78 8.01 8.99 10.31 – 10.03 9.52 9.18 9.71 9.34
Sep 10.00 8.07 10.06 9.14 – 9.73 9.43 9.43 9.25 9.93
Oct 9.87 7.32 9.39 9.60 – 9.75 9.36 9.85 9.73 9.84
Nov 9.46 7.24 9.34 9.55 – 9.90 8.95 10.31 9.14 10.47
Dec 7.74 7.18P 6.49 11.17 – 10.56 6.37 11.33 6.72 11.31
Jan 7.23 5.32 7.65 4.92 5.27
Feb 7.56 7.57 8.83 6.34 6.68
Mar 7.69 8.65 9.38 6.84 7.19
* * * *
Average 8.94 7.55 8.39 10.00 – 10.04 8.19 9.17 8.35 9.41*
Source: Office of the Economic Adviser, Labour Bureau, Central Statistics Office (CSO).
*
Average (Apr.–Dec.); P : Provisional; CPI : Consumer Price Index; IW : Industrial Workers;
AL : Agricultural Labourers; RL : Rural Labourers; NS : New Series.
< Table 13.1
Different Price Indices

Annual Inflation as per
eceleration in the inflation of non-administered petroleum products contributed to the

d
moderation. This helped contain the effects of the increase in administered prices of diesel
effected in September 2012. Finally, the deceleration in inflation of manufactured products,
with a weight of 64.97 per cent in WPI, was relatively sharp (refer to Table 13.2).
A disaggregation of WPI inflation in terms of composite groups indicates that food
inflation, comprising primary food articles and manufactured food products (24.31 per
cent weight in the WPI) at 9.05 per cent in Q3 of 2012–13 was significantly higher than the
5.30 per cent in Q4 of 2011–12.
Food inflation had once in fact declined to 1.45 per cent in January 2012 before inching
upward to 10.39 per cent in December 2012. Non-food non-manufacturing inflation did
moderate over the current year, but remains high, in the double digits, largely because of
higher inflation for oilseeds and the commodities in the group ‘fuel and power.’
Core inflation which corresponds to inflation for non-food manufactured products, and
is a central focus for the Reserve Bank of India (RBI), however, continued to show modera-
tion from its peak in Q3 of 2011–12. The contribution of this composite group to overall
inflation also declined from over 43 per cent in Q3 of 2011–12 to around 30 per cent in Q3
of 2012–13. Apart from monetary measures taken by the RBI, softening of international and
domestic prices of metals, chemicals, and textile products also contributed to the moderation
in core inflation.
Year-on-year Inflation
Headline WPI inflation remained relatively sticky at around 9 per cent during the calendar
year 2011. The factors contributing to this situation and their relative importance have,
however, been changing over time.
Some of the contributory factors during this period include (a) higher primary articles
prices driven by vegetables, eggs, meat, and fish due to changing dietary pattern of consumers;
(b) increasing global commodity prices especially metal and chemical prices which
ultimately led to higher domestic manufactured prices; and (c) persistently high internation-
al crude petroleum prices in the last two years averaging around US$ 111 per barrel in 2011
(Jan.–Dec.) as compared to US$ 80 per barrel (Jan.–Dec.) in 2010.
Inflation in primary articles has declined drastically, falling to 2.25 per cent by January
2012, after remaining in double digits for almost two years.
Inflation in fuel has continued to remain high during the last two years. Inflation in
manufactured products had started to accelerate since January 2011, remaining range-bound
between 7 and 8 per cent in 2011, due to a surge in metal and chemical prices, but it has also
recently started to moderate (refer to Figure 13.1).
Figure 13.1
Year-to-year Inflation for
> 25
20
Primary
Articles
Per cent
Major Groups in WPI 15

Food
10 Articles
5
0 Fuel &
Power
–5
Manufac-
Apr 10
May 10
Jun 10
Jul 10
Aug 10
Sep 10
Oct 10
Nov 10
Dec 10
Jan 11
Feb 11
Mar 11
Apr 11
May 11
Jun 11
Jul 11
Aug 11
Sep 11
Oct 11
Nov 11
Dec 11
Jan 12
tured
Products
Year
All commo-
dities
Source: Economic Survey 2011–12.

Major Groups/ Weight Average 2011–12 2012–13
Composite groups (%) (Apr.–Mar.)
2010–11 2011–12 Q1 Q2 Q3 Q4 Q1 Q2 Q3P
All Commodities 100.0 9.56 8.94 9.60 9.71 9.01 7.50 7.54 7.87 7.25
Primary Articles 20.12 17.75 13.09 13.09 12.05 7.76 6.70 9.87 10.32 9.27
Fuel & Power 14.91 12.28 12.74 12.74 12.99 15.08 14.94 11.90 9.72 10.34
Manufactured Prod. 64.97 5.70 7.38 7.38 7.87 7.95 5.89 5.29 6.23 5.46
Composite groups
All food 24.31 11.10 7.24 8.36 8.81 6.60 5.30 9.12 9.07 9.05
Non-food Non-manufacturing 2.69 15.67 14.51 16.20 14.97 13.72 13.33 10.52 10.79 10.37
Non-food Manufacturing 55.00 6.11 7.29 7.35 7.80 8.13 5.92 5.15 5.71 4.64
Source: Office of the Economic Adviser. P : Provisional

< Table
WPI (%)
13.2
Quarterly Inflation
in Major Group of the
WPI-Food Inflation
Inflation for both primary food articles and manufactured food products have moved
together since 2011–12.
Overall food inflation declined to 5.30 per cent in Q4 of 2011–12, its lowest quarterly
level in the last seven quarters. Inflation in both primary food articles and manufactured
food products was also at its lowest during this quarter (refer to Table 13.3).
An increase in inflation has been observed for both these groups in the current year.
Within primary food articles, however, inflation in protein foods has moderated, especially
so in the case of milk and animal products, where it has been significant and sequential. For
pulses too, a sharp decline in inflation in Q3 of 2012–13 is observed. Cereals have, however,
emerged as the major contributor to an increase in the inflation in food articles in first three
quarters of the current year.
Inflation in cereals which had moderated to a level of 2.73 per cent in Q3 of 2011–12
increased to 17.05 per cent in Q3 of 2012–13 mainly contributed by wheat, rice, and maize.
There has also been an increase in inflation in fruits and vegetables partly because of the
increase in inflation in onions and potatoes. While in the case of potatoes, the current
increase in prices may be a correction as prices had declined below the base level prices of
2004–05 in January 2012, an upsurge in onion prices and inflation has been observed in the
last two months.
In the manufactured food products group, a sequential and sharp moderation in inflation
has been observed in dairy products from Q4 of 2011–12.
This decline in inflation is sharper and more pronounced than the inflation in milk.
Grain mill products have witnessed an increase in inflation largely because of an upsurge in
wheat prices, the key ingredient for these commodities. Sugar inflation had also shown an
upward trend, after having remained at moderate levels in 2010–12.
Prices have been particularly buoyant in the second and third quarter of the current
year. In last two months, however, there has been some moderation in sugar prices. Futures
prices also suggesting a softening trend of a moderate level. While inflation in edible oils has
remained stable though elevated, there has also been increase in inflation in oil cakes in the
current financial year. Momentum of food inflation as observed from the seasonally adjusted
monthly WPI series indicates a mild upward trend (refer to Figure 13.2).
WPI-Non-food Non-manufacturing Inflation

The composite non-food non-manufacturing group is a heterogeneous mix of commodities
and comprises non-food primary articles including minerals as well as commodities in the
broad group of ‘fuel and power.’
Figure 13.2
Momentum of WPI Food
> 24.0
21.0
36.0
33.0
30.0
18.0 27.0
Inflation 24.0
15.0
Inflation (%)
21.0
18.0
SAAR (%)
12.0
15.0
9.0 12.0
6.0 9.0
6.0
3.0 3.0
0.0 0.0
–3.0
–3.0 –6.0
Jan 09
Feb 09
Mar 09
Apr 09
May 09
Jun 09
Jul 09
Aug 09
Sep 09
Oct 09
Nov 09
Dec 09
Jan 10
Feb 10
Mar 10
Apr 10
May 10
Jun 10
Jul 10
Aug 10
Sep 10
Oct 10
Nov 10
Dec 10
Jan 11
Feb 11
Mar 11
Apr 11
May 11
Jun 11
Jul 11
Aug 11
Sep 11
Oct 11
Nov 11
Dec 11
Jan 12
Feb 12
Mar 12
Apr 12
May 12
Jun 12
Jul 12
Aug 12
Sep 12
Oct 12
Nov 12
Dec 12
Total food (y-0-y) Total food SAAR
Source: indiabudget.nic.in
Components/ Weight Average 2011–12 2012–13
Sub components (%) (Apr.–Mar.)
2010–11 2011–12 Q1 Q2 Q3 Q4 Q1 Q2 Q3P
FOOD INFLATION 24.31 11.10 7.24 8.36 8.81 6.60 5.30 9.12 9.07 9.05
(A) Food Articles 14.34 15.60 7.30 8.83 9.14 6.34 5.05 1.82 9.18 8.76
Non-Protein food 7.97 12.33 4.79 11.50 9.50 1.96 –2.88 8.00 6.23 7.54
Cereals 3.37 5.26 3.87 5.08 4.83 2.73 2.90 6.36 11.06 17.05
Fruits & Vegetables 3.84 16.44 6.45 16.11 14.93 1.71 –5.26 14.40 5.30 3.98
Other Food (Tea & Coffee) 0.18 –7.25 18.97 22.62 20.90 18.43 14.21 10.01 15.25 13.10
Condiments & Spices 0.57 33.56 –2.65 14.47 0.49 –3.83 –18.07 –18.18 –12.48 –15.99
Protein Food 6.37 19.78 10.32 5.78 8.72 11.75 14.85 14.28 12.66 10.13
Pulses 0.72 3.20 2.52 –8.32 –3.03 12.95 9.65 16.2 3.68 18.84
Milk 3.24 20.13 10.31 6.84 10.15 11.02 13.08 11.56 7.05 6.13
Eggs, Meat & Fish 2.41 25.51 12.73 9.17 10.64 12.32 18.55 17.12 14.63 12.47
(B) Food Products 9.97 3.72 7.12 7.52 8.19 7.07 5.76 6.02 8.85 9.59
Dairy Products 0.57 9.56 12.85 6.04 12.11 17.94 15.28 9.38 4.09 –1.03
Processed Food 0.36 5.05 9.72 7.22 8.87 10.55 12.55 8.12 2.47 1.15
Grain Mill Products 1.34 5.67 0.27 2.80 0.81 –0.30 –2.10 –0.55 3.90 9.48
Bakery Products 0.44 8.60 0.75 –0.58 0.40 1.43 1.74 2.12 2.13 3.62
Sugar, Gur & Khandsari 2.09 –0.88 4.50 3.74 5.41 5.49 3.36 5.27 14.50 14.29
Edible Oils 3.04 5.43 12.55 14.92 14.45 12.22 9.00 10.35 10.82 9.59
Oil Cakes 0.49 0.79 3.95 3.91 6.85 1.60 3.63 12.60 25.90 24.41
Processed Tea & Coffee 0.71 3.48 4.55 11.19 4.77 –3.16 6.11 –1.98 –0.71 7.77
Salt 0.05 2.67 0.84 –6.70 1.47 3.73 5.42 5.51 5.51 1.72
Other Food Products 0.88 4.72 11.54 9.22 13.92 14.48 8.69 6.15 1.89 3.57

< Table 13.3
Sub Components of
WPI Food Inflation (%)
Inflation in this composite group at aggregate level has shown some moderation from its
peak in Q1 of 2011–12, though it has remained in double digits overall. Within this compos-
ite group, inflation differed widely across commodity groups. In case of non-food primary
articles, inflation witnessed a sharp downturn and a nearly ‘V’ shaped rebound.
The drivers for the downturn and the rebound, however, were different. Fibres led by
cotton witnessed inflation of 62.7 per cent in Q1 of 2011–12, but this turned negative by Q4
of the same year. A sharp increase in cotton production in 2010–12 and recessionary global
conditions affected prices.
In other non-food primary articles, inflation surged in 2010–11 largely because of
increase in prices of sugarcane and rubber. In 2011–12, guar seed, used in variety of indus-
trial application, became the main driver of inflation in this group with an average inflation
of 155 per cent. Oilseeds also witnessed a sustained increase in prices. Inflation in minerals
followed the prices of crude petroleum. For commodities in the ‘fuel and power’ group an
increase in the price of electricity across states pushed up the inflation in Q2 and Q3 of the
current year.
The prices of non-administered petroleum products tracked international prices and
witnessed moderation in inflation from its peak in Q3 of 2011–12. The increase in inflation
of administered petroleum products in Q3 of 2012–13 was due to increase in the prices of
diesel (refer to Table 13.4). Diesel prices have been revised again in January and inflationary
impact of this revision would be reflected in the WPI for January 2013. While this will add
to inflation, it will also reduce suppressed inflation, and through its contribution to fiscal
consolidation, have a moderating effect in the long run.
Momentum of inflation in this heterogeneous group based on SAAR indicates a down-
ward trajectory. Stable or moderately rising crude oil prices and a benign inflationary outlook
for other products suggests grounds for some optimism (refer to Figure 13.3).
WPI-Non-food Manufacturing Inflation

Non-food manufacturing (NFM) inflation, defined as core inflation by the RBI, has declined
from 8.35 per cent in November 2011 to 4.24 per cent in December 2012. Within the non-food
manufacturing group, beverages and tobacco products, wood and wood products, chemical
and chemical products witnessed inflation of over 6 per cent in Q3 of 2012–13. Deceleration
in inflation was witnessed across all major segments of manufacturing. However, inflation in
machinery and transport equipment has generally remained low (refer to Table 13.5).
Figure 13.3
Momentum of Non-
> 20.0
15.0
30.0
25.0
20.0
food Non-manufactured 10.0 15.0
Inflation (%)
10.0
Inflation
SAAR (%)
5.0 5.0
0.0
0.0 –5.0
–5.0 –10.0
–15.0
–10.0 –20.0
–25.0
–15.0 –30.0
Jan 09
Feb 09
Mar 09
Apr 09
May 09
Jun 09
Jul 09
Aug 09
Sep 09
Oct 09
Nov 09
Dec 09
Jan 10
Feb 10
Mar 10
Apr 10
May 10
Jun 10
Jul 10
Aug 10
Sep 10
Oct 10
Nov 10
Dec 10
Jan 11
Feb 11
Mar 11
Apr 11
May 11
Jun 11
Jul 11
Aug 11
Sep 11
Oct 11
Nov 11
Dec 11
Jan 12
Feb 12
Mar 12
Apr 12
May 12
Jun 12
Jul 12
Aug 12
Sep 12
Oct 12
Nov 12
Dec 12
(y-0-y) SAAR
Source : indiabudget.nic.in
Sub Components (%) (Apr.–Mar.)
2010–11 2011–12 Q1 Q2 Q3 Q4 Q1 Q2 Q3P
Non-food Non-manufacturing 20.69 15.67 14.51 16.20 14.97 13.72 13.33 10.52 10.79 10.37
(A) Non-food Articles 4.26 22.33 9.65 22.23 16.16 4.15 –0.89 5.64 12.60 12.88
Fibres 0.88 41.69 10.09 62.69 29.78 1.39 –26.05 –20.84 1.04 –1.77
Oil Seeds 1.78 4.71 12.33 11.64 15.08 10.79 11.86 18.11 27.84 29.18
Other Non-food Articles 1.39 37.26 10.52 14.72 12.20 7.93 7.77 16.07 6.82 6.19
(B) Minerals 1.52 24.32 26.60 25.48 24.48 23.67 35.52 11.66 13.51 6.61
Metallic Minerals 0.49 44.70 10.10 11.70 7.00 4.91 16.74 9.70 12.51 6.33
Crude Petroleum 0.90 11.82 45.19 40.60 43.76 44.93 51.02 12.85 13.44 5.23
(C) Fuel & Power 14.91 12.28 13.96 12.74 12.99 15.08 14.94 11.90 9.72 10.34
Coal 2.09 5.68 15.52 13.25 13.25 13.25 21.97 13.92 13.92 13.92
Mineral Oils 9.36 16.00 16.85 16.05 16.49 18.84 16.02 12.23 7.20 8.93
Administered POL 6.32 15.12 10.43 8.99 10.94 10.87 10.85 10.00 2.67 11.73
Non-administered POL 3.04 17.47 27.43 27.62 26.18 32.36 23.89 15.35 14.17 4.95
Electricity 3.45 5.38 1.64 0.27 –0.32 2.63 4.00 8.56 16.52 13.16
Source: Office of the Economic Adviser. P. Provisional.

< Table 13.4
Non-food Inflation (%)

Sub-components of WPI
Inflation (%)
Non-food Manufacturing
Sub-components of WPI
Table 13.5
>

Sub Components (%) (Apr.–Mar.)
2010–11 2011–12 Q1 Q2 Q3 Q4 Q1 Q2 Q3P
Non-food Manuf. (Core) 55.00 6.11 7.29 7.35 7.80 8.13 5.92 5.15 5.71 4.64
Beverages & Tobacco Prod. 1.76 7.36 11.67 10.01 13.23 13.32 10.21 7.79 6.76 7.89
Textiles 7.33 12.08 7.46 15.78 9.69 6.14 –0.78 –2.78 2.86 4.49
Wood & Wood Products 0.59 3.97 8.09 5.87 8.88 8.91 8.70 6.67 5.92 6.03
Paper & Paper Products 2.03 5.33 5.39 7.51 5.53 5.30 3.30 2.21 2.86 3.35
Leather & Leather Products 0.84 –0.99 2.32 0.16 0.91 2.71 5.61 3.73 3.98 2.18
Rubber & Plastic Products 2.99 6.68 5.97 8.56 7.70 5.67 2.23 1.88 2.85 3.24
Chemical & Products 12.02 5.34 8.61 7.45 8.71 9.93 8.36 7.24 7.63 6.09
Non-Metallic Mineral Prod. 2.56 2.68 5.73 3.91 4.12 7.65 7.23 7.13 9.22 5.44
Basic Metals, Alloys & Prod. 10.75 8.67 11.06 8.46 11.58 13.19 10.97 10.62 8.39 4.68
Machinery & its Tools 8.93 2.82 3.11 2.96 3.20 3.41 2.88 2.50 2.91 2.52
Transport, Equipment 5.21 3.02 3.52 2.16 4.07 4.54 3.34 3.83 3.80 4.34

Inflation | 343
10.0 15.0
< Figure 13.4
Momentum of Non-food
10.0
Manufactured Inflation
5.0
Inflation (%)
5.0
SAAR (%)
0.0
0.0
–5.0
–5.0 –10.0
Jan 09
Feb 09
Mar 09
Apr 09
May 09
Jun 09
Jul 09
Aug 09
Sep 09
Oct 09
Nov 09
Dec 09
Jan 10
Feb 10
Mar 10
Apr 10
May 10
Jun 10
Jul 10
Aug 10
Sep 10
Oct 10
Nov 10
Dec 10
Jan 11
Feb 11
Mar 11
Apr 11
May 11
Jun 11
Jul 11
Aug 11
Sep 11
Oct 11
Nov 11
Dec 11
Jan 12
Feb 12
Mar 12
Apr 12
May 12
Jun 12
Jul 12
Aug 12
Sep 12
Oct 12
Nov 12
Dec 12
(y-0-y) SAAR
12.0
< Figure 13.5
WPI Inflation for Core,
9.0
Consumer Durables and
Capital Goods
Inflation (%)
6.0
3.0
0.0
–3.0
Apr 09
May 09
Jun 09
Jul 09
Aug 09
Sep 09
Oct 09
Nov 09
Dec 09
Jan 10
Feb 10
Mar 10
Apr 10
May 10
Jun 10
Jul 10
Aug 10
Sep 10
Oct 10
Nov 10
Dec 10
Jan 11
Feb 11
Mar 11
Apr 11
May 11
Jun 11
Jul 11
Aug 11
Sep 11
Oct 11
Nov 11
Dec 11
Jan 12
Feb 12
Mar 12
Apr 12
May 12
Jun 12
Jul 12
Aug 12
Sep 12
Oct 12
Nov 12
Dec 12
NFM (core) Capital Goods Consumer Durables
SAAR of non-food manufacturing (refer to Figure 13.4) also shows a downward

momentum. Non-food manufactured products, except urea, are fully tradeable and as such
are significantly influenced by global price trends. With global commodity prices witnessing
a decline in 2013 and a near stability in 2014 , non-food manufacturing inflation may see
some further moderation.
Within core inflation, inflation in capital goods continued to remain muted. Inflation
in consumer durables, though generally above core inflation, has started showing signs of
moderation from Q3 of 2011–12 and has since been gradually converging to the levels of core
inflation (refer to Figure 13.5). Moderation in inflation in consumer durables, where demand
is interest sensitive, probably reflects the impact of monetary policy.
• Annual average WPI since 2005–06 was heading upward. All commodity inflation
shifted upward by 49.3 per cent in the year 2011–12 compared with the year 2005–06.
• Primary articles has witnessed a growth of 92 per cent in 6 years.
• Food articles, non-food articles, fuel and power, and manufactured products have
moved upward by 82.8 per cent, 89 per cent, 48 per cent and 36.2 per cent, respectively
(refer to Table 13.6).
• Annual average CPI since 2006–07 was heading upward. Industrial workers inflation
shifted upward by 56 per cent in the year 2011–12 compared with the year 2006–07.
• Industrial workers food has witnessed a growth of 63.5 per cent in 5 years.
• Urban non-manual employees had moved up by 30.5 per cent in 3 years.
• Agricultural labourers has moved upward by 60.7 per cent (refer to Table 13.7 and
F
igure 13.8).
Figure 13.6
Wholesale Price Index-
> 250.0
Annual Average (Base: AC

200.0
2004–05 = 100)
PA
150.0 FA
NF
100.0
F&P
50.0 MP
0.0
2005–06 2006–07 2007–08 2008–09 2009–10 2010–11 2011–12
Figure 13.7
Consumer Price Index-
> 700
600
Annual Average (Base:
500
2000–01 = 100) IW
400
IW-Food
300
200 UNME
100 AL
0
2006–07 2007–08 2008–09 2009–10 2010–11 2011–12
Table 13.6
Wholesale Price
> Year AC PA FA NF F&P MP
Index–Annual Average 2005–06 104.5 104.3 105.4 96.7 113.6 102.4
(Base: 2004–05 = 100)
2006–07 111.4 114.3 115.5 102.3 120.9 108.2
2007–08 116.6 123.9 123.6 114.4 121.0 113.4
2008–09 126.0 137.5 134.8 129.2 135.0 120.4
2009–10 130.8 154.9 155.4 136.2 132.1 123.1
2010–11 143.3 182.4 179.6 166.6 148.3 130.1
2011–12 156.1 200.3 192.7 182.7 169.0 139.5
Source: Office of the Economic Adviser, Ministry of Commerce and Industry, Government of India.
AC : All commodities PA : Primary articles.
FA : Food articles NF : Non-food articles.
F&P : Fuel and Power MP : Manufactured products.
Inflation | 345
Year Index Average of Months < Table 13.7

Consumer Price
IW IW - Food UNME AL Index–Annual Average
2006–07 125 126 486 380
(Base: 2000–01 = 100)
2007–08 133 136 515 409

2008–09 145 153 561 450
2009–10 163 176 634 513
2010–11 180 194 – 564
2011–12 195 206 – 611
Source:
1. Labour Bureau, Ministry of Labour and Employment, Government of India.
2. Central Statistics Office, Ministry of Statistics and Programme Implementation, Government of India.
IW: Industrial workers.
UNME: Urban non-manual employees.
AL: Agricultural labourers.
12.00
11.00
25.0
< Figure 13.8
Inflation and SAAR of
20.0
10.00
CPI-IW vs WPI
15.0
SAAR (%)
Inflation (%)
9.00
10.0
8.00
5.0
7.00
6.00 0.0
5.00 –5.0
Jan 11
Feb 11
Mar 11
Apr 11
May 11
Jun 11
Jul 11
Aug 11
Sep 11
Oct 11
Nov 11
Dec 11
Jan 12
Feb 12
Mar 12
Apr 12
May 12
Jun 12
Jul 12
Aug 12
Sep 12
Oct 12
Nov 12
Dec 12
Inflation CPI-IW Inflation (WPI) SAAR CPI-IW
INFLATION AND DEVELOPING ECONOMIES

Inflation in the developed countries may be regarded as a full-employment phenomenon and Inflation in the developed coun-
it may be well linked with full-employment policies. But what about the underdeveloped or tries may be regarded as a full-
newly developing economies? To explain the phenomenon of inflation in developing econo- employment phenomenon and
mies, champions of development economics like Myrdal say that underdeveloped countries it may be well linked with full-
employment policies.
like India are structurally backward with a lop-sided development, characterized by sectoral
imbalances due to market imperfections and stagnancy, as may be caused by a dual nature of
the economy with a high fragmentation.
As such, scarcity in some sectors may cause under utilization of the productive capacity
of the economy and create the problem of sectoral inflation, more serious than a general price
rise. Hence, the general aggregate demand-and-supply analyses are not suitable to such types
of situation. It should be replaced by the analyses of sectoral demand-and-supply balances
and the bottlenecks involved to study the true nature of inflation in these economies.
In short, to understand the true In short, to understand the true nature of inflation in an underdeveloped country, one
nature of inflation in an under- has to examine the bottlenecks and gaps of various types, which obstruct the normal growth
developed country, one has to process, causing prices to rise with the generation of money income, without an appropriate
examine the bottlenecks and
gaps of various types, which
rise in the real income. These gaps and bottlenecks may be enlisted as follows:
obstruct the normal growth
process, causing prices to rise Market Imperfections
with the generation of money
income, without an appropriate Market imperfections like factor immobility, price rigidity, ignorance of market conditions,
rise in the real income. rigid social and institutional structures and lack of specialization and training in
underdeveloped economies do not allow an optimum allocation and utilization of resources.
Hence, an increase in money supply and increased money income remain unaccompanied
by an increased supply of real output, causing a net price rise of inflationary nature in these
economies.
Capital Bottleneck
On account of a very low rate of capital formation and consequent capital deficiency, a poor
country is caught in a vicious circle of poverty, and any excessive money supply instead of
breaking this vicious circle, tends to create a chronic inflationary spiral. Thus, in a poor coun-
try, there is inflation because, by virtue of its internal backwardness, it is prone to chronic
inflation.
Entrepreneurial Bottleneck
Entrepreneurs in the underdeveloped countries lack skill, the spirit of boldness, and
adventure. They prefer trading or safer traditional investments rather than attempting risky
innovations. Absence of adequate industrial capital, prevalence of merchant capital, and
a colossal amount of private investments in such unproductive fields like land, jewellery,
gold, and so on, which is a gross socio-economic waste, starve the developing economy of its
much-needed capital resources.
Thus, the increased money supply of savings in terms of money makes a little impact on
the real output, and monetary equilibrium is just obtained through a galloping price rise in
various sectors of the economy.
Food Bottleneck
Due to the slow growth of agriculture, overpressure on land due to the growing population,
primitive methods of cultivation, defective land tenure system, lack of adequate irrigation fa-
cilities, and many other reasons, agricultural output—especially, food supply that constitutes
a large part of wage goods, has failed to keep in pace with the growing demand for it, from
the growing population, but has increased rural employment in the rural industrialization
process in these countries. This food bottleneck has created the problem of price rise of food
grains, and it has become the corner stone in the whole of price structure in the developing
economies.
Infrastructural Bottleneck
This bottleneck refers to power shortages and inadequacies of transport facilities in the un-
derdeveloped economies. It obviously restricts the growth process in industrial, agricultural,
and commercial sectors and causes under utilized capacity in the economy as a whole. The
under utilization of resources does not absorb the full increase in money supply but reflects
upon the rising prices.
Inflation | 347
Foreign Exchange Bottleneck

The developing economies suffer from a fundamental, structural disequilibrium in the bal-
ance of payments due to high imports and low exports on unfavourable terms of trade; hence,
they usually suffer from foreign exchange scarcity problem. In recent years, day by day, the
rising import bills due to high oil prices have aggravated the problem further. This foreign ex-
change bottleneck comes in the way of necessary imports to check domestic inflation. Again,
the need to boost exports to meet the growing deficits in the balance of payments, puts an
extra pressure on the marketable surplus that is meant for domestic requirements. This even-
tually leads to a heavy price rise of exportable commodity in the domestic market.
Resources Gap
When the public sector is widely expanded for industrial development in the underdevel-
oped countries, the government aggravates the problem of ‘resources gap.’ Owing to the
backward, socio-economic-political structure of the less-developed country (LDC), the gov-
ernment always finds it difficult to raise sufficient resources through taxation, public bor-
rowings, and profit of state enterprises, to meet the ever-increasing public expenditure in
intensive and extensive dimensions. As such, under the pressure of the resources gap, the
government has to resort to a heavy dose of deficit financing, despite knowing its dangers.
This makes the economy inflation-prone. Similarly, the resource gap in the private sector,
caused by low voluntary savings and high-cost economy, presses for an over-expansion of
money supply through bank credit which, by and large, results in an acceleration of inflation-
ary spiral in the economy.
DEMAND-PULL vs COST-PUSH INFLATION

Broadly speaking, there are two schools of thought regarding the possible causes of inflation.
One school views the demand-pull element as an important cause of inflation, while the According to the demand-pull
other group of economists holds that inflation is mainly caused by the cost-push element. theory, prices rise in response
to an excess of aggregate
Demand-pull inflation According to the demand-pull theory, prices rise in response to an demand over the existing sup-
excess of aggregate demand over the existing supply of goods and services. The demand-pull ply of goods and services.
theorists point out that inflation (demand-pull) might be caused, in the first place, by an in-
crease in the quantity of money, when the economy is operating at the full-employment level.
As the quantity of money increases, the rate of interest will fall and, consequently, the invest-
ment will increase. This increased investment expenditure will soon increase the income of
the various factors of production. As a result, the aggregate consumption expenditure will
increase leading to an effective increase in the effective demand. With the economy already
operating at the level of full employment, this will immediately raise prices, and inflationary
forces may emerge. Thus, when the general monetary demand rises faster than the general
supply, it pulls up prices (commodity prices as well as factor prices, in general). Demand-pull
inflation, therefore, manifests itself when there is an active cooperation, or passive collusion,
or a failure to take counteracting measures by monetary authorities.
However, the demand-pull inflation can also occur without an increase in the money
supply. This can happen when either the marginal efficiency of capital increases or the mar-
ginal propensity to consume (MPC) rises, so that investment expenditures may rise, thereby
leading to a rise in the aggregate demand, which will exert its influence in the raising prices
beyond the level of full employment that was already attained in the economy.
In short, the inflationary pro- According to the demand-pull theorists, during the process of demand inflation, the rise
cess, described by the demand- in wages accompanies or follows die-price rise as a natural consequence. Under the condi-
inflation theory, implies the tion of rising prices, when the rate of profit is increasing, producers are inclined, in general,
following sequences: increas-
ing demand, increasing prices,
to increase investment and employment, in that they bid against each other for labour, so
increasing costs, increasing that labour-prices (i.e., wages) may rise. In short, the inflationary process, described by the
income, and so on. demand-inflation theory, implies the following sequences: increasing demand, increasing
prices, increasing costs, increasing income, and so on.
Causes of Demand-pull Inflation

It should be noted that the concept of demand-pull inflation is associated with a situation
of full employment where an increase in the aggregate demand cannot be met by a corre-
sponding expansion in the supply of real output. There can be many reasons for such excess
monetary demand as follows:
Increase in Public Expenditure

There may be an increase in the public expenditure (G) in excess of public revenue. This
might have been made possible (or rendered necessary) through public borrowings from
banks or through deficit financing, which implies an increase in the money supply.
Increase in Investment
There may be an increase in the autonomous investment (II) in firms, which is in excess of
the current savings in the economy. Hence, the flow of total expenditure tends to rise, causing
an excess monetary demand, leading to an upward pressure on prices.
Increase in MPC
There may be an increase in the MPC, causing an excess monetary demand. This could be
due to the operation of demonstration effect and such other reasons.
Increasing Exports and Surplus Balance of Payments

In an open economy, an increasing surplus in the balance of payments also leads to an excess
demand. The increasing exports also have an inflationary impact because there is a gen-
eration of money income in the home economy due to export earnings but, simultaneously,
there is a reduction in the domestic supply of goods because products are exported. If an
export surplus is not balanced by increased savings, or through taxation, the domestic spend-
ing will be in excess of the value of domestic output, marketed at current prices.
Diversification of Goods
A diversion of resources from die-consumption-goods sector either to the capital-good
sector or the military sector (for producing war goods) will lead to an inflationary pressure
because while the generation of income and expenditure continues, the current flow of the
real output decreases on account of high gestation period involved in these sectors. Again,
the opportunity cost of war goods is quite high in terms of consumption goods meant for
the civilian sector. This leads to an excessive monetary demand for the goods and services
against their real supply, causing the prices to move up. In short, it is said that the demand-
pull inflation could be averted through deflationary measures adopted by the monetary and
fiscal authorities. Thus, passive policies are responsible for the demand-pull inflation.
Inflation | 349
Cost-push Inflation
A group of economists hold the opposite view that the process of inflation is initiated not
by an excess of general demand but by an increase in costs, as factors of production try to
increase their share of the total product by raising their prices. Thus, it has been viewed that
a rise in prices is initiated by growing factor costs. Therefore, such a price rise is termed as
‘cost-push’ inflation as prices are being pushed up by the rising factor costs.
Cost-push inflation, or cost inflation, as it is sometimes called, is induced by the wage-
Cost-push inflation, or cost infla-
inflation process. It is believed that wages constitute nearly 70 per cent of the total cost of tion, as it is sometimes called,
production. This is especially true for a country like India, where intensive techniques are is induced by the wage-inflation
commonly used. Thus, a rise in wages leads to a rise in the total cost of production and a process. It is believed that wages
constitute nearly 70 per cent of
consequent rise in the price level, because fundamentally, the prices are based on costs. It
the total cost of production.
has been said that a rise in wages causing a rise in prices may, in turn, generate an inflation-
ary spiral because an increase would motivate the workers to demand higher wages. Indeed,
any autonomous increase in costs, such as a rise in the prices of imported components or
an increase in the indirect cost-push inflation may occur either due to wage-push or profit-
push. Cost-push analysis assumes monopoly elements either in the labour market or in the
product market. When there are monopolistic labour organizations, prices may rise due to
wage-push. And, when there are monopolies in the product market, the monopolists may be
induced to raise the prices in order to fetch high profits. Then, there is profit push in raising
the prices.
However, the cost-push hypothesis rarely considers autonomous attempts to increase
profits, as an important inflationary element. Firstly, because profits are generally a small frac-
tion of the total price, a rise in profits would have only a slight impact on the prices. Secondly,
the monopolists generally hesitate to raise prices in the absence of obvious demand-pull
elements. Finally, the motivation for profit-push is weak since, at least in corporations, those Cost-push is generally con-
who make the decision to raise the prices are not the direct beneficiaries of the price increase. ceived as a synonymous one
with wage-push. When wages
Hence, cost-push is generally conceived as a synonymous one with wage-push. When wages are pushed up, the cost of pro-
are pushed up, the cost of production increases to a considerable extent so that the prices may duction increases to a consider-
rise. Since wages are pushed up by the demand for high wages by the labour unions, wage- able extent so that the prices
push may be equated with union-push. may rise.
CAUSES OF INFLATION
Inflation is a complex phenomenon which cannot be attributed to a single factor. We may
summarize the major causes of inflation as follows:
Over-expansion of Money Supply

Many a times, a remarkable degree of correlation between the increase in money supply and
the rise in the price level may be observed.
Expansion of Bank Credit

Rapid expansion of bank credit is also responsible for the inflationary trend in a country.
Deficit Financing
The high doses of deficit financing, which may cause reckless spending, may also contribute
to the growth of the inflationary spiral in a country.
Ordinary Monetary Factors

Among other monetary factors influencing the price trend in an economy the major ones are
listed as follows:
High Non-development Expenditure: The continuous increase in public expenditure
and, especially, the growth of defence and non-development expenditure.
Huge Plan Investment: The huge plan investment and its high rate of growth in every
plan may lead to an excess demand in the capital goods sector, so that the industrial
prices may raise.
Black Money: Some economists have condemned black money, which is in the hands of
tax evaders and black marketers, as an important source of inflation in a country. Black
money encourages lavish spending, which causes excess demand and a rise in prices.
High Indirect Taxes: Incidence of high commodity taxation. The prices tend to raise on
account of high excise duties imposed by the government on raw materials and essential
goods.
Non-monetary Factors
There are various non-monetary and structural factors that may cause a rising-price trend in
a country. They are as follows:
High Population Growth: Undoubtedly, the rising pressure of demand, resulting from
growing population and money income, will cause a high price rise in an over-populated
country.
Natural Calamities and Bad Weather Conditions: Vagaries of monsoon, bad weather
conditions, droughts, and failure of agricultural crops have been responsible for the price
spurts, from time to time, in many underdeveloped countries. Agricultural prices are
most sensitive to inflationary forces in India. Natural calamities also contribute occa-
sionally to the inflationary boost in a country. Events such as cyclones and floods, which
destroy village economies, also aggravate the inflationary pressure.
Speculation and Hoarding: Hoarding and speculative activities, that is, corruption at
every level, in both private and public sectors and so on, are also responsible to some
extent for aggravating inflation in a country.
High Prices of Imports: Inflation has also been inflicted on some countries through
the import content used by their industries. The prices of petroleum products have been
increased in many countries due to price hikes by the oil-producing countries.
Monopolies: Monopoly profits and unfair trade practices by big industrial houses are
also responsible for the price rise in countries like India.
Under utilization of Resources: Non-utilisation of installed capacities in large indus-
tries is also a contributory factor to inflation.
To understand the true nature of
inflation in an underdeveloped Inflation in a country may be regarded as a symptom of a deep-seated malady, born of struc-
country, one has to examine tural deficiencies involved in the functioning of its economic system, which is characterised
the bottlenecks and gaps of var-
ious types, which obstruct the by inherent weaknesses, wastages, and imbalances.
normal growth process, causing
prices to raise with the genera- Gaps and Bottlenecks
tion of money income, without
an appropriate rise in the real To understand the true nature of inflation in an underdeveloped country, one has to examine
income.
the bottlenecks and gaps of various types, which obstruct the normal growth process, causing
Inflation | 351
prices to raise with the generation of money income, without an appropriate rise in the real
income. These gaps and bottlenecks may be enlisted as follows: market imperfections, capital
bottleneck, entrepreneurial bottleneck, food bottleneck, infrastructural bottleneck, foreign
exchange bottleneck, and resources gap.
EFFECTS OF INFLATION
Inflation has direct socio-economic consequences. As such, inflation has been taken to be a Inflation has direct socio-eco-
serious social and economic problem. The US Presidents Ford and Carter have considered nomic consequences. As such,
inflation as ‘public enemy number one.’ inflation has been taken to be a
serious social and economic
problem. The US Presidents
Economic Effects of Inflation Ford and Carter have consid-
ered inflation as ‘public enemy
The effects of inflation on the economic system may be classified into three kinds as follows: number one.’
1. Effects on production, that is, changes in the tempo of economic activity,
2. Effects on income distribution, that is, re-distribution of income and wealth, and
3. Effects on consumption and welfare.
Effects on Production
Keynes argues that a moderate rise in prices, that is, a mild inflation, or creeping inflation, as
it may be called, has a favourable effect on production when there are unutilised or underem-
ployed resources in existence in an economy. The rising prices breed optimistic expectations
within the business community in view of increasing profit margins, because the price level
moves up at a faster rate than the cost of production. Businessmen are induced to invest
more, and as a result, employment, output, and income increase.
The tempo of economic activity starts raising. But, there is a limit to it—this limit is set
by the full-employment ceiling. Once the full-employment stage is reached in an economy,
a further rise in prices will not stimulate production, employment, and real income, due to
physical limitations. Therefore, till the level of full employment is reached, moderately rising
prices, though otherwise harmful, are also beneficial. The benefit effect on production, how-
ever, is possible only when an inflation does not take place at too fast a rate. A state of running
of galloping inflation creates uncertainty, which is inimical to production. Thus, when the
inflation has reached an advanced stage, its brighter aspects disappear and the evil aspects
manifest themselves. The disastrous consequences of inflation on the economic system may
be stated briefly as follows:
Maladjustments: Inflation leads to maladjustments in production and disrupts the
working of the price system, which is ruinous to the entire system.
Hindrance to Capital Accumulation: Capital accumulation is hindered by uncontrolled
inflation, and the savings potentiality of the community also declines due to the dimin-
ishing purchasing power of money.
Speculation: Since excessive inflation disturbs all economic relationships and leads
to uncertainty, the skills and energies of the business community are concentrated on
speculation and on making quick profits rather than on genuine productive activity, as a
result. In short, speculation takes the place of production in the economy.
Hoarding and Black Marketing: During inflation, when prices are rapidly rising, the
holding of larger stocks of goods becomes very profitable. Hoarding is encouraged,
which further decreases the available supply of goods in relation to increasing mon-
etary demand. Eventually, the phenomena of black marketing and spiralling inflation
develop.
Distortion of Production Pattern: Inflation not only adversely affects the volume of
production but also changes its pattern. Generally, resources are diverted from the pro-
duction of essential goods to those of nonessential because the rich people, whose in-
comes increase more rapidly, make their demand for luxury goods felt in the market.
Production of undesirable lines is, therefore, stimulated and finally, results in the break-
down of the economic system.
Creation of a Sellers Market: Inflation tends to create a sellers market. As a result, sell-
ers have a command on prices because of the excessive demand in the market. Anything
can be sold in such a market. The sellers do not care for quality as their interest is in high
profits only.
Distortions in Resource Allocation: Inflation will turn away resource allocation from
longer-term productive investments and towards unproductive assets like housing, real
estate, inventories, gold, and so on. Such a diversification of savings tends to inhibit the
future capacity to grow.
Disincentive Effect due to Income-tax Bracket Creep: During inflation, with the rise in
money incomes of the individuals under progressive income tax system, the effective tax
rate will raise (called ‘Income-tax Bracket Creep’). This may cause a disincentive effect on
willingness to work, save, and invest, thus, discouraging the productive activity.
Distributional Effects
Inflation redistributes income

Inflation redistributes income because prices of all factors do not rise in the same propor-
because prices of all factors do tion. Since the effect of inflation on the income of different classes of earners varies, there are
not rise in the same proportion. serious social consequences. During inflation, the distributive share accruing to the profi-
Since the effect of inflation on teers increases more than that of wage earners or fixed-income earners, such as the rentier
the income of different classes
of earners varies, there are seri- class. All producers, traders, and speculators gain during an inflation because of the windfall
ous social consequences. profits which arise, as prices rise at a faster and a higher rate than the cost of production;
wages, interest, and rent do not increase rapidly, and are more or less fixed. Moreover, profits
increase because there is a lag between the rise in the prices and the rise in the cost of pro-
duction. Businessmen always find the money value of their inventories going up because the
general price level raises. Usually, inflation enlarges the money incomes in the hands of the
flexible groups, and adversely affects the people in the fixed-income groups, such as pension-
ers, government employees, and salaried classes, such as teachers, clerks, and, to some extent,
labourers or wage earners. Among the wage earners or the labour class, those who are well
organized are hit less than others.
The changes in the value of money also cause redistribution of wealth, partly because
(a) during inflation, there is no uniform price rise as prices of some types of goods alone
change more than others and (b) debts are expressed in terms of money. Inflation is a sort
of hidden tax, steeply regressive in effect. The redistribution of wealth due to inflation is a
burden on those groups of people who are least able to bear it. Let us study the concrete
effects of inflation on various economic groups as follows:
Debtors and Creditors: Generally, debtors gain and creditors lose during an inflation.
Gain accrues to a debtor because he repays loan at a time when the purchasing power
of money is lower than when it was borrowed. The creditor, on the other hand, is a loser
during inflation, since he receives, in effect, less in goods and services than he would
Inflation | 353
have received in times of low prices. Thus, the borrowers who borrowed funds prior to
inflation stand to gain by inflation, and creditors who lent funds lose. However, this does
not mean that debtors always welcome inflation because, usually, they are members of
one another group of people who are adversely affected by inflation.
Business Community: Inflation is welcomed by entrepreneurs and businessmen as they
stand to profit by raising prices. They find that the value of the then inventories and
stock of goods is rising in money terms. They also find that prices are rising faster than
the costs of production, so that their profit margin is greatly enhanced. The business
community, therefore, gets supernormal profits during the period of inflation, and those
profits continue to increase as long as the prices raise. However, the producers of con-
ventionally priced goods and services, such as electricity and transport services, gain
very little or not at all during inflation, because the prices of their goods are fixed by
convention or by law. When the prices in general raise, the cost of production of these
commodities or services also raises but their price remains constant, giving the producer
a continuously decreasing margin of profit.
Fixed Income Groups: Inflation hits wage earners and salaried people very hard. Al-
though wage earners, by the grace of trade unions, can chase the galloping prices, they
seldom win the race. Since the wages do not raise at the same rate and at the same time
as the general price level, the cost of living index raises, and the real income of the wage
earner decreases. Moreover, in trying to push up wages to sustain their real income,
wage earners bring about a cost-push inflation and, in the process, worsen their posi-
tion. Those who depend exclusively on fixed salaries for a living are severely affected
by inflation. Among these people are teachers, clerks, government servants, pensioners,
and persons living on past savings. The salaried groups are further handicapped by the
fact that they are less organized than the labour class, to press for higher pay in order to
compensate for a fall in the real income.
Investors: Those who invest in debentures and fixed-interest bearing securities, bonds,
and so on, lose during inflation. However, the investors in equities benefit because more
dividend is yielded on account of high profits made by the joint-stock companies during
inflation.
Farmers: Farmers usually gain during an inflation, because they can get better prices for
their harvest during inflation.
We may conclude that inflation redistributes income and wealth in favour of businessmen,
debtors, and farmers but hits consumers, creditors, small investors, labour class, middle
class, and fixed-income groups very hard. Inflation favours one group at the expense of an-
other. Besides, it is always regressive in effect, that is, it hits hard all those who cannot protect
themselves.
Effects on Consumption and Welfare

Inflation implies an erosion of the consumer’s value of money. It is a form of taxation. Due Inflation implies an erosion of
the consumer’s value of money.
to deteriorating purchasing power, the real consumption of the common people declines. It is a form of taxation.
The rising cost of living during inflation implies falling standard of living and lowering of
general economic welfare of the community at large. A galloping inflation is, therefore, de-
In short, inflation is unfair on
scribed as the ‘cruelest tax of all.’ In short, inflation is unfair on the distribution side of
the distribution side of eco-
economic activity. nomic activity.
Other Economic Effects

Inflation may lead to many adverse consequences as follows:
Deterioration in Savings: A continuous inflation reduces the real worth of savings in
the long run. Savers are also adversely affected when the annual rate of inflation is ex-
ceeding the current rate of interest. During an inflation, the real rates of interest tend to
decline. The capacity to save is also reduced due to the rising cost of living and the con-
sequent rise in money expenditure caused by the rising prices. Persistent inflation also
discourages individual savings.
Distortion of the Budget and Vicious Circle: The budgetary provision for public spend-
ing proves to be inadequate, due to the rising costs caused by inflation. A vicious circle
is thus developed. When deficit financing leads to inflation, more deficit financing may
be needed to fill the resource gap occurring in public spending, which further pushes
up the prices, causing further deficit financing and further inflation and so on, and thus,
a vicious circle is developed.
Disturbance in the Planning: Plan programmes and allocation of resources may be
grossly disturbed due to resource constraints caused by a continuous inflation and rising
factor costs. The investment allocation based on the current price level at the beginning
of a particular plan obviously proves to be inadequate in the later years of the plan. Thus,
a severe resource constraint may be experienced in the fulfillment of the plan targets.
Lowering of International Competitiveness: If the rate of inflation in a country is higher
than in other countries, its international competitiveness in foreign market is weakened.
Distortion of the Exchange Rate: A high rate of inflation in a country, when compared
to the inflation rates in other countries, would ultimately lead to a decrease in the ex-
ternal value of its currency, that is, lowering of its exchange rate in terms of foreign
currencies or key currencies such as dollar. Even a key currency like the dollar has lost its
real worth and reputation due to the high inflation rate in the US economy.
Irrationality of Consumption: Inflation enhances money incomes of many. This fosters
‘consumerism’ resulting in distorted consumption patterns. Consumerism spurts the
trend to consider all goods as nondurable. Due to expensive labour, repair gives way
to replacement of parts/products. Modern society is, thus, becoming a ‘junk’ society in
which nothing is durable. People fanatically crave for new models and new things, which
is facilitated by the consumer credit given by the banks. Today’s inflation-oriented pros-
perity is based on credit-induced consumption in many countries. Thus, to stop credit
involves a great risk of unemployment and recession.
Control of Inflation
Data Management
The price policy since 1973–74 has relied predominantly on fiscal and monetary measures
with a view to check the demand of the general public for goods and services.
Fiscal Measures
Since 1990–91, the govern-
ment of India has woken up to
Since 1990–91, the government of India has woken up to the importance of reducing fiscal
the importance of reducing fis- deficit. The budget of July 1991–92 took the first decisive action to limit the fiscal deficit
cal deficit. by bringing it down from 8.4 per cent of GDP in 1990–91 to 6.2 per cent in 1991–92 and
Inflation | 355
4.9 per cent in 1992–93. Since then, the government has failed to reduce the fiscal deficit
which has remained around 7 per cent of GDP till date.
Monetary Measures
In general, the RBI uses its monetary policy to achieve a judicious balance between the In general, the RBI uses its
growth of production and control of the general price level. RBI uses bank rate, CRR (cash monetary policy to achieve a
reserve ratio), SLR (statutory liquidity ratio), and open-market operations to increase bank judicious balance between the
credit and expansion of business activity (in times of business recession), or to contract bank growth of production and con-
trol of the general price level.
credit and check business and speculative activity (in periods of inflation).
Supply Management
This is related to the volume of supply and its distribution system. On the commodity front,
the government has generally focused its attention on (a) securing a greater control over the
process of rice, wheat, sugar, oils, and other commodities of mass consumption and (b) to
increase in domestic supplies, that is, large releases from official stocks of food grains, and
widening and streamlining of the network of public distribution. Also the government has
taken some measures to prevent an undue increase in the prices of essential commodities.
Some of the important aspects of this policy are given as follows:
• Fixing of maximum prices.
• The system of dual prices.
• Increase in supplies of food grains.
• Problem of oilseeds and edible oils.
• Public distribution system.
Even as the government pulls out all stops to douse the fires of inflation, we should not forget
that what we are dealing with is the outcome of years of neglect of agriculture. The oilseeds
mission of the 1980s and later of the pulses were both given a short shrift when it was realized
that India has sufficient foreign exchange reserves (FERs) to import edible oils and pulses.
However, nobody cared to ask what would happen the if global prices rose. Likewise, in the
1990s the liberalites were keen that India focuses on ‘value addition’ in agriculture and meets
its food security through imports. Again, the fears expressed about the cost of imports in a
tight global market were dismissed as of little consequence; we are now paying the costs. We
can only hope that even if it takes years, may be even a decade and more, the demands of
food security are ultimately addressed by expanding the domestic production in agriculture
through adequate research, investment in infrastructure, and appropriate mix of price and
non-price incentives.
Measures Taken and Proposed by the Government to Contain Price Rise

1. Fiscal measures: Import duties for wheat, onions, pulses, and crude palmolein were
reduced to zero and 7.5 per cent for refined vegetable and hydrogenated oils.
Duty-free import of white/raw sugar was extended up to 30 June 2012; presently, the
import duty has been fixed at 10 per cent.
2. Administrative measures: Ban on exports of onions was imposed for short periods
of time whenever required. Exports of onions were calibrated through the mechanism
of minimum export prices (MEP). Futures trading in rice, urad, tur, guar gum and
guar seed was suspended. Exports of edible oils (except coconut oil and forest-based
oil) and edible oils in blended consumer packs up to 5 kg with a capacity of 20,000
tons per annum and pulses (except Kabuli chana and organic pulses and lentils up to
a maximum of 10,000 tonnes per annum) were banned. Stock limits were imposed
from time to time in the case of select essential commodities such as pulses, edible oil,
and edible oilseeds and in respect of paddy and rice up to 30 November 2013.
3. The government has undertaken various measures to insulate the vulnerable
sections of society from price rise.
The central issue prices (CIP) for rice (at ` 5.65 per kg for below poverty line [BPL]
and ` 3 per kg for Antodaya Anna Yojana [AAY] families) and wheat (at ` 4.15 per kg
for BPL and ` 2 per kg for AAY families) have been maintained since 2002. Under
the targeted PDS (TPDS) allocation of foodgrains is being made to 6.52 crore AAY
and BPL families at 35 kg per family per month at a highly CIP. The government has
allocated rice and wheat under the Open Market Sales Scheme (OMSS). The scheme
for imports of pulses which envisaged imports for distribution to BPL households
through the PDS with a subsidy of ` 10 per kg operated from November 2008 to June
2012. The government has decided to implement a varied form with a subsidy ele-
ment of ` 20 per kg per month for BPL cardholders for the residual part of the current
year. The targeted BPL cardholders will be as estimated by the Department of Food
and Public Distribution. The Scheme for Distribution of Subsidized Imported Edible
Oils has been implemented since 2008–9 through state/ union territory (UT) govern-
ments for distribution of 1 litre per ration card per month with a central subsidy of
` 15 per kg. The scheme has been extended up to 30 September 2013.
4. Budgetary and other measures: A number of measures were announced in Union
Budget 2012–13 to augment supply and improve storage and warehousing facilities.
The government launched a National Mission for Protein supplements in 2011–12
with an allocation of ` 300 crore. To broaden the scope of production of fish to coastal
aquaculture, apart from fresh water aquaculture, the outlay in 2012–13 was stepped
up to ` 500 crore. Recently the government permitted FDI in multibrand retail
trading. This will help consumers and farmers as it will improve the selling and
purchasing facilities.
5. Monetary measures: The RBI had also taken suitable steps to contain inflation with
13 consecutive increases by 375 basis points (bps) in policy rates from March 2010 to
October 2011.
Global Commodity Prices

Global commodity prices peaked in Q3 of 2008–09. Prices started decelerating thereafter and
this trend continued until January 2009, since then prices have firmed up. The increase was
particularly sharp in 2010 and Q1 of 2011, both for energy and non-energy commodities.
While non-energy prices began to moderate from Q2 of 2011–12 and inflation began to turn
negative for most of the commodity groups, the moderation in energy prices began a little
later (refer to Table 13.8 and Figure 13.9). In the first three quarters of the current year, both
energy and non-energy prices registered a decline. This was partly because of the base effect
and partly because of a decline in prices, particularly for beverages and basic metals. Global
supply shortages in food grains in 2012–13, particularly in wheat and coarse grains resulted
in sharp increase in prices in wheat and maize, pushing up the commodity index for the
broad group of grains. In Q2 of 2012–13, fats and oils also witnessed an increase in prices
because of the food, feed, and fuel leakages. Prices for fats and oils moderated thereafter and
remained range bound in Q3.
Major Groups 2010–11 2011–12 2011–12 2012–13
Q1 Q2 Q3 Q4 Q1 Q2 Q3P
Index (2005=100)
Energy 154.5 193.0 197.6 187.2 186.6 200.8 183.7 183.2 182.1
Non-energy 188.4 202.8 217.2 212.3 188.8 192.9 189.3 191.0 186.9
Beverages 194.1 196.2 218.7 210.7 183.7 171.7 162.7 169.7 160.8
Grains 189.7 236.8 245.8 245.4 229.3 226.8 227.1 263.9 258.9
Fats & Oils 202.2 216.7 227.1 220.4 202.5 216.9 231.1 250.2 221.9
Base Metals 181.0 185.1 203.8 194.4 164.1 178.2 166.2 162.1 167.7
Precious Metals 294.2 385.7 370.2 404.5 382.0 386.1 363.6 372.7 390.7
Inflation YOY (%)
Energy 21.10 24.94 38.35 35.12 20.02 10.80 –7.05 –2.14 –2.41
Non-Energy 24.82 7.63 32.70 25.52 –4.62 –12.93 –12.83 –10.02 –1.01
Beverages 17.47 1.08 24.33 12.61 –5.09 –21.91 –25.61 –19.43 –12.46
Grains 14.14 24.87 65.93 45.07 10.31 –2.87 –7.63 7.53 12.87
Fats & Oils 18.22 7.20 36.78 20.96 –7.78 –9.93 1.76 13.54 9.57
Base Metals 30.08 2.27 27.41 19.35 –13.90 –15.40 –18.44 –16.59 2.16
Precious Metals 31.02 31.12 41.02 50.20 21.75 16.61 –1.77 –7.85 2.27
Source: World Bank Pink Sheet.

< Table 13.8
Inflation in Global
Commodity Groups
Figure 13.9
Global Commodity Price
> 250
230
Index 2005 = 100

Index 210
190
170
150
130
110
90
70
Apr-08
Jun-08
Aug-08
Oct-08
Dec-08
Feb-09
Apr-09
Jun-09
Aug-09
Oct-09
Dec-09
Feb-10
Apr-10
Jun-10
Aug-10
Oct-10
Dec-10
Feb-11
Apr-11
Jun-11
Aug-11
Oct-11
Dec-11
Feb-12
Apr-12
Juln-12
Aug-12
Oct-12
Dec-12
Energy Metals Food
GLOBAL INFLATION AND INDIA

The benign inflationary trend is expected to continue and the World Bank in its Global Eco-
nomic Prospects in January 2013 has projected non-energy prices to continue to disinflate,
with moderate inflation expected for energy products (Box 13.1). The impact of benign infla-
tionary expectations internationally will have a moderating influence on commodity prices
in India. Domestic prices of industrial raw materials and metals usually follow the interna-
tional trend and in case of crude oil and edible oils, international prices directly impact the
domestic prices because of a high import dependency.
Box 13.1 Global Commodity Prices : Forecast

Nominal Price Indices-actual and forecasts (2005 = 100)
Forecast Rate of change (%)

2008 2009 2010 2011 2012 2013 2014 2012–13 2013–14
Energy 183 115 145 188 187 183 183 –2.6 0.1
Non-Energy 182 142 174 210 190 186 180 –2.0 –3.2
Metals 180 120 180 205 174 176 176 1.3 0.1
Agriculture 171 149 170 209 194 188 180 –3.2 –4.4
Food 186 156 170 210 212 205 192 –3.2 –6.4
Grains 223 169 172 239 244 239 225 –2.1 –6.0
Fats and oils 209 165 184 223 230 220 206 –4.2 –6.5
Other food 124 131 148 168 158 153 143 –3.1 –6.6
Beverages 152 157 182 208 166 158 155 –4.7 –2.0
Raw Materials 143 129 166 207 165 162 162 –2.2 0.4
Fertilizers 399 204 187 267 259 245 232 –5.6 –5.3
Precious Metals 158 175 272 372 378 378 353 0.0 –6.7
Crude oil ($/bbl) 97 62 79 104 105 102 102 –2.9 0.2
Gold ($/toz) 872 973 1225 1569 1670 1600 1550 –4.2 –3.1
Source: World Bank
(Continued)
Inflation | 359
Box 13.1 (Continued)

The broad assessment of inflation for commodity groups subsequent years due to rising power costs, and
by the World Bank is as under: the fact that current prices have pushed some pro-
ducers at or below production costs. Copper prices
• Nominal oil prices are expected to average US$102/
bbl in 2013 and 2014 as supplies accommodate may decline mostly due to substitution pressures,
moderate demand growth. Over the longer term, oil and slowing demand. Although there are no physical
prices are projected to fall in real terms, due to grow- constraints in metal markets, declining ore grades,
ing supply, efficiency gains, and a substitution away environmental issues, and rising energy costs may
from oil. While OPEC may continue to limit produc- force prices higher.
tion, it probably will not let prices rise too high, for • Assuming that there are no major shifts for biofuels,
fear of inducing a search for alternative oil supplies or agricultural prices are projected to decline in 2013.
energy sources that alters the long-term price of oil. Specifically, wheat and maize prices are expected to
be lower than their 2012 levels. Soybean and palm
• Overall metal prices, except copper are expected to
increase. Aluminum prices may increase by 3 per oil prices are also expected to be lower because of
cent in 2013 and remain at that level in the two adequate availability.
Forces Behind the Rise

To understand this, it is necessary to examine the forces behind the price rises for different In the case of food, there are
commodities. In the case of food, there are more than just demand forces at work, although more than just demand forces
it is certainly true that rising incomes in Asia and other parts of the developing world have at work, although it is certainly
true that rising incomes in Asia
led to increased demand for food. Five major aspects affecting supply conditions have been
and other parts of the develop-
crucial in changing the global market conditions for food crops. ing world have led to increased
Firstly, there is the impact of high oil prices, which affect the agricultural costs directly demand for food. Five major
because of the significance of energy as an input in the cultivation process itself (through fer- aspects affecting supply con-
ditions have been crucial in
tilizer and irrigation costs) as well as in transporting food. Across the world, the governments changing the global market
have reduced protection and subsidies on agriculture, which means that high costs of energy conditions for food crops.
directly translate into higher costs of cultivation, and, therefore, the higher prices of output.
Secondly, there is the impact of both oil prices and government policies in the United
Firstly, there is the impact of
States, Europe, Brazil, and elsewhere that have promoted biofuels as an alternative to high oil prices.
petroleum. This has led to significant shift s in acreage as well as in the use of certain grains.
For example, in 2006 the United States diverted more than 20 per cent of its maize pro-
Secondly, there is the impact of
duction to the production of ethanol; Brazil used half of its sugarcane production to make both oil prices and government
bio-fuel; and the European Union (EU) used the greater part of its vegetable oil production as policies.
well as the imported vegetable oils, to make bio-fuel. This has naturally reduced the available
land for producing food.
Policy Neglect
Thirdly, the impact of policy neglect of agriculture over the past two decades is finally being Thirdly, the impact of policy
felt. The prolonged agrarian crisis in many parts of the developing world; the shifts in acreage neglect of agriculture over the
from food crops to cash crops relying on the purchased inputs; the excessive use of ground- past two decades.
water and inadequate attention to preserving or regenerating land and soil quality; the lack
of attention to relevant agricultural research and extension; the overuse of chemical inputs
that have long-run implications for both safety and productivity; the ecological implications
of both pollution and climate change, including desertification and loss of cultivable land: all
these are issues that have been highlighted by analysts but largely ignored by policymakers in
most of the countries. Reversing these processes is possible but will take time and substantial
public investment, so until then the global supply conditions will remain problematic.
Fourthly, there is the impact of
Fourthly, there is the impact of changes in the market structure, which allows for a
changes in the market struc- greater international speculation in commodities. It is often assumed that rising food prices
ture, which allows for a greater automatically benefit farmers, but this is far from the case, especially as the global food
international speculation in trade has become more concentrated and vertically integrated. A small number of agri-
commodities.
business companies worldwide increasingly control all aspects of cultivation and distribu-
tion, from supplying inputs to farmers, to buying crops and even in some cases, to retail
food distribution. This means that marketing margins are large and increasing, so that di-
rect producers do not get the benefits of increases except with a time lag and even then, not
to the full extent. This concentration also enables greater speculation in food, with a more
centralised storage.
Financial Speculators
Finally, primary commodity mar-
Finally, primary commodity markets are also attracting financial speculators. As the global
kets are also attracting finan- financial system remains fragile with the continuing implosion of the US housing finance
cial speculators. market, commodity speculation is increasingly emerging as an important alternative invest-
ment market. Such speculation by large banks and financial companies is in both agricultural
and non-agricultural commodities, and explains, at least partly, why the very recent period
has seen such sharp hikes in the price. The commodity speculation has also affected the min-
erals and metals sector. For these commodities, it is evident that recent price increases have
been largely the result of increased demand, not only from China and other rapidly growing,
developing countries, but also from the United States and EU.
A positive fallout of the recent growth in the demand and diversification of sources of
the demand is that it has allowed primary metal-producing countries, especially in Africa, to
benefit from the competition to extract better prices and conditions for their mined products.
But there is also the unfortunate reality that higher mineral prices have rarely, if ever, trans-
lated into better incomes and living conditions of the local people, even if they may benefit
the aggregate economy of the country concerned.
At any rate, metal prices are high and are likely to remain so because of the growing
imbalance between the world supply and demand. A reduction in the global output growth
rates would definitely have some dampening effect on prices from their current highs, but
the basic imbalance is likely to continue for some time. This is also because there has been
a neglect of investment in this sector as well, so that building up of a new capacity will take
time, given the long gestation period involved in investments for the metal production.
Implications for India

So the medium-term outlook for the global commodity prices, while uncertain, is that they
are likely to remain high even if the world economy slows down in terms of the output
growth. What does this mean for India? Until the 1990s, both producers and consumers in
India were relatively sheltered from the impact of such global tendencies because of a com-
plex system of trade restrictions, public procurement, and distribution and policy emphasis
on at least food self-sufficiency.
Inflation | 361
The liberalizing policies that began in the early 1990s have rendered all of that history, The liberalising policies that
since one explicit aim of the reform strategy was to bring the Indian prices closer in line to began in the early 1990s have
the world prices. The countries like India, seeking to manage this effect of global speculation rendered all of that history,
since one explicit aim of the
on the prices of a universal intermediate like oil, have to decide how important it is to insulate
reform strategy was to bring the
the domestic economy and the domestic consumer from its effect. Indian prices closer in line to
Given the huge revenues being derived from duties on oil products, one way to get that the world prices. The countries
done is to forego duty while holding the oil prices. This would require compensating for like India, seeking to manage
this effect of global specula-
revenue losses with taxes in other areas, which a growing economy can contemplate. But tion on the prices of a universal
the government appears unwilling to take this route, thereby increasing pressure to hike oil intermediate like oil, have to
prices further and aggravate an inflationary tendency that is already proving to be economi- decide how important it is to
cally and politically damaging. insulate the domestic economy
and the domestic consumer
from its effect.
Ineffective Strategy
This reticence, till recently, to proactively insulate the domestic economy, has meant that
both producers and consumers are now more or less directly affected adversely by the global
trends. The government’s response to the domestic price rise, which is already creating panic
in the official corridors in an election year, has been to reduce or eliminate import duties on
several food items such as edible oils, so as to allow imports to bring the price down.
But that is a short-sighted and probably an ineffective strategy. It provides a direct com-
petition to Indian farmers producing oilseeds, even as they suffer rapidly rising costs. It sends
confused signals not only to farmers for the next sowing season, but also to consumers, and
leaves the field open for domestic speculators as well, as the imports are not under public
supervision but are left to private traders.
Most of all, given the tendency of international commodity prices noted here, it will not
solve the basic problem of rising inflation in such commodities. Instead, it will make the
Indian economy even more prone to the volatility and inflationary pressure of world markets.
In fact, the increases in prices in India have not been as sharp for some commodities, largely
because of the vestiges of the intervention era.
Thus, the prices of some commodities, like rice for example, have gone up less than world
prices only because exports have been prohibited. This does suggest that the Indian economy
cannot hope to remain insulated from these global trends, without much more proactive
policies that rely substantially on the government intervention in several areas. In the case of
food, this essentially requires a more determined effort to increase the viability of food cul-
tivation, to improve the productivity of agriculture through public measures, and to expand
and strengthen the public system of procurement and distribution. For other commodities
too, it is now evident that a laissez faire system is simply not good enough and public inter-
vention and regulation of markets is essential.
C ase
Calculating Inflation in India
Some economists assert that India’s method of calculating inflation is wrong, as there are
serious flaws in the methodologies used by the government. So, how does India calculate
inflation? And how is it calculated in the developed countries?
• India uses the WPI to calculate and then decide the inflation rate in the economy.
• Most developed countries use the CPI to calculate inflation.
WPI was first published in 1902, and it was one of the more economic indicators available to
policymakers, until it was replaced by the most developed countries by the CPI in the 1970s.
WPI is the index that is used to measure the change in the average price level of goods
traded in the wholesale market. In India, a total of 435 commodities data on price level is
tracked through WPI, which is an indicator of a movement in the prices of commodities in
all trade and transactions. It is also the price index which is available on a weekly basis with
the shortest possible time lag of only two weeks. The Indian government has taken WPI as an
indicator of the rate of inflation in the economy.
The WPI has an all commodities index, which consists of three major groups—primary
articles; fuel, power, light, and lubricants; and manufactured products. These are again bro-
ken up into smaller sub-groups. For instance, the primary articles group would have food
articles, non-food articles, and minerals. Each of these sub-groups would have several indi-
vidual commodities in them.
The current WPI tracks the prices of 435 commodities, of which 98 are primary ar-
ticles; 19 fall in the fuel, power, light and lubricants group; and 318 are in the manufactured
products group. The WPI in India has been periodically revised from the time it was first
constructed in the 1930s and, for obvious reasons, the weights have moved progressively in
favour of manufactured products. The current index, which uses 1993–94 as its base year, has
weights of 22.025 for primary articles, 14.226 for fuel, and so on, and 63.749 for manufac-
tured products.
CPI is a statistical time-series measure of a weighted average of prices, of a specified set
of goods and services, purchased by consumers. It is a price index that tracks the prices of a
specified basket of consumer goods and services, providing a measure of inflation. CPI is a
fixed-quantity price index and is considered by some as a cost-of-living index. Under CPI, an
index is scaled so that it is equal to 100 at a chosen point in time, so that all other values of
the index are a percentage relative to this one.
The economists say that it is high time that India abandoned WPI and adopted CPI to
calculate inflation. India is the only major country that uses a WPI to measure inflation. Most
countries use the CPI as a measure of inflation, as this actually measures the increase in price
that a consumer will ultimately have to pay for.
CPI is the official barometer of inflation in many countries such as the United States,
the United Kingdom, Japan, France, Canada, Singapore, and China. The governments
functioning there review the commodity basket of CPI, every four to five years, to factor in
changes in the consumption pattern.
It has pointed out that WPI does not properly measure the exact price rise, an end-
consumer will experience because, as the same suggests, it is at the wholesale level. The main
problem with WPI calculation is that more than 100 out of the 435 commodities included
in the index have ceased to be important from the consumption point of view. Take, for ex-
ample, a commodity like coarse grains that go into the making of a livestock feed. This com-
modity is insignificant, but it continues to be considered while measuring inflation.
India constituted the last WPI series of commodities in 1993–94, but has not updated
it till now. Economists argue that the Index has lost relevance and cannot be the barometer
to calculate current inflation (www.rediff.com.money/2008/may/27infl a1.htm). WPI is sup-
posed to measure the impact of prices on business. However, it is used to measure the impact
on consumers.
Many commodities not consumed by consumers get calculated in the index. And it does
not factor in services that have assumed so much importance in the economy. But why India
is not shifting calculation from WPI to CPI is a major question. The officials of Finance Min-
istry point out that there are many intricate problems in shifting from WPI to CPI model.
Inflation | 363
First of all, they say, in India, there are four different types of CPI indices, and that makes
switching over to the index from WPI fairly ‘risky and unwieldy.’ The four CPI series are as
follows: CPI industrial workers, CPI urban non-manual employees, CPI agricultural labour-
ers, and CPI rural labourers. The different CPIs are needed because the prices facing different
consumer groups are different. Thus, while urban house rents may be of great significance to
the first two groups, they would be of no relevance to the farm labourers. Thus, the composi-
tion of each CPI is different, and it should ideally reflect the actual consumption patterns of
the relevant consumer groups.
Secondly, officials say that the CPI cannot be used in India because there is too much of
a lag in reporting the CPI numbers. In fact, as of May 2006, the latest CPI number reported
is for March 2006. The WPI is published, on a weekly basis and the CPI, on a monthly basis.
And in India, inflation is calculated on a weekly basis. But then, the question remains how the
United States, the United Kingdom, Japan, France, Canada, Singapore, and China use CPI for
inflation calculation.
Case Questions
1. Do you think India’s method of calculating inflation is wrong as there are serious
flaws in the methodologies used?
2. Why India is not able to shift WPI to CPI for calculating inflation?
3. Suggest some innovative methods for calculating inflation in India.
Key W o r d s
● Wholesale Price Index (WPI) ● Resource Gap ● Deficit Financing
● Consumer Price Index (CPI) ● Demand-pull Inflation ● The Organisation of The Petroleum
● Market Imperfection ● Cost-push Inflation Exporting Countries (OPEC)
● Food Price Index
Q u est i o n s
1. How is ‘inflation’ defined? Can any rise in price be 6. Explain the relationship between inflation and em-
considered as inflation? What is the acceptable or ployment. Is achieving a high rate of employment by
desirable limit of inflation? means of inflation always desirable?
2. What are the methods of measuring inflation? Why is 7. What is monetarists’ explanation for inflation?
national income deflator considered as a more reli- Is inflation always and everywhere a monetary
able method of measuring inflation? phenomenon?
3. Explain the various kinds of inflation. How do they 8. Explain how the demand factors cause demand-pull
differ from one another? inflation. What are the major weaknesses of the
4. What are the effects of inflation on wage earners, demand-pull theory of inflation?
fixed income people, debtors and creditors, produc- 9. What are the factors behind cost-push inflation? Is
ers, and the government? Give the reasons for the there any link between cost-push and demand-pull
effects of inflation. inflation?
5. In what way does inflation contribute to economic 10. Distinguish between demand-pull and cost-push infla-
growth? What kind of inflation affects economic tion. Can the two types of inflation go hand-in-hand?
growth adversely? Explain in this regard the ‘wage price spiral.’
11. Combating inflation has been one of the most intrac- 13. Explain the working of the monetary weapons of infla-
table economic problems faced by the developed and tion control. Which of these weapons is more effec-
the underdeveloped countries. Comment. tive under what conditions?
12. What are the traditional monetary measures to con- 14. What are the fiscal measures for controlling inflation?
trol inflation? Explain how these measures work to Are they more effective than the monetary measures
control inflation. in controlling inflation?
Refe r e n ces
n Economic and Political Weekly, 43(14), April 5–11, n www.indiabudget.nic.in
2008
n The Hindu Business Line, April 8, 2008 Economic Survey
2011–12
14
C hapter
Human Development
>>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>>
• Concept of Human Development 365 • Human Development Report (2007–08) 389
• Meaning and Importance of • Case 392
Human Resource 366 • Summary 394
• How to Attain Human Development 369 • Key Words 394
• Human Development and Gender Situation 370 • Questions 394
• Growth of Human Development 386 • References 394
Concept of Human Development

The ultimate objective of a planned development is to ensure human well-being through a The ultimate objective of a plan
sustained improvement in the quality of life of people, particularly the poor and the vulner- ned development is to ensure
able segments of the population. In terms of policy measures it requires an emphasis on the human well-being through a
sustained improvement in the
social sector development and programmes. The human resource development (HRD) con-
quality of life of people, particu-
tributes to sustained growth and productive employment. A healthy, educated, and skilled larly the poor and the vulnerable
workforce can contribute more significantly and effectively to economic development. segments of the population.
The concept of human development (HD) is complex and multi-dimensional. It is,
however, certain that HD is much more than mere poverty eradication. It requires a situa-
tion where people can freely identify and select their choices. In this chapter, I have confined
to the concept of HD from the vantage point of policymakers and planners, who believe in
intervention of the state and civil society, for a better social order for the development of
all. The present concept of HD has gained currency with the efforts of the United Nations
Development Project (UNDP). Mahbub ul Haq, one of the architects of UNDP, spells out the
concept in the following manner:
The basic purpose of development is to enlarge people’s choices. In principle, these

choices can be infinite and can change over time. People often value achievements
that do not show up at all, or not immediately, in income or growth figures: greater
access to knowledge, better nutrition and health services, more secure livelihoods,
security against crime and physical violence, satisfying leisure hours, political and cul-
The objective of development is
tural freedoms and a sense of participation in community activities. The objective of to create an enabling environ-
development is to create an enabling environment for people to enjoy long, healthy and ment for people to enjoy long,
creative lives. healthy and creative lives.
Meaning and Importance of

Human Resource
The people of a country constitute its most important resource called ‘human resource’.
Human resource implies the Human resource implies the abilities, skills, and technical know-how of the population of
abilities, skills, and technical a country. Here, human resource of the country is not only the size of population but its
know-how of the population of efficiency, education, qualities, productivity, and organisational abilities. If the people are ed-
a country.
ucated, skilled, and healthy, they provide a good quality of human resource to the economy.
All developmental efforts of the government are for the welfare of the people—to raise their
standard of living and improve their quality of life. The human resource of an economy, par-
The human resource of an econ-
omy, particularly of an under- ticularly of an underdeveloped economy, can be improved by providing education, medical
developed economy, can be facilities, and other facilities like housing, sanitation, and so on.
improved by providing educa- Since its launch in 1990, the Human Development Report (HDR) published by UNDP
tion, medical facilities, and has defined HD as the process of enlarging people’s choices. The most critical ones are to
other facilities like housing,
sanitation, and so on. lead a long and healthy life, to be educated, and to enjoy a decent standard of living. The
additional choices include political freedom, other guaranteed human rights, and various
ingredients of self-respect. These are among the essential choices, the absence of which can
block many other opportunities. HD is thus a process of widening people’s choices as well as
raising the level of well-being that is achieved. Thus, as noted by Paul Streeten, the concept of
HD puts people back at the centre stage, after decades in which a maze of technical concepts
had obscured this fundamental vision.
According to Mahbub ul Haq,
The defining difference between the economic growth and the human development
schools is that the first focuses exclusively on the expansion of only one choice—
income—while the second embraces the enlargement of all human choices—whether
economic, social, cultural or political. It is sometimes suggested that the expansion of
income can enlarge all other choices as well. This may happen but generally does not,
on account of a variety of reasons. First, income may be unevenly distributed within
a society. The choices of those people who have either no access to income or a very
limited access, are very much limited. Thus, economic growth does not ‘trickle down’.
Second, and more importantly, the national priorities chosen by the society or its rulers
and the political structure prevalent in the society may not allow the income expansion
to enlarge human options.
A society does not have to be As emphasised by Mahbub ul Haq, ‘use of income’ by a society is just as important as
rich to afford democracy. A
family does not have to be
‘generation of income’ itself as would be clear from the fact that income expansion leads
wealthy to respect the rights to much less human satisfaction in a virtual political prison or cultural void than in a more
of each member. A nation liberal, political and economic environment. Accumulation of wealth may not be necessary
does not have to be affluent to for the fulfilment of several kinds of human choices. In fact, many choices do not require any
treat women and men equally.
Valuable social and cultural
wealth at all. For instance,
traditions can be and are main-
A society does not have to be rich to afford democracy. A family does not have to be
tained at all levels of income.
wealthy to respect the rights of each member. A nation does not have to be affluent to
treat women and men equally. Valuable social and cultural traditions can be and are
Haq thus rightly warns ‘unless
societies recognize that their maintained at all levels of income.
real wealth is their people, an
excessive obsession with creat-
There are many human choices that extend far beyond economic well-being. Knowledge,
ing material wealth can obscure health, a clean physical environment, political freedom, and simple pleasures of life are not
the goal of enriching human dependent on income. Accumulation of wealth can expand people’s choices in the above are-
lives’. as but it is not necessary. It is the use of wealth and not wealth itself that is decisive. Haq, thus,
Human Development | 367
rightly warns, ‘unless societies recognize that their real wealth is their people, an excessive
obsession with creating material wealth can obscure the goal of enriching human lives’.
According to Paul Streeten, HD is necessary on account of the following reasons:
• HD is the end, while economic growth is only a means to this end. The ultimate HD is the end while economic
purpose of the entire exercise of development is to treat men, women, and children— growth is only a means to this
present and future generations—as ends, to improve the human condition, to enlarge end.
people’s choices.
• HD is a means to higher productivity. A well-nourished, healthy, educated, skilled, HD is a means to higher produc-
and alert labour force is the most important productive asset. Thus, investments in tivity.
nutrition, health services, and education are justified on the grounds of productivity.
• HD helps in lowering the family size by slowing the human reproduction. It is the HD helps in lowering the fam-
experience of all developed countries that has seen improvement in education levels ily size by slowing the human
(particularly of girls), better health facilities, and reduction in infant mortality rates reproduction.
(IMRs), leading to a lowering of the birth rates. While improved education facilities
make the people aware of the benefits of a small family (a higher-income level, bet-
ter standard of living, etc.), reduction in IMRs reduces the incentive of having larger
families as fewer child deaths are now feared.
• HD is good for physical environment. Deforestation, desertification, and soil erosion HD is good for physical environ-
decline when poverty declines. How population growth and population density affect ment. Deforestation, desertifi-
the environment is a subject of controversy. The conventional view is that they have cation, and soil erosion decline
a detrimental effect. However, Paul Streeten cites a recent research to show that rapid when poverty declines.
(though not accelerating) population growth and high population density (particu-
larly if combined with secure land rights) can be good for soil and forest conserva-
tion. Reduced poverty contributes to a healthy civil society, increased democracy, and
a greater social stability.
• HD can help in reducing the civil disturbances in a society and in increasing the HD can help in reducing the
olitical stability.
p civil disturbances in a society
and in increasing the political
The above discussion shows that the HD paradigm embraces the entire society and not just stability.
the economy alone. The political, cultural, and social factors are given as much importance
as the economic factors. What is more, a careful distinction is being maintained between
ends and means. While people are regarded as the end of development, the means are not for-
gotten. In this context, the expansion of GNP (gross national product) becomes an essential
means for expanding many human options. However, the character and distribution of eco-
nomic growth are measured in terms of enriching the lives of people. People not only remain
the instruments for producing commodities but also acquire the centre stage. The production
processes are not treated in an abstract vacuum but are made to acquire a ‘human’ context.
According to Mahbub ul Haq, there are four essential components in the HD paradigm:
According to Mahbub ul Haq,
equity, sustainability, productivity, and empowerment. there are four essential com-
ponents in the HD paradigm:
equity, sustainability, productiv-
Equity ity, and empowerment.
If a development is to enlarge people’s choices, people must enjoy an equitable access to op-
portunities. Equity in access to opportunities demands a fundamental restructuring of power
in many societies and changes along the following lines: (i) change in the distribution of
If a development is to enlarge
productive assets especially through land reforms; (ii) major restructuring in the distribution people’s choices, people must
of income through a progressive fiscal policy, aimed at transferring income from the rich to enjoy an equitable access to
the poor; (iii) overhauling of the credit systems so that the credit requirements of the poor opportunities.
people are satisfactorily met; (iv) equalisation of political opportunities through voting rights
reform, campaign finance reform, and other actions aimed at limiting the excessive political
power of a feudal minority; and (v) undertaking steps to remove social and legal barriers that
limit the access of women or of certain minorities or ethnic minorities to some of the key
economic and political opportunities.
Sustainability
The next generation deserves The next generation deserves the opportunity to enjoy the same well-being that we now enjoy
the opportunity to enjoy the and this right makes sustainability an essential component of the HD paradigm. At times, the
same well-being that we now concept of sustainability is confused with the renewal of natural resources, which is just one
enjoy and this right makes sus- aspect of sustainable development. As emphasised by Mahbub ul Haq, ‘it is the sustaining
tainability an essential compo-
nent of the HD paradigm. of human opportunities that must lie at the centre of our concerns’. This, in turn, requires
sustaining all forms of capital—physical, human, financial, and environmental. Sustainability
is a matter of distributional equity—of sharing development opportunities between present
and future generations and ensuring intra-generational and inter-generational equity in
access to opportunities. However, as cautioned by Haq,
Sustainability does not mean sustaining present levels of poverty and human depriva-
tion. If the present is miserable and unacceptable to the majority of the world’s peo-
ple, it must be changed before it is sustained. In other words, what must be sustained
are worthwhile life opportunities, not human deprivation. Not only this, sustainability
also means that wide disparities in life styles within and between nations must be re-
examined and efforts undertaken to reduce them. This is due to the reason that an
unjust world is inherently unsustainable both politically and economically. It may be
environmentally unsustainable as well.
Productivity
‘An essential part of the human development, paradigm is productivity, which requires in-
An essential part of the human
development, paradigm is vestments in people and an enabling macroeconomic environment for them to achieve their
productivity, which requires maximum potential. Economic growth is therefore a subset of human development models—
investments in people and an an essential part but not the entire structure’, by Haq. Many East Asian economies like Japan
enabling macroeconomic envi-
ronment for them to achieve
and the Republic of Korea have accelerated their growth through tremendous investments
their maximum potential. in human capital. In fact, most of the development literature has focused on the productivity
of human endeavour. Many recent models of development are based primarily on human
capital. However, as correctly pointed out by Haq, this approach treats people only as a means
of development and obscures the centrality of people as the ultimate end of development.
Therefore, it is better to treat productivity only as one part of the HD paradigm—with equal
importance given to equity, sustainability, and empowerment.
Empowerment
HD paradigm envisages a full
HD paradigm envisages a full empowerment of the people. Empowerment means that people
empowerment of the people. are in a position to exercise choices of their own free will.
Empowerment means that peo-
ple are in a position to exercise It implies a political democracy in which people can influence decisions about their
choices of their own free will. lives. It requires economic liberalism so that people are free from excessive economic
controls and regulations. It means decentralisation of power so that real governance
is brought to the doorstep of every person. It means that all members of civil society,
particularly non-governmental organisations, participate fully in making and imple-
menting decisions.
The empowerment of people requires action on various fronts: (i) it requires investing in the
education and health of the people so that they can take advantage of market opportunities;
(ii) it requires ensuring an enabling environment that gives everyone access to credit and
productive assets so that the playing fields of life are more even; and (iii) it implies empower-
ing both women and men so that they can compete on an equal footing.
How to Attain Human Development

How to attain HD is a moot question for policymakers. Rule of law, relative equality, and
How to attain HD is a moot
freedom are important pillars of socio-political system in facilitating the HD. They provide question for policymakers. Rule
equal opportunities, irrespective of gender, race, creed, or caste to everyone to ‘empower’ of law, relative equality, and
oneself and opt for choices according to one’s own preferences. Inequality in status and power freedom are important pillars of
socio-political system in facili-
restricts exercise of choices of those who are at the lower rung of the hierarchical ladder. In tating the HD.
a situation where very wide gap in status and income prevails between those who are at the
higher echelon and at the bottom, the latter are vulnerable to the dictation of the powerful.
Such inequitable system provides better and more opportunities to the former because of
their network and socialisation than to the latter. They also enjoy hegemony in the form of
value system and ideology over the latter. In such a situation, autonomy of the lower strata
in identifying choices is restricted. For instance, people at the lower strata in Scandinavian
countries have relatively more autonomy than those who are in a similar position in the
United States.
It is assumed, almost orchestrated by the institutions of global governance that market-
driven growth is a royal path for HD. Alternative approaches for the development of hu-
man civilizations are believed to have been exhausted with the fall of the Soviet Union. The
Western capitalist societies have invented an ideal path for the development of all. According
to some proponents of the path, human civilization has reached the end of history only
with capitalist economy and liberal democracy. This is the final and inevitable destiny of
the civilization (Fukuyama 1992). It is argued that the state has curbed human freedom and
incentives. People are made dependent on the state for their development. Such a state is
antithetical to the well-being of all—including of the poor. Therefore, the state should roll
back and confine to the minimum functions of maintaining law and order. In the contem-
porary dominant discourse, the mantra is let the economy flourish and be free from politics.
Market is a dynamic force for self-corrections. Bill Clinton asserted in 2004 before the World
Economic Forum: ‘We have to reaffirm unambiguously that open markets are the best engine
we know of to lift living standards and build shared prosperity’. The responsibility of the state
is to facilitate market-oriented economic growth. It is required to maintain macro-economic
stability and guarantee property rights. This economic trajectory is sacrosanct. The IMF and UNDP defines governance,
‘as the exercise of economic,
the World Bank, the architects and monitors of neoliberal trajectory, claim that their policies political, and administrative
are essentially apolitical in nature and simply reflect the ‘value free’ principles uncovered by authority to manage a coun-
‘positive economics’ (Thomas 2000). try’s affairs at all levels. It com-
In this trajectory, what is needed is good management and good governance on the part prises mechanisms, processes,
and institutions through which
of the state. Intervention of the state from the social sphere needs to be minimum. Given citizens and groups articulate
this, UNDP defines governance, ‘as the exercise of economic, political, and administrative their interests, exercise their
authority to manage a country’s affairs at all levels. It comprises mechanisms, processes, and legal rights, meet their obliga-
institutions through which citizens and groups articulate their interests, exercise their legal tions, and mediate their differ-
ences (1997)’. Accountability,
rights, meet their obligations, and mediate their differences (1997)’. Accountability, trans- transparency, and equality
parency, and equality before the law are the important parameters of good governance. before the law are the impor-
Catch words like ‘decentralisation’, ‘empowerment’, and ‘participation’ of the people are often tant parameters of good gover-
repeated with a little clarity. Cooperation and accommodation of ‘conflicting and diverse nance.
interests’ are called for.
Within this neoliberal framework, ‘good governance’ guarantees ‘property rights’ and
maintenance of macro-economic stability. But redistribution of growth—nationally and
internationally—is not even mentioned. Relative equality in income, assets, and opportuni-
ties is not on agenda. Nor it gives importance to social and economic security of the popu-
lation. Insecurity of job, income, and health breeds uncertainties, anxiety, and fear of an
unknown situation. Insecured persons tend to become vulnerable to the manipulation of
power mongers. Without relative equality and social security, it is agreed that accountabil-
ity, transparency, decentralisation, and electoral democracy though very important cannot
attain HD. Mere market-driven growth makes the state subservient to those who control
capital and undermines societal networks and human needs. HD is possible with the shift
from market-oriented growth to social-oriented growth. Our plea is that the market needs
to be tamed and brought under the supervision of civil society and state. Therefore, alterna-
tive politics, of course, not of excessive Centralised statism, has to be brought back. This is a
political issue.
Human Development and Gender

Situation
As per the UNDP’s Global HDR 2011, in spite of the absolute value of the human develop-
ment index (HDI) for India improving from 0.254 in 1970 to 0.547 in 2011 and further to
0.619 in 2005, the relative ranking of India has not changed much, even till date. India ranks
India ranks at 134 among the
countries with medium HD, out at 134 among the countries with medium HD, out of 177 countries of the world, as against
of 177 countries of the world. 126 in the previous year. In terms of Gender Development Index (GDI), India ranks 129 out
of 157 countries ranked on the basis of their GDI value. A zero count for HDI rank minus
GDI rank for India is indicative of almost a similar status of ranking in terms of GD and HD.
At the same time, while India’s HDI rank reflects a low relative achievement in the level of
HD, a negative count of (−11) for gross domestic product (GDP) per capita (PPP US$) rank
minus HDI rank is also indicative that the country has done better in terms of per capita
income than in the other components of HD. The other indicators related to health and edu-
cation also indicate the same. The situation reinforces the need for a greater focus on this area
in our development planning. It is this concern that is reflected in the Eleventh Plan which
seeks to reduce not only poverty but also the various kinds of disparities across regions and
communities by ensuring a better access to not only the basic physical infrastructure but also
the health and education services to one and all.
India’s Global position on human and gender development (refer to Table 14.1).
Table 14.1
Human Development
> 2011 1970 2011
and Gender Inequality HDI Value Rank HDI Value Rank GII Value Rank
Index India 0.547 134 0.254 82 0.617 129
Australia 0.929 2 0.862 12 0.136 18
Sweden 0.904 10 0.881 2 0.049 1
Canada 0.908 6 0.887 1 0.140 20
Switzerland 0.903 11 0.872 8 0.067 4
USA 0.910 4 0.881 3 0.299 47
(Continued)
2011 1970 2011 < Table 14.1

(Continued)
HDI Value Rank HDI Value Rank GII Value Rank
Netherlands 0.910 3 0.867 10 0.052 2
Japan 0.901 12 0.875 6 0.123 14
UK 0.863 28 0.873 7 0.209 34
France 0.884 20 0.871 9 0.106 10
Italy 0.874 24 0.831 19 0.124 15
Germany 0.905 9 0.856 15 0.085 7
Korea Rep 0.897 15 0.523 45 0.111 11
Argentina 0.797 45 0.748 26 0.372 67
Hungary 0.816 38 0.705 31 0.164 25
Mexico 0.770 57 0.642 36 0.448 79
Russian 0.755 66 n/a - 0.338 59
Federation
Brazil 0.718 84 0.507 48 0.449 80
Saudi Arabia 0.770 56 0.511 46 0.646 135
China 0.687 101 0.372 64 0.209 35
Sri Lanka 0.691 97 0.506 49 0.419 74
Indonesia 0.617 124 0.306 75 0.505 100
Egypt 0.644 113 0.269 80 - -
South Africa 0.619 123 0.591 76 0.490 94
Pakistan 0.504 145 0.244 85 0.573 115
Bangladesh 0.500 146 0.199 94 0.550 112
Kenya 0.509 143 0.254 81 0.627 130
Nigeria 0.459 156 0.230 88 – –
Major Initiatives in the Social Sector

In consonance with the commitment to foster a social sector development under the National In consonance with the com-
Common Minimum Programme (NCMP), the Central government has launched new initia- mitment to foster a social sec-
tives for a social sector development during 2011–12. Substantial progress was also made on tor development under the
National Common Minimum
the major initiatives launched in earlier years.
Programme (NCMP), the Central
The Central government expenditure on social services and rural development has gone government has launched new
up consistently over the years. The Central support for social programmes has continued to initiatives for a social sector
expand in various forms though most of the social sector areas fall within the purview of the development during 2011–12.
Substantial progress was also
states. A significant amount of programme-specific funding is available to the states through made on the major initiatives
the Centrally sponsored schemes. The pattern of funding for these schemes varies depending launched in earlier years.
upon the priority laid on the sector. At the same time, the objective is to make states more
and more self-reliant in supporting these schemes, as is borne out by the funding pattern
proposed for Sarva Shiksha Abhiyan (SSA).
The increasing trend of expenditure on social services by the general government (the
Centre and the states combined) in the recent years as shown in Table 14.2 reflects the high
priority attached to these sectors.
Table 14.2
Expenditure of Union
> 2011–12 2010–11 2009–10 2008–09
(BE) (RE)
and State Governments
on Social Sector Rs (in crores)
Total Social Sector 600,516 562,970 446,382 380,628
Education 276,866 249,343 197,070 161,360
Health 115,426 103,742 88,050 73,898
Others 208,224 209,885 161,262 145,370
Social Sector expenditure as proportion of %
a) Gross Domestic Product
Total Social Sector Expenditure 6.74 7.34 6.91 6.76
Education 3.11 3.25 3.05 2.87
Health 1.30 1.35 1.36 1.31
Others 2.34 2.73 2.50 2.58
b) Total Government Expenditure
Total Social Sector Expenditure 25.00 25.00 24.10 23.80
Education 11.50 11.10 10.60 10.10
Health 4.80 4.60 4.80 4.60
Others 8.70 9.30 8.70 9.10
c) Total Social Sector Expenditure
Education 46.10 44.30 44.10 42.40
Health 19.20 18.40 19.70 19.40
Others 34.70 37.30 36.10 38.20
Note: *GDP at current market prices.

The inter-state comparisons based upon the important socio-economic indicators bring
out the disparities between the states in the development outcomes. The performance of
states across various sub-sectors, be it poverty, health, or education-related, reinforce each
other. To some extent, this disparity in performance between states may be accounted for by
extraneous factors, but largely can be attributed to governance and delivery of services. This
calls for a greater emphasis on the governance issues. While governance is a broader area
to be tackled at various fronts, the use of e-governance is becoming an important method
to ensure better delivery and monitoring of services in different sectors including the social
sectors.
Education
Right to Education Act
The constitution of India in article 45 under Directive Principles of State Policy recogniz-
es the importance of ensuring universal basic education for all children up to the age of
14 years. Subsequently, many documents, including every five year plan, the 1968 National
Policy on Education (NPE), and the 1986 National Policy on Education (revised in 1992)
have attempted to refine India’s efforts at Universal Elementary Education (UEE).
There were important constitutional amendments as well that intended to give a boost to
elementary education, which was largely a state responsibility, on to the concurrent list and
made universalizing elementary education the responsibility of both the central and state
governments.
In 2002, the government took another significant step by making elementary education
a fundamental right through the 86th constitutional amendment. Sarva Shiksha Abhiyaan
(SSA) was launched in 2001–02 to universalize elementary education. Prior to SSA, there
were efforts such as Operation Blackboard, District Primary Education Programme (DPEP)
and so on.
The Mahila Samkhya (MS) programme was established with a broader mandate than
mere literacy with an endeavour to empower socially and economically marginalized women
through mobilizing and organizing women’s collectives. MS has been functioning since the
late 1980’s and the collectives have started to federate. Two other schemes to enhance girls’
education that were launched around 2003–04 are the National Programme for Education of
Girls at Elementary Level (NPEGEL) and the Kasturbha Gandhi Balika Vidyalaya (KGBV).
Other Schemes implemented with specific objectives to improve the outreach of schooling
to remote pockets and backward sections belonging to Scheduled Castes (SCs), Scheduled
Tribes (STs), Other Backward Castes (OBCs), and Minorities have been implemented in the
new millennium.
The 2005 National Curriculum Framework (NCF) deserves mention in this section since
it marks a prominent shift in the thinking and approach recommended as a plan for the im-
plementation of educational aims. The NCF focuses on the learner and advocates for a more
child centred approach to education. The methods of teaching or teacher transactions within
classrooms must also be made flexible, keeping in mind. The curriculum needs to be made
more locally relevant and in a manner to allow for plural understandings. Subsequently,
through a detailed plan of action, textbooks were prepared for different grades over a period
of three years.
Efforts to mainstream children with special needs (CWSN) in regular schools were made
in SSA and during the Eleventh Five-Year Plan. The endeavour in the twelfth five-year plan
would be to identify the ‘hidden’ CWSN and develop human resources for support services,
infrastructure and material support for inclusive education. This still remains a weak spot.
With the passing of the Right of Children to Free and Compulsory Education Act (RTE)
in 2009 a legal obligation to ensure elementary education to all children in the age group
6–14 years is cast on the central and state governments. This marks the movement of India
towards adopting a rights based framework in the sphere of universal elementary education.
This legislation implies that every child has a right to full time elementary education of satis-
factory and equitable quality in a formal school as specified by set norms and standards. The
RTE act aims to address the persisting problems that prevent universal and effective coverage
of elementary education in India. Among these are shortfalls in universal retention, reaching
the unreached and most difficult to reach sections and addressing the quality concerns.
The government has instituted many schemes and incentive measures to encourage
universal cover of at least elementary education, but also beyond for complete schooling:
mid-day meals and the pre schooling element of the Integrated Child Development Services
(ICDS) are the two schemes which are universal in their spread and outreach. Other schemes
include free distribution of textbooks and uniforms, student scholarships and so on. Some
of these schemes have been beneficial for the country as a whole, especially in terms of the
implications that these efforts have made on the transformation of the demand for educa-
tion. All reports/studies and data over the last two decades reflect the growing demand for
basic education as parents and guardians recognize the importance of education and aspire
towards educating their children. Infrastructural facilities have improved over the period,
with gross enrolment becoming almost universal, dropout rates declining even for girls at the
primary level and many more teachers being appointed.
The capacity of India to provide education for all at the school level, that is, all children
of ages 6–14 years and also those who are 15–17 years old, depends on a range of factors such
as school availability; infrastructure; access dimensions; personnel, especially teachers; cur-
riculum and pedagogy; book banks, laboratories and playgrounds; teaching learning facili-
ties and materials; and related aspects as reflected in the outcomes.
On similar lines to SSA, another scheme was launched in 2009–the Rashtriya
Madhyamik Shiksha Abhiyaan (RMSA)–extending universal education to the 14–18 year
olds. It is guided by the principles of universal access, equality and social justice, relevance
and development of curricular and structural aspects. The vision for secondary education is
good quality education made available, accessible and affordable to all young persons in the
ages of 14–18 years.
However, unless all children of 6–14 years are in school, their continuation for further
education towards secondary and higher education obviously remain limited to that extent.
Also, it need hardly be reiterated that universalization of elementary education is feasible
only if primary and subsequently, upper primary education is inclusive and does not miss out
any children, especially those belonging to a social group, community, caste, class or gender.
Roadmap Set Out for RTE

As per the roadmap laid down, by 31 March 2013, that is, a timeframe of three years,
neighbourhood schools have to be established. Provision of school infrastructure, all
weather school buildings, one teacher per classroom, and various other infrastructure such
as an office-cum-store-cum-head teacher room, toilets, drinking water facilities, barrier
free access, library, playground and fencing or boundary walls need to be established in the
neighbourhood schools. In addition, a prescribed pupil teacher ratio (PTR) must be attained.
Training of untrained teachers has been assigned a time period of five years. This requires
institutional restructuring and capacity enhancement to enrol additional persons for training
since existing facilities are fairly limited.
Efforts to revamp SSA and implement RTE guided by the following principles–holistic
approach to education based on the interpretations of NCF 2005, which has implications
for curriculum, teacher education, educational planning and management; equity, access,
gender concerns, centrality of teachers, moral compulsion rather than punitive processes
and moving towards a convergent and integrated system of educational management in all
states as speedily as is feasible. The major challenge will be in the implementation of quality
interventions and other related provisions.
Achievements and Remaining Challenges over the SSA Period

Near universal coverage in the primary stages has been achieved, although challenges re-
main in upper primary education in attaining goals of universal enrolment and retention
as defined by SSA as well. The positive changes noted over the years may be summarized in
five points: Expansion of elementary schools–numerical and spatial; near universal levels
of access and enrolment at the primary stages; reduction in the number of out-of-school
children; narrowing of the gender gap in elementary education; and percentage of SC/ST
children enrolled in schools being proportionate to their population.
The status of education in India reflects the progress made and the challenges that still
remain. Amidst narrowing gaps, there are certain persistent inequalities. Literacy rates and
attendance have been improving, as have school availability and facilities across locations, yet
variations and disparities prevail.
Status of Education in India

The improvements are reflected in higher literacy rates among Indians, and more emphati-
cally among women and the other disadvantaged social groups, including Muslims among
the minorities. Other parameters which also display positive developments are a gradual
upward movement of the proportion of students in higher education and in professional
courses. Nearly 11 per cent of India’s population is enrolled for higher education. While this
is way lower than other countries there has been a noteworthy increase over time.
However, given the fact that only a small proportion still manage to reach the higher
stages of education, the concern is to ensure that all children attain schooling at least up to
the elementary stages. The pursuit to ensure equity, inclusion and quality requires the basic
education levels to improve and become universal.
Concluding Remarks
Will operationalizing RTE be a panacea for India’s inability to establish a system of elemen-
tary education that is free and of good quality? The high growth experienced over the years
and its resultant additional resources has not succeeded in ensuring free and good quality
education so far. The enhanced budgetary allocations are a reflection of the political will
to boost education outcomes. The budget speech of the finance minister in 2012 promises
higher allocations to SSA (22 per cent) and RMSA (29 per cent) compared to previous years.
Financial allocations are no doubt important for meeting educational needs. While
these may be essential for providing infrastructure, its maintenance and the management
of schools, teachers and training concerns only be partially addressed through this. Some
studies have found little association between financial allocations and ensuring equality of
opportunities across sections of the population or states across India.
The economic challenges faced by households and their impact on children’s education,
has an overwhelming influence in constraining a sustained pursuit of seeking schooling.
Under these circumstances, can legal rights to children translate into altering the inherent
social and economic inequalities, prevalent and persisting, in our society for long years? How
will the rights be protected and the provisions as per the RTE provided? Correct and appro-
priate as they may be, can legal provisions and statutory mandated alone change the scenario
to accommodate children of weaker sections without addressing the economic backwardness
of households to which they belong?
Until such time that all households are protected or are at a level where their basic needs
of food, shelter and clothing are secured, there may be a need to plan for providing additional
support to households to send their wards to school for at least eight years of education
initially. Incentives and support to improve education play a critical role but can only serve
if quality education is ensured. The element of improving learning outcomes is therefore,
an extremely critical one. Returns to education are well documented, especially at the post-
secondary education levels, but also for every additional year of schooling. The relevance
of all this increases with effective learning from the schooling availed as earnings prospects
improve in the economy with employment generation. While globalization and exposure to
possibilities has established an aspirational spiral among all youth and adults increasing the
demand for education, with high unemployment levels among the educated may disturb the
signals for agents.
The current emphasis on target based approaches for example, those which are based on
reducing disparities in enrolment between gender and social groups are unlikely to translate
into desired outcomes unless an understanding of the reasons that constrain participation
of children in schooling is developed from a localized perspective. For instance, what are
the appropriate measures to improve the performance and participation among groups of
children who have historically underachieved in the school system? In other words more
clarity is required in the social inclusion agenda and efforts to make this a shared vision are
essential. Numerous issues remain unresolved amidst some that are not so contradictory or
conflict ridden, for which more debates and discussions are essential.
Finally the areas where knowledge building is required and to which attention needs to
be paid in order to move towards quality education as per RTE are: Mapping exercises that
consider social access to schools and schooling apart from spatial concerns; improving pre
schooling, reducing dropouts; assessing the functioning of schools, curriculum load, class-
room transactions and learning potentials; reforming teacher deployment and training; cre-
ating appropriate spaces for the coexistence of different types of schools or moving towards a
uniform schooling structure is not an option at the moment; and developing a consensus on
what constitutes good quality education.
Table 14.3 depicts the status of school and college education in India from 1990–91 to
2009–10.
Table 14.3
School and College
> 2009–10 2005–06 2001–02 1990–91
Education No of Institutions
Primary (‘000s) 823.2 772.6 664.0 560.9
Middle (‘000s) 367.7 288.5 219.6 151.5
Higher Secondary (‘000s) 190.6 159.7 133.5 79.8
General Education 14,146@ 11,698 8,737 4,862
Colleges (No.)
Professional Colleges* (No.) 7,980@ 5,284 2,409 886
Universities^ (No.) 409 350 272 184
Enrolment
Primary (Mn.) # 135.7 132.1 113.9 97.4
(115.5) (109.4) (96.3) (83.8)
Of which: Girls 64.8 61.6 50.3 40.4
(115.4) (105.8) (86.9) (71.9)
Middle (Mn.) # 59.4 52.2 44.8 34.0
(81.5) (71.0) (60.2) (66.7)
Of which: Girls 27.6 23.3 18.7 12.5
(78.3) (66.4) (52.1) (51.9)
Higher Secondary (Mn.) 48.3 38.4 30.5 19.1
Notes:
* Medicine, Engineering & Technology and Architecture teachers training colleges only.
^ Including Deemed Universities and institutions of National Importance.
# Figures in bracket show average gross enrollment ratio in classes I–V (6–11 Years) and VI–VIII
(11–14 Years).
@ Data pertains to 2008–09.
Table 14.4 depicts the enrollment in school education in India from 1950–51 to 2010–11.
Year Primary Middle Primary Sec/Sr. Sec/Inter/ < Table 14.4

Enrollment in School
(I–V) (VI–VIII) Pre Degree (IX–XII)
Education
1950–51 19.2 3.1 1.5
1960–61 35 6.7 3.4
1970–71 57 13.3 7.6
1980–81 73.8 20.7 11
1990–91 97.4 34 19.1
2000–01 113.8 42.8 27.6
2001–02 113.9 44.8 30.5
2002–03 122.4 46.9 33.2
2003–04 128.3 48.7 35
2004–05 130.8 51.2 37.1
2005–06 132.1 52.2 38.4
2006–07 139.1 54.5 39.9
2007–08 135.5 57 44.5
2008–09 n/a n/a n/a
2009–10 135.7 59.4 48.2
2010–11 135.3 62.1 51.2
Source: Statistics of School Education 2010–11.
Table 14.5 shows the gross enrollment ratio of students at primary, middle and pre-degree
level in India from 1950–51 to 2010–11.
Year Primary (I–V)

Middle Primary Sec/Sr. Sec/Inter/ Pre < Table 14.5
Gross Enrollment
(VI–VIII) Degree (IX–XII) Ratio
1950–51 43.1 12.7 n/a
1960–61 62.4 22.5 10.6
1970–71 78.6 33.4 19.0
1980–81 80.5 41.9 17.3
1990–91 100.1 76.6 19.3
2000–01 95.7 58.6 30.1
2001–02 96.3 60.2 33.3
2002–03 95.3 61.0 37.5
2003–04 98.2 62.4 38.9
2004–05 107.8 69.9 39.9
2005–06 109.4 71.0 40.4
2006–07 111.4 73.8 40.6
2007–08 114.0 78.1 45.8
2008–09 114.4 76.2 47.0
2009–10 115.5 78.3 49.3
2010–11 116.0 85.5 52.1
Note: Gross Enrolment Ratio (GER)–percentage of number of population enrolled in different age groups
to total population in appropriate age groups.
Table 14.6 shows the Drop-out ratio of students at primary, middle and pre-degree level
in India from 1960–51 to 2010–11.
Table 14.6
Drop Out Ratio
> Year Classes I–V Classes VI–VIII Classes IX–XII
1960–61 64.9 78.3 n/a
1970–71 67.0 77.9 n/a
1980–81 58.7 72.7 82.5
1990–91 42.6 60.9 71.3
2000–01 40.7 53.7 68.6
2001–02 39.0 54.6 66.0
2002–03 34.9 52.8 62.6
2003–04 31.5 52.3 62.7
2004–05 29.0 50.8 61.9
2005–06 25.7 48.8 61.6
2006–07 25.6 45.9 59.9
2007–08 25.1 42.7 56.7
2008–09 n/a n/a n/a
2009–10 28.9 42.4 52.8
2010–11 27.0 40.6 49.3
Note: Total Dropouts during a course as percent of intake in the first year of the course has been taken.
Dropout rate is the percent of pupils who dropped out from a given grade/cycle/level of education in a
given school year. It does not include repeaters.
Table 14.7 shows the estimated stock of manpower by Major Categories.
Table 14.7
Estimated Stock of
> 2001 2000 1991 1981
Manpower by Major 000 s
Categories Graduates
Medicine 391.9 380.5 296.4 219.5
Dentistry 24.0 22.9 13.9 8.0
Agricultural Science 238.6 231.2 168.4 105.8
Veterinary Science 46.7 45.3 34.4 24.4
Post Graduates
Arts 3917.3 3718.4 2185.3 113.6
Science 805.0 767.1 482.1 292.4
Commerce 902.5 841.7 403.6 148.3
Graduates
Arts 8769.0 8392.8 5501.9 3242.6
Science 4024.9 3837.7 2430.3 1434.6
Commerce 4853.1 4573.6 2468.0 1054.2
(Continued)
2001 2000 1991 1981 < Table 14.7

(Continued)
000 s
Engineers
Degree Holders 1024.4* 969.5 519.6 304.9
Diploma Holders 1531.7* 1456.0 859.3 425.9
Nursing Personnel
General Nurses 295.8 260.0^ 184.8 117.8
Auxiliary Nurses and Mid wives n/a 227.0^ 182.4 90.0
Health Visitors 23.4 23.4^ 21.0 11.6
Note: Based on estimates by the institute of applied manpower research, New Delhi. The manpower
stock is at the beginning of the year.
* In 2003 there were 11 lakh degree holders and 17.2 lakh diploma holders.
^ Figures pertain to 1999.
Table 14.8 shows the public expenditure on education pertaining to both the centre and
the states.
Expenditure < Table 14.8

Public Expenditure on
Rs (in Billion) % to Public % to GDP Education
Expenditure
1951–52 0.6 7.9 0.6
1961–62 2.6 11.7 1.4
1971–72 10.1 9.5 2
1981–82 43 10.3 2.5
1991–92 223.9 13.1 3.4
2001–02 798.7 12.9 3.8
2002–03 855.1 12.6 3.8
2003–04 890.8 12 3.5
2004–05 966.9 12.1 3.4
2005–06 1132.3 12.7 3.5
2006–07 1373.8 13.3 3.7
2007–08 1614.2 13.3 3.7
2008–09 1865 13.6 3.9
Note: Public expenditure pertains to both States and Centre.
Source: Department of Secondary Education.
Health PEQ
There has been some improvement in the quality of health care over the years (refer to
Table 14.9), but wide inter-state, male–female, and rural–urban disparities in the outcomes
and the impacts continue to persist. While population stabilisation is in the Concurrent List,
Inadequacies in the existing
health is a state subject. The reproductive and child-health services reach community and health infrastructure have led to
household levels through the primary health-care infrastructure. Inadequacies in the ex- gaps in coverage and outreach
isting health infrastructure have led to gaps in coverage and outreach services in the rural services in the rural areas.
a reas. India’s position on health parameters when compared even to some of its neighbours
continues to be unsatisfactory. While India has improved in respect to some important health
indicators, over the years, it compares poorly with China and Sri Lanka (refer to Table 14.10).
Table 14.9
Comparative
> Parameter 1981 1991 Current Level
Health-care Crude Birth Rate (CBR) 33.9 29.5 23.5 (2006)
Parameters (per 1,000 population)
Crude Death Rate (CDR) 12.5 9.8 7.5 (2006)
(per 1,000 population)
Total Fertility Rate (TFR) 4.5 3.6 2.9 (2005)
(per women)
Maternal Mortality Rate (MMR) NA NA 301 (2001–03)
(per 100,000 live births)
Infant Mortality Rate (IMR) 110 80 57 (2006)
(per 1,000 live births)
Child (0–4 years) Mortality Rate 41.2 26.5 17.3 (2005)
(per 1,000 children)
Life Expectancy at Birth (1981–85) (1989–93) (2001–05)
Male 55.4 59.0 62.3
Female 55.7 59.7 63.9
Source: Office of the Registrar General of India.

NA: Not available.
Table 14.10
Some Health
> Country Life Under-five Mortality Infant Mortality Maternal
Expectancy Rate (per 1,000 Rate (IMR) (per Mortality Rate
Parameters: India and
at Birth live births) 1,000 live births) (per 100,000
its Neighbours
(years) live births)
2000–05 1990 2005 1990 2005 2005
China 72 29 27 38 23 45
India 62.9 123 74 80 56 450
Nepal 61.3 145 74 100 56 830
Pakistan 63.6 128 99 96 79 320
Sri Lanka 70.8 23 14 19 12 58
Bangladesh 62.0 144 73 96 54 570
South Asia 62.9 126 80 84 60 NA
Source: UNDP, Human Development Report 2007–08.

Notes:
NA: Not available. Figures shown for India are at variance with the official figures of the Office of Regis-
trar General of India (RGI) for Maternal Mortality Rate and IMR. Data shown in the table are as per the
methodology and adjustment made by the UNDP.
National Rural Health Mission (NRHM)

The NRHM was launched on April 12, 2005, to provide accessible, affordable, and account-
able quality-health services to the poorest households in the remotest rural regions. The
thrust of the Mission was on establishing a fully functional, community-owned, decentral-
ized, health-delivery system with inter-sectoral convergence at all levels, to ensure a simul-
taneous action on a wide range of determinants of health like water, sanitation, education,
nutrition, and social and gender equality. Under the NRHM, the focus was on a functional
health system at all levels, from the village to the district.
NRHM has successfully provided a platform for community health action at all levels. NRHM has successfully provided
Besides being a merger of Departments of Health and Family Welfare in all states, NRHM a platform for community health
has successfully moved towards a Single State and District-level Health Society for effec- action at all levels.
tive integration and convergence. Through a concerted effort at a decentralised planning
Through a concerted effort at a
through a preparation of District Health Action Plans, NRHM has managed to bring about decentralised planning through
intra-health sector and inter-sectoral convergence for effectiveness and efficiency. In all a preparation of District Health
the states, the specific health needs of people have been articulated for local action. With Action Plans, NRHM has man-
the establishment of public institutions like the Village Health and Sanitation Committees aged to bring about intra-health
sector and inter-sectoral con-
(VH&SCs), Hospital Development Committees, and PRI-led Committees, it is the civil vergence for effectiveness and
society to which the health system is being made increasingly accountable. Through untied efficiency.
and flexible financing, NRHM is trying to drive reforms that empower local communities to
make their own decisions. It is thus a serious effort at putting people’s health in people’s hands
itself (refer to Box 14.1).
Box 14.1 Broad Achievements Under the Mission

• 543,315 ASHAs (accredited social health activists)/ PHCs today, as reported by the states, is 8,755,
link workers have been selected so far in the states. signifying the great leap forward in getting patients
• 186,606 ASHAs/link workers have drug kits. to the government system.
• In all the states, ASHAs/link workers have facilitated • 2,852 PHCs are having three nurses.
the households’ links with the health facilities. • More than 50 lakh women have been brought under
• 177,578 VH&SCs are already functional. Many the Janani Suraksha Yojana (JSY) for institutional
other states have also issued government orders in deliveries in the last two-and-a-half years.
this regard and are in the process of activating the • So far, 4,380 other paramedical staff have been
Committees. appointed on contract.
• Of the 141,492 functional sub-health centres, • 6,232 doctors, 2,282 specialists, and 11,537 staff
111,979 have operationalised a joint bank account nurses have been appointed on contract in the
of ANM and Sarpanch for united funds. states so far, reducing the human resource gaps in
• ANMs are playing an important role in the many institutions.
Organisation of Village Health and Sanitation Days • 2,335 Community Health Centres (CHCs) have
and nearly 4.8 lakh such days have been organised completed their facility surveys and 441 their
in the last two years. physical upgradation so far.
• 25,987 ANMs have been appointed on contract • The Indian Public Health Standards (IPHS) have been
so far. 14,440 sub-centres (SCs) are reporting to finalised and a first grant of ` 20 lakh was made
two ANMs. available to all the district hospitals of the country
• Strengthening of the PHCs for 24×7 services is a to improve their basic services, given the increased
priority of NRHM. Of the 22,669 PHCs in the country, patient load due to JSY and other programmes.
only 1,634 of them were working 24×7 on March • State-level societies have been merged in
31, 2005 (before the NRHM). The number of 24×7 32 States/UTs and 527 districts so far.
(Continued)

• Project management units have been set up in 506 • 319 districts have received funds for mobile medical
districts and 2,432 blocks of 30 states. units.
• The IPHS developed for eight different levels of • So far, 188 mobile medical units are operational in
public institutions in health, provide a basis for all the states.
programmes in the health sector.
• Most states have completed the facility surveys up
to CHCs.
Funding for Support Mechanism of ASHA

One of the key strategies under the NRHM is a community health worker, that is, Accredited
Social Health Activist (ASHA) for every village at a norm of 1,000 population. The role of
ASHA vis-à-vis that of Anganwadi Worker (AWW) and Auxiliary Nurse Mid-wife (ANM)
is also clearly laid down. Under the implementation framework for the NRHM, the scheme
of ASHA has now been extended to all the 18 high-focus states. Besides, the scheme would
also be implemented in the tribal districts of the other states. In the new implementation
framework, a provision has been made for an expenditure of ` 10,000 per ASHA during a
financial year. This ceiling does not include the performance-based compensation, which
the different programme divisions would disburse from their own funds. The earlier ASHA
guidelines had visualised an expenditure of ` 7,415 per ASHA. The increased outlay gives a
valuable opportunity to further strengthen the support mechanism.
Strengthening of Primary Health Infrastructure and

Improving Service Delivery
Although there has been a steady increase in the health-care infrastructure available over
the plan period (refer to Table 14.11) as per the Bulletin on Rural Health Statistics in India
2006—Special Revised Edition, as in March 2006, there is a shortage of 20,903 SCs, 4,803 Pri-
mary Health Centres (PHCs), and 2,653 Community Health Centres (CHCs), as per the 2001
population norm. Further, almost 50 per cent of the existing health infrastructure is in rented
buildings. Poor upkeep and maintenance and high absenteeism of manpower in rural areas
have also eroded the credibility of the health-delivery system in the public sector. NRHM
seeks to strengthen the public health-delivery system at all levels. In addition to strengthen-
ing the health-delivery system under NRHM, several other programmes in the area of health
are being implemented in the country (refer to Box 14.2).
Table 14.11
Trends in Health-care
> 1991 2005–06
Infrastructure SC/PHC/CHC (March 2006) a
57,353 171,567
Dispensaries and Hospitals (all) (April 1, 2006)b 23,555 32,156
Nursing Personnel (2005) b
143,887 1,481,270
Doctors (Modern System) (2005) b
268,700 660,801
a
RHS: Rural Health Statistics in India, 2006—A special revised edition.
b
National Health Profile, 2006.
Box 14.2 Major Public Health Programmes

• Universal Immunisation Programme pregnant women, children below two years of age,
The coverage of the programme, first launched in the and seriously ill persons. During 2007, AMDA has
urban areas in 1985, was progressively extended been observed in 19 states. The reported coverage
to cover the entire country by 1990. Between 1988 of 19 states is 87.28 per cent. Kala-azar is endemic
and 2006, there has been a decline of 83 per cent in four states of the country, viz., Bihar, West
in diphtheria, 83 per cent in pertussis, 59 per cent Bengal, Jharkhand, and Uttar Pradesh. However,
in measles, 94 per cent in neo-natal tetanus, and about 80 per cent of the total cases are reported
97 per cent in poliomyelitis. Hepatitis-B Vaccination from Bihar. During 2007 (up to October), 37,525
Programme, which was started in 2002 in 33 cases and 169 deaths have been reported. The
districts and 15 cities as a pilot, has been expanded NHP (2002) envisages kala-azar elimination by
to all districts of good-performing states. Vaccination 2010. Under the elimination programme, the Central
against Japanese encephalitis (JE) was started in government provides 100 per cent operational
2006. cost to the state governments, besides anti-kala-
azar medicines, drugs, and insecticides. Acute
• Pulse Polio Immunisation Programme
Encephalitis Syndrome (AES)/Japanese Encephalitis
An outbreak of polio has been witnessed in 2006 (JE) has been reported frequently from 12 states/
with the spread of polio virus. During 2007 (as on UTs. During 2007 (till December 28, 2007), 3,887
December 14, 2007) a total of 471 cases have cases and 910 deaths have been reported. Dengue
been reported. To respond to this, supplementary is prevalent in different parts of the country but
immunisation activities have been intensified in the outbreak of the disease is reported mainly in
the high-risk areas. Initiatives include the use of urban areas. However, in the recent past, dengue is
Monovalent Oral Polio Vaccine (mOPV1 & mOPV3) in reported from the rural areas as well. In 2007 (up to
the high-risk districts and high-risk states to enhance December), 5,025 cases and 64 deaths have been
immunity against P1 and P3 virus, vaccinating the reported. During 2006, chikungunya fever had re-
children in transit, and covering children of migratory emerged in the country in epidemic proportions after
population from Uttar Pradesh and Bihar. Special a quiescence of about three decades. During 2007
rounds have been conducted in Haryana, Punjab, (up to December 28, 2007), 56,355 suspected
Gujarat, and West Bengal during August, September, chikungunya fever cases have been reported. The
October, and November 2007. government has taken various steps to tackle the
• National Vector Borne Disease Control Programme vector-borne diseases (VBDs), including dengue and
The National Vector Borne Disease Control chikungunya, which include the implementation of
Programme (NVBDCP) is being implemented for a strategic action plan for prevention and control of
prevention and control of vector-borne diseases chikungunya by the state governments.
like malaria, philariasis, kala-azar, JE, dengue, and • Revised National Tuberculosis Control Programme
chikungunya. Most of these diseases are epidemic (RNTCP)
prone and have seasonal fluctuations. During 2007 The Revised National Tuberculosis Control
(till October), 0.99 million positive cases, 0.44 Programme (RNTCP) using Directly Observed
million plasmodium falciparum cases, and 940 Treatment, Short-course (DOTS) is being
deaths have been reported. Currently, about 100 implemented with the objective of curing at least
districts are identified as highly malaria endemic 85 per cent of the new sputum-positive patients
where focused interventions are being undertaken. initiated on treatment, and detecting at least
To achieve NHP-2002 (National Health Policy) goal 70 per cent of such cases. Since its inception,
for Elimination of Lymphatic Philariasis by 2015, RNTCP has initiated more than 8.4 million TB
the Government of India initiated Annual Mass patients on treatment, thereby saving over 1.4 million
Drug Administration (AMDA) with a single dose additional lives. Deaths have been reduced from over
of Diethylcarbamazine citrate (DEC) tablets to all 5 lakh per year at the beginning of the programme to
individuals living at risk of philariasis excluding
(Continued)

less than 3.7 lakh per year currently. Good quality- to eight times greater than that among the general
assured anti-TB drugs are provided in the patient- population. Based on the HIV Sentinel Surveillance
wise drug boxes, free of cost. Paediatric, patient-wise Data from the last three years (2004–06), the
drug boxes have been introduced in the programme districts have been classified into four categories.
from January 2007. The treatment’s success of new About 156 districts have been identified as
infectious TB cases under RNTCP has consistently category A where the HIV prevalence among ANC
exceeded the global benchmark of 85 per cent. clinic attendees is greater than 1 per cent and 39
RNTCP detected 66 per cent of the estimated new districts have been classified as category B where
infectious cases in 2006, which is close to the global HIV prevalence among high-risk population has been
target of 70 per cent. In the third quarter of 2007, found to be more than 5 per cent. These districts
the detection rate was 70 per cent. The national are being given top-priority attention. National AIDS
programme has initiated the DOTS plus services for Control Organisation has tried to increase access to
management of Multi-drug Resistant TB (MDR-TB), services and communicate effectively for behavioural
The community-based Drug Resistance Surveillance change. The Government of India has launched
(DRS) conducted in Gujarat and Maharashtra recently National AIDS Control Programme Phase III, with the
estimated the prevalence of MDR-TB to be around goal to halt and reverse the epidemic in the country
3 per cent among new cases; in terms of absolute over the next five years, by integrating programmes
numbers, the burden is quite significant. for prevention, care, support, and treatment.
• National AIDS Control Programme During NACP III, an investment of ` 11,585 crore
is required. Of this, an amount of ` 8,023 crore
Nearly 20,408 AIDS cases were reported in 2007
is provided in the budget, the rest being extra-
(December 2007), out of which, 87.4 per cent of
budgetary funding largely from private donations and
the infections were transmitted through the sexual
direct funding from bilateral and UN organisations.
route, and pre-natal transmission accounted for
A total expenditure of ` 482.94 crore up to January
4.7 per cent of infections. About 1.8 per cent and
15, 2008 has been made for implementing various
1.7 per cent of infections were acquired while
interventions during the financial year 2007–08. An
injecting drugs and through contaminated blood and
outlay of ` 11,585 crore has been approved for the
blood products, respectively. The HIV prevalence
next five years (2007–12).
among high-risk groups continues to be nearly six
Major components of IDSP are Integrated Disease Surveillance Project (IDSP)

integration and decentralisa-
tion of surveillance activities, Integrated Disease Surveillance Project (IDSP) was launched in November 2004. It is a
strengthening of public health decentralised, state-based surveillance programme in the country. It is intended to detect
laboratories, HRD, and use of early-warning signals of impending outbreaks and help to initiate an effective response in
information technology for col-
lection, collation, compilation,
a timely manner. In Phase-I, 9 states; in Phase-II, 14 states; and in Phase-III, 12 states; are
analysis, and dissemination of included. Major components of IDSP are integration and decentralisation of surveillance
data. activities, strengthening of public health laboratories, HRD, and use of information technol-
ogy for collection, collation, compilation, analysis, and dissemination of data.
User charges, as an option of

financing health-care-delivery
User Charges in Government Health Facilities in India
system, need to be supported
User charges came to be levied on patients belonging to the families above the poverty line for
by an efficient system of collec-
tion, and utility of user charges, diagnostic and curative services offered in the health institutions, while free or highly subsi-
combined with an improvement dised services continued to be provided to the poor and needy patients. A majority of states
in the quality of health ser- have introduced the user charges for services in public health facilities though there are dif-
vices and facilities, for patients
in health institutions to be
ferences in levying, collecting, and utilising user charges among the states. User charges, as an
encouraged. option of financing health-care-delivery system, need to be supported by an efficient system
of collection, and utility of user charges, combined with an improvement in the quality of
health services and facilities, for patients in health institutions to be encouraged. At the same
time, the access of poor and needy patients to health care should not suffer.
India has one of the highest out-of-pocket household expenditure for health services.
User charges further augment this expenditure. Hence, it is pertinent that mechanisms of risk
pooling are designed and implemented towards improving access to health services. Under
NRHM, Rogi Kalyan Samitis (RKS)/Hospital Development Committees have been created
as legal entities to enable greater flexibility and retention as well as use of resources that they
generate through their services. All the Samitis have also been provided untied funds to carry
out locally relevant action to ensure better services for the poor households that visit the
government facilities. RKS have the mandate to ensure that the poor and needy receive cash-
less, hospitalised treatment and to charge for services only from those who can pay. However,
since the state of public health facilities sometimes force the poor and needy patients also to Since the state of public health
approach private health-care facilities, which are available at high cost, health insurance and facilities sometimes force the
poor and needy patients also
other innovative schemes in this area are vital. to approach private health-care
facilities, which are available at
Ayurveda, Yoga and Naturopathy, Unani, Siddha, high cost, health insurance and
and Homoeopathy (AYUSH) other innovative schemes in
this area are vital.
Under AYUSH, there is a network of 3,203 hospitals and 21,351 dispensaries across the
country. The health services provided by this network are largely focused on primary health The health services provided by
care. The sector has a marginal presence in secondary and tertiary health care. In the private this network are largely focused
and non-profit sector, there are several thousand AYUSH clinics and around 250 hospitals on primary health care.
and nursing homes for in-patient care and specialised therapies like Panchkarma. The key
interventions and strategies in the Eleventh Five-Year Plan include training for AYUSH per-
sonnel, mainstreaming the system of AYUSH in the National Health-Care-Delivery System,
strengthening the regulatory mechanism for ensuring quality control, R&D, and processing
technology involving accredited laboratories in the government and non-government sector,
and establishing centres of excellence.
Family Planning Programme

The ‘Family Planning Programme’ is now repositioned as a ‘Family Planning Programme for The ‘Family Planning Pro-
Achieving MDG (Millennium Development Goals)’ as this is one of the major means through gramme’ is now repositioned as
which both maternal and child mortality and morbidity can be reduced. Increasing the age a ‘Family Planning Programme
of marriage and spacing between the births are major interventions for achieving both these for Achieving MDG (Millen-
nium Development Goals)’ as
objectives. Intra-uterine Device (IUD) services in the country are being given a thrust as this this is one of the major means
is one of the most effective spacing methods available in the country. An alternative training through which both maternal
methodology in IUD is being introduced through which expansion of services as well as en- and child mortality and morbid-
suring their quality is being addressed. This is expected to increase the demand on IUD, along ity can be reduced.
with scaling-up information, education, and communication (IEC), which is presently intro-
duced in 12 states as a ‘pilot project’. Increasing the ‘basket of choice’ in contraceptives through
introduction of newer contraceptives is essential for increasing contraceptive acceptance. The
government has now modified the earlier compensation scheme for sterilisation and has in-
creased the payment to compensate for loss of wages to those accepting sterilisation. Quality
of care in family planning is one of the major thrust areas and monitoring of quality of services
in family planning is done through quality-assurance committees set up at state and district
levels. The government introduced a National Family Planning Insurance Scheme which pro-
vides a compensation to sterilisation acceptors as well as to provide indemnity insurance to
the provider (qualified doctors) against failures, complications, and deaths following sterilisa-
tions. These measures are introduced as confidence-building mechanisms among the family-
planning clients. The increased availability of infrastructure as a result of the NRHM would
assist in increasing access to the family planning services (refer to Table 14.12).
Table 14.12
Family Welfare
> 2010–11* 2000–01 1990–91 1980–81
Program (In million)
Total Sterilization 5.0 4.7 4.1 2.5
Vasectomy 0.2 0.2 0.3 0.4
Tubectomy 4.8 4.4 3.9 2.1
I.U.D. insertions 5.6 6.0 5.3 0.6
Conventional 16.0 18.2 17.8 3.8
contraceptive users
Oral Pill Users 8.3 7.6 3.1 0.1
Note: *Provisional.
Growth of Human Development

It is true that economic growth has to some extent contributed in the reduction of desti-
tution. Over the last five decades more and more poor people, in comparison to the past,
have gained some access to certain public services, such as food, education, modern health
services, and ‘safe’ drinking water. The IMR and longevity have improved. Statistically speak-
ing, HDI of all the South Asian countries have improved. In the case of India, it has moved
0.174 points, from 0.416 in 1975 to 0.590 in 2001. Sri Lanka, which is already very high in the
scale, has gained only 121 points. Bangladesh and Pakistan have also improved their position.
But all of them are far behind to catch up with the developed countries. With the present rate
of growth and other things remaining constant, India would require at least 60 years to attain
a high position in HDI. Assumption is that growth and HD are not only related but they also
have a linear direction. But the fact remains that many of the Scandinavian countries attained
the present level of HD just not by economic growth alone. Sri Lanka and Kerala, the state
within India, also have better HD than high-growth regions.
The countries, which already The countries, which already have high HD, are also in the race for high economic growth.
have high HD, are also in the Policymakers in these countries emphasise that ‘Work is more important than income’. The
race for high economic growth. Finance Minister of the Netherlands asserted that if the country wanted to successfully resolve
Policymakers in these countries
emphasise that ‘Work is more the problem of aging they should ‘learn a lot from the Americans. … USA has a higher rate of
important than income’. economic growth because the people work longer there….’. At the same time, unemployment
is increasing and wage freeze is being introduced. Health and education are increasingly being
privatised. There is also more cut every year on social security provisions such as unemploy-
ment benefits and health-care costs. The cuts in social sectors are not because of the decline rate
in the economic growth. But it is because of the state’s unwillingness to tax profiteers for public
goods. Inequality has increased in these countries (refer to Table 14.13). Andre Gorge argues:
The social security system must be reorganised, and new foundations put in its
place. But we must also ask why it seems to have become impossible to finance this
reconstruction. Over the past 20 years, the EU countries have become 50 per cent to
70 per cent richer. The economy has grown much faster than the population. Yet the
EU now has 20 million unemployed, 50 million below the poverty line, and 5 million
homeless. What has happened to the extra wealth? From the case of the United States,
we know that economic growth has enriched only the best of 10 per cent of the popula-
tion. This 10 per cent has garnered 96 per cent of the additional wealth. Things are not
quite bad in Europe, but they are not much better.
Share of Income/ Percentage of Population < Table 14.13

Profile of Human
Consumption Poverty
Richest Poorest In Poverty* Below Not Likely to Adult
20% 20% (PPP $ 1.25 Poverty Survive upto Illieteracy
a day) Line^ 40 Years Rate^^
1994–2011 1990–2008 2001–2010 2005–10 2005–09
India 42 9 49 28 16 37
Jamaica 52 5 0.2 10 10 14
Brazil 59 3 4 21 8 10
Zimbabwe 56 5 – 72 48 8
Mexico 53 4 <2 47 5 7
Nigeria 54 4 69 55 37 39
Nicaragua 47 6 19 46 8 22
Zambia 59 4 65 59 43 29
Malaysia 52 5 <2 4 4 8
Philippines 50 6 22 27 6 5
Kenya 53 5 20 46 30 13
Thailand 47 7 <2 8 11 6
China 48 5 28 6 6 –
Indonesia 43 8 21 13 7 8
Vietnam 43 7 22 15 6 7
Bangladesh 41 9 58 40 12 44
Sri Lanka 48 7 14 15 6 9
Pakistan 40 10 23 22 13 44
Egypt 40 9 11 40 7 34
Note: Based on Human Development Report, 2008–11, UNDP.

* Based on consumption expenditure of $1.25 (PPP) a day per person.
^ Refers to poverty line determined by national authorities and is based on population weighted sub
group estimates from household surveys.
^^ Defined as the proportion of the population age, 15 years and older, who usually cannot read and
write.
In Germany since 1979 corporate profits have risen by 90 per cent and wages
by 6 per cent. But the revenue from income tax has doubled over the past 10 years,
while the revenue from corporate taxes has fallen by a half. It now contributes a mere
13 per cent of the total tax revenue, down from 25 per cent in 1980 and 35 per cent in
1960. Had the figure remained at 25 per cent, the state would have annually netted an As we have seen in the case of
India, the economic growth has
extra 86 billion marks in recent years, (Beck 2000). not generated employment. It
is a jobless growth. The pres-
As we have seen in the case of India, the economic growth has not generated employment. It ent development of high tech-
is a jobless growth. The present development of high technology reduces a requirement for nology reduces a requirement
human labour. It is capital intensive. As a result, ‘the global employment situation is grim for human labour. It is capital
and getting grimmer’, ILO observes. ‘Social exclusion of the most vulnerable is intensifying: intensive.
the old, the young, the disabled, ethnic minority groups, the less skilled, and across all these
groups there is a bias against women’ (Thomas 2000: 31).
On the other hand, profits of the 95 multinationals among India’s top 900 companies have
increased their share of profits from 7.70 per cent of total profits in 1994–95 to 10.82 per cent
in 2002–03. The growth rate of their net profit is 225.05 during the period. Despite their
poor sales, their profits have increased because their share in salaries and wages fell from
11.99 per cent in 1994–95 to 10.70 per cent in 2002–03. The rise in profit is also without taxes.
At the global level, the taxes yield from corporate profits fell by 18.6 per cent between 1989
and 1993. Their proportion of the total fiscal revenue has gone down nearly by half (Beck
2000: 5). In India, during the last decade the corporate taxes have not only been reduced
but industries also have received several concessions to boost up production and market. At
The purpose of economic the same time, ‘black economy’ estimated at around 60 per cent continues to dominate the
growth in the capitalist mode
of production is enhancement Indian economy (Kumar 1999; Harris-White 2003: 7).
of profit. The purpose of economic growth in the capitalist mode of production is enhancement
of profit. It provides incentive to capital for the investment and growth. For that, markets
such growth is geared not only
have to be expanded and also invented. Hence, such growth is geared not only to cater to
to cater to the existing needs the existing needs of the people but also to manufacture the needs as well as greed; thereby,
of the people but also to manu- consumerism is promoted. It breeds ‘sense of envy’ among those who cannot possess what
facture the needs as well as the others have; as one advertisement puts ‘owner’s pride is neighbour’s envy’. In the process,
greed; thereby, consumerism is
promoted. relative deprivation and poverty perpetuate. The champions of such models of development
glorify and legitimise inequality. The former British Prime Minister Margaret Thatcher advo-
cated, ‘It is our job to glory in inequality, and see that talents and abilities are given vent and
expression for the benefit of us all’ (Thomas 2000: 14). The incentive for entrepreneurship is,
of course, necessary for the growth of wealth and society, provided they are used for social
goods. More important question is: What should be the ratio of inequality? In India, an ag-
ricultural labourer or a casual labourer gets on an average ` 6,000 a year, not to speak of the
labourer in a draught-prone area, who gets barely ` 3,000. Whereas, the top chief executive
officers (CEOs) of the corporations, on an average, get ` 60 lakh; not to speak of the topmost
In India and elsewhere, the gap who get above ` 90 lakh plus many perks. In India and elsewhere, the gap between poor and
between poor and rich has glar- rich has glaringly widened in the last three decades.
ingly widened in the last three Expansion of all kinds of industries and ‘development’ projects like irrigation dams,
decades. thermal power, roads, and so on, take away the livelihood resources such as land, forest, river,
and marine of the poor people. Forest areas are shrinking every year and so is biodiversity.
Environmental degradation continues unabated. Ground and river water, land, as well as
According to a recent survey,
crops—vegetables and food-grains—get contaminated with industrial effluents. According
it is estimated that if the pres- to a survey, seven largest estates of more than 100 industrial development estates in India
ent rate of climate change produce 220,381 tonnes of hazardous waste a year. With the growth and consumption, quan-
continues, thanks to industrial tum of solid waste too is mounting. With such a rush for growth, natural resources are not
technologies and greenhouses,
more than one million plant and
only depleting very fast but also endangering the environment. Such growth cannot be sus-
animal species would be extin- tained for a long. According to a recent survey, it is estimated that if the present rate of
guished by 2050. The worse climate change continues, thanks to industrial technologies and greenhouses, more than one
sufferers would be the people million plant and animal species would be extinguished by 2050. The worse sufferers would
from the developing countries.
be the people from the developing countries.
In the present uncontrolled market-driven growth only those who have the capacity to
produce more and expand markets can survive, and those who can buy more and more can
exist. In order to increase the buying capacity, people are pushed into a rat race, to compete
with each other. Space for individual choice and autonomy is shrinking. Philosophy of Social
Darwinism dominates the lifestyle of the well-off. The rest are pushed to imitate the rich for
their survival or else, they get eliminated. Oswaldo De Rivero persuasively argues,
The underlying Darwinism of the neoclassical, ultra-liberal message that inspires cur-
rent capitalist globalisation, turns the economy into the paramount factor determining
all other options, whether political or social and even cultural; nothing could be closer
to the Marxist ideology. However, the archetype is not the robot-like homo sovieticus,
but rather the homo economicus, whose sole motivation is money, the ability to con-
sume more material goods, who is aggressively competitive, a kind of predator lost in
the Darwinian jungle of social and economic de-regulation. In this jungle, not only
companies but also individuals—each social group, each community, must be fittest,
the strongest, and the best. Those who are not competitive must be eliminated from the
economic arena, regardless of social, moral, or environmental implications. This is a
zero-sum game, where there is no cooperation. You win or you lose (2001: 80).
Enough historical and contemporary evidences show that uncontrolled market-driven Enough historical and contem-
growth is self-destructive for human civilisation. It is dangerous to the environment. It is porary evidences show that
unsustainable and increasingly becoming devoid of ethical values for common goods. Its po- uncontrolled market-driven
growth is self-destructive for
tentiality for enhancing HD is questionable. Market is indifferent to the needs of the majority human civilisation. It is danger-
of the people. The corporate sectors—local or transnational—do not take social responsibili- ous to the environment. It is
ties though they talk about social commitments. More often than not, many of them even do unsustainable and increasingly
not take care of the welfare of the workers who work for them. Managing Director of the IMF, becoming devoid of ethical
values for common goods.
Michel Camdessus, also accepts negative aspects of free market:
A new paradigm of development is progressively emerging … A key feature of this is
the progressive humanization of basic economic concepts. It is now recognized that
markets can have major failures and that growth alone is not enough and can even
be destructive of the natural environment and of social and cultural goods. Only the
pursuit of high-quality growth is worth the effort … growth that has human person in
the center … A second key feature is the convergence between respect for ethical values
and the search for economic efficiency and market competition.
Human Development Report (2007–08)

This report seeks to improve understanding and raise awareness about how reducing vulner-
ability and building resilience are essential for sustainable human development. In doing so,
it makes the following central points:
• Vulnerability threatens human development—and unless it is systematically
addressed, by changing policies and social norms, progress will be neither equitable
nor sustainable.
While almost all countries have improved their levels of human development over the past
few decades, recent gains have not been smooth. Progress has taken place in a context of
growing uncertainty due to deeper and more-frequent shocks. From greater financial in-
stability to high and volatile commodity prices, from recurrent natural disasters to wide-
spread social and political discontent, human development achievements are more exposed
to adverse events.
Hundreds of millions of poor, marginalized or otherwise disadvantaged people remain
unusually vulnerable to economic shocks, rights violations, natural disasters, disease, conflict
and environmental hazards. If not systematically identified and reduced, these chronic vul-
nerabilities could jeopardize the sustainability of human development progress for decades
to come. Shocks from multiple causes are inevitable and often unpredictable, but human
vulnerability can be reduced with more-responsive states, better public policies and changes
in social norms.
• Life cycle vulnerability, structural vulnerability and insecure lives are fundamental
sources of persistent deprivation—and must be addressed for human development to
be secured and for progress to be sustained.
Different aspects of vulnerability can overlap and reinforce persistent deprivations. Life cycle
vulnerability—from infancy through youth, adulthood and old age—can affect the forma-
tion of life capabilities. Inadequate investments in sensitive phases of life create long-term
vulnerability. Similarly, vulnerability embedded in social contexts generates discriminatory
behaviours and creates structural barriers for people and groups to exercise their rights and
choices, perpetuating their deprivations. And fear for physical security in daily life has deep-
er ramifications for securing or sustaining progress.
The intersecting or overlapping vulnerabilities arising from economic, environmental,
physical, health and other insecurities magnify the adverse impact on freedoms and func-
tions. This makes it much more difficult for individuals and societies to recover from shocks.
Recovery pathways and public policies must incorporate measures that build resilience and
stabilizers to respond to and cope with future challenges.
• Policy responses to vulnerability should prevent threats, promote capabilities and
protect people, especially the most vulnerable.
Most vulnerabilities remain persistent—a consequence of social marginalization, insufficient
public services and other policy failures. Persistent vulnerability reflects deep deficiencies in
public policies and institutions, societal norms and the provision of public services, including
past and present discrimination against groups based on ethnicity, religion, gender and other
identities. It also reveals state and societal inability or unwillingness to anticipate and protect
vulnerable people against severe external shocks, many of them predictable in kind, if not in
precise timing or impact.
Building resilience thus requires boosting the capacity of individuals, societies and coun-
tries to respond to setbacks. People with insufficient core capabilities, as in education and
health, are less able to exercise their agency to live lives they value. Further, their choices may
be restricted or held back by social barriers and other exclusionary practices, which can fur-
ther embed social prejudice in public institutions and policies. Responsive institutions and
effective policy interventions can create a sustainable dynamic to bolster individual capabili-
ties and social conditions that strengthen human agency—making individuals and societies
more resilient.
• Everyone should have the right to education, health care and other basic services.
Putting this principle of universalism into practice will require dedicated attention
and resources, particularly for the poor and other vulnerable groups.
Universalism should guide all aspects of national policies—to ensure that all groups and
sections in society have equality of opportunity. This entails differential and targeted treat-
ment for unequal or historically disadvantaged sections by providing greater proportional
resources and services to the poor, the excluded and the marginalized to enhance everyone’s
capabilities and life choices.
Universalism is a powerful way of directly addressing the uncertain nature of vulner-
ability. If social policies have a universal aim, not only do they protect those who currently
experience poverty, poor health or a bout of unemployment, but they also protect individuals
and households who are doing well but may find themselves struggling if things go wrong.
Further, they secure certain basic core capabilities of future generations.
• Strong universal social protection not only improves individual resilience—it can
also bolster the resilience of the economy as a whole.
Nearly all countries at any stage of development can provide a basic floor of protection.
They can progressively expand to higher levels of social protection as fiscal space allows.
A lower income country might start with basic education and health care and later expand
to offer cash transfers or basic labour protection. A higher income country with already
well-established basic education, health care and conditional cash transfer programmes
might expand eligibility for unemployment insurance to traditionally excluded populations,
such as agricultural or domestic workers, or expand family leave policies for new parents to
include fathers.
• Full employment should be a policy goal for societies at all levels of development.
When employment is either unattainable or with very low rewards, it is a major source of vul-
nerability with lasting repercussions for individuals and for their families and communities.
It is time to recognize that the opportunity to have a decent job is a fundamental aspect of
building human capabilities—and, equally, to see full employment as smart, effective social
policy. Providing meaningful employment opportunities to all adult job-seekers should be
embraced as a universal goal, just as education or health care. Full employment should be an
agreed societal goal, not simply as a matter of social justice and economic productivity, but as
an essential element of social cohesion and basic human dignity.
Decent work that pays reasonable wages, involves formal contracts preventing abrupt
dismissals and provides entitlements to social security can enormously reduce employee vul-
nerability, although less so in recessions. Reducing employment vulnerability is then hugely
important from the perspective of reducing human vulnerability in general. Yet this is clearly
difficult to do. The importance of realizing decent and full employment has long been recog-
nized, but large-scale unemployment and underemployment continue in most countries.
• The effects of crises, when they occur, can be lessened through preparedness and
recovery efforts that can also leave societies more resilient.
Sudden onset of hazards and crises, from natural disasters to violent conflicts, often occur
with destructive consequences for human development progress. Building capacities in pre-
paredness and recovery can enable communities to withstand these shocks with less loss of
life and resources and can support faster recoveries. Efforts to build social cohesion in con-
flict areas can lead to long-term reductions in the risk of conflict, while early warning systems
and responsive institutions lessen the impacts of natural disasters.
• Vulnerabilities are increasingly global in their origin and impact, requiring collective
action and better international governance.
Pollution, natural disasters, conflicts, climate change and economic crises do not respect
political boundaries and cannot be managed by national governments alone. Today’s frag-
mented global institutions are neither accountable enough nor fast enough to address press-
ing global challenges. Better coordination and perhaps better institutions are needed to limit
transnational shocks and urgently respond to our changing climate as an integral part of
the post-2015 agenda. Stronger, responsive and more-representative global governance is
essential for more-effective global action. Much can be done to improve global and national
responses to crises, to prevent such crises from occurring and to reduce their magnitude.
• A global effort is needed to ensure that globalization advances and protects human
development—national measures are more easily enacted when global commitments
are in place and global support is available.
An international consensus on universal social protection would open national policy space
for better services for all people, reducing the risk of a global ‘race to the bottom’. Elements
of a global social contract would recognize the rights of all people to education, health care,
decent jobs and a voice in their own future. The global agenda must seek to address vulner-
ability and strengthen resilience comprehensively. Whether they are pursued in defining new
sustainable development goals or in the broader post-2015 discussions, a formal interna-
tional commitment would help ensure universal action.
C ase
Iceland and India
Iceland, officially the Republic of Iceland, is a country in northern Europe, comprising the
island of Iceland and its outlying islets in the North Atlantic Ocean between the rest of Europe
and Greenland. It is the least populous of the Nordic countries and the second smallest; it has
a population of about 316,000 (April 1, 2008 estimate) and a total area of 103,000 sq. km. Its
capital and largest city is Reykjavík.
Located on the Mid-Atlantic Ridge, Iceland is volcanically and geologically active on
a large scale; this defines the landscape in various ways. The interior mainly consists of a
plateau characterised by sand fields, mountains, and glaciers, while many big glacial rivers
flow to the sea through the lowlands. Warmed by the Gulf Stream, Iceland has a temperate
climate relative to its latitude and provides a habitable environment and nature.
The settlement of Iceland began in 874 when, according to Landnámabók, the Norwe-
gian chieftain, Ingólfur Arnarson became the first permanent Norwegian settler on the is-
land. Others had visited the island earlier and stayed over winter. Over the next centuries,
people of Nordic and Gaelic origin settled in Iceland. Until the 20th century, the Icelandic
population relied on fisheries and agriculture, and was from 1262 to 1918, a part of the Nor-
wegian and later, the Danish monarchies. In the 20th century, Iceland’s economy and welfare
system developed in a rapid pace.
As of 2007, Iceland is the most developed country in the world, with fellow Nordic coun-
try Norway, according to the HDI; and one of the most egalitarian, according to the calcula-
tion provided by the Gini coefficient. Interestingly, Iceland overtook Norway to top the HD
ranking. Norway, which had held the top position for the last six years, is close to second only.
Based upon a mixed economy where service, finance, fishing, and various industries are
the main sectors, it is also the fourth, most productive country per capita.
India, known as one of the largest and strongest economies, ranks 128th in terms of HD.
The HDI for India is 0.619, which gives the country a rank of 128th out of 177 countries.
The HPI value of 31.3 for India ranks 62nd and Iceland ranks 1st among the 108 devel-
oping countries for which the index has been calculated. HPI focuses on the proportion of
people below a threshold level in the same dimensions of HD as the HDI—living a long and
healthy life, having access to education, and a decent standard of living. By looking beyond
income deprivation, the HPI represents a multi-dimensional alternative to the $1 a day (PPP
US$) poverty measure.
No significant difference is seen between the HD policies of India and Iceland if we have
a comparison.
Inspite of having very strong policies and programmes like Swarnajayanthi Gram
Swarozgar Yojana Scheme, which is a holistic approach towards poverty eradication in
rural India through creation of self-employment opportunities to the rural Swarozgaries,
Pradhan Mantri Gramodaya Yojana, Sampoorna Grameen Rozgar Yojana, Food-for-Work
Programme, Swarnajayanti Shahari Rozgar Yojana, Development of Women and Children in
Rural, and so on, India is having list of policies and programmes for HD.
But the difference lies in the strong implementation of these policies. The public
awareness is high in Iceland when compared to India, and the public is indirectly involved
in the policy formulation in Iceland, the reason may be ‘almost 100 per cent literacy’. Public
expenditures have played an important role in India’s HD. Public expenditure on health and
education of India in terms of percentage of GDP is very less when compared to Iceland.
Public expenditure of India on health and education is just 0.9 per cent and 4 per cent
of GDP, respectively, and Iceland spends 8.3 per cent and 8.1 per cent of GDP on health
and education, respectively. Table 14.14 gives the comparison between Iceland and India in
various aspects.
Country HDI Life Maternal Total Gross Popula- Adult Combined < Table 14.14
Customised Indicator
(I-1) Expect- Mortal- Popula- National tion Below Literacy GER for Comparison Report of
(rank) ancy at ity Ratio tion Income US$1 / Rate Primary, Iceland and India
Birth (I-4) (per (I-5) day (I-6) Second-
(1–2) 100,000 (US$ (%) ary and
(years) live per Tertiary
births) Capita) Education
(%)
Iceland 1 81 0 300,000 50,580 Nil 99.0 95.4
India 128 64 540 1,131, 820 34.3 61.0 63.8
900,000
Source UNDP, PRB UNFPA, PRB World UNDP UNDP UNESCO
2007 Data 2007 Data Bank, 2007 2007– 2007
Sheet, Sheet, 2007 08
2007 2007
The interesting fact here is that Transparency International has published an annual Cor-
ruption Perceptions Index (CPI), ordering the countries of the world according to ‘the de-
gree to which corruption is perceived to exist among public officials and politicians’. Iceland
ranked 6th place in the year 2007 and 72nd place as per CPI. Iceland, the block of sub-Arctic
lava to which these statistics apply, tops the latest table of the UNDP’s HDI rankings, mean-
ing that as a society and as an economy—in terms of wealth, health, and education—they are
the champions of the world. The highhights like—the only country in Nato with no armed
forces (they were banned 700 years ago); the highest ratio of mobile telephones to popula-
tion; the fastest-expanding banking system in the world; rocketing export business; crystal-
pure air; hot water delivered to all Icelandic households straight from the earth’s volcanic
bowels; and so on and so forth—add feathers to its crown.
Case Questions
1. Why Iceland is ranked first in HDI?
2. What are the reasons for low HDI of India when compared to Iceland, inspite of
having strong policies and programmes for human development?
3. Suggest some policies and programmes for human development in India.
4. Collect some more facts and figures and give a complete, detailed comparison of
human development in Iceland and India.
SUMMARY
The human resource of an economy, particularly of an un- facilities, and immigration from the neighbouring countries of
derdeveloped economy, can be improved by providing edu- Bangladesh and Nepal. The population density of India was
cation, medical facilities, and other facilities like housing, 325 persons per sq. km in the year 2004. Several solutions
sanitation, and so on. These facilities help the HRD in an to decrease the rate of population increase have been tried
economy. The Government of India gives more importance to by the government, though some were successful, some
the development of women and children as they are impor- were unsuccessful too. Although the rate of increase has de-
tant for the development of an economy. creased, the rate has not reached the satisfactory level yet.
India, being a developing country, has had to face several The population in India continues to increase at an alarming
economic and political challenges. One of the most important rate. The effects of this population increase are evident in
problems is the population explosion. Some of the reasons the increasing poverty, unemployment, air and water pollu-
for this ‑population explosion are poverty, better medical tion, and shortage of food and health resources.
KEY WORDS
● Human Resource Development ● Birth Rate ● Unemployment
(HRD) ● Death Rate ● Illiteracy
● Life Expectancy ● Population Explosion ● Indra Mahila Yojana
● Education ● Migration ● Health
QUESTIONS
1. What do you mean by human development? What are 3. Define the term population and explain the scenario
the essential components of human development? of population in India.
2. Give the importance of human resource develop- 4. What are the impacts of population explosion in
ment for a nation, and explain the steps taken by the India?
Government of India for the development of human 5. Give the different measures for controlling the popu-
resource. lation of India.
REFERENCES
n Budget Documents of Central and State Governments, n Government of India. The Economic Survey 2007–08.
Government of India. New Delhi: Ministry of Finance.
n Budget Documents of Ministry of Rural Development, n UNDP Report 2007.
Government of India. n World Bank Human Development Report 2007–08.
15
C hapter
Rural Development
>>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>>
• Concept, Meaning, and Definition of Rural • Rural Water Supply and Sanitation 405
Development 395 • Women and Child Development 407
• Integrated Rural Development 397 • Challenges and Outlook 412
• Important Features of Rural Economy • Rural Development: A Critical Analysis 413
and Rural Society 398
• McKinsey Report 414
• Scope of Rural Development 400 • Key Words 417
• Interdependence Between Rural and Urban • Questions 417
Sectors 403
• Strategies for Rural Development 404 • References 417
Concept, Meaning, and Definition of

Rural Development
A vast majority of people in the world live in rural areas and as such, rural development
assumes a global importance in the current scenario. In the early stages of development of
the present rich countries, rural area had played a crucial role in different directions. In the
Asian context, development primarily means rural development, since most of the people
still live in rural communities.
Among the Asian countries, India is primarily a rural country, with 70 per cent of the Among the Asian countries,
total population still living in villages. Indian culture developed and flourished primarily in India is primarily a rural coun-
the rural communities. Even now, rural people wield an overwhelming influence on social, try, with 70 per cent of the total
economic, and political activities in India. In fact, in the Indian context, development prima- population still living in villages.
Indian culture developed and
rily means rural development only. flourished primarily in the rural
communities.
Rural Development Defined

‘Development’ may be defined as an activity or process of both qualitative and quantitative ‘Development’ may be defined
change in the existing systems, aiming at an immediate improvement of the living as an activity or process of
conditions of the people or increase the potential for a betterment of living conditions in both qualitative and quantita-
future. Until recently, the concepts ‘economic development’ and ‘economic growth’ were tive change in the existing sys-
tems, aiming at an immediate
used interchangeably. Nowadays, a clear distinction is made between the two concepts. improvement of the living condi-
Development is a broad concept, which also embraces growth. It covers both quantitative tions of the people or increase
and qualitative aspects. the potential for a betterment
Economic growth is mainly concerned with the quantitative aspect of development. For of living conditions in future.
example, producing more farm output by way of extensive cultivation is an indication of
growth. Producing more output by way of increasing yield per hectare through new farm
technology is an indication of development. However, in the latter case, some authors prefer
the ‘economic progress’, implying an increasing productivity per head. Development has
many dimensions and includes qualitative changes in social, economic, political, cultural,
environmental, and such other aspects. It is a continuous and unending process attempting
to improve all aspects of the society.
Development ultimately means development of man and, therefore, it is to be judged by
Development ultimately means
development of man and, there- what it does to him. In the rural areas, a good number of people for over several years lived
fore, it is to be judged by what it a life of dependency or almost a complete slavery. Because of abject poverty and consequent
does to him. In the rural areas, underdevelopment or social stagnation, people lose faith in themselves and in their potenti-
a good number of people for
over several years lived a life of
alities for development, and remain without active participation in social, economic, cultural,
dependency or almost a com- and political life. It is important to bring them out of this apathy and scepticism and to
plete slavery. motivate them to think freely about progressive ideas. Development should ultimately result
in the reduction of dependency on external resources, increased self-reliance, confidence in
their own strength and potentialities for development, spirit of mutual respect, and collective
effort. Rural development, therefore, should be viewed as a strategy designed to liberate the
rural poor from the age-old bondage of degraded life, and to awaken and activate the entire
rural population in the process of achieving and sharing of higher levels of p roduction.
Anker gives the following working definition of the rural development strategies, policies,
and programmes for the development of rural areas and the promotion of activities carried
out in such areas, (agriculture, forestry, fishery, rural crafts and industries, and the building of
the social and economic infrastructure), with the ultimate aim of achieving a fuller utilisation
of the available physical and human resources, and, thus, higher incomes and better living
conditions for the rural population, as a whole, particularly the rural poor, and the effective
participation of the latter in the development process. In this definition, some important
elements can be identified, which are as follows:
• There should be a full utilisation of the available physical and human resources in
rural areas, with functional linkage;
• There should be the development of agriculture and its allied activities;
• There should be again the development of rural industries;
• There should be an aim for higher incomes and better living conditions of rural
population; and
• There should be a focus of development on rural poor, with their effective participa-
tion in the development process.
The Rural Development Sec- The Rural Development Sector Policy Paper of the World Bank Report, 1973, observed that
tor Policy Paper of the World
Bank Report, 1973, observed Rural development is a strategy designed to improve the economic and social life of a
that Rural development is a specific group of people the rural poor. It involves extending the benefits of develop-
strategy designed to improve ment to the poorest among those who seek a livelihood in the rural areas. The group
the economic and social life of
a specific group of people the
includes small-scale farmers, tenants and the landless.
rural poor. Again, a World Bank publication defines rural development as ‘improving the living stand-
ards of the masses of the low-income population residing in rural areas making the process
Again, a World Bank publica- of rural development self sustaining’.
tion defines rural development The World Bank definition of rural development is based inherently on an opera-
as ‘improving the living stan- tional approach that is constrained by the practicalities of allocating loan resources over a
dards of the masses of the
low-income population residing
wide spectrum of countries, ensuring maximum economic returns to them. In a seminar
in rural areas making the pro- on approaches to rural development in Asia, discussions were centred around a definition
cess of rural development self of ‘rural development as a process which leads to a continuous rise in the capacity of the
sustaining’. rural people to control their environment accompanied by a wider distribution of benefits
Rural Development | 397
r esulting from such control’ (World Bank Report). This definition is composed of three
important elements:
1. Rural development should be viewed as a process of raising the capacity of the rural
people to control their environment. ‘Environment’ does not mean only agricultur-
al or economic development. It includes all aspects of rural life—social, economic,
cultural, and political;
2. Rural development as a process should continuously raise the capacity of the rural
people to influence their total environment, enabling them to become initiators and
controllers of changes in their environment, rather than being merely the passive
objects of external manipulation and control; and
3. Rural development must result in a wider distribution of benefits accruing from tech-
nical developments and the participation of weaker sections of the rural population
in the process of development.
G. Parthasarathy opines that
The critical element in the rural development is improvement of living standards of The critical element in the rural
the poor through opportunities for better utilisation of their physical and human development is improvement
of living standards of the poor
resources; in the absence of this, utilisation of rural resources has no functional through opportunities for better
significance. Making the process of rural development self-sustaining not only utilisation of their physical and
implies the mobilisation of capital and use of technology for the benefit of the poor human resources.
but their active involvement in the building up of institutions as well as in function-
ing of these.
Michael Todaro views that
Rural development encompasses:
1. Improvement in levels of living, including employment, education, health and
nutrition, housing and a variety of social services;
2. Decreasing inequality in the distribution of rural incomes and in rural-urban
balances in incomes and economic opportunities, and
3. Increasing the capacity of the rural sector to sustain and accelerate the pace of these
improvements.
Integrated Rural Development

Development is a function of several disciplines; and as per the final analysis, development is Development is a function of
an all-round development of man. Development is always an integrated one. Economic devel- several disciplines; and as per
the final analysis, development
opment, though has been aspired much, cannot be separated from the social, cultural, and such is an all-round development of
other aspects of development. R. Krishnaswamy rightly views that rural development involves man.
several categories of integration, viz., spatial integration, that is, integration between areas; in-
tegration of different sectors of the rural economy—agriculture, off-farm activities, industry,
and so on, with forward and backward linkages; integration of economic development with
social development; integration of total-area approach and target-group approach; integration
of credit with technical services; integration of human resource development with manpower
needs by dovetailing education and training programmes with anticipated manpower needs;
and integration of income-generating schemes with the Minimum Needs Programme of edu-
cation, rural health, water supply, nutrition, and so on.
Rural development has been an Rural development has been an integral part of India’s development from the very
integral part of India’s develop- beginning. In a nutshell, rural development may be viewed as a programme intended for the
ment from the very beginning. all-round development of the entire rural society with a focus on the rural poor. Different
In a nutshell, rural development
schemes have been initiated to develop agriculture, small-scale and village industries, rural
may be viewed as a programme
intended for the all-round devel- transport and communication, education, health, and so on. Rural development has assumed
opment of the entire rural soci- a considerable significance throughout the planning era. The early development schemes
ety with a focus on the rural such as Community Development Programme, Intensive Agricultural District Programme,
poor.
Intensive Agricultural Area Programme, Drought-Prone Area Programme (DPAP), Com-
mand Area Development Programme, and so on, have all aimed at rural development.
Considerable amounts have been spent over these different schemes.
No doubt, to some extent, development has taken place in the rural areas because of
these different schemes. However, these schemes have not helped significantly all sections of
the rural society. It is noticed that rural poor with meagre or no assets of any type, like small
Rural development, therefore,
and marginal farmers, village artisans, tenant cultivators, agricultural landless labourers, and
is now rightly viewed as a strat-
egy designed to improve the so on, have almost been bypassed by these different development schemes. Rural develop-
socio-economic conditions of ment, therefore, is now rightly viewed as a strategy designed to improve the socio-economic
the rural poor. conditions of the rural poor.
Important Features of Rural

Economy and Rural Society
Rural areas are described as underdeveloped or backward as the per capita real income is low
in the rural areas when compared to the same in the urban areas. This definition is an indica-
tor of one aspect of underdevelopment that is based on income alone. The Indian Planning
The Indian Planning Commis-
sion defined underdevelopment Commission defined underdevelopment as one ‘which is characterised by the co-existence,
as one ‘which is characterised in greater or lesser degree, of unutilised and underutilised manpower, on the one hand, and
by the co-existence, in greater of unexploited natural resources, on the other’. It is a well-known fact that many natural
or lesser degree, of unutilised
and underutilised manpower,
resources like industrial raw materials, water resources, forest resources, and so on, remain
on the one hand, and of unex- unexploited while there is plenty of manpower remaining idle in rural areas.
ploited natural resources, on Owing to inadequate capital resources and lack of skill and technology, different resourc-
the other’. es in the rural areas remain unutilised or underutilised leading to backwardness of rural
areas. There is quite visible ‘poverty in the midst of plenty’ in the rural areas. It is appropriate
to examine the important features of the rural sector before we discuss in detail the nature
and scope of the rural development. The main features of the rural sector or the rural econo-
my in India are as follows:
Agriculture is the main eco-

(i) Greater Dependence on Agriculture: Agriculture is the main economic activity in rural
nomic activity in rural areas areas supporting nearly 70 per cent of the population. Yet, even agriculture remains
supporting nearly 70 per cent backward, as can be seen from the low level of average productivity or yield per hec-
of the population. tare of different crops. Low productivity leads to low level of incomes, which, in turn,
results in poor living conditions. Due to the law of inheritance, land is divided and
subdivided from generation to generation, creating tiny and fragmented holdings. In
many cases, cultivation of a very small holding of say, less than an acre or two and
that too located in more than one place, becomes quite uneconomical, yielding not
even subsistence wages for the family labour. In such type of cultivation, adoption of
new farm technology is almost absent and the farm operator in such a situation is no
better than a landless labourer.
(ii) Large-scale Underemployment and Unemployment: A vast majority of people live in
rural areas; and with faster growth of population and in the absence of a considerable
increase in the non-agricultural occupation, there is growing pressure on land.

Irrigation expansion has been quite inadequate and hence, additional population
cannot be gainfully employed on land. This has resulted in disguised unemploy-
ment with low or zero marginal productivity of labour: even if some people leave the
agricultural families, farm output is not going to decline. As there are no alternatives
for gainful employment opportunities for the surplus rural labour, many continue to
depend on land for their living. Rural employment, again, is seasonal, particularly
where agricultural operations take place under the rain-fed conditions. In many vil- In many villages of drought-
lages of drought-prone areas, a large number of rural people remain idle for a long prone areas, a large number
period in a year. Rural unemployment is more in the nature of underemployment of of rural people remain idle for
a long period in a year. Rural
varying degrees. unemployment is more in the
nature of underemployment of
(iii) Poor Incomes and Indebtedness: In many cases, what is produced is not sufficient to
varying degrees.
meet even their consumption requirements. They resort to ‘distress sales’ of limited
grain reserves, even ignoring the requirement for seed purposes. They are forced to
borrow to meet the basic necessities of life like food, clothing, and so on. A consider- A considerable number of rural
able number of rural poor are born in debt, inherit huge debt from ancestors, and find poor are born in debt, inherit
it impossible to pay even the interest amount for the huge, accumulated past debt. huge debt from ancestors, and
find it impossible to pay even
Borrowing from different sources to repay the accumulated debt is still a common
the interest amount for the
feature in rural areas. There is no wonder that rural indebtedness continues to be a huge, accumulated past debt.
major problem.
(iv) Capital Deficiency: For the development of any sector, adequate investment is neces-
sary. Under the conditions of poor incomes, the saving capacity of rural poor, with
very few exceptions, is very low. With low level of savings, investment capacity is at a
With low level of savings, invest-
low level. The institutional credit made available in the recent years, it is reported, is ment capacity is at a low level.
often used for consumption purposes, thereby denying the minimum investment for
farming operations.
(v) Low Level of Technology and Poor Extension Facilities: In the rural sector, both in
agricultural operations and in on-agricultural enterprises, the application of new
technology is at a very low level. It is a well-known fact that new farm technology Lack of adequate capital, cou-
pled with a lack of provision of
leading to the Green Revolution is confined mostly to the large-size farmers in areas a proper guidance in the appli-
with assured irrigation facilities. Lack of adequate capital, coupled with a lack of pro- cation of technical know-how,
vision of a proper guidance in the application of technical know-how, result in an result in an inadequate utilisa-
tion of even the known technol-
inadequate utilisation of even the known technology for development.
ogy for development.
(vi) Low Level of Productivity: An important feature of rural economy is the low level of
An important feature of rural
farm productivity and a low level of labour productivity, both in the agricultural and economy is the low level of
non-agricultural enterprises. With the average yield per hectare remaining deplor- farm productivity and a low
ably low, the marketable surplus is either almost nil in many cases or is very limited. level of labour productivity,
both in the agricultural and non-
Often, many farmers resort to distress sales to meet the immediate cash requirements
agricultural enterprises.
and once again, they purchase the same grain, paying even higher price, leading to
indebtedness.
(vii) Lack of Infrastructure: Rural India severely suffers from lack of adequate, economic
and social overheads such as power, transportation, and communication. Although
India has made impressive gains in creating a social and economic infrastructure, The infrastructural facilities in
the above overheads are mostly concentrated in urban and semi-urban areas. The the context of different develop-
infrastructural facilities in the context of different developmental schemes are quite mental schemes are quite inad-
equate in the rural areas.
inadequate in the rural areas.
(viii) Lack of Basic Amenities of Life: Many villages in India suffer for want of basic necessities
of life like drinking water, health services, sanitation, and so on. In India, during
1990–96, the population without access to (a) safe drinking water was 19 per cent;
(b) health services was 15 per cent, and (c) sanitation was 71 per cent. It is also
estimated that during 1990–97, 53 per cent of children below five years were found to
be underweight. The children not reaching Grade 5 was found to 5 per cent. Accord-
ing to the study of an expert group for 1993–94, the per capita monthly expenditure
of ` 205.84 in the rural areas and ` 281.35 in the urban areas would be necessary to
37.27 per cent of India’s popu- ensure the minimum level of living. On that basis, about 37.27 per cent of India’s
lation in the rural areas and population in the rural areas and 32.36 per cent in the urban areas were living below
32.36 per cent in the urban the poverty line. It is estimated that nearly two-thirds of expectant mothers belonging
areas were living below the to the poorer sections of the community suffer from a serious m alnutrition.
poverty line.
(ix) Averse to Population Limitation: In rural areas, the ‘small family norms’ is not well
received, particularly by the rural poor without any assets. The agricultural labourer,
for example, who has no assets, thinks that his children, particularly male children,
Family planning is not well are dependable assets to rely upon during his old age. Under these conditions, family
adopted and fertility rate is planning is not well adopted and fertility rate is recorded to be relatively higher in the
recorded to be relatively higher rural areas when compared to that in the urban areas. Under poor dietary conditions
in the rural areas when com-
of the mothers, unhealthy children are born. The maternity facilities in rural areas are
pared to that in the urban areas.
quite inadequate and hence, the infant mortality rate is higher.
(x) Social and Cultural Factors: The backwardness of rural society is not attributable to
economic factors alone. Many non-economic factors too account for the miserable
Men in the rural areas remain
rural life. Men in the rural areas remain illiterate and the illiteracy of women is still,
illiterate and the illiteracy of of a higher degree. It is more disturbing to note a wide gulf in the enrolment of boys
women is still, of a higher degree. and girls. It is estimated that among girls, about 55 per cent at the primary level, about
75 per cent at the middle level, and about 85 per cent at the secondary level are out
of school. The corresponding figures for boys are said to be about 20 per cent at the
primary level, about 57 per cent at the middle level, and 71 per cent at the second-
ary level. The enrolment positions of girls and children of scheduled castes (SCs)
and scheduled tribes (STs), particularly in the rural areas, are found to be quite un-
satisfactory. The rural people are still under the predominant influence of caste and
religious customs and beliefs, resulting in extravagant expenses on avoidable social
and religious functions, and these expenses would adversely affect the family budget
and the normal development activities of the family. Huge amounts are borrowed and
In spite of the different devel-
opmental schemes in operation spent on unproductive items leading to heavy debt burden. The rigid caste system still
in the rural areas, rural masses followed in certain remote rural areas prevents freedom of occupation and mobility
do not have adequate motiva- of labour. Women in certain rural communities are considered inferior and do not
tion for development, and they
have equal status in the society. In spite of the different developmental schemes in
are still guided by superstitious
beliefs and age-old rigid reli- operation in the rural areas, rural masses do not have adequate motivation for devel-
gious customs without a mod- opment, and they are still guided by superstitious beliefs and age-old rigid religious
ern outlook. customs without a modern outlook.
Scope of Rural Development

The need for rural development in India is apparent. The critical areas of development and
the interlinkages among the different elements or dimensions of development have to be
carefully identified and an appropriate strategy has to be evolved. An attempt is made here to
indicate some of the broad areas of rural development, which need an integrated approach.
(i) Developing Social Consciousness: The first step in rural development is the one of a
development of social consciousness among people about the different hindrances to
their development, the ways and means of overcoming them, their rights and duties
in the community in which they live, progressive aspects of their traditions, and their
own strengths and potentialities to develop themselves. This type of consciousness
about the social reality would pave the way for an awareness of many possibilities
for the development. Formal and non-formal education would help to create social
consciousness. Apart from it, certain effective, short-term measures are to be taken
to create social consciousness and awareness. Among others, mass media like slide
shows on specific programmes, films with social development themes, and cultural
programmes with relevant themes can be used. The rural people must be educated to The rural people must be edu-
think for themselves the ways and means of their own development, thus paving the cated to think for themselves
way for a collective decision-making and a collective action. the ways and means of their
own development, thus paving
(ii) Collective Decision-making and Collective Action: When people in the rural areas face the way for a collective deci-
problems and begin to discuss them and take action jointly, the movement towards sion-making and a collective
action.
development has well begun. However, collective decision-making depends upon the
sympathy towards others, helping attitude, collaborative attitude of sharing the gains
of collective work, and the ability to face problems and explore the means of solv-
ing them. For an effective, collective decision and action, certain norms have to be
developed to govern the general behaviour. Individuals who do not follow the norms
must be made answerable to groups. In other words, there must be some mechanism There must be some mecha-
of implementing the collective decisions and the norms established in the groups and nism of implementing the col-
the communities. This calls for a dedicated village leadership. lective decisions and the norms
established in the groups and
(iii) Dedicated Village Leadership: Rural development cannot be achieved by allocation of the communities. This calls for
funds and by the role of government officials alone. It is a process that should come a dedicated village leadership.
from within and it cannot be imposed. It is only through the honest and dedicated
leaders of the village that villagers can be motivated and a proper direction can be
given. Rural and community development programmes should not be tools for politi-
cal parties for propaganda and promotion of their political interests. There should be There should be a separate
a separate cadre of dedicated and honest, rural leadership with a genuine interest in cadre of dedicated and honest,
the development of rural India with democratic ideals. rural leadership with a genuine
interest in the development
(iv) Use of Science: Use of science and scientific knowledge is essential for the rural de- of rural India with democratic
velopment in several ways. Through science and scientific reasoning, the illiterate ideals.
and ignorant rural poor can be convinced of the causal relationship between events;
and their knowledge and awareness helps in a better understanding of social rela-
tionships and reduces the hold of prejudices and superstitious beliefs. With scientific
knowledge, one can improve work skills and reduce the drudgery of human muscles.
Science helps to devise the appropriate technology for rural development and higher
levels of productivity from all sectors. Further, science has helped people, wherever
it is used constructively, to solve a wide range of problems from fighting diseases and It is necessary for the scien-
increasing the longevity of life to improvement of living conditions, through higher tists to communicate through
appropriate media, the relevant
levels of production of various necessities of life. It is necessary for the scientists to
discoveries that are made in
communicate through appropriate media, the relevant discoveries that are made in various sciences to the people
various sciences to the people in rural areas. in rural areas.
(v) Development of Agriculture and Allied Sectors: Even though rural development is not Agriculture and allied activities
synonymous with agricultural development, yet agricultural development is critical should be developed as more
for meeting the growing demand for food and raw material and for creating more em- rewarding pursuits with a focus
ployment opportunities in the rural sector. Therefore, agriculture and allied activities on higher productivity.
should be developed as more rewarding pursuits with a focus on higher productivity.

The average yield per hectare of most of the crops all over India is lower than the
yield achieved in some states and also in a few areas within a particular state. This
disparity between high and low yields is an indication of both backwardness as well
as potentiality for achieving higher productivity. There is a pressing need not only for
a substantial increase in the agricultural growth, but also for a sustainable growth.
Proper and prudent use of land by small and marginal farmers by a committed effort
is of utmost importance. Japan could produce from her small holdings significantly
higher levels of productivity or yield per hectare. It should not, therefore, be difficult
to raise productivity levels by the small farmers too. This calls for
(a) An acceleration in the land development programmes,
(b) Land reforms, particularly tenancy reform,
(c) An assured availability of water with proper water management,
(d) A better access to institutional credit at a reasonable interest rate,
(e) An improvement of agricultural work skills through intensive extension
services, backed by intensified area-specific agricultural research,
(f) An efficient delivery system, leading to easy supply of modern inputs to all,
(g) An efficient marketing system with an assured remunerative price, and
(h) An effective administering of the different development schemes so as to remove
structural bottlenecks, if any, and tap the potential for a higher productivity
among the poor.
(vi) Provision of Subsidiary Occupations and Incomes: The small and marginal farmers,
the landless poor, and similar such rural poor without any asset must be helped to
have a gainful employment through dairy farming and other subsidiary occupations.
Dairying may be developed as the main occupation for some, apart from serving as a
supplementary occupation. The development of dairying calls for
(a) An adequate fodder supply,
(b) A marketing facility with a remunerative price for milk and milk products,
(c) A more intensive, veterinary facilities in rural areas by following the policy,
‘clinic to the cow’ in remote villages and thereby, improving the milch yield and
genetic make-up of local cows and buffaloes.
Through adequate institutional

Through adequate institutional credit, weaker sections must be helped to earn
credit, weaker sections must be through dairying, poultry, sericulture, and so on.
helped to earn through dairying,
poultry, sericulture, and so on. (vii) Development of Cottage and Village Industries: The unemployed and underemployed
masses in rural areas must be gainfully employed through the development of village
industries and other non-farm enterprises. The local resources in terms of raw materi-
Several programmes of rural al, capital, and so on, must be identified and suitable village industries must be started.
development have stressed the
development of non-agricultural
This measure should receive an immediate attention so that there would be no further
skills in rural areas. It calls for pressure on the land and the rural poor are, thus, helped to secure gainful employment.
technical and mechanical skills
which are essential for the This would require the development of various skills and setting up of industries in ru-
development of rural industries ral areas. Several programmes of rural development have stressed the development of non-
and for evolving appropriate agricultural skills in rural areas. It calls for technical and mechanical skills which are essential
technologies for rural areas.
for the development of rural industries and for evolving appropriate technologies for rural areas.
Interdependence Between Rural and

Urban Sectors
Rural development cannot be planned and achieved in isolation. For the overall development
of India, both rural development and urban development become necessary. The develop-
ment of these two sectors is interlinked. We cannot conceive of rural development without We cannot conceive of rural
the urban development. They are interdependent, one supporting the other and in the proc- development without the urban
ess, both are being benefitted. Rural development is a comprehensive programme of activi- development. They are interde-
ties which include agricultural growth; development of village industries; development of pendent, one supporting the
other and in the process, both
housing for the poor; planning for public health, family planning and child care, and health are being benefitted.
care for livestock; education, like provision of adult education—including functional literacy;
development of rural transport and communication; and so on.
In each of these different aspects of the rural development, the urban support in terms In each of these different
of goods and services is required. Modern agricultural inputs like chemical fertilizers, pes- aspects of the rural develop-
ticides, pump-sets, tractors, and so on, that are required for agricultural development, have ment, the urban support in
terms of goods and services is
to be supplied by the urban sector. Again, the urban people have to supply different types
required.
of improved tools and implements for the development of rural industries, rural transport,
and communication. Many urban-based goods and services are required for rural house
construction and rural electrification. Further, tools and implements for digging of wells,
construction of irrigation canals, and so on, are drawn from the urban centres. Education,
health and medical, and other professional services needed for rural development are to be
provided by the urban-based people. Certain food items are processed and supplied by the
urban people to the rural consumers also. The demand for different rural products is gener-
ated by urban consumers, apart from providing marketing services.
The rural sector, as discussed earlier, plays a very crucial role in the process of the economic
development of a country. It supplies food for a fast-growing population, including urban pop-
ulation. The raw material required for the urban manufacturing sector is provided by the rural
sector. Rural people are the major source of demand for several urban products. Rural peo-
ple significantly contribute to capital formation that is needed for the industrial development.
Through export of rural products a considerable amount of foreign exchange is earned in India.
The interdependence between rural and urban sectors clearly shows that the develop- The interdependence between
ment of both is necessary for the mutual good as well as the overall development of the rural and urban sectors clearly
country. It is such interdependent relationship that will culminate in the fusion of the two shows that the development
of both is necessary for the
sectors and formation of an integrated modern society. However, it should be noted that mutual good as well as the over-
there is a category of poor people both in the rural and urban areas who are normally by- all development of the country.
passed by the development programmes in both the sectors. The urban- or rural bias in the
development strategies should not ignore the interests of the poor classes. The policies sug-
gested for rural development, among others, are
(a) A shift in terms of trade in favour of agriculture,
(b) Resource allocation in favour of agriculture, village industries, and so on, through
institutional credit and public investment,
(c) Protecting the small producer from unhealthy competition of large-scale industry
through quotas and reservation, and
(d) Application of science and technology, thereby, meeting the production require-
ments of small units, and so on.
In all these measures, the rural poor are not the direct beneficiaries with a significant
increase in their incomes. For example, while there is a case for a shift in the terms of trade
in favour of the rural communities, on equity grounds, this may not help the rural poor at all.
Many rural people live on the sale of labour power and not on the sale of any products of their
‘The contradictions between the
objectives of integrated rural
household or farms. It is, therefore, argued that certain radical measures in the redistribution
development and the existing of wealth in the unorganised sector and socialisation in the organised sector is relevantly re-
structure of production rela- quired. After a clear analysis of different policies of rural development and real obstructions
tionship are too strong to be in a fair distribution of the gain of development, it is concluded that ‘the contradictions be-
ignored’. Therefore, there is a
strong case for a development tween the objectives of integrated rural development and the existing structure of production
strategy, with a thrust on equity relationship are too strong to be ignored’. Therefore, there is a strong case for a development
and social justice. strategy, with a thrust on equity and social justice.
Strategies for Rural Development

After the dawn of freedom, India got wedded to the goal of democratic set up in the country.
Under the Directive Principles, it has been laid down that the ‘state shall strive to promote
the welfare of the people by securing and protecting, as effectively as it may, social order in
which social justice, economic and political, freedom shall inform all the institutions of na-
tional life’. With this motto, the strategy of direct assault on poverty and inequality through
rural development and rural employment programme has been adopted in different five-year
The beginning of Community plan periods. The beginning of Community Development Programme in 1952 had been the
Development Programme in landmark in the history to establish a network of basic extension and development services
1952 had been the landmark in the rural areas. This had created a sense of awareness among the rural masses about the
in the history to establish a potentials and means of development.
network of basic extension and
development services in the The investments in various five-year plans have led to the creation of necessary physi-
rural areas. cal and institutional infrastructure of socio-economic development in many areas. Later on
it was felt that the benefits of the development are being pocketed by those who are better
endowed. Therefore, in the early 1970s, special programmes were designed for the uplift-
The establishment of Drought- ment of small and marginal farmers. The establishment of Drought-Prone Area Programme
Prone Area Programme (DPAP) (DPAP) and Development of Desert Areas (DDA) in 1970 are some leading examples for the
and Development of Desert development of small and marginal fanners. Similarly, the Food-for-Work Programme was
Areas (DDA) in 1970 are some launched in 1977 to provide opportunities of work for the rural poor especially during the
leading examples for the devel-
opment of small- and marginal slack employment periods of the year. Moreover, irrigation facilities in the rural areas have
fanners. been expanded to a large extent. In order to remove the regional disparities, special sub-plans
of development were also introduced.
Some Important Strategies of Rural

Development
During the last, more than five decades of planning, several significant strategies have been
adopted for the development of rural poor. The most important rural development strategies
are discussed as follows:
1. Small Farmers Development Agency
2. Marginal Farmers and Agricultural Labour Development Agency
3. Cash Scheme for Rural Development
4. Drought-Prone Area Programme (DPAP)
5. Development of Tribal Areas
6. Minimum Needs Programme
7. Twenty-point Economic Programme

8. Development of Desert Areas (DDA) Programme
9. Village Development Programme
10. Training of Rural Youth for Self-employment
11. National Rural Development Programme (NRDP)
12. Rural Landless Employment Guarantee Programme
13. Development of Women and Children
14. Council for Advancement of People’s Action and Rural Technology
15. AntodayaYojana
16. Jawahar Rozgar Yojana
17. Tribal Sub-plan (TSP)
18. Scheme for Rural Artisan
19. Employment Insurance Scheme
20. National Social Assistance Programme
21. Rural Group Life Insurance Scheme
22. Swarna Jayanti Shahari Rozgar Yojana
23. Swarnajayanti Gram Swarozgar Yojana
24. Jawahar Gram Samridhi Yojana
25. Pradhan Mantri Gramodaya Yojana
Rural Water Supply and Sanitation

‘Water supply and sanitation’ is a critical determinant of public health outcomes, particularly
in low and lower middle-income countries. Drinking-water supply schemes are implement-
ed by the states. The Government of India supplements the efforts of the states by providing The Government of India sup-
financial assistance under the Accelerated Rural Water Supply Programme (ARWSP). Addi- plements the efforts of the
tional assistance is also available to states for Rural Water Supply Programme under various states by providing financial
assistance under the Acceler-
externally aided projects. ated Rural Water Supply Pro-
The entire programme (ARWSP) was given a mission approach when the technol- gramme (ARWSP).
ogy mission on drinking water management, called the National Drinking Water Mission
(NDWM) was introduced as one of the five societal missions in 1986. NDWM was renamed
as Rajiv Gandhi National Drinking Water Mission (RGNDWM) in 1991. ARWSP is currently
being implemented through the Rajiv Gandhi National Drinking Water Mission. The prime
objectives of the Mission are
(a) To ensure coverage of all rural habitations, especially to reach the unreached with an
access to safe drinking water;
(b) To ensure sustainability of the systems and sources; and
(c) To tackle the water-quality problems in the affected habitations.
With an investment of over ` 76,000 crore, a considerable success had been achieved
in meeting the drinking-water needs of the rural population. The status of the state-wise
uncovered habitations under Bharat Nirman indicates the need for an accelerated implemen-
tation in the lagging states. The problem of water quality on account of contamination due to
The problem of water quality
on account of contamination arsenic, salinity, fluoride, iron, nitrate, and so on, in a large amount in the habitations, also
due to arsenic, salinity, fluoride, needs to be addressed on a priority basis.
iron, nitrate, and so on, in a Large incidence of slippage from ‘fully covered’ to ‘partially/not covered’ categories is
large amount in the habitations, due to a number of factors such as sources going dry, lowering of the ground-water table,
also needs to be addressed on
a priority basis. systems outliving their lifespan, and an increase in population resulting in lower per cap-
ita availability. The Central allocation of funds for Rural Water Supply (ARWSP) had been
stepped up from ` 5,200 crore in 2006–07 to ` 6,500 crore in 2007–08.
Drinking water Supply Under

Bharat Nirman
Drinking water supply is one of the six components of Bharat Nirman, which had been con-
Drinking-water supply is one of
the six components of Bharat ceived as a plan to be implemented in four years from 2005–06 to 2008–09, for building rural
Nirman, which had been con- infrastructure. During the Bharat Nirman period, around 55,067 uncovered habitations and
ceived as a plan to be imple- about 3.31 lakh slipped-back habitations were to be covered, and 2.17 lakh quality-affected
mented in four years from
habitations were to be addressed. Tackling arsenic and fluoride contamination had been
2005–06 to 2008–09, for
building rural infrastructure. given priority. Under the Bharat Nirman, in the first two years, impressive achievements
had been made. In 2006–07, against the target to cover 73,120 habitations, about 107,350
habitations had been covered. As on April 1, 2007, there are 29,534 uncovered habitations,
174,782 slipped-back habitations, and 159,348 quality-affected habitations. These habitations
are proposed to be covered/addressed during the Bharat Nirman period, which may defi-
nitely be fruitful.
Rural Sanitation
The Centrally sponsored scheme of Central Rural Sanitation Programme (CRSP), remod-
elled as the Total Sanitation Campaign (TSC), has the main objectives of bringing about
an improvement in the general quality of life in rural areas, accelerate sanitation coverage,
generate demand through awareness and health education, cover all schools and anganwadis
in the rural areas with sanitation facilities, and promote hygienic behaviour among students
and teachers, encourage cost-effective and appropriate technology development and applica-
tion, and endeavour to reduce the water and sanitation-related diseases.
TSC is currently, operational in 578 districts with an outlay of ` 13,426 crore. The entrust-
ed goals for TSC are construction of individual household latrines, coverage of rural schools,
and solid waste management, provision of revolving fund for Self-Help Groups (SHGs) and
Cooperative Societies; School Sanitation & Hygiene Education (SSHE); and coordination
In the success of TSC, Pan- with other departments. The sanitation coverage in 1981 was only 1 per cent which increased
chayati Raj Institutions (PRIs) to 11 per cent in 1991. By the year 2001, the access to toilets improved to 21.9 per cent of the
have played a key role in the
rural population. However, in the last few years, with the launch of the demand-based TSC,
further acceleration of sanita-
tion coverage. However, in a there has been tremendous improvement in rural sanitation coverage in the country, which
few states, there is a need to has reached 50 per cent. In the success of TSC, Panchayati Raj Institutions (PRIs) have played
improve the implementation so a key role in the further acceleration of sanitation coverage. However, in a few states, there is
that the goal of total sanitation
by the year 2012 is achieved.
a need to improve the implementation so that the goal of total sanitation by the year 2012 is
achieved.
Women and Child Development

As women and children constitute roughly 72 per cent of the population of this country, the As women and children consti-
Ministry of Women and Child Development was carved out as a separate ministry in 2006 tute roughly 72 per cent of the
to further accelerate their development. Two schemes are being implemented for the devel- population of this country, the
Ministry of Women and Child
opment of adolescent girls, viz., Kishori Shakti Yojana (KSY) and Nutrition Programme for
Development was carved out as
Adolescent Girls (NPAG). KSY aims at addressing the needs of self-development, nutrition a separate ministry in 2006 to
and health status, literacy and numerical skills, and vocational skills of adolescent girls in further accelerate their devel-
the age group of 11–18 years. The scheme is currently operational in 6,118 Integrated Child opment.
Development Services (ICDS) scheme projects. NPAG is being implemented in 51 identi-
fied districts across the country to provide free food grain @ 6 kg per beneficiary per month
to undernourished adolescent girls (11–19 years), irrespective of the financial status of the
family to which they belong. Both the schemes are being implemented through the infra-
structure of ICDS.
The Support to Training and Employment Programme (STEP) seeks to provide updated
skills and new knowledge to poor assetless women in 10 traditional sectors, viz., agricul-
ture, animal husbandry, dairying, fisheries, handlooms, handicrafts, khadi and village in-
dustries, sericulture, social forestry, and wasteland development, through mobilising them
into cohesive groups. About 13 new projects had been sanctioned during 2007–08 (up to
November 30, 2007). To facilitate employment of women away from their homes/towns,
schemes such as Working Women’s Hostels with day-care centres or crèches continue.
Provision of care and protection for women in distress is a focused area for attention and
is provided through Swadhar Homes and Short-Stay Homes. A comprehensive scheme for
prevention of trafficking and rescue, rehabilitation and re-integration of victims of trafficking
and commercial sexual exploitation—‘Ujjawala’—has been launched recently. The scheme
has five components—prevention, rescue, rehabilitation, re-integration, and repatriation.
The National Commission for Women (NCW) safeguards the interests of women with
a mandate to cover all aspects of women’s rights. The Protection of Women from Domestic
Violence Act, 2005, which came into force on October 26, 2006, seeks to provide immediate
relief to women who are facing situations of violence in their homes. Gender Budgeting, as
an application of gender-mainstreaming in the budgetary process, has also been adopted. It
encompasses incorporating a gender perspective at all levels and all stages of the budgetary
process, and paves the way to translating gender commitments of the government to budget-
ary commitments.
A rights-based approach has been continued in the Eleventh Plan for promoting sur- A rights-based approach has
vival, protection, and development of children. The National Commission for Protection been continued in the Eleventh
of Child Rights (NCPCR) was set up on March 5, 2007, for an effective implementation of Plan for promoting survival,
child rights in the country. Initiated in 1975, ICDS is one of the largest child intervention protection, and development
of children. The National Com-
programmes in the world with a holistic package of six basic services for children, up to six mission for Protection of Child
years of age, and for pregnant and nursing mothers. These services are health check-up, im- Rights (NCPCR) was set up on
munisation, referral services, supplementary feeding, preschool education, and health and March 5, 2007, for an effective
implementation of child rights
nutrition education through one platform, that is, Anganwadi Centre (AWC). Starting with a
in the country.
modest 33 blocks/projects, it had gradually expanded to 6,284 projects with 1,052,638 AWCs,
of which 5,885 projects with 863,472 AWCs became operational as on June 30, 2007. ICDS
covers 736.96 lakh beneficiaries consisting of 606.50 lakh children below six years of age and
130.46 lakh pregnant women and lactating mothers as on June 30, 2007.
To fulfil the NCMP commitment of providing a functional AWC in every settlement
and ensuring a full coverage of all children, and also to comply with the Supreme Court’s
directives, the government had sanctioned 466 additional ICDS projects and 188,168 AWCs,
during 2005–06; and 166 additional ICDS projects, 106,833 AWCs, and 25,961 mini-AWCs,
during 2006–07. A number of new initiatives have been taken to improve the impact of the
programme, which includes a sharing of one-half of the cost of supplementary nutrition
with the states under ICDS, as per the latest updation. The scheme of Rajiv Gandhi National
Creche Scheme for Children of Working Mothers provides its services to the children of age
group 0–6 years, which includes supplementary nutrition, emergency medicines, and contin-
gencies. At present, about 28,000 crèches are functioning under the scheme benefitting about
7 lakh children.
The Juvenile Justice (Care and Protection of Children) Act, 2000 is the primary law relat-
ing to juveniles in conflict with law as well as children in need of care and protection. This Act
provides for proper care, protection, and treatment for juveniles, by adopting a child-friendly
approach in the adjudication and disposition of matters in the best interest of children and
for their ultimate rehabilitation through various institutions established under the Act. The
Juvenile Justice (Care and Protection of Children) Amendment Act, 2006 came into effect
from August 23, 2006 and had made the law more child friendly.
Under the scheme ‘A Programme for Juvenile Justice’, about 50 per cent expenditure
requirements of states/UTs (union territories) are being provided for the establishment and
maintenance of various homes under the Juvenile Justice (Care and Protection of Children)
The Intergrated Programme for
Act, 2000. The Integrated Programme for Street Children provides basic facilities like shelter,
Street Children provides basic nutrition, health care, education, and recreation facilities, and also seeks to protect street
facilities like shelter, nutrition, children from abuse and exploitation. Childline with a dedicated telephone number 1098,
health care, education, and a 24-hour toll-free telephone service for all children in distress, is also available in 76 cities
recreation facilities, and also
seeks to protect street children
under the scheme. The implementation of ‘Scheme for Welfare of Working Children in Need
from abuse and exploitation. of Care and Protection’ commenced in January 2005 to provide non-formal education and
vocational training to working children, to facilitate their entry/re-entry into the mainstream
education.
The Central Adoption Resource Agency (CARA), an autonomous organisation of the
Ministry of Women and Child Development is functioning with the goal to promote do-
mestic adoption and regulate inter-country adoption as provided under the guidelines of the
Government of India. CARA is also implementing the Shishu Greh Scheme for providing
institutional care to children up to the age of six years and their rehabilitation through an
in-country adoption.
The bias against the girl child is reflected in the fall in child sex ratio (0–6 yrs), which
had declined drastically from 945 in 1991 to 927 per 1,000 males in 2001. Female Foeticide is
found more in the urban-educated prosperous classes and in the states of Punjab, Haryana,
and Gujarat with low sex ratios. Efforts are, therefore, being made to ensure the survival
of the girl child and her right to be born, and nurture her so that she grows up to be an
informed, secure, and productive, participating member of the community and society.
A multi-dimensional strategy has been adopted with legislative, preventive advocacy and
A multi-dimensional strategy
has been adopted with leg-
programmatic inputs for the welfare and development of SCs, STs, Other Backward Classes
islative, preventive advocacy (OBCs), and other weaker sections.
and programmatic inputs for The programmes for educational development and economic and social empowerment
the welfare and development of socially disadvantaged groups and marginalised sections of the society are implemented
of SCs, STs, Other Backward
Classes (OBCs), and other through the close participation of state governments, UT administrations, and non-govern-
weaker sections. mental organisations (NGOs). Public–Private Partnership (PPP) approach is also one of the
strategies for attaining objectives of development of the targeted groups. National-level Fi-
nance and Development Corporations for SCs, Safaikaramcharis, STs, OBCs, and the disa-
bled are working towards the economic empowerment of the beneficiaries. Allocation for
schemes exclusively for the welfare and development of SCs and STs had been enhanced to
` 3,271 crore in 2007–08.
Scheduled Castes Development

A number of schemes are being implemented to encourage SC students for continuing their A number of schemes are being
education from school level to higher education. During the financial year up to November implemented to encourage SC
2007, ` 3.09 crore had been released under the scheme of Pre-Matric Scholarships to the students for continuing their
children of those engaged in unclean occupation and ` 458.98 crore had been released under education from school level to
higher education.
the scheme of Post-Matric Scholarships (PMS) to an estimated number of over 33.86 lakh
SC students. A sum of ` 3.94 crore had been released for construction of eight hostels for 610
boys and 117 girls belonging to the SCs. For upgrading the merit of SC students, ` 0.95 crore
had been released for benefitting 706 students. For free coaching to 2,230 students belong-
ing to SCs and OBCs, ` 1.57 crore had been released. An allocation of ` 88 crore had been
made under Rajiv Gandhi National Fellowship for SC students for pursuing M.Phil and Ph.D
courses. During the current year, 1,333 fresh students will be given fellowship.
The scheme of Top Class Education for SCs aims at promoting quality education among The scheme of Top Class Edu-
students belonging to SCs by providing full financial support for pursuing education at cation for SCs aims at promot-
graduate and post-graduate levels in identified, reputed institutions. Under this scheme, ing quality education among
students belonging to SCs by
` 0.96 crore had been released up to November 2007 out of a budget allocation of ` 16 crore.
providing full financial support
The scheme of National Overseas Scholarships for SC candidates provides financial assist- for pursuing education at gradu-
ance to the finally selected candidates, for pursuing higher studies abroad in the specified ate and post-graduate levels in
fields of master level courses and Ph.D. in the field of engineering, technology, and sciences. identified, reputed institutions.
Of 30 awards given every year, about 27 are given to SCs, two to denotified, nomadic, and
semi-nomadic tribes, and one to landless agricultural labourers and traditional artisans. An
amount of ` 1.70 crore had been released to selected students up to November 2007 out of the
budget allocation of ` 4 crore.
Special Central Assistance (SCA) to SC Sub-plan is a major scheme for economic ad- Special Central Assistance
vancement of persons belonging to SCs. During 2007–08, an allocation of ` 470 crore had (SCA) to SC Sub-plan is a major
been made under this scheme. Up to November 30, 2007, ` 252.70 crore had been released scheme for economic advance-
ment of persons belonging to
to states/UT administrations for the overall socio-economic development of SC persons. The SCs.
formulation and implementation of SC Sub-plan for the welfare of SCs by the state govern-
ments is being monitored intensively. National Scheduled Castes Finance and Development
Corporation (NSCFDC) provides credit facilities to the beneficiaries who are living below
double the poverty line.
Under the schemes of National Safaikaramcharis Finance and Development Corpo-
ration (NSKFDC), there is no income criteria. NSCFDC had disbursed ` 21.64 crore ben-
efitting 4,445 persons up to November 2007 and had disbursed ` 38.06 crore benefitting To abolish the practice of
untouchability and curb the
6,806 persons. A sum of ` 20 crore had been released as an equity support to NSCFDC up
high incidence of crimes and
to November 2007 and ` 15 crore had been released to NSKFDC. Under Self-Employment atrocities against SCs, efforts
Scheme for Rehabilitation of Manual Scavengers, ` 25 crore had been released out of budget are being made through effec-
allocation of ` 50 crore up to November 2007. The scheme, launched in January 2007, is being tive implementation of the
Protection of Civil Rights (PCR)
implemented through NSKFDC and other apex corporations of the Ministry. To abolish Act, 1955 and the Scheduled
the practice of untouchability and curb the high incidence of crimes and atrocities against Castes and the Scheduled
SCs, efforts are being made through effective implementation of the Protection of Civil Tribes (Prevention of Atrocities)
Rights (PCR) Act, 1955 and the Scheduled Castes and the Scheduled Tribes (Prevention of Act, 1989.
Atrocities) Act, 1989.
Scheduled Tribes Development

According to the 2001 Census, Scheduled Tribes (STs) accounted for 84.32 million, corre-
sponding to 8.2 per cent of the country’s total population. The objective of the Tenth Plan
was to empower the STs through their educational, economic, and social development. For
the welfare and development of the STs, an outlay of ` 1,719.71 crore had been provided in
the Annual Plan for 2007–08, which is 3.79 per cent higher than the outlay of ` 1,656.90 crore
for the year 2006–07 (RE). The outlay of 2007–08 includes ` 816.71 crore provided as SCA to
Tribal-Sub plan (TSP), which includes ` 220.00 crore for the development of forest villages
and ` 150 crore for the minor irrigation of tribal lands.
SCA to TSP is a 100 per cent grant extended to states as an additional funding to undertake
a number of developmental schemes on family-oriented income-generating schemes, crea-
tion of critical infrastructure, extending financial assistance to SHGs for community-based
activities, and development of Primitive Tribal Groups (PTGs), and forest villages. Grant-
in-aid under Article 275(1) is also being provided to the states with an objective to promote
the welfare of the STs and improve administration in the states to bring them at par with the
rest of the states, and to take up such special welfare and development programmes, which
are otherwise not included in the Plan programmes. Under the scheme of PMS, all eligible
Under the scheme of PMS, all
eligible ST students are pro- ST students are provided with a stipend to pursue their education beyond matric, includ-
vided with a stipend to pursue ing professional and graduate and post-graduate courses in the recognised institutions. The
their education beyond matric, scheme of Rajiv Gandhi National Fellowship for ST students to pursue higher education
including professional and grad- was launched during the year 2005–06 and had been entrusted to UGC (University Grants
uate and post-graduate courses
in the recognised institutions. Commission) for implementation.
A new Central Sector Scholarship Scheme of Top Class Education for ST students was
launched during the year 2007–08, with the objective of encouraging meritorious ST stu-
dents to pursue studies at degree and post-degree level in any of the identified institutes.
There are 127 institutes identified under the scheme in both the government and private sec-
tors covering the fields of management, medicine, engineering, law, and commercial courses.
Each institute had been allocated five awards, with a ceiling of 635 scholarships per year. The
family income of the ST students from all the sources shall not exceed ` 2 lakh per annum.
Economic empowerment of the STs continued through extension of financial support
Economic empowerment of the
STs continued through exten- to National Scheduled Tribes Finance and Development Corporation (NSTFDC). Finan-
sion of financial support to cial support is being extended to ST beneficiaries/entrepreneurs in the form of term loans
National Scheduled Tribes and micro-credit at concessional rate of interests from income-generating activities. Tribal
Finance and Development Cor-
Cooperative Marketing Federation of India Limted (TRIFED) is engaged in the marketing
poration (NSTFDC).
development of tribal products and their retail marketing through its sales outlets.
In order to address the prob- In order to address the problems of tribal communities, who are dependent on forests,
lems of tribal communities, who and to undo the historical injustice done to them, the Scheduled Tribes and Other Tradi-
are dependent on forests, and tional Forest Dwellers (Recognition of Forest Rights) Bill, 2006 was passed by the Parliament
to undo the historical injustice in 2006. This Act recognises the forest rights of forest dwelling STs and other traditional
done to them, the Scheduled
Tribes and Other Traditional forest dwellers over the forest land under their occupation for self-cultivation, rights over
Forest Dwellers (Recognition of minor forest produce, and traditional rights. There is a great emphasis on the education of
Forest Rights) Bill, 2006 was ST girls, especially in the low literacy areas. From 2007–08, keeping in view the habitat/
passed by the Parliament in
hamlet development approach and also to give a boost to the socio-economic development
2006.
of the most marginalised community among STs, that is, PTGs, the long-term Conservation-
cum-Development (CCD) plans have been formulated on the basis of results of the baseline
surveys conducted by the various state governments and the UT of Andaman and Nicobar
Islands.
Five communities, viz., Mus-

lims, Christians, Sikhs, Bud-
Minorities Development
dhists, and Parsis were notified Five communities, viz., Muslims, Christians, Sikhs, Buddhists, and Parsis were notified by
by the government as minority
communities under Section 2(c) the government as minority communities under Section 2(c) of the National Commission
of the National Commission for for Minorities Act, 1992. As per the 2001 Census, the minority communities constitute
Minorities Act, 1992. 18.42 per cent of the total population. A new Ministry of Minority Affairs was created in
January 2006, to ensure a focused approach to issues relating to the minorities and to play a
pivotal role in the overall policy, planning, coordination, evaluation, and review of the regu-
latory and development programmes for the benefit of the minority communities.
The Prime Minister’s new 15-Point Programme for the welfare of minorities was an- The Prime Minister’s new
nounced in June 2006. An important aim of this programme is to ensure that the benefits 15-Point Programme for the wel-
of various government schemes for the underprivileged reach the disadvantaged sections fare of minorities was announced
of the minority communities. It provides that, wherever possible, 15 per cent of the targets in June 2006.
and outlays under various schemes, included in the programme, should be earmarked for
minorities. The targets for 2007–08 had been fixed and efforts had been made to refine the
A high-level committee under
method of targeting, to ensure that the targets are as close as possible to the earmarked 15 per the chairmanship of Justice
cent. A high-level committee under the chairmanship of Justice Rajindar Sachar was set up Rajindar Sachar was set up to
to look into the social, economic, and educational status of the Muslim community of India. look into the social, economic,
and educational status of the
The Committee submitted its report in November 2006. A total of 76 recommendations and Muslim community of India. The
suggestions contained in the report were examined. A statement on the ‘Follow-up Action on Committee submitted its report
the Recommendations of the Sachar Committee’ was laid in both the Houses of Parliament in November 2006.
on August 31, 2007.
Maulana Azad Education Foundation provides financial assistance to implement educa- Maulana Azad Education
tional schemes for the benefit of the educationally backward minorities. The National Minor- Foundation provides financial
ities Development & Finance Corporation (NMDFC) is engaged in promoting self-employ- assistance to implement educa-
ment and other ventures among the backward sections of the minority communities through tional schemes for the benefit
of the educationally backward
term loans and micro-finance. For the development of OBCs, the government provides cen- minorities.
tral assistance to state governments/UT administrations for the educational development of
OBCs. Till November 2007, ` 59.16 crore had been released to states/UT administrations
against an allocation of ` 100 crore under PMS for OBCs, and ` 9.46 crore had been released
under Pre-Matric Scholarships against an allocation of ` 25 crore.
For construction of hostels for OBC boys and girls, state governments/UT administra-
tions/NGOs had been released ` 5.92 crore against an allocation of ` 21 crore up to Novem- The National Backward Classes
Finance & Development Corpo-
ber 2007. The National Backward Classes Finance & Development Corporation (NBCFDC)
ration (NBCFDC) extends credit
extends credit facilities to persons living below double the poverty line, for undertaking vari- facilities to persons living below
ous income-generating activities. During the year 2007–08, the Corporation had disbursed double the poverty line, for
` 73.23 crore till November 2007 to benefit 82,955 persons. NBCFDC had released ` 25 crore undertaking various income-
generating activities.
as equity support against an allocation of ` 28 crore up to November 2007.
Welfare and Development of Persons

with Disabilities
During 2007–08, an allocation of ` 221 crore had been made for the welfare and development During 2007–08, an alloca-
of persons with disabilities. An expenditure of ` 63.9 crore had been incurred up to Novem- tion of ` 221 crore had been
ber 2007. The programmes are implemented through national and apex institutes dealing made for the welfare and
with various categories of disabilities. These institutes conduct short and long-term courses development of persons with
disabilities.
for various categories of personnel for providing rehabilitation services to those needing
them. Till November 2007, ` 20.20 crore (plan) had been released to these institutes.
The Persons with Disabilities (equal opportunities, protection of rights, and full partici-
pation) Act, 1995 is under implementation. Five Composite Rehabilitation Centres (CRCs)
at Srinagar, Lucknow, Bhopal, Guwahati, and Sundernagar provide facilities for manpower
development and ensuring availability of rehabilitation services for all categories of persons About 199 District Disability
Rehabilitation Centres (DDRCs)
with disabilities. Four Regional Rehabilitation Centres (RRCs) provide services to persons had been sanctioned in the
with spinal injuries at Chandigarh, Cuttack, Jabalpur, and Bareilly. About 199 District Dis- country for providing compre-
ability Rehabilitation Centres (DDRCs) had been sanctioned in the country for providing hensive rehabilitation services
comprehensive rehabilitation services at the grass-root level. at the grass-root level.
Under the scheme of Assistance to the Disabled for Purchase/Fitting of Aids and
Appliances (ADIP), ` 10.31 crore had been released during 2007–08 up to November 2007.
Deen Dayal Disabled Rehabilitation Scheme provides financial assistance to voluntary
organisations for running special schools for children with hearing, visual, and mental dis-
ability; rehabilitation centres for persons with various disabilities, including leprosy-cured
persons; and manpower development in the field of mental retardation and cerebral pal-
sy. Under this scheme, organisations are given grant-in-aid for both recurring and non-
recurring expenditure to the extent of 90 per cent of the total approved cost of the project.
During the year 2007–08, ` 22.30 crore had been released up to November 2007 to voluntary
organisations. The National Handicapped Finance & Development Corporation provides
credit facilities to persons with disability for their economic empowerment and ` 7 crore had
been released to the Corporation till the end of November 2007.
Social Defence Sector

Older persons who, in the wake of declining family support systems and other socio-economic
circumstances, are left helpless, also require the support and protection of the state. To ful-
fil the commitments of the National Policy on Older Persons for providing health, shelter,
vocational training, recreation, protection of life, and so on, for the aged, a special emphasis
is being placed on expanding the on-going programmes of old-age homes, day-care centres,
and mobile medicare units, under the scheme of Integrated Programme for Older Persons.
During 2007–08, ` 4.80 crore had been released under this scheme till the end of Novem-
The Maintenance and Welfare ber 2007. The Maintenance and Welfare of Parents and Senior Citizens Bill, 2007 had been
of Parents and Senior Citizens passed by both the Houses of Parliament. The Bill contains provisions for the maintenance
Bill, 2007 had been passed by and welfare of parents and senior citizens guaranteed and recognised under the Constitution.
both the Houses of Parliament. Rigorous efforts are being made to tackle the growing problem of drug abuse and alcohol-
The Bill contains provisions for
the maintenance and welfare ism through an integrated and comprehensive, community-based approach in the country.
of parents and senior citizens The programme is implemented through voluntary organisations running Treatment-Cum-
guaranteed and recognised Rehabilitation Centres and Awareness and Counselling Centres. An amount of ` 6.62 crore
under the Constitution.
had been released to voluntary organisations under the scheme of Prevention of Alcoholism
and Substance (Drugs) Abuse up to November 2007, during the year 2007–08. For an effec-
tive implementation of the social defence programmes, personnel engaged in the delivery of
services in this area are being trained under various training programmes being organised by
the National Institute of Social Defence.

With the objective of inclusive growth taking the centre stage, the government has strength-
With the objective of inclusive
growth taking the centre stage, ened its efforts for the social sector development in the recent years. The expenditures of
the government has strength- the Government of India on social services and rural development have more than doubled
ened its efforts for the social over the last four years. Impressive outlays on education, health, water supply, and housing
sector development in the indicate the emphasis which the government places on these sectors. These expenditures
recent years. The expenditures
of the Government of India on have supplemented and sustained a high level of economic growth in achieving a better so-
social services and rural devel- cial sector performance and improvement in the quality of life. Several initiatives have been
opment have more than dou- launched, especially for the poor. Programmes like the National Rural Employment Guar-
bled over the last four years.
antee Scheme, Pradhan Mantri Gram Sadak Yojana, Aam Admi Bima Yojana, and Rashtriya
Swasthya Bima Yojana can go a long way in improving the living conditions of the common
men in the remotest part of the country. Proper implementation of these programmes is
essential. Consequently, the role of states and district administrations responsible for the
implementation of the welfare schemes too is vital.
Along with higher economic growth and poverty reduction, there has been an improve-
ment in many important social indicators like life expectancy, infant mortality rate, and
gross enrolment ratios at the primary level of education. However, disparities continue at
the state and regional level. Better governance and improved service delivery are essential to
ensure that the leakages are plugged, and also to rest assured that the funds under the welfare
schemes reach the intended beneficiaries to the maximum extent. Local governments and
PRIs, as well as social and non-government organisations, can play an important role in this
area. It is essential that these higher outlays result in better outcomes. To achieve this objec-
tive, the government has taken the initiative of introducing outcome budgets.
The Eleventh Five-Year Plan also aims at reducing poverty and the disparities that are The Eleventh Five-Year Plan
found across regions and communities. The pattern of funding also has the objective of mak- also aims at reducing poverty
ing states more self-reliant. Proper monitoring and evaluation against the laid-down bench- and the disparities that are
found across regions and com-
marks, along with the use of modern technology like e-governance, can help in ensuring that
munities.
higher outlays result in better outcomes and more inclusive growth.
Rural Development: A Critical

Analysis
Despite making a spectacular progress in various fields, India still faces poverty, unemploy- Despite making a spectacular
ment, ignorance, and socio-economic inequality. New economic forces are bringing with progress in various fields, India
them new opportunities for development and for contributing to nation-building. It is, still faces poverty, unemploy-
ment, ignorance, and socio-
however, important to ensure that our growth is inclusive and that we do not leave anyone economic inequality.
behind, and that the benefits of development reach everyone, particularly the rural masses
who have not been effectively touched by the efforts of six decades of freedom. The policies
and programmes formulated to augment economic growth should also contribute towards
improving the lives of the poor and the vulnerable.
More than 70 per cent of our people live in villages and 80 per cent of our poor live in More than 70 per cent of our
rural areas. The benefits of economic growth are not percolating to more than two-thirds people live in villages and 80
of our population. The divide between the rural and the urban areas in terms of economic per cent of our poor live in rural
infrastructure is widening day by day. Crop failures due to unpredictable climatic variations, areas. The benefits of economic
growth are not percolating to
inability to meet the rising cost of cultivation, and the increasing debt burden are among more than two-thirds of our
the factors that lead our farmers to growing frustration that is being expressed in the most population.
extreme ways. In the recent years, agricultural growth in India has fallen. So have invest-
ment in, and profitability of, agriculture, the net sown area under crops, and the area under
irrigation. It is apprehended that the Indian peasantry is facing a serious crisis. According to
the Economic Survey 2006–07, low yield per unit area across almost all crops has become a
regular feature.
Agriculture is the backbone of our economy. Although the share of agriculture in the Agriculture is the backbone
of our economy. Although the
gross domestic product (GDP) had seen a steady decline from 36.4 per cent in 1982–83 to share of agriculture in the gross
18.5 per cent in 2006–07, the sector continues to sustain more than half a billion people, domestic product (GDP) had
providing employment to 52 per cent of the workforce. It is an important source of raw ma- seen a steady decline from
terial and absorbs many industrial products, particularly fertilizers, pesticides, agricultural 36.4 per cent in 1982–83 to
18.5 per cent in 2006–07, the
implements, and consumer goods. The very fact that over a period, the growth in agriculture sector continues to sustain
had remained much lower than the growth in the non-agricultural sectors will explain the more than half a billion people,
unpleasant plight of the rural people. Today, there is a greater need than ever before to criti- providing employment to 52 per
cally analyse and address the problems facing this sector. Initiatives on the part of the media cent of the workforce.
will have a positive impact on policy formulation for the rural economic sector and on their
effective implementation.
Poverty, hunger, and health care represent some of the major challenges before rural India.
Poverty, hunger, and health
care represent some of the The unenviable plight of the landless labourers and small and marginalised farmers can be
major challenges before rural attributed to factors such as natural calamities, crop failures, exploitation by moneylenders,
India. lack of adequate supplementary income, and low level of education, besides lack of effective
intervention by the state in the form of measures like land reforms. It is a socio-economic
phenomenon rooted in structural inequalities and an unjust and inegalitarian social and eco-
nomic order. Acute poverty, indebtedness, and illiteracy are among the factors that have com-
bined to compel many farmers to take their own lives. This is a blot on the nation’s collective
conscience.
Addressing unemployment in the rural areas is crucial to improving the economic
Addressing unemployment in
the rural areas is crucial to conditions of the people. Governments, at the Centre and the states, have adopted a multi-
improving the economic condi- pronged approach, and several initiatives have been launched in the recent years to address
tions of the people. the challenges in our rural economy. Some of the developmental programmes launched by
the Union government, if implemented sincerely, can mitigate the misery of the rural poor,
substantially. The political leadership, the bureaucracy, and the media have vital roles in this.
The honest implementation of such well-meaning programmes and their effective monitor-
ing should be ensured. No one should be permitted to misuse the resources or benefit from
the distress of the rural poor.
In order to increase productiv-
In order to increase productivity and employment generation in the agricultural sector,
ity and employment generation structural changes are needed. Land reforms are the primary need; support prices and provi-
in the agricultural sector, struc- sion of cheap credit do not help beyond a point. The experience in West Bengal and Kerala
tural changes are needed. has shown that providing the poor with access to land through the honest implementation
of land reform legislation always acts as a major catalyst for growth, and helps to address
rural poverty as the peasants get an identity of their own. Such institutional reforms in the
ownership of agricultural land can unleash the peasantry’s productive forces, increasing the
food-grain production and helping to address poverty and distress.
Mckinsey Report
India Can Raise Farm Yields by Rebalancing Investment and Making
Targeted Reforms in the Agricultural Sector
Focusing on the productivity of the agricultural sector to lift the incomes of smallholder
farmers is one of the most direct routes to addressing rural poverty. Yet agriculture has not
kept pace with growth in India’s broader economy. Today the nation’s yield per hectare is half
the average of China, Indonesia, Malaysia, and Thailand. But India has the capacity to raise
its yield growth from 2.0 per cent, its historical level; to 5.5 per cent annually over the next
ten years—and this can raise approximately 10 per cent of the nation’s population above the
Empowerment Line.
A range of technical levers can help to achieve productivity gains of this magnitude.
These include fertiliser and manure use to improve the quality of the soil, more efficient water
management (for example, through decentralised water harvesting and micro-irrigation),
research-driven improvements in seed quality, technology-based ‘precision farming’, better
market access, and improved postharvest logistics to reduce crop waste (Exhibit E1).
In the past, India’s spending on agriculture has focused on input and output price sup-
port rather than investment in agricultural infrastructure, scientific research, and extension
services (which educate farmers on new technologies and best practices). In 2010–11, the
Yield
Tonnes per hectare < Exhibit E1
By 2022, India can
India 0.3 4.0
0.4 Increase Farm Yields
0.3 0.2
0.5 +7.2% to 4 Tonnes Per
2.3 Hectare, which would be
Comparable to Current
Yields in Other Emerging
Economies
Yield, Soil fertility Irrigation Seed quality Precision Market Yield target,
2012 farming access1 2022E
Other 7.4
countries,
2011–12
5.5
5.0
4.2
3.7
3.1
Thailand Mexico Indonesia Malaysia Vietnam China
1
Includes post-harvest infrastructure and rural roads.
Source: UN Food and Agriculture Organization; McKinsey Global Institute analysis.
government spent ` 86,000 crore ($18 billion) on input subsidies (primarily fertiliser), but
less than half that amount (` 34,000 crore, or $7 billion), on building storage and irrigation
systems, as well as scientific research and extension services. Along with rebalancing this
investment profile, policy makers can focus on reforms in nine high-priority areas of the
agriculture sector:
• Enable private trade by reforming APMC Acts. India’s agricultural produce mar-
ket committees (APMC) place severe restrictions on private trade in farm produce.
APMC reform could introduce a greater degree of competition and enable farmers
to obtain sufficient value for their output. Some states have excluded certain agricul-
tural products from APMC coverage, but these are piecemeal solutions at best. The
Model APMC Act issued by the central government in 2003 facilitates private trade in
more comprehensive way, but the states have varying track records for implementa-
tion. To create a sense of accountability and urgency for state-level reforms, India can
strengthen transparency and awareness among farmers by keeping a digital record
of the prices and quantities at APMC auctions; organising annual Krishi Mahotsav
gatherings; and improving direct interaction among farmers, traders, corporations,
bureaucrats, and the agriculture minister. A greater role for the private sector, includ-
ing modern retail, can also enable the agricultural produce market to flourish.
• Use technology for better price discovery. Poor price information reduces farmers’
bargaining power with traders and prevents them from selling their product in the most
lucrative market if multiple options are available. Fee-based price dissemination serv-
ices can help: Esoko, which operates across Africa, provides automatic and personalised
price alerts and buy and sell offers by SMS to farmers. In India, IFFCO Kisan Sanchar
Ltd., provides information on market prices via voice messages in local languages.
• Rationalise price supports for agricultural produce. The government’s minimum

support price for a wide range of crops distorts the efficient allocation of resources.
For example, it deters farmers from diversifying to higher-value crops such as fruits
and vegetables, which are six times as productive per hectare as cereals. The govern-
ment can rebalance minimum support prices to reflect consumer preferences and
the true cost of production, within fiscal boundaries. The creation of an independent
regulatory agency to set support prices within a fixed fiscal framework, responsive to
consumer needs and preferences, could help.
• Introduce hybrid public-private crop insurance programmes. Only 17 per cent of
India’s farmers are insured. The National Agriculture Insurance Scheme, the govern-
ment’s flagship crop insurance programme, needs to become more responsive to their
needs. A hybrid model, such as the one that prevails in France (where private-sector
companies offer crop insurance, with premiums subsidised by the government) could
boost utilisation. With the introduction of competition, market forces, and better
administration, public insurance providers would be forced to respond by improving
technology and introducing new products and pricing strategies.
• Provide financial incentives to adopt new technology. More can be done to encour-
age farmers to adopt the latest technologies. Under the National Mission on Micro
Irrigation, for example, the central government funds 40 per cent of the cost of a
micro-irrigation system, while the state government contributes 10 per cent. Andhra
Pradesh has set up special-purpose vehicles for micro-irrigation subsidies.
• Overhaul the public extension network and enhance private-sector participation.
A holistic approach to extension across various divisions and departments has been
successful in some states. In Gujarat, for example, Krishi Raths (mobile vehicles) visit
village after village to share information on agricultural best practices. Fee-based pri-
vate extension services (such as those offered by Mahindra Subhlabh Services Ltd.)
can boost extension support to medium-size and large farms with the capability to
pay. Public extension will need to play an important role for poor farmers and those
in remote geographies, and the focus will need to shift to mobile-based innova-
tions (such as disseminating weather forecasts, new seed information, and improved
farming tips through phones).
• Improve farmers’ access to credit. Regional disparities in access to credit can be
addressed by complementing commercial bank lending with channels such as coop-
erative banks. Technology and delivery innovations such as business correspondents
(third-party, non-bank agents who extend banking services right to people’s door-
steps) can be deployed in areas with low conventional banking penetration. Targets
can be set on the basis of cropped area and level of technology to ensure more equi-
table access to capital.
• Reform land markets and create an institutional framework to promote leasing.
Land markets in several parts of rural India are dysfunctional, as mentioned above.
Creating more modern and comprehensive landownership records is a crucial first
step in addressing this issue. The leasing market could also be strengthened by the in-
troduction of public land banks that allow absentee landowners to ‘deposit’ their land
and receive rent for its use. Small and marginal farmers could be encouraged to bor-
row and cultivate the land, knowing that they have secure tenancy for a fixed period.
This would utilize more arable land and allow farmers to increase their o utput.
• Integrate governance of agriculture at a grassroots level. Gujarat has achieved an

impressive agricultural turnaround, and at its core is good interministerial coordi-
nation. But in most of India, the organisational bureaucracy overseeing the farm
sector is overwhelming, with separate ministries for agriculture, chemicals and fer-
tilisers, food processing, water resources, and rural development at the centre, and
an even greater multiplicity of authorities at the state level. A formal structure such
as a Delivery Unit could be considered to coordinate ministries and departments.
Similarly, agricultural missions could empower a team of bureaucrats and domain
experts to make decisions and allocate financial support.
Key W o r d s
● Green Revolution ● Reduction of Dependency ● Lack of Infrastructure
● ualitative and Quantitative
Q ● Increased Self-reliance ● Social and Cultural Factors
Aspects of Rural Development ● Unexploited Natural Resources ● Developing Social Consciousness
● Betterment of Living Conditions ● Inadequate Capital Resources ● ollective Decision-making and
C
● Economic Development ● Poor Incomes and Indebtedness Collective Action
● Economic Growth ● Capital Deficiency ● Dedicated Village Leadership
● Abject Poverty ● L ow Level of Technology and Poor
● Underdevelopment Extension Facilities
● Social Stagnation ● Low Level of Productivity
Q u est i o n s
1. What do you mean by rural development? Discuss its 6. Discuss the important economic reforms of rural
nature and scope. development.
2. State the important features of rural economy and 7. What are the measures adopted by the government
rural society? in the Union Budget 2008–09 for rural development.
3. Discuss the strategy of rural development after inde- 8. Write short notes on
pendence. a. Agriculture Finance Corporation (AFC).
4. Discuss the poverty alleviation programmes intro- b. Rural Infrastructure Development Fund (RIDF).
duced in the country since 1995. c. National Rural Development Programme (NRDP).
5. Discuss the integrated rural development pro- d. Small Farmers Development Agency.
grammes adopted by the government since 1952. e. Rural development during Eleventh Five-Year Plan.
r efe r e n ces
n Government of India. Economic Survey 2007–08. n Finance Minister’s Budget Speech 2008–09.
New Delhi: Ministry of Finance. n World Bank Report 1973.
n The Hindu, May 12, 2008.
16
C hapter
Problems of Growth
>>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>>
• Parallel Economy 418 • Key Words 435
• Regional Imbalances 424 • Questions 435
• Social Injustice 433 • References 435
• Case 434
Parallel Economy
Parallel economy connotes the functioning of an unsanctioned sector in the economy, whose
This is variously referred to as
objectives run parallel, rather in contradiction with the avowed social objectives. This is
black economy, unaccounted variously referred to as black economy, unaccounted economy, illegal economy, subterranean
economy, illegal economy, sub- economy, or unsanctioned economy. The term ‘parallel economy’ emphasises a confrontation
terranean economy, or unsanc- between the objectives of the legitimate and illegitimate sectors.
tioned economy.
Review of the Various Estimates of

Black Income
IMF Staff Survey, on the unac- IMF Staff Survey, on the unaccounted sector of the economy, has estimated black money
counted sector of the economy, in India at 50 per cent of gross national product (GNP), which was ` 145,141 crore in
has estimated black money in 1982–83 at current prices. On this computation, India’s unaccounted sector is of the order of
India at 50 per cent of gross na-
` 72,000 crore. The main findings of the various studies on black income are as follows:
tional product (GNP).
• The amount of black money has not only been rowing in absolute terms, but also in
relative terms as a percentage of GNP.
• In 1994–95, as per the estimate of the Parliament Standing Committee on Finance,
black money in circulation at current prices was ` 1,100,000 crore against the GNP
estimate of ` 843,294 crore, that is, 130 per cent of GNP. Obviously, black money
operators are running a parallel economy.
• The rate of growth of black income generation is faster than the rate of growth of
GNP.
• Higher rate of taxation motivated businessmen and industrialists to go for massive
tax evasion.
• The political system winked at the growth of black income but did not take effective
measures to curb the growth of unaccounted income.
Problems of Growth | 419
Impact of Black Income on the Economic The creation of a parallel econ-

omy, as a consequence of the
and Social System growing proliferation of black
money in every sector of the
• The creation of a parallel economy, as a consequence of the growing proliferation of economy, has a very serious
and, in a number of ways.
black money in every sector of the economy, has a very serious and, in a number of
ways, pernicious influences on the working of the Indian economy.
• First of all, the direct effect of black income is the loss of revenue to the state exchequer First of all, the direct effect of
as a consequence of tax evasion, both from direct and indirect taxes. Moreover, tax black income is the loss of rev-
evasion does not include loss of revenue resulting from unreported production or enue to the state exchequer as
illegal economic activity. Since the government is not able to plug the leakage of tax a consequence of tax evasion,
both from direct and indirect
evasion, it has to resort to other avenues of raising funds. So it imposes more taxes taxes.
on commodities or raises the existing rates of taxation on commodities. As a conse-
quence, India has developed a regressive tax structure. It is the salaried person (who
cannot escape taxation) who suffers and the dishonest tax-payer is able to get away
and then, use the evaded income in luxurious and ostentatious consumption.
• Secondly, the availability of black income with businessmen and capitalists and the
consequent inequalities of income place a large amount of funds at their disposal.
As a result, the consumption pattern is tilted in favour of the rich and the elite classes, The consumption pattern is
at the cost of encouraging the production of articles of mass consumption. tilted in favour of the rich and
the elite classes, at the cost of
• Thirdly, black money encourages investment in precious stones, jewellery, bullion, encouraging the production of
and so on. This has an adverse effect on growth via its demonstration effect. articles of mass consumption.
• Fourthly, black money has encouraged diversion of resources in the purchase of

Black money has encouraged
real estate and investment in luxury housing. There is large-scale under-valuation of diversion of resources in the
property and, in this way, lots of black money is made white. purchase of real estate and in-
vestment in luxury housing.
• As most of these buildings are registered at under-value prices, the government loses
by way of tax revenues when these buildings are transferred as gifts or are bequeathed.
• Fifthly, a part of the black income is held in cash and, as a consequence, there is an
abundance of liquidity which becomes available through the accumulation of savings Whenever the government at-
held in the form of cash, bullion, gold, silver, and so on. This is popularly termed tempts to control the excess
demand with the help of mea-
as ‘black liquidity’. Thus, whenever the government attempts to control the excess
sures like credit control or
demand with the help of measures like credit control or rationing, such attempts are rationing, such attempts are
frustrated by the huge liquidity provided by black money. Since this liquidity results frustrated by the huge liquidity
in heavy inventory build-up, it becomes a threat to price stability. provided by black money.
• Sixthly, black money results in transfer of funds from India to foreign countries Black money results in transfer
through clandestine channels. Such transfers are made possible by violations of of funds from India to foreign
foreign exchange regulations, through the device of under-invoicing of exports and countries through clandestine
over-invoicing of imports. channels.
• Last but not the least, black money has corrupted our political system in the most Black money has corrupted
vicious manner. At various levels, MLAs, MPs, ministers, and party functionaries our political system in a most
openly and shamelessly go on collecting funds. vicious manner.
Corruption
There is, perhaps, not even a single person who does not rail against corruption and its baneful
impact on both the country’s economy, as well as on its social fabric. The governments pledge
to stop and eradicate it, middle-class drawing rooms discuss the ways in which corruption
has a baneful influence on the national life, the press continues to expose its prevalence,
religious leaders and moralists preach against it, while courts of law and the police express
their inability to stamp it out. From the helper in a government office to some of the top
functionaries of our governments, almost everyone seems implicated. Paul Wolfowitz, the
soon-to-be past president of the World Bank, has surely helped to underline the universality
of this scourge across country and ethnicity.
A World Bank study that put the It was, in fact, a World Bank study that put the value of all the bribes paid all over the
value of all the bribes paid all world in 2003 at over $1,000 bn (or 1 tn). Some experts consider this a gross underestimation.
over the world in 2003 at over A study of corruption in India by a noted economist Prof. Arun Kumar, some years ago, noted
$1,000 bn (or 1 tn).
that this ‘black economy’ accounted for about 50 per cent of the national gross domestic
product (GDP). At today’s figures, this proportion would mean that India’s black economy
is approximately $500 bn a year. According to the report of Transparency International,
the foremost corruption-monitoring body internationally, most South Asian countries fall
far below the watershed 5-point mark on their 10-point scale. India is at 3.3 points while
Pakistan is at 2.2. This means that, if anything, corruption is deeper and more widespread in
Pakistan. So if we take Prof. Kumar’s estimate of the ‘black economy’ in India as a representa-
tive of South Asian economies, it would imply that the size of Pakistan’s black economy is at
least $62 bn, given that its GDP for 2006 is estimated at $124 bn.
The mind boggles at the size of corruption and, perhaps, it is this widespread and deep-
ly entrenched nature of corruption that gets bigger with each passing year, while everyone
seems to rant and rage against it. Unfortunately, solutions to corruption have fallen into two
broad categories. They are
• The first strategy has been of moral strictures and ethical exhortations by religious
heads, those with moral authority in our society, and by the State functionaries.
• The second strategy has been of enacting laws, establishing rules, and framing poli-
cies by the governments and the public authorities to curb corruption. While the first
has been a spectacular failure, the latter too has floundered in most cases.
The reason for the relative fail-

The reason for the relative failure of all measures to fight corruption has to be found, as with
ure of all measures to fight cor- all successes and failures in our societies, in a class analysis of the situation, by discovering
ruption has to be found, as with which class is placed where in relation to corruption and who benefits in what manner.
all successes and failures in our Prof. Kumar in his study of India estimates that black money is concentrated in the top
societies, in a class analysis of
the situation, by discovering few per cent of the population, based on income (refer to Figure 16.1). India’s top 10 per cent
which class is placed where in of households earn 33.5 per cent of its income, while the top 20 per cent of its households earn
relation to corruption and who 46.1 per cent of the total income. The bottom 40 per cent of the household earned less than
benefits in what manner. 20 per cent of the total income. If we combine the figures of this study with Prof. Kumar’s,
it would suggest that the top 10 per cent of the households, apart from earning a third of
the legal income, also controls an extra-legal economy with a GDP of $500 bn a year! For
Pakistan, assuming the proportion of those involved in the black economy to be similar, this
would mean that the top decile of the population controls an extra-legal economy larger
than $60 bn.
Very little of this money is actually kept hidden, as most of it is poured back into profit-
able economic activities. The main difference of the black economy from the legal one is that
there is no legal control over this money and no public scrutiny. No taxes are paid for this and
it is not part of the larger wealth that society can use for public purposes. It is truly a ‘private’
capital outside of all public control and other than that, this money is as much a capital as any
other legal wealth.
15.0%
14.0%
<Figure 16.1
Real Income of Top
13.0% One Per cent of Income
12.0% Earners as a Share of
11.0% Total Income
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
1956–57
1958–60
1960–61
1962–63
1964–65
1966–67
1968–69
1970–71
1972–73
1974–75
1976–77
1978–80
1980–81
1982–83
1984–85
1986–87
1988–89
1990–91
1992–93
1994–95
1996–97
1998–99
Source: Banerjee and Piketty (2001).
There are mainly two ways in which this black money is generated. They are as follows:
• One is by siphoning off money from government schemes and payments. Former Former Indian Prime Minister
Indian Prime Minister Rajiv Gandhi once famously said: ‘Out of every rupee that Rajiv Gandhi once famously
the government spends on welfare schemes, only 14 paisas reach the actual benefici- said: ‘Out of every rupee that
the government spends on wel-
ary’. While specifics may differ, it seems that this figure is similar for all South Asian fare schemes, only 14 paisas
countries. Even in the other government expenditure, whether it is infrastructure or reach the actual beneficiary’.
defence, money is siphoned off. This is a veritable open secret of all our countries,
even though no government would accept this.
Government expenditure on welfare is a direct concession to the demands of the poor. It is
the ‘subsidy’ that our governments purportedly give to the poor to keep them quiet. These
allocations are made in our budget, but much of the money does not reach the poor. So while
the poor are pacified by the announcement of huge schemes with massive financial outlays,
the income redistribution they are meant to effect never happens. This money, siphoned off
by government officials, contractors, and other middlemen, who form the bulk of our middle
classes, is nothing but a financial transfer from the state to those classes on whose ideologi-
cal and professional services the state survives. They provide the legal, religious, educational,
media, and other services that sustain the hegemony of the state among the working classes
and peasantry.
• The second way in which black money is generated is through tax evasion and keep-
ing goods and services out of the ambit of legal transactions. One, it reduces the
amount of revenues generated by the state that could be used for public purposes,
and two, it reduces public control over a very large part of the economy. Therefore,
it has been suggested that black economy is truly a ‘private’ capital without any state
control.
The South Asian states, whether democracies or tyrannies, have had to make large popu-
list concessions to the poor and marginalised, who live within their national boundaries.
The specific form of that populism has varied greatly, but some form of populism has been
i nvariant in all our countries. On the other hand, again despite a great variation, the ruling
classes have been, as ruling classes often are, loathe to give up their power, position, and share
of national wealth.
Corruption, or the siphoning off of public money and keeping a large part of the economy
outside of public scrutiny, has been one of the most effective tools of our ruling classes to,
one, reduce income distribution to the minimum necessary level and two, keep a significant
Unless a significant transforma- part of their capital as a ‘private’ one. Unless a significant transformation of social and politi-
tion of social and political pow- cal power is effected in our societies, it would be impossible to make a dent in corruption, as
er is effected in our societies, it has entrenched itself as one of the most important ways in which our ruling classes effect
it would be impossible to make
a dent in corruption, as it has the accumulation of capital.
entrenched itself as one of the
most important ways in which
our ruling classes effect the ac- Factors Responsible for the Generation of
cumulation of capital.
Black Money
There are several factors responsible for the generation of black money. It would be relevant
to discuss those factors so that a correct understanding about the genesis, growth, and expan-
sion of black money can be made. The principal factors are
Divergence Between the Acceptable, Net Rate of Return, and Legally

Permissible Rate of Return
There is a school of thought which believes that the chief factor responsible for generation
of black income is that individuals expect a higher net rate of return than the legally permis-
sible rate of return. In this connection, the higher marginal rates of taxes assume special
importance.
Black Money Generation as a Consequence of Controls and

Licensing System
There is another school of thought which firmly believes that the system of controls, permits,
quotas, and licences, which are associated with maldistribution of the commodities in short
supply, results in the generation of black money.
Donation to Political Parties

Ever since the government decided to ban donations to political parties in 1968, it prompted
the businessmen to fund political parties, especially the ruling party, with the help of black
money. Ostensibly, this decision was taken to reduce the influence of big business on the
electoral process but, in practice, what happened was precisely the opposite.
Ineffective Enforcement of Tax Laws
Whereas the government has Whereas the government has an armoury of tax laws pertaining to income tax, sales tax,
an armoury of tax laws pertain- stamp duties, excise duty, and so on, their enforcement is very weak due to widespread cor-
ing to income tax, sales tax, ruption in these departments. The high rates of these taxes induce businessmen to avoid
stamp duties, excise duty, and recoding of these transactions. The soft attitude to tax compliance by the government can be
so on, their enforcement is very
weak due to widespread corrup- seen from the fact that according to the Finance Ministry, an amount of ` 224 crore was out-
tion in these departments. standing by way of arrears towards 20 monopoly houses on February 28, 1990, with Modis
at the top accounting for an arrear of ` 70.17 crore. Followed by J.K. Singhania, ` 45.90 crore;
Tata, ` 36.73 crore; Mafatlal, ` 19.49 crore; Birla, ` 12.84 crore; Hindustan Lever, ` 9.65 crore;
Shri Ram, ` 6.76 crore; Thapar, ` 5.85 crore; Walchand, ` 5.02 crore; M.A. Chidambaram,
` 3.51 crore; Reliance, ` 3.17 crore; Bangor, ` 1.74 crore; and Kirloskar, ` 1.1 crore.
Generation of Black Money in the Public Sector

Every successive Five-Year Plan planned for a large size of investment in the public sector.
The projects undertaken by the public sector have to be monitored by the bureaucrats in the
government departments and public sector undertakings. Tenders are invited for various
works, and these tenders are awarded by the bureaucracy in consultation with the political
bosses. Thus, a symbiotic relationship develops between the contractors, bureaucracy, and A symbiotic relationship devel-
the politicians and, by a large number of devices, costs are artificially escalated and black ops between the contractors,
money is generated by underhand deals. bureaucracy, and the politi-
cians and, by a large number
of devices, costs are artificially
A Survey of Measures Undertaken to escalated and black money is
generated by underhand deals.
Unearth Black Money
Measures to Check Tax Evasion
One of the basic causes of black income generation and, then, its conversion into either white
money by various measures or into black wealth is ‘tax evasion’. Therefore, plugging the loop-
holes that are found in tax evasion by a large number of legal and administrative measures
becomes mandatory.
Demonetisation
In 1946, demonetisation was resorted but the Direct Taxes Enquiry Committee in its interim
report admitted: ‘Demonetization was not successful then, because only a very small pro-
portion of total notes in circulation was demonetized. Notes demonetized in 1946 were of
the value of ` 143.97 crore as against the total notes issued of the value of ` 1,235.93 crore’.
Demonetisation assumes that all black income are held in the form of cash balances, but the
matter of fact is that it is only a small part of the total black income which is held in liquid
form. The rest are in circulation. Secondly, businessmen invent a number of clandestine ways
to circumvent demonetisation. So, the net effect of this limited and partial measure to destroy
black income becomes too insignificant.
Voluntary Disclosure Schemes

From time to time, various voluntary disclosure schemes were floated by the government.
These schemes were nothing but a camouflaged version of reduction in the tax rates at higher
income levels.
Special Bearer Bonds Scheme

Special Bearer Bonds Scheme (1981) was intended for canalising unaccounted money for
productive purposes. The Special Bearer Bonds Scheme, that was found in 1981, with the
face value of ` 10,000 each, was issued at par with a maturity period of 10 years. The holders
of these bonds were to be entitled to receive ` 12,000 on maturity. In other words, they carry
an interest of 2 per cent per annum. Complete immunity has been granted to the original
subscriber or possessor of the bonds from being questioned about the possession of bonds or
about the sources of money from which the same have been acquired.
Voluntary Disclosure Scheme (1997)

Finance Minister M.P. Chidambaram while presenting 1997–98 budget announced a
Voluntary Disclosure Scheme (VDS). After balancing the economic and ethical arguments
for harnessing black money, his conclusion was that that period was the most favourable one
to introduce VDS. The scheme is very simple. Irrespective of the year or nature of the source
of funds, the amount disclosed either as cash, securities, or assets, whether held in India or
abroad, would be charged to tax at 30 per cent for individuals and 35 per cent for corpora-
tions. Total immunity would be granted for any action under the scheme under the Income
Tax Acts, Wealth Tax Acts, and Foreign Exchange Regulation Act (FERA).
Regional Imbalances
Balanced regional growth is necessary for the harmonious development of a federal state
such as India. India, however, presents a picture of extreme regional variations, in terms of
such indicators of economic growth as per capita income, the proportion of population living
below the poverty line, working population in agriculture, the percentage of the urban popu-
Relatively speaking, some states lation’s manufacturing industries, and so on. Relatively speaking, some states are economi-
are economically advanced cally advanced while others are relatively backward. The coexistence of relatively developed
while others are relatively back- and economically depressed states, and even regions within each state, is known as ‘regional
ward.
imbalance’. Economic backwardness of a region is indicated by symptoms like high pressure
of population on land, excessive dependence on agriculture leading to high incidence of rural
employment, absence of large-scale urbanisation, low productivity in agriculture and cottage
industries, and so on.
Indicators of Regional Imbalance

To study regional imbalance, the 15 major states of India have been classified into two major
groups: forward states and backward states. Among the forward states are included: Pun-
jab, Gujarat, West Bengal, Karnataka, Kerala, Tamil Nadu, and Andhra Pradesh. Among the
backward states are included: Madhya Pradesh, Assam, Uttar Pradesh, Rajasthan, Orissa, and
Bihar (refer to Box 16.1).
Box 16.1 Socio-economic Profile of States

Poverty and 47 per cent in Haryana had MPCE of at least
The percentage of population below the poverty ` 690. At the all-India level, this corresponds to the
line is the highest in Orissa, followed by Bihar, top 20 percentile of the MPCE distribution.
Chhattisgarh, Jharkhand, and Madhya Pradesh. During 2004–05, as compared to 30 per cent at the
Apart from them, Punjab followed by Himachal all-India level, 55 per cent of Bihar and 50 per cent
Pradesh, Haryana, Kerala, and Andhra Pradesh of Orissa’s urban population were below the MPCE
have low poverty. level of ` 580 or ` 19 per day. As against the top
Consumption 20 per cent at the all-India level, 28 per cent
of Kerala’s and 27 per cent of Punjab’s urban
During 2004–05, when compared to 30 per cent at
population were having an MPCE level of at least
the all-India level, 57 per cent of the rural population
` 1,380.
in Orissa followed by Chhattisgarh (55 per cent),
Madhya Pradesh (47 per cent), Bihar and Jharkhand Inequality
(46 per cent each) were living below the monthly In the urban areas, inequality in consumption,
per capita expenditure (MPCE) level of ` 365 or as measured by Lorenz Ratio, is the highest in
about ` 12 per day. As against this, 57 per cent of Chhattisgarh, followed by Kerala, Madhya Pradesh,
the rural population in Kerala, 51 per cent of Punjab, Punjab, and West Bengal. It is low in urban Gujarat,
(Continued)

followed by Assam and Himachal Pradesh. It is also Pradesh, followed by Rajasthan (83 per cent),
lower in rural India than urban India in all major Maharashtra (74 per cent), Haryana (71 per cent),
states. In rural India, it is the highest in Kerala, and Gujarat (67 per cent). It was low in Uttar
followed by Haryana, Tamil Nadu, and Maharashtra. Pradesh, West Bengal, Chhattisgarh, Kerala, and
Assam has the lowest inequality followed by Bihar, Bihar.
Jharkhand, and Rajasthan amongst the states in Hunger and Inadequate Food
rural India.
Prevalence of hunger as measured in months in
Employment which any member of the household had inadequate
Regular employment is the major engagement of food is unusually high in West Bengal. It is also high
working urban households in most of the major in Orissa, Assam, and Bihar, but lower in Himachal
states. About (48 per cent) of urban households in Pradesh, Rajasthan, Haryana, Gujarat, Karnataka,
Maharashtra, followed by Haryana (47 per cent), and Tamil Nadu.
Chhattisgarh (46 per cent), Gujarat (45 per cent), Education
and Punjab and Assam (44 per cent each), depend
In 2004–05, the gross enrolment ratios (GER) for
on regular employment. Percentage of self-employed
elementary education, that is, Classes I–VIII (6–14
households in the urban areas is higher in Uttar
years), was highest in Madhya Pradesh (114.1
Pradesh (49 per cent) and Bihar (47 per cent). The
per cent), followed by Tamil Nadu (114 per cent)
proportion of casual-labour households was higher
and Chhattisgarh (112.6 per cent). It was found
in the urban areas for Kerala (25 per cent) and
lowest in Bihar (65.2 per cent), followed by Punjab
Himachal Pradesh (24 per cent) than in the other
(72.6 per cent) and Jharkhand (75.8 per cent).
major states.
GER for Secondary Education (Classes IX-X) was high
In the rural areas, self-employment was more
in Himachal Pradesh (134.9 per cent), followed by
important in many of the major states. The
Kerala (93 per cent) and Tamil Nadu (80.7 per cent).
proportion was high in Uttar Pradesh (68 per cent),
It was lowest in Bihar (22.5 per cent), Jharkhand
followed by Rajasthan and Assam (66 per cent
(26.5 per cent), and West Bengal (41.5 per cent). For
each), Himachal Pradesh (57 per cent), and Madhya
Senior-Secondary level (Classes XI-XII), GER was least
Pradesh (56 per cent).
at 2.5 per cent in Jharkhand, followed by 9.8 per cent
Health in Bihar; and highest at 127.7 per cent for Himachal
Life expectancy is highest in Kerala, followed by Pradesh, followed by 43.9 per cent in Tamil Nadu.
Punjab, Maharashtra, Himachal Pradesh, and Basic Amenities
Tamil Nadu. It was found least in Madhya Pradesh,
Himachal Pradesh, Punjab, Haryana, Kerala,
followed by Assam, Orissa, Uttar Pradesh, and Bihar.
Karnataka, Gujarat, Tamil Nadu, and Andhra
As in March 2006, 100 per cent of Primary Health Pradesh have much larger percentage of households
Centres (PHCs) had labour room in Andhra Pradesh, having electricity than is the case in Bihar, Assam,
Karnataka, and Tamil Nadu, while it was low in Uttar Jharkhand, Uttar Pradesh and Orissa. Households
Pradesh, Bihar, Kerala, and Madhya Pradesh. having access to toilet facilities are high in Kerala,
As in March 2006, the proportion of PHCs with Assam, and Punjab and are low in Chhattisgarh,
operation theatres was 87 per cent in Andhra Jharkhand, Bihar, and Madhya Pradesh.
Net State Domestic Product (NSDP) as the Indicator of

Regional Imbalance
An important indicator of regional disparity is the growth rate of net state domestic product
(NSDP) observed during the last two decades. In 1980–81, out of a total net domestic income
of ` 110,340 crore of the whole country, the nine forward states accounted for 55 per cent,
while the six backward sates accounted for nearly 39 per cent.
NSDP in forward states indicated an annual average growth rate of 5.2 per cent between
1980–81 and 1990–91, that is, the pre-reform period. However, the situation showed a
marked improvement in these states, and the states, in turn, showed a higher annual average
growth rate of 6.3 per cent during the period from 1990–91 to 1997–98.
As against them, the backward states indicated a growth rate of 4.9 per cent during the
The planning process, by help- pre-reform period, but this growth rate decelerated in the post-reform period. The planning
ing the backward regions, made process, by helping the backward regions, made an effort to reduce regional disparities, but
an effort to reduce regional the force of liberalization and globalisation strengthened the investment in forward states
disparities, but the force of
liberalization and globalisation
much more than in the backward states.
strengthened the investment in
forward states much more than Trends in Investment and Financial Assistance
in the backward states.
A study indicated that more than two-third of investment proposals (69.2 per cent) in the
post-reform period were concentrated in the forward states and a similar situation prevailed
in terms of financial assistance distributed by All India Financial Institutions as well as State
Financial Corporations. The All India Financial Institutions, viz., IDBI, IFCI, ICICI, UTI,
LIC, GIC, IRBI, and SIDBI disbursed 67.3 per cent of total financial assistance to forward
states up to March 31, 1997. Even among the nine forward states, four states, viz., Mahar-
ashtra, Gujarat, Tamil Nadu, and Andhra Pradesh were able to appropriate about 51 per cent
of the total assistance. Even in the case of State Financial Corporations, 70 per cent of total
The reform process has fa- assistance was received by the forward states. This analysis underlines the fact that the reform
voured the forward states in process has favoured the forward states in terms of approval of investment proposals as well
terms of approval of investment as financial assistance.
proposals as well as financial
assistance.
Infrastructure Disparities
Consumption of power per capita is an indicator of the level of energy consumption.The
upshot of analysis of indicators of regional imbalances is that even though during the plan-
ning process, there is some evidence of the growth of regional disparities but, still, the state
The reform process, which made a conscious effort to reduce them. But the reform process, which strengthened the
strengthened the market forces market forces within the country, coupled with globalisation, favoured the forward states and
within the country, coupled with neglected the backward states. As a result, regional disparities were aggravated.
globalisation, favoured the for-
ward states and neglected the
backward states. Regional Inequality
There was a sharp increase in the regional inequality in India during the 1990s. In 2002–03,
the per capita NSDP of the richest state, Punjab, was about 4.7 times that of the poorest state,
Bihar (refer to Figure 16.2a). This ratio had increased from 4.2 per cent in 1993–94. A time-
series graph of this ratio shows that the disparity between the richest and poorest state shot
up remarkably during the 1990s (refer to Figure 16.2a). This has been highlighted by Ghosh
and Chandrasekhar (2003), who showed that inter-state inequality increased sharply in India
during the reform period. As the authors pointed out, based on the per capita SDP, the basic
hierarchy of the Indian states remained the same during the reform period, with Punjab,
Haryana, and Gujarat, at the top, and Bihar and Orissa, at the bottom. They also noted that
The gap between the richest the gap between the richest and poorest states opened up considerably after 1990–1991. To
and poorest states opened up illustrate this, the authors benchmarked the average per capita net SDP of the three richest
considerably after 1990–1991. states (Punjab, Haryana, and Gujarat) against the average per capita net SDP of the two poor-
est states (Bihar and Orissa) as seen in Figure 16.2b.
Ahluwalia (2002) also highlighted the trend of increasing inequality among the states
by using the per capita state GDP data for the period between 1980–81 and 1998–99. The
trend of the Gini coefficient indicating inter-state inequality is shown in Table 16.1, which
a. Ratio of Per Capita Net State Domestic b. Ratio of Per Capita Net State Domestic
Product of 3 Richest States (Punjab,
< Figure 16.2
Widening Disparity
Product of the Richest (Punjab) and the
Poorest (Bihar) Major State of India Haryan, Gujarat) and the two poorest Between the Richest
5.5 State (Bihar and Orissa) and the Poorest States
3.40
5.0
3.20
4.5 3.00
4.0 2.80
2.60
3.5
2.40
3.0
2.20
2.5 2.00
1980–81
1982–83
1984–85
1986–87
1988–89
1990–91
1992–93
1994–95
1996–97
1998–99
2000–01
1980–81
1982–83
1984–85
1986–87
1988–89
1990–91
1992–93
1994–95
1996–97
1998–99
2000–01
Source: Banerjee and Piketty (2001).
Rural Urban < Table 16.1

Gini Coefficients
a
50th round 55th round 50th round 55th round

Andhra Pradesh 24.9 23.8 30.3 31.7
Assam 17.6 20.3 28.3 31.2
Bihar 20.9 20.8 29.7 32.3
Gujarat 22.3 23.8 26.9 29.1
Haryana 26.9 25.0 26.7 29.2
Karnataka 24.3 24.5 30.4 33.0
Kerala 27.2 29.0 32.3 32.7
Madhya Pradesh 25.0 24.2 29.7 32.2
Maharashtra 26.7 26.4 33.5 35.5
Orissa 22.4 24.7 29.4 29.8
Punjab 23.8 25.3 26.5 29.4
Rajasthan 23.5 21.3 26.8 28.7
Tamilnadu 28.2 28.4 32.8 39.1
Uttar Pradesh 25.2 25.0 30.2 33.3
West Bengal 23.8 22.6 32.7 34.3
All India 25.8 26.3 31.9 34.8
Source: Sen and Himanshu (2005).

a
Using comparable estimates for the 50th and 55th Round of NSS Surveys.
confirms that inter-state inequality grew steadily in India with liberalization. More evidence
on the increasing inter-state inequality came from Singh and others (2003), who used regres-
sions to check convergence in the per capita consumption expenditures across states. The
study found absolute divergence of inter-state per capita consumption expenditures for the
periods between 1983 and 1999–2000, and 1993–94 and 1999–04. A convergence exercise by
Jha (2004) indicated that the ranking of states with respect to inequality had not changed in
the reform period. According to his findings, inter-state convergence of the level of inequality
was weak.
Causes of Economic Backwardness and

Regional Imbalances
There can be certain deterrent factors, which come in the way of rapid development of a
region; most important of these are the geographical isolation and inadequacy of economic
Historically, the existence overheads like transport, labour, technology, and so on. Historically, the existence of back-
of backward regions started ward regions started from the British rule in India. The British helped the development of
from the British rule in India. only those regions, which possessed facilities for prosperous manufacturing and trading
The British helped the devel-
opment of only those regions,
activities. Maharashtra and West Bengal were the states preferred by the British industrialists.
which possessed facilities for The three metropolitan cities—Calcutta, Bombay, and Madras—attracted all the industries
prosperous manufacturing and the rest of the country was neglected and remained backward.
and trading activities. Further, under that land system of the British, the rural areas were continuously pauper-
ised, and the farmers remained the most oppressed class; the zamindars and the moneylend-
ers were, of course, the only prosperous persons on the rural scene. The absence of effective
land reforms allowed the structure in most of the rural India to remain inimical to economic
growth. The uneven investment in irrigation during the British period helped some areas
become prosperous under the British rule.
In the developing countries, the
In the developing countries, the developed regions are generally confined to urban
developed regions are gener- centres and urban areas. This is mainly because physical geography controls the economic
ally confined to urban centres growth in a greater degree in developing countries and in developed countries. For example,
and urban areas. This is mainly Japan and Switzerland have overcome the handicaps of mountain terrain but our Himalayan
because physical geography
controls the economic growth states, viz., Northern Kashmir, Himachal Pradesh, the hill districts of Uttar Pradesh, Bihar,
in a greater degree in develop- and NEFA (Arunachal Pradesh), have remained backwards and underdeveloped mainly
ing countries and in developed because of inaccessibility. Climate too plays an important role in the low economic develop-
countries. ment of many regions in India as reflected in the low agricultural output and in the absence
of a large-scale industry.
Some regions are preferred because of certain locational advantages. The location of iron
and steel factories or oil refineries will have to be only in those technically defined areas,
which are optimal from all the standpoints considered together. Naturally, as the proc-
New investment, more so, in ess of development gains momentum, they attract feed from the developing regions. New
the private sector has a ten-
investment, more so, in the private sector has a tendency to concentrate in an already well-
dency to concentrate in an al-
ready well-developed area, thus developed area, thus reaping the benefit of external economies. This is but natural from the
reaping the benefit of external private sector point of view, since well-developed area offers private investors certain basic
economies. advantages, viz., labour, infrastructure facilities, transport, and the market.
Nature of Development During the Planning Era

Serious regional imbalances resulted during the period of planned economic development
Since 1951, considerable since 1950–51. Even though a balanced development was strongly endorsed by the Industrial
investments have been Policy Resolution of 1956 and was accepted as one of the principal objectives of economic
concentrated at a few places
like Bombay, Ahmedabad, Dehi, planning from the Second Plan onwards, it was almost completely ignored by our planners
Kanpur, Calcutta, Bangalore, and the licensing authorities.
and so on, on ‘efficiency Since 1951, considerable investments have been concentrated at a few places like Bombay,
criteria’.
Ahmedabad, Dehi, Kanpur, Calcutta, Bangalore, and so on, on ‘efficiency criteria’. These areas
have outgrown their capacities and are faced with serious problems of congestion, slums,
transport, public health, and so on. At the same time, they are causing serious brain-and-
resource drain from the adjoining areas. They act as ‘suction pumps’, pulling in more dynamic
elements from the more static regions. While the growth centres experience rapid, sustained,
and cumulative economic growth, the neighbouring regions have experienced an outflow of
people, capital, and resources.
The adoption of new technologies in agriculture during the 1960s has also aggravated the
regional economic disparities. Working on the assumption of using the scarce resources in
the most productive ways and maximising the food-grain production to solve the problem of
food shortage, the government has concentrated its resources on farmers of heavily irrigated
tracts in different parts of the country. These farmers were already well-off and they are made
still better-off. On the other hand, the dry-land farmers and non-farming population of the
countyside have been left out. This has led to a widening of the gap of income disparities
between the irrigated areas and the dry areas, and between the large farmers and the small
farmers in every state.
The government did make an attempt towards decentralisation and development of The government did make an
backward regions through public sector investment programmes in such areas as Rourkela, attempt towards decentralisa-
Bhilai, Barauni, and so on. But as the ancillary industries did not come up fast enough, these tion and development of back-
areas have continued to remain backward despite the heavy investment by the Centre. Finally, ward regions through public
sector investment programmes
there was an additional factor for the growing regional imbalance after independence. While in such areas as Rourkela, Bhi-
some state governments like Punjab, Haryana, Gujarat, Maharashtra, and Tamil Nadu (at lai, Barauni, and so on. But as
one time), devoted much attention to the industrial development of their regions, others the ancillary industries did not
were more interested in political intrigues and manipulation than in the rapid and balanced come up fast enough, these
areas have continued to remain
economic growth of their areas. backward despite the heavy
investment by the Centre.
Criteria for Industrial Backwardness
Balanced development of all regions and all states in a country is necessary to draw the avail-
able human and material resources throughout the country into the development process
and to enable people in all regions to share the benefits of development. According to the
Planning Commission,
Balanced regional development has always been an essential component of the Indian
development strategy in order to ensure the unity and integrity of the nation. Since not
all parts of the country are equally well-endowed to take advantage of growth opportu-
nities, and since historical inequalities have not been eliminated, planned intervention
is required to ensure that large regional imbalances do not recur.
Economic Plans and Regional Planning

The First Plan did not refer to the problem of regional disparities. The Second Plan clearly ad-
mitted that ‘in any comprehensive plan of development, it is axiomatic that the special needs
of the less developed areas should receive due attention. The pattern of investment must be so
devised as to lead to balanced regional development’. The Second and Third Plans mentioned
the necessity to locate basic industries in the less-developed areas, subject, of course, to tech- In 1968, the National Develop-
nical and economic limitations, as means to achieving regional development. ment Council (NDC) considered
the problem of industrial back-
wardness among states and
Identification of Industrially Backward Areas recommended the following five
cities for the purpose of identi-
In 1968, the National Development Council (NDC) considered the problem of industrial fication of industrially backward
backwardness among states and recommended the following five cities for the purpose of states and union territories
(UTs).
identification of industrially backward states and union territories (UTs):
• Total per capita income together with the contribution of industry and mining;
• Number of workers in factories per lakh of population;
• Per capita annual consumption of electricity;
• Length of surfaced road in relation to population and area of the state; and
• Railway mileage in relation to the population and the areas of the state.
The NDC appointed the following two working groups: (a) identify industrially backward
states and UTs (using the above criteria); and (b) the Wanchoo Working Group to recom-
mend fiscal and financial incentives for starting industries in the backward areas.
Selection of Backward States

On the basis of the five criteria given by the NDC, the Pande Working Group identified the
following states and UTs as industrially backward and, hence, qualified to receive a special
treatment for industrial development.
a. Andhra Pradesh, Assam, Bihar, Himachal Pradesh, Jammu & Kashmir, Madhya
Pradesh, Nagaland, Orissa, Rajasthan, and Uttar Pradesh and
b. All UTs except Chandigarh, Delhi, and Pondicherry.
Accordingly, the Planning Commission evolved the following criteria to identify the back-
ward districts in all states:
(i) The per capita food grains/commercial crop production;
(ii) Ratio of agriculture labour to the total number of factory employees per lakh of
population;
(iii) Per capita industrial output;
(iv) Number of factory employees per lakh of populations;
(v) Number of persons engaged in secondary and tertiary activities per lakh of
population;
(vi) Per capita consumption of electricity; and
(vii) Length of surfaced roads in relation to population or railway mileage in relation to
population.
The Planning Commission in consultation with national financial institutions constructed
a composite weighted index for all the districts in each state. The territories as backward
districts are eligible for concessional finance and other facilities.
Wanchoo Working Group

The Wanchoo Working Group studied the fiscal and financial incentives that are to be provided
for starting industries in backward areas and the following measures are recommended:
• Grant of higher-development rebate to industries located in the backward areas;
• Grant of exemption from corporate income tax for a period of five years;
• Exemption from import duty on plant and machinery and components imported by
a unit located in a backward district;
• Exemption from excise duties for a period of five years;

• Exemption from sales tax for a period of five years; and
• Provision of transport subsidy.
These recommendations were broadly accepted by the government and were implemented,
with some modifications.
Conclusion
In India, although there are claims that inequality has decreased in the post-liberalization In India, although there are
period, a careful analysis of the available data shows that these views are mostly unsubstanti- claims that inequality has de-
ated. The comparable estimates of the 50th (1993–94) and 55th (1999–2000) rounds of the creased in the post-liberaliza-
tion period, a careful analysis
National Sample Survey (NSS) data reveal that inequality increased in both rural and urban of the available data shows that
India. Several authors have also pointed out that though the richer sections of the population these views are mostly unsub-
benefitted in the post-liberalization period, there has been a stagnation of income for the stantiated.
majority, with the bottom rung of the population severely affected negatively by this process.
There is also evidence that, both at the National and the State levels, the income disparities
between the rural and the urban sectors increased during this period. State-level data also
showed that not only had the income gap between the poorest and the richest states increased
during the 1990s, but the urban inequality also had increased for all the 15 major states in
India. Inequality also has alarmingly increased in the north-eastern part of the country, where
all the states experienced an increased rural and urban poverty during this same period.
One of the reasons behind the increased income inequality observed in India in the post- One of the reasons behind the
reform period has been the stagnation of employment generation in both the rural and urban increased income inequality
areas across the states. Open unemployment increased in most parts of the country, and the observed in India in the post-
rate of growth of rural employment hit an all-time low. The declining employment elasticity reform period has been the
stagnation of employment gen-
in several sectors, including agriculture, was one of the main reasons behind this decline. eration in both the rural and
Low employment generation in the agriculture sector has also been associated with a steady, urban areas across the states.
but a significant increase in casualisation of the labour force in India. Due to the large-scale
downsizing and the privatization of public sector units (PSUs), the employment generation
in the organised sector too has suffered. However, the services sector performed relatively
better during this period. The employment growth rate in this sector was higher than in the
other sectors of the economy. Particularly in some sub-sectors like information technology,
communication, and entertainment, employment generation and wages increased substan-
tially in this period. However, these sectors employed only a very small section of the labour
force, and their impact on the overall employment scenario has been minimal. One counter-
vailing force to the lower employment generation has been increased economic migration,
typically to other countries in Asia and the Middle East.
This has been important especially in certain regions and has provided an important
alternative source of transfer income to local residents through remittances. However, these
flows have had little to do with domestic policies and more to do with international economic
processes. The discussion of health and education-related indicators shows that though there
The discussion of health and
has been some progress in India in these areas, this progress has been unsatisfactory, even education-related indicators
when compared to other developing countries. Huge inter-state disparities in health and shows that though there has
education-related indicators remain across the country. State involvement and investment been some progress in India
in these sectors have historically remained very low and declined even further during the in these areas, this progress
has been unsatisfactory, even
1990s. Gradual withdrawal of the state from these sectors and increased reliance on the pri- when compared to other devel-
vate sector are likely to further exacerbate the already inequitable distribution of health and oping countries.
education services in India.
A number of policies adopted A number of policies adopted during the reform period essentially increased the level of
during the reform period es- inequality in India. Liberalization of trade helped some sectors where India was internationally
sentially increased the level of competitive, but it also negatively affected the other sectors. The agriculture sector, as well as
inequality in India.
small and medium enterprises (SMEs), which account for the bulk of employment, were the
worst hit by the trade liberalization undertaken by the policymakers since the mid-1990s.
The inflow of FDI into India has only marginally improved GDCF, but its incidence has been
confined to some very small pockets, both geographically and sectorally. This has increased
inter-state and inter-sectoral inequalities in the country.
An emphasis on the reduction An emphasis on the reduction of the fiscal deficit also increased inequality in India dur-
of the fiscal deficit also in- ing the reform period. Due to pressures from powerful lobbies, direct and indirect tax rates
creased inequality in India dur-
declined in India. The government’s failure to reduce current expenditure implied that most
ing the reform period.
of the adjustment to reduce the fiscal deficit was carried out by reducing capital expenditure
and rural expenditure generally, as well as by selling PSUs to generate a one-time revenue.
Reduction of capital expenditure reduced the public investment in key infrastructural areas
and social welfare schemes. In a country like India, where the level of infrastructure devel-
opment is poor, public investment in infrastructure is critical, not only for its direct devel-
opmental effects, but also for its bringing in the private investment through its crowding
effects.
Attempts to reduce the gov- Attempts to reduce the government expenditure on food subsidies and social welfare
ernment expenditure on food schemes have also had serious negative effects on the inequality in the country. In their zeal
subsidies and social welfare to adopt market-oriented reform measures, Indian policymakers have tended to overlook
schemes have also had serious
negative effects on the inequal- the fact that not only the so-called ‘market economies’ of Europe and America, but also the
ity in the country. industrialisation success stories of East Asia, spend a very high percentage of their GDP on
health, education, and social security. Notwithstanding the free-market rhetoric, these coun-
tries have steadily increased their public expenditure on social services since the 1980s.
Other market-oriented reform measures, like closure of non-profit-making PSUs,
have seriously undermined the social objectives of the PSUs and have negatively affected
the employment and the economic development in some parts of the country. The closure
of non-profit-making PSUs hurt the backward regions of the country more severely as the
profit-maximising private sector often does not find these areas economically attractive.
Opening up of the economy Opening up of the economy and the financial sector liberalization too had major nega-
and the financial sector liberal- tive consequences for the weaker sections of the population. The introduction of prudential
ization too had major negative norms for private and public sector banks and the Basle NPA benchmark made wary banks
consequences for the weaker
sections of the population.
avoid lending to borrowers in agriculture and to small enterprises. As a result, credit flows to
agriculture and SMEs went down drastically in the recent years. This reinforced the problems
faced by these sectors due to trade liberalization and the complete removal of quantitative
restrictions on imports.
All the above factors points to conclusions with implications for a government policy.
The first is the crucial importance of a continued and increased public expenditure for pro-
ductive investments in the infrastructure as well as social expenditures, and ensuring food
access. Both aggregate expenditure and the pattern of public expenditure are important. In
addition, fiscal federalism—relations between the Central and Provincial governments—are
very significant in large countries like India. Methods of raising resources for government
expenditure, such as the pattern of taxation, also impact this connection. The relationships
between the growth patterns and the extent and type of employment generated have been
extremely important as well. Trade liberalization has had disequalising effects while it pro-
FDI patterns have tended to re-
inforce the existing inequalities, vided more opportunities for some export activities. There were adverse effects for those
possibly even more than the employed in import-competing sectors, especially in the small-scale activities. FDI patterns
domestic investment. have tended to reinforce the existing inequalities, possibly even more than the domestic
investment.
Social Injustice
Researchers have advanced a hypothesis of compression of public sector outlay on educa-
tion and health during the reform period. The government expenditures on social services
and education have registered an increase in the absolute terms over the period of time,
illustrating, as it were, Wanger’s Law of increasing state activity. Thus, during the six-year
period before the intensive reform process of 1991, the State government expenditures on
social services aggregated to ` 10,491 crore, which increased to ` 13,438 crore, during the six-
year period after 1991–92. Similarly, expenditures on education, medical and public health,
housing, urban development, and so on, also registered significant increases during the same
period.
But, what is worth noting is the decline in the share of expenditures of some of the crucial
components of the social sector during the reform period. Thus, before the reform period,
the social services constituted about 39.4 per cent of the total government expenditures. This
percentage declined to 6 per cent during the period between 1991–92 and 1996–97. Similar
trends are seen in the case of education, sports, art and culture, medical and public health,
water supply and sanitation, housing, labour and labour welfare, social security and welfare
relief on account of natural calamities, and so on. Table 16.2 presents the percentage share of
some of these crucial components of the social sector.
Thus, in most of the components of the social sector, the percentage share of the state In most of the components
of the social sector, the per-
government expenditures has declined during the reform period. This is worth noting. The centage share of the state
share of plan expenditures has also declined in the case of a number of components of the government expenditures has
social sector. From this point of view, it appears that the reforms are not associated with fresh declined during the reform
initiatives (i.e., plan programmes) of the government with regard to the social sector. period.
Components of Pre-reform Period During Reform Period < Table 16.2

Expenditure of All States
social sector (1985–86 to 1990–91) (1991–92 to 1998–99)
on Social Sector
Plan Non-plan Total Plan Non-plan Total (% to Total Government
Expenditure)
Social services 9.18 30.20 39.39 8.32 27.68 36.00
Education, sport, and art and 2.11 18.89 21.00 2.28 17.58 19.86
culture
Medical and public health 2.18 4.60 6.78 1.77 4.06 5.83
Water supply sanitation 1.71 0.84 2.55 1.22 0.89 2.11
Housing 0.17 0.38 0.55 0.19 0.28 0.47
Urban development 0.35 0.45 0.80 0.45 0.41 0.86
Welfare of SC, ST, and OBC 1.29 1.25 2.53 1.18 4.85 6.03
Labour and labour welfare 0.18 0.53 0.71 0.14 0.42 0.56
Social security and welfare 0.67 1.36 2.04 0.60 1.16 1.76
Nutrition 0.46 0.29 0.75 0.34 0.57 0.91
Relief on account of natural 0.01 1.35 1.37 0.10 0.92 1.01
calamities
Others 0.05 0.27 0.32 0.06 0.22 0.28
Source: RBI Bulletins 1985–99.
C ase
In India, the per capita income of Punjab is ` 25,048 and Bihar is ` 5,460. In 1965, Punjab’s
per capita income at ` 562 was just 1.7 times that of Bihar’s ` 332. Since then, Punjab’s per capita
income has grown 45 times and is now almost five times that of Bihar’s. The latter state’s
per capita income in contrast, grew by just 16 times. In the same period, the national per capita
grew from ` 490 to ` 16,707 or by 34 times.
Quite clearly, Bihar has been growing at a much slower pace than the rest of the country,
while Punjab has been growing faster. Compounding this extremely unhappy situation is the
fact that the intra-state inequality too is much greater in Bihar than that is in Punjab. One obvi-
ous thing is that the State has been the main engine of economic growth in India; and Planning
Commission, as it decided the priorities and apportions resources, is the driver of this engine.
Although the achievements of a greater equalisation of people and regions in India were
not explicitly stated in the constitution, the very notion of a socialistic society and democracy
implies a determined thrust towards just that. Unfortunately from all the available data, it is
obvious that it did not happen.
The relative prosperity of Punjab is due to the hardworking and innovative peasant,
while the poverty of Bihar is due to the deep divisions in its society, corruption, and law-
lessness. Like the most generalisation, these too are seriously flawed. Clearly Punjab pros-
pered as India made huge investments in it. These investments were often at the cost of other
regions. In 1955, the total national outlay for irrigation was ` 29,106.30 lakh, of this Punjab
got ` 10,952.10 lakh or 37.62 per cent.
In contrast, Bihar got only ` 1,323.30 lakh, a meagre 4.54 per cent. The Bhakra Nangal
Dam—one of Nehru’s grandest temples of Modern India, planned at an outlay of ` 7,750 lakh—
alone irrigates 14.41 lakh ha. Even after excluding this from Punjab’s irrigation plan, its outlay
is almost 2.5 times that of Bihar. Punjab extends over 50.36 lakh ha, of which 42.88 lakh ha is
arable. Of this 89.72 per cent or 38.47 lakh ha is irrigated; in other words, 76.38 per cent of all
land in Punjab is irrigated, thanks to the magnificence of the government.
In contrast, only 40.86 per cent or 71 lakh ha, of Bihar’s total area of 173.80 lakh ha is under
cultivation. Of this, only 36.42 lakh ha or 51.30 per cent is irrigated. Thus, Bihar, which is almost
3.5 times larger than Punjab, has less irrigated land than the latter. Even after accommodating for
the differences in terrains in both states, the sheer difference in the irrigated acreage and the per-
centage of irrigated acreage, the direct result of public spending on irrigation in Punjab is telling.
That Punjab grew faster than Bihar because of higher investment is easily discerned from the per
capita plan allocation from the First Plan onwards. In the current plan of 2003–04. Bihar has a
per capita outlay of ` 2,536.23 while Punjab is more than three times than that of ` 7,681.10.
Higher public investment in a state has other long-term effects. Higher investment results
in greater tax collections giving rise to an ever-increasing entitlement to Central funds. In this
manner, the original injustice leads to perennial flow of rightful funds. There is no need to stress
that the bulk of the plan funds are provided by the Centre. This is well known, but what needs
to be stressed is that there are many other less-obvious benefits; for instance, almost 50 per cent
of the food grains procurement by the Food Corporation of India (FCI) is from Punjab, which
means about half the food subsidy of ` 25,160 crore too flows to that State’s farmers; likewise,
as Punjab consumes 8.01 per cent of the total fertilizers, it benefitted by ` 1,060.85 crore on this
account. As subsidies rise constantly, in the years to come Punjab will only benefit more.
In the recent years, a new trend of magazines and other publications are ranking states
ostensibly on the basis of performance. As they command considerable resources and are
politically influential, sure awards are public occasions with constitutional functionaries
present lending an area of authencity to the awards. If there was one for the most subsidised
state, will that too go to Punjab?
As we have seen in the case of Punjab and Bihar, unequal public spending has created an
unequal economic situation. But this does not automatically establish that Punjab is better
administered, as these publications would like us to believe. Punjab’s financial position is not
very much better than that of Bihar. Probably, the best measure of how well a state is being
administered is to look at its debt-service ratio. Punjab is not better than Bihar in this regard.
While both Punjab and Bihar live beyond their means, the latter is doing on this account with
much smaller revenue expenditure to revenue gap.
In 2002–03, this gap for Bihar was ` 1,517 crore, whereas it was ` 3,018 crore for Punjab.
Both states have almost the same revenue levels. Bihar has a superior improving record than
Punjab when it comes to the proportion of disbursement, out of capital budgets. If one has to
go by the charges made by the present Chief Minister of Punjab against his immediate pred-
ecessor, the corruption in Punjab is a more serious matter. There is no evidence to suggest
that the incidence of subordinate corruption is any less in the state than Bihar.
Clearly, being better-off does not make a State better, especially when doing better just
means getting more than others from the Centre. This now leaves us with the question as to
how much more did Punjab get on account of Central planning and how much less did Bihar
get? The record since the First Plan onwards shows that Punjab consistently got more than
the national per capita average and Bihar, progressively, got less in each Plan.
When these are added, the amount is quite huge. Even without factoring in the ben-
efits due to The Bhakra Nangal Project and border roads and canal networks, Punjab got
` 9,742.19 crore more and Bihar a huge ` 77,161.50 crore less. Furthermore, on account of
just salaries and pensions from the armed forces, food, and fertilizer subsides, Punjab has
benefitted by over ` 100,000 crore in just the past years alone.
Case Question
What are the reasons for the regional imbalance in the above Case, where Punjab is ahead
than Bihar?
KEY WORDS
● Black Money ● Black Income ● Infrastructure
● Recession ● Regional Imbalances ● Social Infrastructure
● Supply Management ● Social Sector
● Parallel Economy ● Economic Backwardness
QUESTIONS
1. What do you mean by regional imbalance? Discuss 3. What do you mean by parallel economy? Discuss the
the measures taken by the government to remove factors governing black money.
the regional imbalance. 4. Discuss measures adopted by the government to
2. Discuss the measures adopted by the government to control parallel economy.
eradicate social injustice.
REFERENCES
n Agarwal, A. N. (2000). Indian Economy: Problems of n India (2004): A Reference, Annual Publications Division,
Development and Planning. New Delhi: Wishwa Prakashan. Ministry of Information and Broadcasting, Government
n Dewett, K. K. (2002). Modern Economic Theory. of India.
New Delhi: Sultan Chand.
17
C hapter
Direct and Indirect Taxes

>>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>>
• Introduction 436 • Customs Tariff 467
• Governing Authority 436 • Central Sales Tax (CST) 470
• Direct Tax 439 • Modified Value Added Tax (Modvat) 472
• Income Tax 439 • Central Value Added Tax 475
• Wealth Tax 439 • Value Added Tax (VAT) 480
• Corporation Tax: India and The World 439 • Service Tax 483
• Indirect Tax 441 • Case 487
• Income Exempted Under Section 10 442 • Summary 488
• Assessee [Section 2(7)] 442 • Key Words 489
• Total Income 446 • Questions 489
• Excise Duties 461 • References 490
INTRODUCTION
A tax is a financial charge imposed upon a taxpayer by a functional authority such that failure
to pay is punishable by law. Taxes consist of direct or indirect taxes and paid in money. Tax
is a means by which governments finance their expenditure by imposing charges on citizens
and corporate entities on income generated. Tax is not a voluntary payment or donation, but
an enforced contribution, exacted pursuant to legislative authority. Government uses taxa-
tion to encourage or discourage certain economic decisions.
India has a well developed taxation structure. The tax system in India is mainly a three-
tier system which is based between the central, state governments and the local government
or organizations. In most cases, these local bodies include the local councils and the munici-
palities. According to the Constitution of India, the government has the right to levy taxes
on individuals and organizations. However, the constitution states that no one has the right
to levy or charge taxes except the authority of law. Whatever tax is being charged has to be
backed by the law passed by the legislature or the parliament.
GOVERNING AUTHORITY
The Ministry of Finance under the Government of India is concerned with taxation, financial
legislation, financial institutions, capital markets, centre and state finances and the union
budget. The Union Finance Ministry of India comprises five departments.
Direct and Indirect Taxes | 437
Department of Economic Affairs

The Department of Economic Affairs (DEA) is the nodal agency of the Union Government
to formulate and monitor country’s economic policies and programmes having a bearing
on domestic and international aspects of economic management. A principal responsibility
of this department is the preparation of the union budget annually (excluding the railway
budget). Other main functions include:
• Formulation and monitoring of macroeconomic policies, including issues relating to
fiscal policy and public finance, inflation, public debt management, and the function-
ing of capital market including stock exchanges. In this context, it looks at ways and
means to raise internal resources through taxation, market borrowings, and mobili-
zation of small savings;
• Monitoring and raising of external resources through multilateral and bilateral
Official Development Assistance, sovereign borrowings abroad, foreign investments
and monitoring foreign exchange resources including balance of payments;
• Production of bank notes and coins of various denominations, postal stationery,
postal stamps; and cadre management, career planning and training of the Indian
Economic Service (IES) officers.
Department of Expenditure
The Department of Expenditure is the nodal department for overseeing the public finan-
cial management system in the central government and matters connected with all finances.
The principal activities of the department include pre-sanction appraisal of major schemes/
projects (both plan and non-plan expenditure), handling the bulk of the central budgetary
resources transferred to states, implementation of the recommendations of the Finance and
Central Pay Commissions, overseeing the expenditure management in the central minis-
tries/departments through the interface with the financial advisors and the administration of
the financial rules/regulations/orders through monitoring of audit comments/observations,
preparation of central government accounts, managing the financial aspects of personnel
management in the central government, assisting central ministries/departments in control-
ling the costs and prices of public services, assisting organizational re-engineering through
review of staffing patterns and O&M studies and reviewing systems and procedures to
optimise outputs and outcomes of public expenditure. The department is also coordinat-
ing matters concerning the Ministry of Finance including Parliament-related work of the
ministry. The department has under its administrative control the National Institute of
Financial Management (NIFM), Faridabad.
The business allocated to the Department of Expenditure is carried out through its
Establishment Division, Plan Finance-I and II Divisions, Finance Commission Division, Staff
Inspection Unit, Cost Accounts Branch, Controller General of Accounts, and the Central
Pension Accounting.
Department of Revenue
The Department of Revenue functions under the overall direction and control of the secretary
(revenue). It exercises control in respect of matters relating to all the direct and indirect union
taxes through two statutory boards namely, the Central Board of Direct Taxes (CBDT) and
the Central Board of Excise and Customs (CBEC). Each board is headed by a chairman who is
also ex officio special secretary to the Government of India (secretary level). Matters relating
to the levy and collection of all direct taxes are looked after by the CBDT, whereas those
relating to levy and collection of customs and central excise duties and other indirect taxes
fall within the purview of the CBEC. The two boards were constituted under the Central
Board of Revenue Act, 1963. At present, the CBDT has six members and the CBEC has five
members. The members are also ex officio secretaries to the Government of India.
The Department of Revenue administers the following Acts:

1. Income Tax Act, 1961;
2. Wealth Tax Act, 1958;
3. Expenditure Tax Act, 1987;
4. Benami Transactions (Prohibition) Act, 1988;
5. Super Profits Act, 1963;
6. Companies (Profits) Sur-tax Act, 1964;
7. Compulsory Deposit (Income Tax Payers) Scheme Act, 1974;
8. Chapter VII of Finance (No. 2) Act, 2004 (relating to Levy of Securities Transactions
Tax);
9. Chapter VII of Finance Act 2005 (relating to Banking Cash Transaction Tax);
10. Chapter V of Finance Act, 1994 (relating to Service Tax);
11. Central Excise Act, 1944 and related matters;
12. Customs Act, 1962 and related matters;
13. Medicinal and Toilet Preparations (Excise Duties) Act, 1955;
14. Central Sales Tax Act, 1956;
15. Narcotic Drugs and Psychotropic Substances Act, 1985;
16. Prevention of Illicit Traffic in Narcotic Drugs and Psychotropic Substances Act, 1988;
17. Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976;
18. Indian Stamp Act, 1899 (to the extent falling within jurisdiction of the Union);
19. Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974;
20. Foreign Exchange Management Act, 1999 and
21. Prevention of Money Laundering Act, 2002.
Department of Financial Services

The Department of Financial Services covers banks, insurance, and financial services provid-
ed by various government agencies and private corporations. It also covers pension reforms
and industrial finance and micro-, small-, and medium enterprises.
Department of Disinvestments
Initially set up as an independent ministry (The Ministry of Disinvestment) in December
1999, The Department of Disinvestments came into existence in May 2004 when the ministry
was turned into a department of the Ministry of Finance. The department took up all the
functions of the erstwhile ministry which broadly was responsible for systematic policy
approach to disinvestment and privatization of public sector units (PSUs).
DIRECT TAX
A direct tax is a kind of charge, which is imposed directly on the taxpayer and paid directly
to the government by the persons (juristic or natural) on whom it is imposed. A direct tax is
one that cannot be shifted by the taxpayer to someone else. A tax which is paid by the person
on whom it is legally imposed and the burden of which cannot be shifted to any other person
is called a ‘direct tax’. J.S. Mill defines a direct tax as ‘one which is demanded from the very
persons who, it is intended or desired, should pay it’. The person from whom it is collected
cannot shift its burden to somebody else. Thus, we have the impact, that is, the initial, as the
first burden and the incidence, the ultimate burden of the direct tax.
The some important direct taxes imposed in India are as under:
Income Tax
Income Tax Act, 1961 imposes tax on the income of the individuals or Hindu undivided
families or firms or co-operative societies (other than companies) and trusts (identified as
bodies of individuals associations of persons) or every artificial juridical person. The inclu-
sion of a particular income in the total incomes of a person for income tax in India is based
on his/her residential status. There are three residential status, viz.,
(i) Resident and ordinarily residents (residents),
(ii) Resident but not ordinarily residents, and
(iii) Nonresidents.
WEALTH TAX
A wealth tax is generally conceived of as a levy based on the aggregate value of all household Wealth tax refers to the an-
assets, including owner-occupied housing; cash, bank deposits, money funds, and savings in nual levy by the central govern-
insurance and pension plans; investment in real estate and unincorporated businesses; and ment on the net value of non-
corporate stock, financial securities, and personal trusts. A wealth tax is a tax on the accumu- agricultural properties of an
assessee.
lated stock of purchasing power, in contrast to income tax, which is a tax on the flow of assets.
CORPORATION TAX: INDIA AND THE WORLD

Many countries impose corporate tax, also called corporation tax or company tax, on the
income or capital of some types of legal entities. The taxes may also be referred to as income
tax or capital tax. Entities treated as partnerships are generally not taxed at the entity level.
Most countries tax all corporations doing business in the country on income from that
country. Many countries tax all income of corporations organised in the country.
Company income subject to tax is often determined much like taxable income for
individuals. Generally, the tax is imposed on net profits. In some jurisdictions, rules for
taxing companies may differ significantly from rules for taxing individuals. Some types of
entities may be exempt from tax.
Many countries tax corporate entities on income and also tax the owners when the cor-
poration pays a dividend. Where the owners are taxed, a withholding tax may be imposed.
Generally, these taxes on owners are not referred to as corporate tax.
The companies and business organizations in India are taxed on the income from their
worldwide transactions under the provision of Income Tax Act, 1961. A corporation is
deemed to be resident in India if it is incorporated in India or if its’ control and manage-
ment is situated entirely in India. In case of non-resident corporations, tax is levied on the
income which is earned from their business transactions in India or any other Indian sources
depending on bilateral agreement of that country.
Corporate tax rates generally are the same for differing types of income. However, many
systems have graduated tax rate systems under which corporations with lower levels of
income pay a lower rate of tax. Some systems impose tax at different rates for different types
of corporations. Tax rates vary by jurisdiction. In addition, some countries have subcountry
level jurisdictions that also impose corporate income tax. Some jurisdictions also impose tax
at a different rate on an alternative tax base (see the following discussion). Note that some
entities may be eligible for tax exemption on part or all of their income in some jurisdictions.
Examples of corporate tax rates for a few countries are given hereunder.
• India: 30 per cent
• Australia: 30 per cent
• Canada: Federal 11 per cent or 15 per cent plus provincial 1 per cent to 16 per cent.
• Hong Kong: 16.5 per cent
• Ireland: 12.5 per cent
• New Zealand: 28 per cent
• Singapore: 17 per cent
• United Kingdom: 21 per cent to 26 per cent
• United States of America: Federal 15 per cent to 35 per cent
Property Tax
Property tax or ‘house tax’ is a local tax on buildings, along with appurtenant land, and im-
posed on owners. The tax power is vested in the states and it is delegated by law to the local
bodies, specifying the valuation method, rate band, and collection procedures. The tax base
is the annual ratable value (ARV) or area-based rating. Owner-occupied and other properties
not producing rent are assessed on cost and then converted into ARV by applying a percent-
age of cost, usually 6 per cent. Vacant land is generally exempted from the assessment. The
properties lying under control of centre are exempted from the taxation. Instead a ‘service
charge’ is permissible under executive order. Properties of foreign missions also enjoy tax
exemption without an insistence for reciprocity.
Gift Tax
Gift tax in India is regulated by the Gift Tax Act which was constituted on 1st April, 1958. It
came into effect in all parts of the country except Jammu and Kashmir. As per the Gift Act
1958, all gifts in excess of ` 25,000, in the form of cash, draft, cheque or others, received from
one who does not have blood relations with the recipient, were taxable. However, with effect
from 1st October, 1998, gift tax got demolished and all the gifts made on or after the date
were free from tax. However, in 2004, the act was again revived partially. A new provision
was introduced in the Income Tax Act 1961 under section 56 (2). According to it, the gifts
received by any individual or Hindu Undivided Family (HUF) in excess of ` 50,000 in a year
would be taxable as income under other source.
INDIRECT TAX
An indirect tax, on the other hand, is a tax, the burden of which can be shifted to others.
Thus, the impact and the incidence of indirect taxes are on different persons. An indirect tax
is levied on and collected from a person who manages to pass it on to some other person or
persons on whom the real burden of the tax falls. Hence, in the case of indirect taxes, the tax
payer is not the tax bearer. Commodity taxes are generally indirect taxes, as they are imposed
on the producers or sellers, but their incidence falls upon the consumers as such taxes are
wrapped up in the prices.
Table 17.1 gives a list of the major direct and indirect tax laws and the authorities who
are responsible for administering these laws. A system of advance ruling has recently been
introduced by the tax authorities. At present, nonresidents can apply for advance rulings on
the income tax law. Under the Indian Income Tax (IT) Act, 1961, the income earned during a
tax year, that is, April 1–March 31 is subject to income tax. Box 17.1 gives a list of direct and
indirect taxes under that category.
Nature of Tax Government Act Authority < Table 17.1

Direct and Indirect
Direct Tax Tax Laws
Income Tax Income Tax Act, 1961 Central Board of Direct Tax
Wealth Tax Wealth Tax Act, 1957 Central Board of Direct Tax
Gift Tax Gift Tax Act, 1958 Central Board of Direct Tax
Indirect Tax
Central Excise Central Excise & Salt Act, 1944 Central Board of Excise and
Customs (CBEC)
Customs Customs Act, 1962 CBEC
Central Sales Tax Central Sales Tax Act, 1956 Union Government
State Sale Tax Respective State Sales Tax Acts Respective State Governments
Box 17.1 Taxes

Direct Taxes Indirect Taxes
1. Personal Income Tax 1. Excise Duty
2. Corporation Tax 2. Value Added Tax (VAT)
3. Inheritance Tax 3. Custom Duty
4. Wealth Tax 4. Sales Tax
INCOME EXEMPTED UNDER SECTION 10

Section 10 is specifically dedicated to grant various exemptions to assesses of all class on
incomes earned by them. They are as follows:
EXEMPTION U/S 10 (1): Agricultural income = Totally exempt provided it falls within the
definition of agriculture income given u/s 2(1A)
EXEMPTION U/S 10 (2): Share from income of HUF any individual, being a member of
HUF Entire amount = EXEMPT FROM TAX
EXEMPTION U/S 10 (7): Any allowance or perquisites-paid or allowed outside India to
citizen of India by Govt. For rendering service outside India= Exempt
EXEMPTION U/S 10 (10BB): Any payment made Under BHOPAL GAS LEAK ACT 1985
= Exempt
EXEMPTION U/S 10(10AA): Leave encashment
EXEMPTION U/S 10 (10BC): Any amount received or receivable by an individual from the
Govt. or local authority by way of compensation is exempt from tax
EXEMPTION U/S 10 (10CC): The income tax actually paid by the employer on non-
monetary perquisite provided to employee shall be exempt in the hands of employee
EXEMPTION U/S 10 (10D): Any sum received from life Insurance policy is fully exempt
from tax
EXEMPTION U/S 10(11): Any payments received from a provident fund to which provident
fund act applies or from PPF set up by central Govt. is exempt from tax
EXEMPTION U/S 10 (13A): Minimum of the following is exempt 50 per cent of salary if
house is situated at Delhi, Mumbai, Madras and Kolkata OR 40 per cent of salary if house is
at any other place, actual HRA received rent paid less 10 per cent of salary
EXEMPTION U/S 10 (16): Scholarships granted to meet cost of education is exempt
EXEMPTION U/S 10 (17): Any of the following allowances received by an MP and MLA are
exempt in full: daily allowance or constituency allowance
EXEMPTION U/S 10 (32): Minor’s income clubbed with individual is exempt upto ` 1,500
per child
EXEMPTION U/S 10 (33): Dividend declared by a domestic company is liable to dividend
distribution tax @ 15% + surcharge @ 7.5% + education cess @ 2% + SHEC @ 1% of the
amount declared. Hence, it is exempt from tax in the hands of shareholder
EXEMPTION U/S 10 (35): Any income received on units of UTI and mutual funds covered
u/s 10(23D) is exempt from tax
ASSESSEE [Section 2(7)]

The Income Tax Act 1961 defines ‘assessee’ as a person by whom any tax or any other sum of
money is payable under the Act, and includes:
i. Every person in respect of whom any proceedings under this Act has been taken for
the assessment of his/her income or
ii. of the income of any other person in respect of which he/she is assessable or
iii. of the loss sustained by him/her or by such other person, or
iv. of the amount of refund due to him/her or to such other person;
• Every person who is deemed to be an assessee under any provision of this Act.
• Every person who is deemed to be an assessee in default under any provision of
this Act.
From the above definition, assesses are classified into three types:
1. Ordinary assessee: Under this type, 4 categories are included:
• Proceedings of the Act: Any person against whom proceedings under the income
tax Act are going on, irrespective of any tax or any amount payable by the person.
• A person who filed return of loss: Any person who has made loss and filed return
of loss under Section 139(3).
• A person who has to pay amounts: Any person who has to pay interest, tax or
penalty under the income tax act.
• A person who is entitled to refund: Any person who is entitled to refund of tax
under the income tax Act.
2. Representative or deemed assessee: In certain cases, a person is liable not only for
his/her own income or loss but also for the income or loss of other persons. In such
cases, he/she is treated as ‘deemed’ or ‘representative assessee’. The following are the
situations:
• In the case of deceased person: If a person dies after waiting his/her will, the
executors of the property are deemed assessees.
• In case of lunatic or minor or idiot: In case of these special individuals having
taxable income, their guardian is deemed assessee.
• Nonresidents: In case of nonresidents having income in India, the person acting
on his/her behalf is deemed as assessee.
3. Assessee in default: If a person fails to fulfil his/her statutory obligation as per the
income tax act he/she is called ‘assessee in default.’
• Employers: An employer paying salary has to deduct tax and remit it to the Govt.
Treasury. If he/she fails to deduct or does not remit it to the treasury he/she is
called assessee in default.
• A person paying interest: A person paying interest is under statutory obligation
to deduct tax at source. If he/she does not deduct or does not remit it to the
treasury, he/she is treated as assessee in default.
Assessment Year [Section 2(9)]

The question then arises as to what an assessment year is? In the IT Act, the ‘income tax Assessment Year or the income
year’ is described as an assessment year, that is, the year in which the income of the previ- tax year, refers to the year,
ous year which ended before the commencement of the assessment year is to be assessed. in which the income of the
previous year which ended
The ‘assessment year’ comprises of a period of 12 months corresponding to a financial year, before the commencement of
commencing from April 1 and ending on March 31. Thus, the assessment year 2004–05 com- the assessment year, is to be
menced from April 1, 2004 and ended on March 31, 2005. assessed.
Previous Year [Section 3]

The financial year that precedes
There will be only one previous year for all assessees ending on 31 March for all sources of
the assessment year is the uni- income. In other words, the financial year immediately preceding the assessment year shall
form previous year. be the uniform previous year. In the case of a newly set-up business or a profession during
the financial year, the previous year will end on 31 March, even though the period comprised
in the previous year may be less than 12 months. For example, an assessee has started a new
business on 1 July, 2003, his/her previous year for the assessment year 2004–05 would be of
nine months beginning from 1 July, 2003 and ending on 31 March, 2004 and for the subse-
quent assessment years, his previous year will consist of 12 months beginning with 1 April
and ending on 31 March [Proviso to Section 3].
Person [Section 2(31)]

The term person as per income tax law is defined to include:
1. An individual, e.g., Mr. Abhijeet or Mr. Jain
2. A Hindu undivided family, e.g., Mr. A (HUF) or Mr. B (HUF).
3. A company, e.g., XYZ Pvt. Ltd. or ABC Ltd.
4. A partnership firm, e.g., M/s ABC or M/s XYZ and Co.
5. An association of persons or a body of individuals, whether incorporated or not,
e.g., ABC Sangh or XYZ Dal.
6. A local authority, e.g., Pune Municipal Corporation or PCMC Municipal Corpora-
tion.
7. Every artificial juridical persons not falling within any of the above categories
(residual category).
Residential Status of an Assessee

The income liable to tax in the hand of an assessee is determined on the basis of residential
status. For this purpose, the assessees are divided into the following two categories:
i. Resident in India
Individuals and HUFs, who are resident in India, are again classified as:
a. Ordinarily resident and
b. Not ordinarily resident
ii. Nonresident in India
Resident Status
In respect of ‘individuals’: Taxation of individuals is determined by their residential status.
An individual is ‘resident’ if he/she stays in India in the fiscal year (1 April–31 March) either
• for 182 days or more, or
• for 60 days or more (182 days or more for NRIs), and has been in India in aggregate
for 365 days or more in the previous four years.
In respect of ‘HUF, Firm, and Other Association of Persons’: A HUF, firm, or other association
of persons is said to be a resident in India in any previous year, except during that year when
the control and management of its affairs is situated wholly outside India [Section 6(2)].
In respect of a ‘Company’: A company is said to be a resident in India in any previous
year, if it satisfies any of the following two conditions:
i. it is an Indian company, or
ii. during that year, the control and management of its affairs is situated wholly in India
[Section 6(3)].
Nonresident in India
An individual who does not satisfy either of these requirements is a ‘nonresident’. A resi-
dent individual is considered to be ‘ordinarily resident’ in any fiscal year if he/she has been
a resident in India for 9 out of the previous 10 years and, in addition, has been in India for
a total of 730 days or more in the previous seven years. The residents who do not satisfy
these conditions are called the ‘not ordinarily resident’ individuals. Taxability of individuals
is summarized in Table 17.2.
The remuneration for work done in India is taxable irrespective of the place of receipt.
Remuneration includes salaries and wages, pension, fees, commissions, profits in lieu of or in
addition to salary, advance salary, and perquisites. Allowances, deferred compensation, and
tax equalization are also taxable. Perquisites are taxed beneficially.
Determination of Gross Total Income

Section 14 of the Act defines the gross total income as the aggregate of the incomes computed
under the five heads after making adjustments for set-off and carry forward of losses. The five
heads of income are as follows namely:
1. Income from salaries
2. Income from house property
3. Profits and gains from business and profession
4. Capital gains
5. Income from other sources
The aggregate income under these heads is termed as ‘gross total income’ In other words,
gross total income means total income computed in accordance with the provisions of the
Act before making any deduction under Sections 80C to 80U. However, any exemptions as
allowed by Section 10 are deducted from the respective heads before arriving at the gross
total income like conveyance allowance, capital gains on sale of personal effects, dividend
income, etc.

Status
Indian Foreign < Table 17.2
Taxability of Individuals
Income Income
Resident and ordinarily resident Taxable Taxable
Resident but not ordinarily Taxable Not taxable
resident
Nonresident Taxable Not taxable
TOTAL INCOME
The total income of an assesse is computed by deducting from the gross total income all per-
missible deductions available under Chapter VI A of the Income Tax Act, 1961. This is also
referred to as the ‘net income’ or ‘taxable income.’
Steps to determine net income
Determination of Residential Status
Income under Different Heads
Income from Salary Income from Business or Profession Income from Capital Gain
Income from House Property Income from Other Sources
Set off and Carry Forward
Clubbing of Income
Total Income
Permissible Deductions
Net Income
Heads of Income [Section 14 of IT Act]

Save as otherwise provided by the IT Act, 1961, that all income shall, for the purposes of
charge of income tax and computation of total income, be classified under the following
heads of income:
• Income from salaries
• Income from house property
• Profits and gains of business or profession
• Income from capital gains
• Income from other sources
Tax Slabs
Income tax is a tax levied on the financial income of a person, corporation or other legal enti-
ties. The individual income tax rate is applicable to those whose income exceeds ` 2,00,000
for the previous year and calculated in the current assessment year 2013–14.
Categories
• Individual resident (age below 60 years) • Firm

or any NRI or HUF or AOP or BOI or AJP *
• Senior citizen • Local authority
• Super senior citizen • Domestic company
• Co-operative society • Other company
1. Individual resident below 60 years of age (i.e., born on or after 1st April 1953) or
any NRI/HUF/AOP/BOI/AJP*
Income Slabs Income Tax Rate

i. Where the total income does not NIL
exceed ` 2,00,000/-.
ii. Where the total income exceeds 10 per cent of amount by which the
` 2,00,000/- but does not exceed total income exceeds ` 2,00,000/-
` 5,00,000/-.
iii. Where the total income exceeds ` 30,000/- + 20 per cent of the
` 5,00,000/- but does not exceed amount by which the total income
` 10,00,000/-. exceeds ` 5,00,000/-.
iv. Where the total income exceeds ` 130,000/- + 30 per cent of the
` 10,00,000/-. amount by which the total income
exceeds ` 10,00,000/-.
Surcharge: Nil
Education cess: 3 per cent of the income tax
*Abbreviations used
NRI, Non-Resident Individual; HUF, Hindu Undivided Family; AOP, Association of Persons;
BOI, Body of Individuals; AJP, Artificial Judicial Person
2. Individual resident who is of the age of 60 years or more but below the age of 80
years at any time during the previous year (i.e., born on or after 1st April 1933 but
before 1st April 1953)

exceed ` 2,50,000/-.
ii. Where the total income exceeds 10 per cent of the amount by which the
` 2,50,000/- but does not exceed total income exceeds ` 2,50,000/-.
` 5,00,000/-
` 5,00,000/- but does not exceed amount by which the total income
` 10,00,000/- exceeds ` 5,00,000/-.
iv. Where the total income exceeds ` 125,000/- + 30 per cent of the
` 10,00,000/- amount by which the total income
exceeds ` 10,00,000/-.
Surcharge: Nil
3. Individual resident who is of the age of 80 years or more at any time during the
previous year (i.e., born before 1st April 1933)

exceed ` 5,00,000/-.
ii. Where the total income exceeds 20 per cent of the amount by which the
` 5,00,000/- but does not exceed total income exceeds ` 5,00,000/-.
` 10,00,000/-
` 10,00,000/- amount by which the total income
exceeds ` 10,00,000/-.
Surcharge: Nil
4. Co-operative Society

i. Where the total income does not 10 per cent of the income.
exceed ` 10,000/-.
ii. Where the total income exceeds ` 1000/- + 20 per cent of income in
` 10,000/- but does not exceed excess of ` 10,000/-.
` 20,000/-.
iii. Where the total income exceeds ` 3000/- + 30 per cent of the amount
` 20,000/- by which the total income exceeds
` 20,000/-.
Surcharge: Nil
5. Firm
Income tax: 30 per cent of total income
Surcharge: Nil
6. Local Authority
Income tax: 30 per cent of total income
Surcharge: Nil
7. Domestic Company
Income tax: 30 per cent of total income.
Surcharge: The amount of income tax as computed in accordance with the above
rates, and after being reduced by the amount of tax rebate shall be increased by a
surcharge at the rate of 5 per cent of such income tax, provided that the total income
exceeds ` 1 crore.
Education cess: 3 per cent of the total of income tax and surcharge.
8. Company other than a Domestic Company

• @ 50 per cent of on so much of the total income as consist of (a) royalties received
from the government or an Indian concern in pursuance of an agreement made
by it with the government or the Indian concern after the 31st day of March, 1961
but before the 1st day of April, 1976; or (b) fees for rendering technical services
received from the government or an Indian concern in pursuance of an agree-
ment made by it with the government or the Indian concern after the 29th day of
February, 1964 but before the 1st day of April, 1976, and where such agreement
has, in either case, been approved by the central government.
• @ 40 per cent of the balance.
Surcharge: The amount of income tax as computed in accordance with the above
rates, and after being reduced by the amount of tax rebate shall be increased by
a surcharge at the rate of 2 per cent of such income tax, provided that the total
income exceeds ` 1 crore.
Education cess: 3 per cent of the total of income tax and surcharge.
Spouses are treated separately for tax purposes and their income is not normally clubbed.
However, income of all minors, except handicapped minors, is clubbed with the income of
their parents unless the income is derived from manual work or an activity involving skill,
specialized knowledge, and experience. The Finance Act, 1994 increased the income tax
exemption limit and has abolished surcharge on income tax for individuals.
To widen the tax base, the Union Budget for 1995 made a new provision in the IT Act
subjecting the sums payable by way of fees for professional or technical services to the
requirement of deduction of income tax at source, at the rate of 10 per cent. There will be no
deduction of tax at source where the aggregate of payments or credits during the financial
year is below ` 22,000 or where payments are made by individuals and HUFs.
Special provisions relating to the income of non-resident Indian individuals: When
the income of an NRI consists only of investment income or income from long-term capital
gains, the tax payable is at the rate of 20 per cent. The capital gains on transfer of assets that
are acquired in foreign exchange are not taxable in certain cases.
NRI are not required to file a tax return if their income consists of only interests and
dividends, provided the taxes due on such income are deducted at source. The tax rate on
such income is 20 per cent. It is possible for NRI to avail of these special provisions even after
becoming residents by following certain procedures that have been laid down by the IT Act.
Agricultural Income
a. Any rent or revenue derived from land, which is situated in India and is used for
agricultural purposes;
b. Any income derived from such land by—
i. Agriculture; or
ii. The performance by a cultivator or receiver of rent-in-kind of any process ordi-
narily employed by a cultivator or receiver of rent-in-kind to render the produce
raised or received by him/her, fit to be taken to market; or
iii. The sale by a cultivator or receiver of rent-in-kind of the produce raised or
received by him/her, in respect of which no process has been performed other
than a process of the nature described in paragraph (ii) of this subclause;
c. Any income derived from any building owned and occupied by the receiver of the
rent or revenue of any such land, or occupied by the cultivator or the receiver of
rent-in-kind, of any land with respect to which, or the produce of which, any process
mentioned in the paragraphs (ii) and (iii) of subclause (b) is carried on
• Provided that—
i. The building is on or in the immediate vicinity of the land, and is a building
which the receiver of the rent or revenue or the cultivator, or the receiver of
rent-in-kind, by reason of his/her connection with the land, requires as a dwell-
ing house, or as a storehouse, or other out-building, and
ii. The land is either assessed for land revenue in India or is subject to a local rate,
assessed and collected by the officers of the government as such or where the land
is not so assessed to land revenue or subject to a local rate, it is not situated—
A. in any area which is comprised within the jurisdiction of a municipality (whether
known as a municipality, municipal corporation, notified area committee, town area
committee, town committee, or by any other name) or a cantonment board and
which has a population of not less than 10,000 according to the last preceding census
of which the relevant figures have been published before the first day of the previous
year; or
B. in any area within such distance, not being more than 8 km, from the local limits of
any municipality or cantonment board referred to in item (A), as the central govern-
ment may, having regard to the extent of, and scope for, urbanization of that area and
other relevant considerations, specify in this behalf by a notification in the official
gazette.
Explanation: For the removal of doubts, it is hereby declared that the revenue derived
from land shall not include and shall be deemed never to have included any income
arising from the transfer of any land referred to in item (a) or item (b) of subclause
(iii) of Clause (14) of this section.
Highlights of the Union Budget 2013–2014 on

Agriculture
• Agriculture Ministry gets `27,049 crore, an increase of 22 per cent over the revised
estimates (RE) of the current year.
• Plan outlay for agriculture has been raised considerably: total plan outlay for Agricul-
ture Ministry: `17,095 crore (2012–13 RE: 13,787 crore); out of this, for agricultural
research: `3415 crore (2012–13 RE: 2520 crore).
• Agricultural credit target has been fixed at `700,000 crore. The target was `575,000
crore for 2012–13, which is likely to be exceeded.
• The interest subvention scheme for short term crop loans will be continued next year
also. A farmer who repays the loan on time will be able to get credit at 4 per cent per
annum.
• The interest subvention scheme has so far been applied to loans given by public sector
banks, RRBs, and cooperative banks. This is being extended to crop loans borrowed
from private sector scheduled commercial banks for loans given within the service
area of the branch concerned.
• Bringing green revolution to eastern India (BGREI) has been a remarkable success.
Assam, Bihar, Chhattisgarh, and West Bengal have increased their contribution to
rice production. The scheme is being continued, with an allocation of `1000 crore in
2013–14.
• The original green revolution states face the problem of stagnating yields and over-
exploitation of water resources. The answer lies in crop diversification. Further, `500
crore has been allocated in the budget for a programme of crop diversification that
would promote technological innovation and encourage farmers to choose crop
alternatives.
• The Rashtriya Krishi Vikas Yojana is intended to mobilize higher investment in agri-
culture and for the same `9954 crore is being allocated to this scheme.
• The National Food Security Mission, a scheme intended to bridge yield gaps of major
crops, has been provided `2250 crore.
• The allocation for the integrated watershed programme has been raised from `3050
crore in 2012–13 (BE) to `5387 crore. This will help small and marginal farmers
who are vulnerable everywhere especially in drought prone and ecologically stressed
regions. Watershed management techniques help in improving productivity of land
and water use.
• On suggestion from eminent agricultural scientists, a pilot programme is to be start-
ed on nutri-farms for introducing new crop varieties that are rich in micronutrients
such as iron-rich bajra, protein-rich maize, and zinc-rich wheat. Hence, `200 crore
has been allocated to start the pilots. Ministry of Agriculture will formulate a scheme
on this. It is hoped that agri businesses and farmers will come together to start pilots
in the districts most affected by malnutrition.
• The National Institute of Biotic Stress Management for addressing plant protection
issues will be established at Raipur, Chhattisgarh. The Indian Institute of Agricultural
Biotechnology will be established at Ranchi, Jharkhand and will serve as a centre of
excellence in agricultural biotechnology.
• A pilot scheme to replant and rejuvenate coconut gardens that was implemented in
some districts of Kerala and the Andaman & Nicobar Islands will be extended to
the entire State of Kerala. An additional sum of `75 crore has been allocated for this
scheme in 2013–14.
• Farmer Producer Organizations (FPO), including Farmer Producer Companies
(FPC), have emerged as aggregators of farm produce and link farmers directly to
markets. Matching equity grants will be provided to registered FPOs up to a maxi-
mum of `10 lakh per FPO to enable them to leverage working capital from financial
institutions. Further, `50 crore is being provided for this purpose.
• Besides, a Credit Guarantee Fund will also be created in the Small Farmers’ Agri
Business Corporation with an initial corpus of `100 crore. The Finance Minister has
urged state governments to support such FPOs through necessary amendments to
the APMC Act and in other ways.
• The National Livestock Mission will be launched in 2013–14 to attract investment
and to enhance productivity of livestock, taking into account local agro-climatic con-
ditions. Hence, `307 crore have been provided for the Mission. There will be a sub-
Mission in NLM for increasing the availability of feed and fodder.
Income Deemed to Be Received

[Section 7 of IT Act]
The following incomes shall be deemed to be received in the previous year:
i. The annual accretion in the previous year to the balance at the credit of an employee
who participates in a recognized provident fund, to the extent provided in Rule 6 of
Part A of the Fourth Schedule; and
ii. The transferred balance in a recognized provident fund, to the extent provided in
sub-rule (4) of Rule 11 of Part A of the Fourth Schedule.
Income Deemed to Accrue or Arise in India

The following incomes shall be deemed to accrue or arise in India:
i. All income accruing or arising, whether directly or indirectly, through or from any
business connection in India, or through or from any property in India, or through or
from any asset or source of income in India, or through the transfer of a capital asset
situated in India.
Explanation: For the purposes of this clause—
a. In the case of a business of which all the operations are not carried out in India,
the income of the business deemed under this clause to accrue or arise in India
shall be only such part of the income as is reasonably attributable to the opera-
tions carried out in India;
b. In the case of a nonresident, no income shall be deemed to accrue or arise in
India to him/her through or from operations which are confined to the purchase
of goods in India for the purpose of export;
c. In the case of a nonresident, being a person engaged in the business of running
a news agency or of publishing newspapers, magazines, or journals, no income
shall be deemed to accrue or arise in India to him/her through or from activities
which are confined to the collection of news and views in India for a transmis-
sion out of India;
d. In the case of a nonresident, being—
1. An individual who is not a citizen of India; or
2. A firm which does not have any partner who is a citizen of India or who is a
resident in India; or
3. A company, which does not have any shareholder who is a citizen of India or
who is a resident in India, no income shall be deemed to accrue or arise in
India to such individual, firm, or company through or from operations, which
are confined to the shooting of any cinematograph film in India;
ii. An income, which falls under the head ‘salaries’, if it is earned in India.
Explanation: For the removal of doubts, it is hereby declared that the income of
the nature referred to in this clause payable for a service rendered in India shall be
regarded as the income that is earned in India;
iii. An income that is chargeable under the head ‘salaries’ that is payable by the govern-
ment to a citizen of India for a service outside India;
iv. A dividend paid by an Indian company that is outside India;

v. An income by way of interest payable by—
a. The government; or
b. A person who is a resident, except where the interest is payable in respect of any
debt incurred or money borrowed and used, for the purposes of a business or a
profession carried on by such person outside India, or for the purposes of mak-
ing or earning any income from any source outside India; or
c. A person who is a nonresident, where the interest is payable in respect of any
debt incurred, or money borrowed and used, for the purposes of a business or a
profession carried on by such person in India;
vi. Income by way of royalty payable by—
b. A person who is a resident, except where the royalty is payable in respect of any
right, property, or information used or services utilized for the purposes of a
business or a profession carried on by such person outside India or for the pur-
poses of making or earning any income from any source outside India; or
c. A person who is a nonresident, where the royalty is payable in respect of any
right, property, or information used or services utilized for the purposes of a
business or a profession carried on by such person in India or for the purposes of
making or earning any income from any source in India:
1. Provided that nothing contained in this clause shall apply in relation to so
much of the income by way of royalty as consists of a lump-sum considera-
tion for the transfer outside India of, or the imparting of information outside
India in respect of, any data, documentation, drawing, or specification re-
lating to any patent, invention, model, design, secret formula, or process, or
trade mark, or similar property, if such income is payable in pursuance of an
agreement made before 1 April, 1976, and the agreement is approved by the
central government:
2. Provided further that nothing contained in this clause shall apply in rela-
tion to so much of the income by way of royalty as consists of lump sum
payment made by a person, who is a resident, for the transfer of all or any
right (including the granting of a licence) in respect of a computer software
that is supplied by a non-resident manufacturer, along with a computer or
a computer-based equipment under any scheme approved under the Policy
on Computer Software Export, of the Software Development, and Training,
1986, of the Government of India.
Explanation 1: For the purposes of the first proviso, an agreement made on or
after 1 April, 1976, shall be deemed to have been made before that date if the
agreement is made in accordance with the proposals approved by the central
government before that date; however, where the recipient of the income by
way of a royalty is a foreign company, the agreement shall not be deemed to
have been made before that date unless, before the expiry of the time allowed
under sub-section (1) or sub-section (2) of Section 139 (whether fixed origi-
nally or on extension) for furnishing the return of income for the assessment
year commencing on April 1, 1977, or the assessment year in respect of which
such income first becomes chargeable to a tax under this Act, whichever
a ssessment year is later, the company exercises an option by furnishing a dec-

laration in writing to the AO (such option being final for that assessment
year and for every subsequent assessment year) that the agreement may be
regarded as an agreement made before 1 April, 1976.
Explanation 2: For the purposes of this clause, ‘royalty’ means a considera-
tion (including any lump sum consideration but excluding any consideration
which would be the income of the recipient that is chargeable under the head
‘capital gains’) for—
i. The transfer of all or any rights (including the granting of a licence) in
respect of a patent, invention, model, design, secret formula, or process,
or trade mark, or similar property;
ii. The imparting of any information concerning the working of, or the
use of, a patent, invention, model, design, secret formula, or process, or
trade mark, or similar property;
iii. The use of any patent, invention, model, design, secret formula, or proc-
ess, or trademark, or similar property;
iv. The imparting of any information concerning technical, industrial,
commercial, or scientific knowledge, experience, or skill;
v. The transfer of all or any right (including the granting of a licence) in
respect of any copyright; literary, artistic or scientific work including
films or video tapes for any use in connection with a television or tape
or with a radio broadcasting, but not including any consideration for the
sale, distribution, or exhibition of cinematographic films; or
vi. The rendering of any services in connection with the activities referred
to in sub-clauses (i)–(v).
Explanation 3: For the purposes of this clause, the expression ‘computer soft-
ware’ shall have the meaning assigned to it in Clause (b) of the Explanation to
Section 80HHE;
vii. Any income by way of fees for technical services payable by—
b. A person who is a resident, except where the fees are payable in respect of serv-
ices that are utilized in a business or a profession that is carried on by such per-
son outside India or for the purposes of making or earning any income from any
source outside India; or
c. A person who is a nonresident, where the fees are payable in respect of services
utilized in a business or a profession carried on by such person in India or for the
purposes of making or earning any income from any service in India: Provided
that nothing contained in this clause shall apply in relation to any income by way
of fees for technical services that are payable in pursuance of an agreement that
is made before 1 April, 1976, and approved by the central government.
Explanation 1: For the purposes of the foregoing proviso, an agreement made on
or after 1 April, 1976, shall be deemed to have been made before that date if the
agreement is made in accordance with proposals approved by the central govern-
ment before that date.
Explanation 2: For the purposes of this clause, ‘fees for technical services’ means
any consideration (including any lump sum consideration) for the rendering of
any managerial, technical, or consultancy services (including the provision of
services of technical or other personnel) but does not include a consideration for
any construction, assembly, mining, or a like project that is undertaken by the
recipient, or a consideration which would be the income of the recipient that is
chargeable under the head ‘salaries.’
Transfer [Section 2(47) of IT Act]

‘Transfer’ in relation to a capital asset includes—
i. The sale, exchange, or relinquishment of the asset; or
ii. The extinguishment of any rights therein; or
iii. The compulsory acquisition thereof under any law; or
iv. In a case where the asset is converted by the owner thereof into, or is treated by him/her
as, a stock-in-trade of a business carried on by him/her, such conversion or treatment; or
v. Any transaction involving the allowing of the possession of any immovable property
to be taken or retained in part performance of a contract of the nature referred to in
Section 53A of the Transfer of Property Act, 1882 (4 of 1882); or (vi) any transaction
(whether by way of becoming a member of, or acquiring shares in, a cooperative
society, company, or other association of persons; or by way of an agreement or any
arrangement or in any other manner whatsoever) which has the effect of transferring,
or enabling the enjoyment of any immovable property.
Explanation: For the purposes of sub-clauses (v) and (vi) ‘immovable property’ shall
have the same meaning as in clause (d) of Section 269UA.
Transactions Not Regarded as Transfer

Nothing contained in Section 45 shall apply to the following transfers:
i. any distribution of capital assets on the total or partial partition of a HUF;
ii. any transfer of a capital asset under a gift or will or an irrevocable trust;
iii. any transfer of a capital asset by a company to its subsidiary company, if—
a. the parent company or its nominees hold the whole of the share capital of the
subsidiary company, and
b. the subsidiary company is an Indian company;
iv. any transfer of a capital asset by a subsidiary company to the holding company, if—
a. the whole of the share capital of the subsidiary company is held by the holding
company, and
b. the holding company is an Indian company:
Provided that nothing contained in Clause (iv) or Clause (v) shall apply to the
transfer of a capital asset made after 29 February, 1988, as stock-in-trade;
v. any transfer, in a scheme of amalgamation, of a capital asset by the amalgamating company
to the amalgamated company, if the amalgamated company is an Indian company;
v(a) any transfer, in a scheme of amalgamation, of a capital asset being a share or shares
held in an Indian company, by the amalgamating foreign company to the amalga-
mated foreign company, if—
a. at least 25 per cent of the shareholders of the amalgamating foreign company
continue to remain shareholders of the amalgamated foreign company, and
b. such transfer does not attract a tax on the capital gains in the country in which
the amalgamating company is incorporated;
vi. any transfer by a shareholder, in a scheme of amalgamation, of a capital asset being a
share or shares held by him in the amalgamating company, if—
a. the transfer is made in consideration of the allotment to him/her of any share or
the shares in the amalgamated company, and
b. the amalgamated company is an Indian company:
vi(a) any transfer of a capital asset being bonds or shares referred to in sub-section (1) of
Section 115AC, made outside India by a nonresident to another nonresident;
vii. any transfer of agricultural land in India effected before 1 March, 1970;
viii. any transfer of a capital asset, being any work of art—archaeological, scientific, or art
collection; book, manuscript, drawing, painting, photograph, or print; to the govern-
ment or a university or the national museum, national art gallery, national archives,
or any such other public museum or institution as may be notified by the central
government in the official gazette to be of national importance or to be of renown
throughout any state or states.
Explanation: For the purposes of this clause, ‘university’ means a university estab-
lished or incorporated by or under a central, state, or provincial Act, and includes an
institution declared under Section 3 of the University Grants Commission Act, 1956
(3 of 1956), to be a university for the purposes of that Act;
ix. any transfer by way of conversion of bonds or debentures, debenture-stock, or deposit
certificates in any form of a company, into shares or debentures of that company.
x. any transfer made on or before 31 December, 1998 by a person (not being a company)
of a capital asset, being membership of a recognized stock exchange, to a company in
exchange of shares allotted by that company to the transferor.
Explanation: For the purposes of this clause, the expression ‘membership of a recog-
nized stock exchange’ means the membership of a stock exchange in India which is
recognized under the provisions of the Securities Contract (Regulation) Act, 1956 (42
of 1956);
xi. any transfer of a capital asset, being the land of a sick industrial company, made under
a scheme prepared and sanctioned under Section 18 of the Sick Industrial Companies
(Special Provisions) Act, 1985(1 of 1986) where such sick industrial company is being
managed by its workers’ cooperative:
a. Provided that such transfer is made during the period commencing from the
previous year in which the said company has become a sick industrial company
under subsection (1) of Section 17 of that Act and ending with the previous year
during which the entire net worth of such company becomes equal to or exceeds
the accumulated losses.
Explanation: For the purposes of this clause, ‘net worth’ shall have the meaning
assigned to it in Clause (ga) of sub-section (1) of Section 3 of the Sick Industrial
Companies (Special Provisions) Act, 1985(1 of 1986).
Recognized Provident Fund

[Section 2(38) of IT Act]
This means a provident fund which has been and continues to be recognised by the Chief
Commissioner or Commissioner in accordance with the rules contained in Part A of the
Fourth Schedule, and includes a provident fund established under a scheme framed under
the Employees’ Provident Funds Act, 1952 (19 of 1952).
Permanent Account Number

Permanent account number (PAN) is a number by which the AO can identify any person.
Permanent account number
Presently, the income tax department is allotting PAN under the ‘new series’ to all assessees (PAN) refers to a number of 10
that consist of 10 alpha-numeric characters and is issued in the form of a laminated card. The alphanumeric characters by
PAN is ultimately meant to supplant the General Index Register Number, which is currently which a person can be identi-
fied by the assessing officer and
in use. The General Index Register Number is a number given by an AO to the assessees
ultimately supplants the Gener-
in the General Index Register maintained by him, which also contains the designation and al Index Register Number.
the particulars of the AO. As per Section 139A of the Act, obtaining PAN is a must for the
following persons:
1. Any person whose total income or the total income of any other person in respect
of which he is assessable under the Act exceeds the maximum amount which is not
chargeable to tax.
2. Any person who is carrying on any business or profession whose total sales, turnover,
or gross receipts are or is likely to exceed ` 5 lakh in any previous year.
3. Any person who is required to furnish a return of income under Section 139(4)
of the Act.
• The requirement for applying for allotment of PAN under the new series has now
been extended to the whole of India.
• PAN is required to be quoted in all the transactions mentioned below—
• In all returns and in all correspondence with the department.
• In all challans for payment of any tax or sum due to the department.
• In certain notified transaction. (See the sub-module on notified transactions
where PAN has to be quoted.)
How to Obtain PAN

Form No. 49A has been prescribed for making an application for allotment of the PAN. The
existing assessees who have already filed their returns of income and who have not been al-
lotted the PAN can attach Form No. 49A (duly filled in), along with the return of income,
while filing their return of income with their respective AOs.
The form should be filled in carefully and completely as it may not be possible for the
department to allot PAN if all the details are not filled in. In any case, the following informa-
tion must necessarily be given:
In the case of companies, the information that is necessarily required is as follows:

• Date of incorporation
• Registration number
• Date of commencement of the business
• Full and complete names of at least two directors of the company
• Branch addresses and branch names of the company
Unless the Form No. 49A contains all the above information, it would not be possible to allot
the PAN to a company assessee.
In the case of individuals, the information that is necessarily required is as follows:
• Full and complete name of the assessee
• Full and complete name of his/her father
• Date of birth
• Sources of income
Unless the Form No. 49A contains all the above information, it would not be possible to allot
the PAN to an individual assessee.
Usefulness of PAN
• If PAN is quoted in all documents, it would be very convenient to locate the AO hold-
ing jurisdiction over the person concerned.
• If PAN is quoted in all challans, the credit for payment of taxes can be quickly granted
to the tax payer.
• If PAN is quoted in all specified transactions, the department can exercise a greater
control over unregulated and undisclosed transactions.
Notified Transactions Where PAN Has to be Quoted

Provisions of Section 139A(5): Every person shall quote his PAN or General Index Register
Number in all documents pertaining to the transactions specified as follows:
a. Sale or purchase of any immovable property valued at ` 500,000 or more;
b. Sale or purchase of a motor vehicle or vehicles, which requires registration by a regis-
tering authority;
c. A time deposit, exceeding ` 50,000, with a banking company to which the Banking
Regulation Act, 1949 applies (including any bank or banking institution referred to
in Section 51 of that Act);
d. A deposit, exceeding ` 50,000, in any account with post office savings bank;
e. A contract of a value exceeding ` 1,000,000 for sale or purchase of securities as defined
in Clause (h) of Section 2 of the Securities Contracts (Regulation) Act, 1956(42 of 1956);
f. Opening an account with a banking company to which the Banking Regulation Act,
1949 applies (including any bank or banking institution referred to in Section 51 of
that Act);
g. Making an application for installation of a telephone connection (including a cellular

telephone connection);
h. Payment to hotels and restaurants against their bills for an amount exceeding ` 25,000
at any one time—
• A person shall quote General Index Register Number in the documents pertain-
ing to transactions specified in the above Clauses (a)–(h), till such time the PAN
is allotted to him/her.
• A person, being a minor and who does not have any income chargeable to in-
come tax, making an application for opening an account referred to in the Clause
(f) of this Rule, shall quote the PAN or General Index Register Number of his
father or mother or guardian, as the case may be.
• Any person, who has not been allotted a PAN or who does not have a General
Index Register Number and who makes payment in cash or otherwise, than by
a crossed cheque drawn on a bank or by a crossed-bank draft in respect of any
transaction specified in Clauses (a)–(h), shall have to make a declaration in Form
No. 60, giving therein the particulars of such transaction.
In simple terms, it is mandatory to quote PAN in
• Applications for opening an account with a bank
• Applications for installation of a telephone connection (including a cellular telephone)
• Documents pertaining to sale or purchase of a motor vehicle
• Documents pertaining to sale or purchase of immovable property valued at ` 5 lakh
or more
• Documents pertaining to deposits exceeding ` 50,000 in an account with a post office
savings bank
• Documents pertaining to a contract of a value exceeding ` 10 lakh for sale or purchase
of securities (shares, debentures, etc.)
• Payment to hotels and restaurants against their bills for an amount exceeding ` 25,000
at any one time
• Returns of income
• Challans for payment of direct taxes
• All correspondence with the Income Tax Department
If you have applied for allotment of PAN under the new series and have received a letter ask-
ing for further information, then please send your reply immediately with details as follows:
• Individuals should give their, as well as their father’s full name (expand initials).
• Married ladies should give their father’s name in full (and not husband’s name).
• Exact date of birth/incorporation (not merely month or year) should be specified.
• Give pin code in all the addresses.
Failure to comply with the provisions of Section 139A of the IT Act attracts a penalty of ` 500
(minimum) to ` 10,000 (maximum) for each default or failure.
Persons to whom provisions of Section 139A shall not apply: The provisions of
Section 139A shall not apply to following class or classes of persons, viz.,
a. The persons who have agricultural income and are not in receipt of any other income
chargeable to income tax. Such persons shall instead be required to make a declara-
tion in Form No. 61 in respect of transactions referred to in Clauses (a)–(h) of Rule
114B of the Income Tax Rules.
b. Nonresidents referred to in Clause (30) of Section 2 of IT Act, 1961.
c. A nonresident, who enters into any transaction referred to in Clauses (a)–(h) of Rule
114B, shall have to furnish a copy of his passport.
Obligation of the authorities
• Any authority on receiving any document for purchase or sale of any immovable
property or a motor vehicle and on receiving any document relating to a transaction
specified under Clauses (a)–(h) of sub-rule (i) of Rule 114B of Income Tax Rules shall
ensure that the PAN or the General Index Register Number has been duly quoted in
the document or the declaration in Form No. 60 or Form No. 61, as the case may be.
The specified authorities are—
• A registering officer appointed under the Registration Act, 1908 (16 of 1908);
• A registering authority referred to in Clause (b) of sub-rule (1);
• Any manager or officer of a banking company referred to in Clause (c) of sub-
rule (1);
• Post master;
• Stockbroker, sub-broker, share transfer agent, banker to an issue, trustee of a trust
deed, registrar to an issue, merchant banker, underwriter, portfolio manager, in-
vestment advisor, and such other intermediaries registered under Section 12 of
the Securities and Exchange Board of India Act, 1992(15 of 1992);
• Any authority or company receiving application for installation of a telephone
by it;
• Any person raising bills referred to in Clause (h) of sub-rule (i).
• Such authority shall intimate the details of transactions to the Director of Income Tax
(Investigation) and shall forward the following documents:
a. A statement indicating therein the details of all the documents pertaining to
any transaction referred to in Clauses (a)–(h) of Rule 114B of Income Tax Rules
wherein the PAN General Index Register Number is quoted.
b. The statement referred to in Clause (a) shall contain
• Name and address of the person entering into the transactions,
• Nature and date of the transaction,
• Amount of each transaction,
• PAN or General Index Register Number quoted in the documents pertaining
to any transaction.
c. Copies of declaration in Form No. 60.
d. Copies of declaration in Form No. 61.

e. Copies of passport.
The statement, declaration, and copies of passports shall be forwarded to the concerned
Director of Income Tax (Investigation) by every person, within a month of receipt of the
same by that person.

Personal Tax
• No case to revise either tax slabs or rates
• Personal income tax slabs unchanged in the FY14
• Some relief to tax payers in ` 2 lakh to ` 5 lakh bracket
• Tax credit of 2000 rupees for incomes of up to 5 lakh rupees
• Surcharge of 10 per cent on people with income over 10 million rupees
• Surcharge on high income tax payers only for one year
• Only 42,800 tax payers with income over 10 million rupees
• Education cess to continue at 3 per cent
• Donation to national children fund to get 100 per cent tax relief

Corporate Tax
• 10 per cent surcharge on companies with income above 100 million rupees
• Dividend distribution surcharge raised to 10 per cent vs 5 per cent
• GAAR modified provisions seen effective 1 Apr, 2016
• 20 per cent withholding tax on profits distributed by unlisted companies
• Tax holiday for power plants extended up to March 2014
• Sops for power projects to continue for 1 year
• 15 per cent tax on dividend from overseas arms to continue
• Financial institutions securitization trust exempted from tax
EXCISE DUTIES
Excise duty is a tax on the manufacture of goods within the country. Excise duties are levied
under the Central Excise and Salt Act, 1944, the Excise Tariff Act, 1985, and the Modified
Value Added Tax (MODVAT) scheme. The rates of excise duty leviable vary depending inter
alia on the nature of the item manufactured, the nature of the manufacturing concern, and
the place of ultimate sale. Central excise revenue is the biggest single source of revenue for
the Government of India. The Union government tries to achieve different socio-economic
objectives by making suitable adjustments in the scope and quantum of levy of central excise
duty. The scheme of Central Excise Levy is suitably adapted and modified to serve different
purposes of price control, sufficient supply of essential commodities, industrial growth, and
promotion of small-scale industries (SSIs); and it is like an authority for collecting the ‘central
excise duty’.
Article 265 of the Constitution of India has laid down that both levy and collection of
taxes shall be under the authority of law. The excise duty is levied in pursuance of Entry 45
of the Central List in the Government of India Act, 1935 as adopted by the Entry 84 of List I
of the Seventh Schedule of the Constitution of India. The charging Section is Section 3 of the
Central Excise and Salt Act, 1944. The duty rates are either ad valorem (i.e., a fixed percentage
of the cost of production), specified (a fixed rate depending on the nature of the manufac-
tured item), or a combination of both. In the Finance Act, 1994, there has been a shift in the
basis of taxation from specific to ad valorem rates, with a reduction in excise duty proposed
on a large number of items.
The MODVAT scheme, introduced in 1986, applies to certain specific items. The objec-
tive of this scheme is to limit the cascading effect of duty incidence on a number of goods,
subject to excise, which are further used as inputs for other excisable goods. The Finance
Act, 1994 had extended the MODVAT scheme to capital goods and petroleum products. The
Finance Bill of 1995 has further extended the MODVAT scheme to cover woollen fabrics
and industrial fabrics. Under the scheme, MODVAT credit can be claimed on the purchase
of raw materials on which the excise has been paid. This MODVAT credit can be used to set
off excise duty payable on subsequent manufacture of goods. In addition, countervaling duty
(CVD) paid on imports can be used to claim a MODVAT credit. All the manufacturers of
excisable goods are required to register under the Central Excise Rules, 1944. The registration
is valid as long as the production activity continues and no renewals are necessary.
Liability to Pay Central Excise Duty

Section 3 of the Central Excise and Salt Act, 1944 provides that there shall be levied and
collected in such manner, as may be prescribed, duties of excise on all excisable goods other
than salt, which are
i. Goods. i.e., the article must be movable and marketable
ii. The article must be excisable goods, i.e., it must be included in Central Excise Tariff
Act, 1985(CETA)
iii. Article must be produced
iv. Article must be manufactured – New and identifiable product known in the market
must emerge
v. Production or manufacture must be in India
Types of Excise Duties

• Basic Excise Duty (BED): This is the duty charged under Section 3 of the Central
Excises and Salt Act, 1944 on all excisable goods other than salt which are produced
or manufactured in India. Basic Excise Duty [also known as Central Value Added Tax
(CENVAT)] is levied at the rates specified in the Central Excise Tariff Act.
• Special Excise Duty (SED): As per Section 37 of the Finance Act, 1978 special excise
duty was attracted on all excisable goods on which there is a levy of basic excise duty
under the Central Excises and Salt Act, 1944. Special excise duty is levied at the rates
specified in the Second Schedule to Central Excise Tariff Act, 1985.
• Education Cess on Excise Duty: Section 93 of Finance (No. 2) Act, 2004 states that
education cess is ‘duty of excise’, to be calculated on aggregate of all duties of excise
including special excise duty or any other duty of excise, but excluding education cess
on excisable goods.
• Excise duty in case of clearances by EOU: The EOU units are expected to export all
their production. However, if they clear their final product in DTA (domestic tariff
area), the rate of excise duty will be equal to customs duty on like article if imported
in India.
• National calamity contingent duty (NCCD): A ‘National Calamity Contingent
Duty’ (NCCD) has been imposed vide section 136 of the Finance Act, 2001 [clause
129 of Finance Bill, 2001, w.e.f. 1.3.2001]. This duty is imposed on pan masala, chew-
ing tobacco and cigarettes.
• Duties under other Acts: Some duties and cess are levied on manufactured products
under other Acts. The administrative machinery of central excise is used to collect
those taxes. Provisions of Central Excise Act and Rules have been made applicable for
levy and collection of these duties/cess.
• Additional Duty on Goods of Special Importance (AED [GSI]): Some goods of
special importance are levied additional excise under Additional Duties of Excise
(Goods of Special Importance) Act, 1957. The ‘Additional Duty’ is in addition to ex-
cise duty. This scheme was introduced based on the suggestion made by the manu-
facturers to the government that multiple level taxes and duties should be avoided.
Levy and collection of all taxes at one stage by single authority will be convenient for
payment and administration. Hence, by agreement between the central and state gov-
ernments, it was decided to make a beginning in 1957, by selecting some items where
additional duty will be collected instead of sales tax and such additional duty will be
distributed among various States. Revenue from this duty is distributed among the
state governments on the basis of percentages given in the second schedule to the Act.
• Some items covered are textile articles like cotton fabrics, silk and wool fabrics,
man-made fibres, terry fabrics, metallised yarn, embroidery, sugar, branded to-
bacco, pan masala containing tobacco and cigarettes.
• Duty on Medical and Toilet Preparations: Excise duty is imposed on medical prepa-
rations under Medical and Toilet Preparations (Excise Duties) Act, 1955.
• Additional Duty on Mineral Products: Additional duty on mineral products (like
motor spirit, kerosene, diesel and furnace oil) is payable under Mineral Products
(Additional Duties of Excise and Customs) Act, 1958.
• Additional Customs Duty commonly known as countervailing duty (CVD):
Countervailing duty (CVD) is imposed on the imports.
• Special Additional Duty of Customs (Special CVD): Special CVD is being imposed
on items bound under the Information Technology Agreement (except information
technology software), and also on specified inputs/raw materials for manufacture of
electronics/IT goods.
• Additional Duties of Excise (Textiles and Textile Articles) [AED (TTA)].
• Additional Duty of Excise (Tea and Tea Waste) [AED (TTW)].
• Secondary and Higher Education Cess.
Classification of Goods in Excise Duty

In order to determine the rate of excise duty on goods, classification is prerequisite. Excise
duty payable is based on the classification of goods given in the Central Excise Tariff Act,
1985 (CETA). The Act gives a list of items chargeable to Central Excise duty. It is divided
into 96 Chapters grouped in twenty Sections. Each of these 20 sections relates to broader
class of goods such as Section I relates to Animal and Dairy Products, Section VI relates to
Products of Chemical and Allied Industries, while Chapter XI relates to Textiles and Textile
Articles.
The Central Excise Tariff Act was amended in 2004. Earlier there was six digits classifi-
cation code for classification of the goods, which has been replaced by 8 digits classification
code. With introduction of this 8 digits classification code, a detailed classification of the
goods is now available. The classification of items is significant because it is only the proper
classification, which leads to determination of rate of duty.
In Central Excise Tariff, against each item a rate of duty has been prescribed. These are
normally termed as ‘tariff rates’. In order to determine the rate of duty on a particular prod-
uct, first find out the chapter heading under which the item is classifiable. Against that clas-
sification, the corresponding tariff rate has to be read with the exemption notification, if any.
Thus, effective rate of duty on an item is obtained.
Some commodities may be subject to ‘special duty of excise’ prescribed under the Cen-
tral Excise Tariff Act, 1985. Certain goods may also be subject to duty under some other Acts
such as Additional Duty of Excise (Goods of Special Importance) Act, 1957 or certain Cess.
Rules of Classification
Rule 1: General rule of classification: The titles of Sections, Chapters and Sub-Chapters
are provided for ease of reference only; for legal purposes, classification shall be determined
according to the terms of the headings and any relative Section or Chapter Notes and, pro-
vided such headings or Notes do not otherwise require, according to the subsequent rules
[i.e. rule 2 to 6].
Rule 2(a): Classification of incomplete/unfinished articles
i. Any reference in a heading to an article shall be taken to include a reference to that
article incomplete or unfinished, provided that, as presented; the incomplete or un-
finished article has the essential character of the complete or finished article.
ii. It shall also be taken to include a reference to that article complete or finished (or
falling to be classified as complete or finished by virtue of this rule), presented
unassembled or dis-assembled.
Rule 2(b): Classification of mixtures/combinations of a material/substance with other
materials/substances
i. Any reference in a heading to a material or substance shall be taken to include a refer-
ence to mixtures or combinations of that material or substance with other materials
or substances.
ii. Any reference to goods of a given material or substance shall be taken to include a
reference to goods consisting wholly or partly of such material or substance.
iii. The classification of goods consisting of more than one material or substance shall be
according to the principles of rule 3.
Rule 3: Classification in Case Goods are Classifiable under two or More Headings
The application of this rule arises when the goods consists of more than one material or
substance. When by application of rule 2(b) or for any other reason, goods are, prima facie,
classifiable under two or more headings, classification shall be effected as follows:
Rule 3(a): Specific over general
i. The heading which provides the most specific description shall be preferred to head-
ings providing a more general description.
ii. However, when two or more headings each refer to part only of the materials or sub-
stances contained in mixed or composite goods or to part only of the items in a set up
for retail sale, those headings are to be regarded as equally specific in relation to those
goods, even if one of them gives a more complete or precise description of the goods.
Rule 3(b): Essential character principle
Mixtures, composite goods consisting of different materials or made up of different compo-
nents, and goods put up in sets for retail sale, which cannot be classified with reference to (a),
shall be classified as if they consisted of material which gives them their essential character,
in so far as this criterion is applicable.
Rule 3(c): Latter the better
When goods cannot be classified by reference to (a) or (b), they shall be classified under the
heading which occurs last in numerical order among those which equally merit consideration.
Rule 4: Akin Rule
Goods which cannot be classified in accordance with the above rules shall be classified under
the heading appropriate to the goods to which they are most akin.
Rule 5: In addition to the foregoing provisions, the following rules shall apply in respect
of goods referred to therein:
a. Classification of cases/container s used for packaging of goods Camera cases, musical
instrument cases, gun cases, drawing instrument cases, necklace cases and similar
containers shall be classified with a specific article or a set of articles when of a kind
normally sold therewith. Conditions to be fulfilled:-
i. These cases/containers are specially shaped or fitted to contain a specific article
or a set of articles.
ii. These cases/containers are suitable for long term use and presented with the
articles for which they are intended. This rule does not, however, apply to con-
tainners which give the whole of its essential character.
b. Classification of packing materials and packing containers
Subject to the provisions of (a) above, packing materials and packing containers pre-
sented with the goods therein shall be classified with the goods, if they are of a kind
normally used for packing such goods. However this provision does not apply when
such packing material or packing containers are clearly suit able of repetitive use.
Rule 6: Only sub-headings at the same level are comparable
(i) For legal purposes, the classification of goods in the sub-headings of a heading shall
be determined according to the terms of those sub-headings and any related sub-
heading notes and, mutatis mutandis, to the above rules, on the understanding that
only sub-headings at the same level are comparable.
(ii) For the purposes of this rule, the relative section and chapter notes also apply unless
the context otherwise requires. The main proposition laid down by this rule is that
sub-heading at the same level are comparable. This implies that a sub-heading can be
compared only with another sub-heading within the same heading.
Highlights of the Union Budget 2013–14 on Indirect Taxes

• Indirect tax proposals to yield 47 billion rupees in the FY14
• No change in standard rate of excise duty
• No change in peak basic custom duty rate on non-agri goods
• No change in standard rate of service tax
• Customs duty on leather making machine cut to 5.0 per cent vs 7.5 per cent
• Transaction tax of 0.01 per cent on non-farm commodities future
• Commodity transaction tax on non-farm derivatives trade transaction tax on equity
futures cut to 0.01 per cent vs 0.017 per cent
• Pegs FY14 customs revenue at 1.87 trillion rupees
• To impose service tax on all air-conditioned restaurants
• Sops for low-cost housing to continue
• Films exhibited in cinema halls to have no service tax
• Moots voluntary compliance encouragement plan for service tax
• Vocational courses exempt from service tax
• Coir, jute, and hand-made carpets exempt from excise duty
• Farm produce testing service included in negative list
• Export duty on rice bran oil, oil cakes withdrawn
• To provide certain concessions to aircraft MRO industry
• To up import duty on set-top boxes to 10 per cent from 5 per cent
• Cut custom duty on leather footwear machines to 5 per cent vs 7.5 per cent
• Import duty on raw silk to be raised to 15 per cent from 5 per cent
• 10 per cent export duty on unprocessed ilmenite
• 2 per cent customs duty on bituminous coal
• To up import duty on luxury cars to 100 per cent from 75 per cent
• Import duty on yachts raised to 25 per cent from 10 per cent now
• Duty on 800CC motor cycles raised to 75 per cent vs 60 per cent
• Zero excise duty on cotton and fibre
• Hand-made jute, coir carpets to be excise duty exempt
• Zero excise duty on cotton at fibre stage
• To up specific excise duty on all cigarettes by 18 per cent

• To raise excise duty on non-taxi SUVs to 30 per cent
• Female passengers can get 100,000 rupees duty-free gold
• Male passengers can get duty-free gold worth 50,000 rupees
• Ships, vessels exempted from excise duty
• To up duty on mobile phones above 2000 rupees to 6 per cent
• No change in mobile phone excise duty up to 2000 rupees
• Excise duty on marble hiked to 60 rupees/sq mtr vs 30 rupees
• Basic customs duty on dehulled oatgrains cut to 15 per cent
• No change in 10 per cent basic customs duty on non-farm products
CUSTOMS TARIFF
The Customs Act was formulated in 1962 to prevent illegal imports and exports of goods.
Besides, all imports are sought to be subject to a duty with a view to affording protection to
indigenous industries as well as to keep the imports to the minimum in the interests of secur-
ing the exchange rate of Indian currency.
The duties of customs are levied on goods that are imported or exported from India, at
the rate specified under the Customs Tariff Act, 1975, as amended from time to time, or by
any other law for the time being in force. For the purpose of exercising proper surveillance
over imports and exports, the central government has the power to notify the ports and air-
ports for the unloading of the imported goods and loading of the exported goods, the places
for clearance of goods imported or to be exported, the routes by which the above goods may
pass by land or inland water into or out of India, and the ports which alone shall be coastal
ports. In order to give a broad guide as to classification of goods for the purpose of duty
liability, the Central Board of Excise Customs (CBEC) brings out periodically a book called
the ‘Indian Customs Tariff Guide’ which contains various tariff rulings issued by the CBEC.
The Act also contains detailed provisions for warehousing of the imported goods, and manu-
facture of goods is also possible in the warehouses.
The customs duties are levied on imports at rates specified in the annual budget. The
maximum rate of customs duty for 1994–95 is 65 per cent, except on baggage. The Finance
Act, 1994 has witnessed a general reduction in the duty on capital goods, steel, chemicals,
drugs, pesticides, and project imports. For a person who does not actually import or export
goods, customs has relevance in so far as they bring any baggage from abroad.
Types of Duties
Export duties are levied occasionally to mop up the excess profitability in the international
prices of goods in respect of which domestic prices may be low at the given time. However,
the sweep of import duties is quite wide. Import duties are generally of the following types:
Basic Duty: It may be at the standard rate or, in the case of import from some other
countries, at the preferential rate:
Additional Customs Duty: It is equal to central excise duty that is leviable on like goods
that are produced or manufactured in India. The additional duty is commonly referred to
as the countervailing duty or CVD. It is payable only if the imported article is such as, if
produced in India, that its process of production would amount to ‘manufacture’ as per the
definition in the Central Excise Act, 1944. Exemption from excise duty has the effect of ex-
empting an additional duty of customs.
Additional duty is calculated on a value based on the aggregate value of the goods, in-
cluding landing charges and basic customs duty. Other duties like anti-dumping duty, safe-
guard duty, and so on, are not taken into account. In case of goods, covered by provisions
of the Standards of Weights and Measures Act, 1976, the value base would be the retail sale
price declared on the package of goods less the rebate as notified under the Central Excise
Act, 1944 for such goods.
True Countervailing Duty or Additional Duty of Customs: It is levied to offset the dis-
advantage to like Indian goods due to high excise duty on their inputs. It is levied to provide a
level-playing field to indigenous goods that have to bear various internal taxes. Value base for
this additional duty would be as in the case of CVD, under Customs Tariff Act, 1975 minus
the retail sales price provision. This additional duty will not be included in the assessable
value for levy of education cess on imported goods. Manufacturers will be able to take credit
of this additional duty for payment of excise duty on their finished products.
Anti-dumping Duty/Safeguard Duty: It is levied for import of specified goods with a
view to protecting the domestic industry from an unfair injury. It would not apply to goods
that are imported by a 100 per cent EOU (export oriented units) and units in FTZ (free trade
zones) and SEZ (special economic zones). On the export of goods, anti-dumping duty is re-
batable only by way of a special brand rate of drawback. Safeguard duties do not require the
finding of an unfair trade practice such as dumping or subsidy on the part of exporting coun-
tries but they must not discriminate between imports from different countries. Safeguard
action is resorted to only if it has been established that a sudden increase in the imports has
caused or threatens to cause a serious injury to the domestic industry.
Education Cess: It is levied at the prescribed rate as a percentage of aggregate duties of
customs. If goods are fully exempted from duty or are chargeable to nill duty or are cleared
without any payment of duty under a prescribed procedure, such as clearance under bond,
no cess would be levied.
Highlights of the Union Budget

2013–2014 on Custom Tariff
Basic customs duty is being increased on gold ores and concentrates for use in the manufac-
ture of gold from 1 per cent to 2 per cent [S. No. 116 of notification No. 12/2012-Customs
dated 17.03.2012 refers].
The description of goods classified in tariff item 2601 11 10 to 2601 11 90 is being revised
[Clause 127 read with Third Schedule to the Finance Bill 2012 refers].
Export duty on ‘chromium ores and concentrates, all sorts’ is being enhanced from
` 3000 per tonne to 30 per cent ad valorem [Clause 128 read with Fourth Schedule to the
Finance Bill 2012 refers].
Basic customs duty on nickel ore and concentrate classified under tariff item 2604 00 00 is
being fully exempted [S. No. 118 of notification No. 12/2012-Customs dated 17.03.2012 refers].
Steam coal classified under CTH 2701 19 20 is being fully exempted from basic customs
duty along with 1 per cent CVD. This dispensation would be valid up to 31st March, 2014
[S. No. 123 of notification No. 12x/2012-Customs dated 17.03.2012 refers].
Basic customs duty liquefied natural gas (LNG) and natural gas (NG) (2711), is being
fully exempted when imported for generation of electrical energy by a power generating
company [S. No. 139 of notification No. 12/2012-Customs dated 17.03.2012 refers].
Basic customs duty on nickel oxide and hydroxide classified under 2825 40 00 is being
reduced from 7.5 per cent to nil? [S. No. 161 of notification No. 12/2012-Customs dated
17.03.2012 refers].
Basic customs duty on ammonium metavanadate, classified under heading 2841, is being
reduced from 7.5 per cent to 2.5 per cent [S. No. 162 of notification No. 12/2012-Customs
Basic customs duty on iodine classified under 2801 20 00 is being reduced to 2.5 per cent
[S. No. 156 of notification No. 12/2012-Customs dated 17.03.2012 refers].
Basic customs duty on titanium dioxide classified under CTH 2823 00 10 is being
reduced from 10 per cent to 7.5 per cent [S. No. 150 of notification No. 12/2012-Customs
Basic customs duty on boric acid classified under CTH 2810 00 20 is being enhanced
from 5 per cent to 7.5 per cent [S. No. 150 of notification No. 12/2012-Customs dated
17.03.2012 refers].
Basic customs duty on sintered natural uranium dioxide/sintered uranium dioxide
pellets (U-235) classified under CTH 2844 20 00 for use in the production of nuclear power
is being reduced from 7.5 per cent to nil. [S. No. 163 of notification No. 12/2012-Customs
The concessional rate of 5 per cent of basic customs duty is being extended to six life-
saving drugs/vaccines and their bulk drugs used in the manufacture of said drugs [S. No. 176
to 181 of list appended to notification No. 12/2012-Customs dated 17.03.2012 refers].
Basic customs duty on probiotics classified under 3002 90 30 is being reduced from
10 per cent to 5 per cent [S. No. 195 of notification No. 12/2012-Customs dated 17.03.2012
refers].
Basic customs duty on specified water soluble and liquid fertilizers is being reduced from
7.5 per cent to 5 per cent and from 5 per cent to 2.5 per cent [S. No. 202 of notification
No. 12/2012-Customs dated 17.03.2012 refers].
Triband phosphor classified under CTH 3206 50 00 is being fully exempted from basic
customs duty [S. No. 209 of notification No. 12/2012-Customs dated 17.03.2012 refers].
Basic customs duty on organic/inorganic coating material for manufacture of electri-
cal steel (CTH 3209) is being reduced from 10 per cent to 5 per cent on actual user basis
Basic customs duty on isolated soya protein classified under 3504 00 91 is being reduced
from 15 per cent to 10 per cent [S. No. 216 of notification No. 12/2012-Customs dated
17.03.2012 refers].
Basic customs duty on super absorbent polymer (SAP) classified under 3906 90 90
imported for use in the manufacture of adult diapers is being reduced from 7.5 per cent
to 5 per cent along with Nil SAD on actual user basis [S.No. 242 of notification
No. 12/2012-Customs dated 17.03.2012 refers].
Basic customs duty and additional customs on pneumatic tyres (new or retreaded)
for aircraft is being fully exempted subject to conditions [S. Nos. 249 & 250 of notification
No. 12/2012 customs dated 17.03.2012 refers].
Wood in rough falling under heading 4403 has been exempted from special CVD
Basic customs duty on waste paper, falling in heading 4707, is being fully exempted
from basic customs duty [S. No. 262 of notification No. 12/2012-Customs dated 17.03.2012
refers].
A chapter note in Chapter 48 is being inserted to provide that if paper and paper prod-
ucts of headings 4811, 4816 or 4820 are printed with any character, name, logo, motif or
format, they shall remain classified under Chapter 48 as long as such products intended to
be used for further printing [Clause 127 read with Third Schedule to the Finance Bill 2012
refers].
Basic customs duty on wool waste (CTH 5103) is being reduced from 10 per cent to
5 per cent [S. No. 279 of notification No. 12/2012-Customs dated 17.03.2012 refers].
Basic customs duty on wool tops (CTH 5105) is being reduced from 15 per cent to
5 per cent [S. No. 281 of notification No. 12/2012-Customs dated 17.03.2012 refers].
Basic customs duty on aramid thread/yarn/fabric for manufacture of bullet proof helmets
for defence and police personnel is being reduced from 10 per cent to nil with Nil CVD and
Nil SAD (S. No. 16 of notification No. 39/96-Customs dated 23rd July, 1996 as inserted vide
notification No. 11/2012-Customs dated 17th March, 2012 refers).
Basic customs duty on hydrophilic non-woven, hydrophobic non-woven (CTH
56031100) imported for use in the manufacture of adult diapers is being reduced from
10 per cent to 5 per cent, with 5 per cent CVD and Nil SAD on actual user basis [S. No. 295
of notification No. 12/2012-Customs dated 17.03.2012 refers].
CENTRAL SALES TAX (CST)

‘Sales tax’ is a tax, levied on the sale or purchase of goods. There are two kinds of sales tax,
that is, central sales tax (CST), imposed by the centre, and sales tax, imposed by each state.
Sales tax is levied on the sale of a commodity which is produced or imported and sold for the
first time. If the product is sold subsequently without being processed further, it is exempt
from sales tax. While sales tax is levied by either the central or the state government, CST or
4 per cent is generally levied on all inter-state sales. The state sales taxes, which apply on sales
made within a state, have rates that range from 4 per cent to 15 per cent. The sales tax is also
charged on work contracts in most states, and the value of contracts is subject to tax and the
tax rate varies from state to state. However, exports and services are exempt from sales tax.
When is Sales Tax Payable Central sales tax is generally payable on the sale of all goods by a
dealer in the course of inter-state trade or commerce or, outside a state or, in the course of
import into or, export from India.
Inter-state Trade or Commerce

According to Section 3, a sale or purchase shall be deemed to take place in the course of inter-
state trade or commerce in the following cases:
• when the sale or purchase occasions the movement of goods from one state to
another, and
• when the sale is effected by a transfer of documents of title to the goods during their
movement from one state to another.
Where the goods are delivered to a carrier or other bailee for transmission, the movement of
the goods for the purpose of Clause (b) above, is deemed to start at the time of such delivery
and terminate at the time when the delivery is taken from such carrier or bailee. Also, when
the movement of goods starts and terminates in the same state, it shall not be deemed to be
a movement of goods from one state to another. A sale or purchase of goods is said to take
place outside a state under the following conditions:
1. Subject to the provisions contained in Section 3, when a sale or purchase of goods is
determined in accordance with sub-section (2) to take place inside a state, such sale
or purchase shall be deemed to have taken place outside all other states.
2. A sale or purchase of goods shall be deemed to take place inside a state, if the goods
are within the state—
a. in the case of specific or ascertained goods, at the time the contract of sale is
made, and
b. in the case of unascertained or future goods, at the time of their appropriation to
the contract of sale by the seller or by the buyer, whether assent of the other party
is prior or subsequent to such appropriation.
Where there is a single contract of sale or purchase of goods situated at more places than one,
the provisions of this sub-section shall apply as if there were separate contracts in respect of
the goods at each of such places. A sale or purchase of goods is said to take place in the course
of import or export under the following conditions:
• A sale or purchase of goods shall be deemed to take place in the course of the export
of goods out of the territory of India, only if the sale or purchase either occasions such
export or is effected by a transfer of documents of title to the goods aft er the goods
have crossed the customs frontiers of India.
• A sale or purchase of goods shall be deemed to take place in the course of the import
of the goods into the territory of India only if the sale or purchase either occasions
such import, or is effected by a transfer of documents of title to the goods before the
goods have crossed the customs frontiers of India.
• Notwithstanding anything contained in sub-section (1), the last sale or purchase of
any goods preceding the sale or purchase occasioning the export of those goods out
of the territory of India, shall also be deemed to be in the course of such export, if
such last sale or purchase took place after, and was for the purpose of complying with
the agreement or order for or in relation to such export. To make a sale as one in the
course of inter-state trade, there must be an obligation to transport the goods outside
the state. The obligation may be of the seller or the buyer. It may arise by a reason of
statute or contract between the parties or from mutual understanding or agreement
between them or, even from the nature of the transaction, which linked the sale to
such transaction. There must be a contract between the seller and the buyer. Accord-
ing to the terms of the contract, the goods must be moved from one state to another.
If there is no contract, then there is no inter-state sale. There can be an inter-state sale
even if the buyer and the seller belong to the same state; even if the goods move from
one state to another as a result of a contract of sale; or, the goods are sold while they
are in transit by transfer of documents.
To Whom is Sales Tax Payable and by Whom

Sales tax is payable to the sales tax authority in the state from which the movement of goods
commences. It is to be paid by every dealer on the sale of any goods affected by him in the
course of inter-state trade or commerce, notwithstanding that no liability to tax on the sale of
goods arises under the tax laws of the appropriate state.
CST Act is an Act to formulate principles for determining when a sale or purchase of
goods takes place in the course of inter-state trade or commerce or outside a state or in the
course of import into or export from India, to provide for the levy, collection, and distribu-
tion of taxes on sales of goods in the course of inter-state trade or commerce, and to declare
certain goods to be of special importance of inter-state trade or commerce, and specify the
restrictions and conditions to which state laws imposing taxes on the sale or purchase of such
goods of special importance (GSI) shall be subject.
CST Reduced
On the basis of the discussions between the Empowered Committee (EC) of State Finance
Ministers and the Union Finance Minister regarding the compensation package, the
Department of Revenue, of the Ministry of Finance, of the Government of India, has issued a
Notification on 30 May, 2008 to bring into effect from 1 June, 2008 the newly reduced rate of
CST of 2 per cent on inter-state sales of goods. The notification of new CST rate of 2 per cent
in the place of earlier 3 per cent is in accordance with the announcement made by the Union
Finance Minister in his Budget speech in the Parliament in February 2008 that the rate of
CST would be reduced. The rate of CST on the inter-state sale of goods to registered dealers
(against Form-C) shall now be the lowest of about 2 per cent, and the rate of VAT or State
Sales Tax is applicable. This reduction forms a part of the roadmap for phasing out CST com-
pletely by 31 March, 2010 in the preparation of introducing Goods & Services Tax (GST), the
roadmap for which is being worked out by the EC of State Finance Ministers together with
the Union Finance Ministry. The Central government and the EC of State Finance Ministers
have further agreed that the compensation for revenue loss to the states in any year arising
from the lowering of CST will be limited to he proportionate loss, based on the actual collec-
tion of CST in the relevant year.
MODIFIED VALUE ADDED TAX (MODVAT)

MODVAT is the abbreviated form of ‘Modified Value Added Tax’. The MODVAT scheme
was introduced with effect from April 1, 1986, as an improvement over the Proforma Credit
Scheme, which was in operation prior to that date. The scheme primarily aims at avoiding the
‘cascading effect’ of duty-on-duty, and at ensuring that duty is paid only on the ‘value added’
Central Sales Tax, levied by
either central or the state gov- at each stage of production, instead of on the gross value including the duty paid in the earlier
ernment, is a tax levied on the stages. This is achieved by allowing the manufacturer to avail credit on the duty paid in the
sale of a commodity which is earlier stages and to utilize the credit towards the payment of duty on the goods cleared by
produced or imported and sold
him, provided the conditions and requirements laid down in the scheme are satisfied. To start
for the first time.
with, the scheme applied only to inputs, but later, with effect from 1 March, 1994, the scheme
was extended to capital goods also.
Background of MODVAT
Prior to the introduction of MODVAT, the Proforma Credit Scheme as specified under Rule
56A of the Central Excise Act, 1944 was in operation. The scheme was narrow in scope and
could be applied to some specific situations only.
Introduction
In the Union Budget of 1986 was introduced the new system of MODVAT. It is a tax on the
‘value addition.’ Value addition means the value of the output as reduced by the total cost of
bought-out inputs. The MODVAT scheme at present allows a set-off of the excise duties and
additional duties of custom on inputs against the duty liability on final products and capital
goods.
Purpose
It was introduced in order to avoid a double taxation on the inputs as well as the finished
goods.
MODVAT Credit [Rule 57A]

On Inputs
It is governed in terms of Rules 57A–57J of Central Excise Rules. The manufacturer of the
final products shall be allowed to take the credit of the specified duty paid on the goods,
used in or in relation to the manufacture of the final products, whether directly or indirectly
and whether contained in the product or not. Therefore, the inputs should be such that they
participate in the process of manufacture without which the end product cannot be manu-
factured. Also, it covers not only the goods which are used in the manufacture but which are
also used in the stages once removed from the process.
MODVAT Credit on Consumable Stores

In general, it is to be noted that whichever items are in the nature of consumables are eligible
for MODVAT credits as their usage would qualify them as inputs, as per the broad definition
of Rule 57A of the Central Excise Rules.
MODVAT Credit on Packing Materials

MODVAT credit is available on packing materials that are used to pack finished products,
which are chargeable to specific rates of duty.
MODVAT Credit on Inputs

It is used as fuel.
MODVAT Credit on Accessories

It is applicable if the cost of accessories is included in the assessable value.
MODVAT Credit on Capital Goods

New set of Rules 57Q–57U have been inserted in Chapter V of the Central Excise Rules for
granting MODVAT credit on capital goods. These provisions were inserted with effect from
March 1, 1994.
Pre-conditions to be Fulfilled
1. Final product must be dutiable.
2. Both final product and capital goods must be specified for eligibility under the Table
of Rule 57Q.
3. Capital goods should be duty paid with an evidence of payment.
Salient Features of MODVAT

• No prior permission is required, but a 57G declaration is a must
• No need of filing Form D-3 for an intimation of receipt of input
• It is available for both basic excise duty and special excise duty
• Removal of inputs for home consumption or export under Rule 57F(3)
• Also, the adjustment of credit is allowed; that is, for obtaining a refund on credit if
goods get exported and the credit could not be adjusted in the domestic sale
• Manufacturer availing the MODVAT facility should maintain the following registers
apart from filing the return:
a. RG-23A Part I to show input received/used/lying as stock
b. G-23A Part II to show details of credit availed/utilized/balance
From MODVAT to CENVAT

After MODVAT now its time for CENVAT (central value added taxes) introduced in this year’s
budget which is similar to the industrialized nations who have implemented VAT. This marks
a fundamental change in the government’s revenue collections policy as 86 per cent of the
excise collections during 2000–01 would be under the new levy, and since a single rate is intro-
duced this year the changes that take place in the rate of duties would be eliminated. CENVAT
covers practically all the items in the Central Excise Tariff, though a few items like automo-
biles, pan masala, aerated water, tobacco products, cosmetics, tyres, and air conditioners have
been placed under the special excise duty regime, totalling to only 14 per cent of the estimated
excise collection during the year, and would be under the special excise duty which has been
spread over three slabs of 8 per cent, 16 per cent, and 24 per cent. Only 1 per cent of the total
collections of ad valorem excise duty would be from the 8 per cent slab of additional customs
duty. About 9 per cent would come from the 16 per cent slab while 4 per cent would be from
the 24 per cent levy. Further, this would also eliminate the classification disputes totally.
Inspite of the above, the opinion of most of the industries and the middle-class people
is not very positive towards this single rate of duty as they will have to now pay more for
quite a few items like culinary products, toiletries, ice cream, squashes, cosmetics, perfumes,
talcum powders, jams, and confectionery for which the rate of duty has been raised from
8 per cent to 16 per cent, which is quite a lot. Moreover, the new slab will have a cascading
eff ect on the overall prices. The industry had hoped that the budget would lower the excise
duties, thereby enabling the companies to tread the growth path and improve the market
penetration, especially in the rural areas.
In fact it would increase the inflation level. Another step is towards procedural simpli-
fication, which is supposed to benefit the industry in a big way as maintenance of statutory
records has been done away with. The revenue department would rely on the account that is
maintained by the assessee. Random checks would be done to check any evasion it persists
while a detailed examination on a regular basis would be discontinued. A move is made
towards a regime of transaction cost where documents produced by the assessee would be
accepted. Although the above is supposed to be a procedural simplification, now the revenue
department, instead of relying only on the excise statutory records, can check any records
they wish to and, therefore, the onus is now more on the assessee on how to maintain the
records and how perfect and careful he needs to be.
The amendment of Section 4 of the central excise relating to valuation is made. Instead
of the assessment based on the normal price, a transaction value assessment would be made.
This means that there is a total new change in the valuation norms. The transaction value
would now include the amount charged for servicing, financing, warranty, commission, and
advertising. The changes are in line with customs valuation rules, which are in line with
GATT norms. In simplified terms, the new valuation norms for goods attracting ad volrem
duty would mean that the cost of servicing, providing warranty, or extending credit to the
buyer would be included in the cost of the items for the purpose of imposing excise duty.
As of now, manufacturers pay an excise duty only on the goods and not on the add-ons.
The new norms have also tightened the rules that are governing the transfer of goods
to a related person. Even here, now the onus remains with the assessee to prove that the
goods are sold at a fair market price or there would be a demand of a differential duty by the
excise department; and this would certainly lead to more litigations as in the case of related
persons where the definition has been enlarged with more inclusions like an employee be-
ing added to the list of related persons, which would lead to more interpretations; and more
interpretations means more litigations. About 4 per cent SAD on imports were to be paid
by the manufacturers alone in the last year, but this year it has been introduced even to the
importers and dealers, which is a welcome move. The changes in SAD are set to push up
the premiums on advance licence and freely transferable credits in the duty-free entitlement
passbook scheme (DEPB). The introduction of CENVAT almost puts to rest all the initiatives
taken for the introduction of mini-VAT for exporters, under which all state and central levies
would be reimbursed to them—a sort of expanded-duty drawback scheme. Non-reimbursed
levies such as state sales tax, electricity duty, and the like constitute about 13 per cent of the
cost of export production.
Further, in case of mandatory penalty, it would be reduced to 25 per cent of the duty
amount along with 24 per cent interest if 25 per cent penalty is paid within 30 days of the date
of communication of the order. This is a relief to the assessee in certain cases, while otherwise
the time limit to issue a show-cause notice is increased from six months to one year, which
means that now there is a larger scope for the department to issue show-cause notices. It can
thus be concluded that as usual the changes in the indirect taxes would make some goods
more expensive and some hopefully cheaper. The single slab rate and fortnightly payments of
excise duty will reduce the procedural delays but may not improve the demand.
CENTRAL VALUE ADDED TAX

Today, in India, taxation of inputs, like raw materials, components, and other intermediar-
ies, had a number of limitations. In a production process, the raw material passes through
various process stages till a final product emerges. Thus, the output of the first manufacturer
becomes an input for the second manufacturer and so on.
For example, when the inputs are used in the manufacture of a product A, the cost of
the final product increases not only on account of the cost of the inputs, but also on account
of the duty paid on such inputs. As the duty on the final product is on an ad valorem basis
and the final cost of product A includes the cost of inputs, inclusive of the duty paid, the duty
charged on product A meant doubly taxing the raw materials. In other words, the tax burden
goes on increasing as the raw material and final product passes from one stage to the other
because, each subsequent purchaser has to pay a tax again and again on an the material which
has already suffered tax. This is called ‘cascading effect’ or ‘double taxation.’ This process very
often distorted the production structure and did not allow the correct assessment of the tax
incidence.
Therefore, the government tried to remove these defects of the central excise system by
progressively relieving inputs from excise and countervailing duties. An ideal system to real-
ize this objective would have been to adopt VAT. However, on account of some practical dif-
ficulties it was not possible to fully adopt VAT. Hence, the government evolved a new scheme,
MODVAT. The MODVAT scheme which essentially follows VAT scheme of taxation, that
is, if a manufacturer A purchases certain components (raw materials) from another manu-
facturer B for some use in its product. Then, B would have paid an excise duty on the com-
ponents that were manufactured by it and would have recovered that excise duty in its sales
price from A. Now, A has to pay an excise duty on the product manufactured by it as well as
bear the excise duty paid by the supplier of raw material B. Under the MODVAT scheme, a
manufacturer can take credit of excise duty paid on raw materials and components used by
him/her in his/her manufacture. It amounts to excise duty only on additions in value by each
manufacturer at each stage.
The MODVAT scheme is regulated by Rules 57A–57U of the Central Excise Rules and
the notifications issued there under The Central Excise Rules, 2002, and Section 143 of the
Finance Act, 2002. The Modvat scheme ensures the revenue of the same order and, at
MODVAT scheme ensures that the same time, the price of the final product could be lower too. Apart from reducing the
duty is paid only on the value costs through elimination of cascade effect, and bringing in a greater rationalization in tax
added at each stage of pro-
structure and a certainty in the amount of tax leviable on the final product, this scheme will
duction, thereby avoiding the
‘cascading effect’ of duty-on- help the consumer to understand precisely, the impact of taxation on the cost of any product
duty, by allowing the manufac- and will, therefore, enable the consumer resistance to unethical attempts on the part of the
turer to avail credit on the duty manufacturers to raise the prices of the final products, attributing the same to higher taxes.
paid in earlier stages and utilise
the credit towards payment of
Subsequently, MODVAT scheme was restructured into CENVAT scheme. A new set of
duty on the goods cleared by rules 57AA–57AK, under The CENVAT Credit Rules, 2004, were framed and whatever re-
him/her. strictions were there in MODVAT Scheme were put to an end and comparatively, a free hand
was given to the assesses. Under the CENVAT scheme, a manufacturer of the final product or
a provider of the taxable service shall be allowed to take credit of the excise duty as well as of
the service tax that are paid on any input that is received in the factory or any input service
received by a manufacturer of the final product.
Background of CENVAT
CENVAT provisions are used in central excise to implement the concept of VAT at the manu-
facturing stage by giving credit of the duty that is paid on inputs. CENVAT was known as
MODVAT up to 31 March, 2000. CENVAT has its origin in the system of VAT, which is
common in West European Countries. Generally, any tax is related to the selling price of a
product. In modern production technology, any raw material passes through various stages
and processes till it reaches the ultimate stage, for example, steel ingots made in a steel mill.
These are rolled into plates by a re-rolling unit, while a third manufacturer makes furniture
from these plates. Thus, the output of the first manufacturer becomes the input for the second
manufacturer, who carries out further processing and then, supply it to a third manufacturer.
This process continues till the final product emerges. This product then goes to a distrib-
utor/wholesaler, who sells it to a retailer and then, it reaches the ultimate consumer. If a tax
is based on the selling price of a product, the tax burden goes on increasing as raw material
and final product passes from one stage to the other. A tax purely based on the selling price
of a product has a cascading effect, which has the following disadvantages:
Computation of exact tax content difficult: It becomes very difficult to know the real
tax content in the price of a product, as it passes through various stages and tax too is levied at
each stage. This is, particularly, important for granting export incentives or for fixing regula-
tory prices.
Varying tax burden: The tax burden on any commodity will vary widely depending on
the number of stages through which it passes in the chain from the first producer to the ulti-
mate consumer.
Discourages ancillarisation: Ancillarisation means getting most of the parts/com-
ponents manufactured from outside and making a final assembly. It is common for large
manufacturers (like automobile, machinery, and so on) to get the parts manufactured from
outside and make a final assembly in their plant. If a component is purchased from outside,
tax is payable. However, if the same component is manufactured inside the factory, no tax
is payable. Thus, the manufacturers are tempted to manufacture parts themselves instead of
developing ancillary units for supply of the same. This is against the national policy, because
it discourages the growth of SSI and increases the concentration of economic power.
Increases cost of production: If a manufacturer decides to reduce ancillarisation, it in-
creases the cost of production and wastage of scarce national resources, as the large manufac-
turer may not be in a position to fully utilize the production capacity of the machinery.
Concessions on the basis of use are not possible: Some articles may be used for various
purposes. For example, copper may be used for utensils, electric cables, or air conditioners.
The government would naturally like to vary the tax burden depending on the use. However,
this is not possible as when copper is cleared from the factory, its final use cannot be known.
Exports cannot be made tax free: Although the final products which are exported are
exempt from tax, there is no mechanism to grant rebate of tax that was paid at the earlier
stages on the inputs.
Highlights of CENVAT Scheme

Highlights of the scheme are as follows:
Credit of duty paid on input: The CENVAT scheme is principally based on the system
of granting credit of the duty that is paid on inputs. Under CENVAT, a manufacturer has to
pay duty as per the normal procedure on the basis of ‘assessable value’ (which is mainly based
on selling price). However, he/she gets the credit of duty paid on inputs. The example we saw
above can be recalculated as follows:
B will purchase goods from A @ ` 110, which is inclusive of a duty of ` 10. Since B is
going to get a credit of duty of ` 10, he will not consider this amount for his costing. He will
charge conversion charges of ` 40.00 and will sell his goods at ` 140. He will charge 10 per
cent tax and raise an invoice of ` 154.00 to ‘C’ (140 plus tax @ 10 per cent). In the invoice
prepared by B, the duty shown will be ` 14. However, B will get the credit of ` 10 that was paid
on the raw material purchased by him from A. Thus, the effective duty paid by B will be only
` 4. C will get the goods at ` 154 and not at ` 165, which he would have got in the absence of
CENVAT. Thus, in effect, B has to pay duty only on the value added by him. (See illustration
given in a later para.)
Meaning of ‘value added’: In the above illustration, the ‘value’ of inputs is ` 110, while
the ‘value’ of outputs is ` 150. Thus, the manufacturer has made a ‘value addition’ of ` 40 to
the product. Simply put, ‘value added’ is the difference between the selling price and the pur-
chasing price.
Inputs eligible for CENVAT: Credit will be available for a duty paid on (a) raw materials
(excluding few items), (b) materials that are used in relation to manufacturing of items like
consumables, and so on, (c) Packaging materials, and (d) Paints [Rule 2(g)].
Inputs should be used in or in relation to manufacture: CENVAT credit is available
only on inputs used in or in relation to the manufacture of a final product.
Input may be used directly or indirectly: The input may be used directly or indirectly
in or in relation to manufacture. The input need not be present in the final product.
No credit on HSD, LDO, and petrol: The duty paid on high-speed diesel (HSD) oil,
light diesel oil (LDO), and motor spirit (petrol) is not available as CENVAT credit, even if
these are used as raw materials.
No credit if final product is exempt from duty: No credit is available if the final product
is exempt from duty—Rule 6(1) of CENVAT Credit Rules. If a manufacturer manufactures
more than one product, it may happen that some of the products are exempt from duty. In
such cases, the duty paid on inputs that are used for the manufacture of exempted products
cannot be used for a payment of duty on other products which are not exempt from duty.
However, if the manufacturer uses common inputs both for exempted as well as unexempted
goods, he/she should maintain separate records for inputs that are used for manufacture of
exempted final products and should not avail CENVAT on such inputs. However, if he/she
does not maintain separate records and inventories of inputs that are used in exempted final
products, he/she has to pay an ‘amount’ of 8 percent of the price of the exempted goods. As
no credit is available if the final product is exempt, an SSI unit availing an exemption can-
not avail CENVAT credit and pay 8 per cent amount under Rule 6—CBE&C Circular No.
624/15/2002-CX.8, dated 28 February, 2002.
CENVAT on capital goods: Credit of duty paid on machinery, plant, spare parts of ma-
chinery, tools, dies, and so on, is available. However, up to 50 per cent credit is available in the
current year and the balance in the subsequent financial year or years.
CENVAT available only if there is ‘manufacture’: CENVAT on inputs is available only
if the process amounts to ‘manufacture’. Otherwise, CENVAT is not available. (In fact, in
such cases, no duty is payable on the final product and the question of CENVAT does not
arise at all.)
Eligibility of CENVAT Credit

Rule 3(1) of CENVAT Credit Rules states that a manufacturer or producer of final products
shall be allowed to take credit (termed as CENVAT credit) of specified duties (basic, special,
AED [Additional Excise Duty], NCCD, and so on, as discussed later) that are paid on inputs
or capital goods that are received in the factory.
Manufacturer can avail CENVAT credit: CENVAT credit can be availed by a manufac-
turer or producer of final products. We have already seen that a manufacturer or producer is
the person who actually brings the final product into existence.
Final products eligible under the CENVAT scheme: Recently, CENVAT has been
extended to all items included in CETA, except matches (Heading 36.05). Rule 2(e) of
CENVAT Credit Rules states that ‘final products’ means excisable goods that are manufac-
tured or produced from inputs, except matches. CENVAT scheme has been extended to all
the manufactured final products. These goods cover food products, chemicals, plastics and
rubber products, tobacco products, leather and wood articles, paper, metals, engineering
goods, textile products, electrical and electronic goods, and automobile sector.
Waste and scrap is the final product for CENVAT: As per CENVAT provisions, waste
or scrap is treated as the final product within the definition of Rule 57AA(c) [Now new
Rule 2(e)] and its clearance is as if it is a final product—MFDR TRU No. 345/2/2000-TRU,
dated 29 August, 2000.
Inputs Eligible for CENVAT

Rule 2(g) of CENVAT Credit Rules [earlier Rule 57AA(d)] defines ‘input.’ The definition
covers the following:
• All goods (except HSD, LDO, and petrol) used in, or in relation to, the manufacture
of the final products. The input may be used directly or indirectly in or in relation to
the manufacture of final product. The input need not be present in the final product.
• Input includes (a) accessories of final products cleared along with the final product,
(b) goods used as paint, (c) packing material, (d) fuel, and (e) goods that are used for
generation of electricity or steam that is used for manufacture of final products or for
any purpose.
• Input also includes lubricating oils, greases, cutting oils, and coolants.
• Input includes goods that are used in the manufacture of capital goods which are
further used in the factory of the manufacturer.
Inputs Not Eligible for CENVAT

Motor spirit (petrol), LDO, and HSD is not eligible as inputs. The following is the broad sum-
mary of inputs and outputs that are eligible:
• Most of the goods are eligible under CENVAT both as final products and inputs.
These chapters cover food products, chemicals, plastics and rubber products, tobac-
co products, leather and wood articles, textile products, paper, metals, engineering
goods, electrical and electronic goods, and automobile sector.
• Matches are not eligible as final products, though eligible as input.
• Motor spirit (petrol), LDO, and HSD oil are eligible as final products but not as
inputs.
No time limit for utilization of inputs: It was held that there is no time limit for consump-
tion of inputs. (In this case, it was held that when goods are lying in stock in factory premises,
CENVAT credit is not to be reversed even though the value has been written off in accounts).
CENVAT credit of capital goods that are used in the factory: CENVAT credit is avail-
able in respect of duty that is paid on ‘capital goods’ also. It may be noted that ‘capital goods’
can also be covered in the definition of ‘inputs’ as these are obviously used ‘in or in relation to
the manufacture.’ Some provisions are common in respect of CENVAT on inputs and capital
goods. However, there are some differences too. These are discussed later.
Capital goods that are manufactured within the factory: As per Explanation 2 to Rule
2(g) [earlier Rule 57AA(d)], ‘input’ includes goods that are used in the manufacture of capi-
tal goods which are further used in the factory of a manufacturer. Thus, if a manufacturer
manufactures some capital goods within the factory, goods that are used to manufacture such
capital goods will be eligible as ‘inputs’. (i.e., 100 per cent CENVAT credit will be available in
the same financial year).
No CENVAT if inputs are used for the exempted final products: As per the basic prin-
ciple of VAT, credit of duty can be availed only for a payment of duty on the final product. As
a natural corollary, if no duty is payable on the final product, then the credit of duty paid on
inputs cannot be availed.
As per Rule 6 of CENVAT Credit Rules, CENVAT credit is not admissible if the final
product is exempt from duty. However, as per Rule 6(5), a manufacturer can avail CENVAT
credit on inputs when the final product is despatched without any payment of duty, in the
following cases: When a (a) final product is despatched to SEZ, EOU, EHTP, or STP; (b) when
a final product is supplied to the United Nations or an international organization for their of-
ficial use or supplied to projects funded by them, which are exempt from duty; and (c) when
a final product is exported under bond without any payment of duty.
In other cases, the manufacturer is not entitled to avail CENVAT credit on inputs when
the final product is cleared without any payment of duty. It may happen that same inputs are
used partly for the manufacture of dutiable goods and partly for the exempted products. In
such cases, the manufacturer has two options which are as follows:
• Maintain separate inventories with accounts of receipt and use of inputs that are used
for exempted final products. In such cases, he should not avail CENVAT of credit of
such inputs at all—Rule 6(2) of CENVAT Credit Rules [earlier Rule 57AD(2)—prior
Rule 57CC(9)]. However, it is not necessary to maintain separate accounts in respect

of ‘fuel’ used as inputs. [In CCE v. Padmini Polymers 2003(151) ELT 358 (CEGAT), it
was held that there is no requirement that these must be stored separately.]
• If the manufacturer is unable to maintain such separate accounts, he/she has to pay
an amount equal to 8 per cent of the ‘price’ of such exempted final products. Such
payment can be made by debit to CENVAT credit account or PLA.
Meaning of ‘exempted goods’: As per Rule 2(d) of CENVAT Credit Rules, ‘exempted goods’
means goods which are exempt from the whole of duty of excise that is leviable thereon and
includes goods which are chargeable to ‘nil’ rate of duty. Thus, the ‘exempted goods’ for the
purpose of CENVAT cover (a) goods chargeable to nil duty as per tariff and (b) goods which
are exempt by a notification issued under Section 5A.
When to pay the 8 per cent ‘amount’: The rules do not state on when the ‘amount’
should be paid. It is an established principle that if the statute does not provide any time limit,
the thing should be done in a ‘reasonable time.’ ‘Paying it on a monthly basis’ can be consid-
ered as a ‘reasonable time’ as that time is permitted for the payment of duty. Payment before
clearance cannot be insisted upon, in the absence of any statutory provision. Moreover, no
interest can be charged for delayed payment, as no time limit has been prescribed.
VALUE ADDED TAX

It has become a common practice around the world to adopt VAT in place of excise duties
and sales taxes. With the two-tier VAT regime that debuted on 1 April, 2005, the consumers
can expect a major bonanza. VAT is prevalent in over 120 countries (refer to Table 17.3).
In India, the introduction of VAT would be a historic reform of the domestic trade system.
Since 1991, a momentum was gathering in favour of implementation of VAT all over the
country. The central government, as a policy, decided to implement VAT. However, sales tax
can be levied only by any state government and not by the central government. The role of
central government is only to convince and guide the states to implement VAT.
Table 17.3
Tax Rates Around the
>
Country
Income Tax
VAT (%)
Corporate (%) Individual (%)
World
Argentina 35 9–35 21
Australia 30 17–47 10 (GST)
Austria 25 21–50 20 (GST)
Belgium 33.99 25–50 21
Brazil 34 15–27.5 17–25
Bulgaria 10 10 20
Canada 19.5 (federal) 15–29 (federal) 5 (GST)
China 25 5–45 17
Cyprus 10 20–30 15
Czech Republic 21 15 19
Denmark 24 38–59 25
Egypt 20 10–20 –
(Continued)

Country
Income Tax
VAT (%)
< Table 17.3
(Continued)
Estonia 22 22 18
Finland 26 8.5–31.5 22
France 33.33 10–48.09 19.6
Germany 30–33 (effective) 15–45 19
Gibraltar 33 17–40 –
Greece 22 or 25 0–40 19
Hong Kong 17.5 16–20 –
Hungary 16 18 and 36 20
India 30–40 10–30 12.5
Indonesia 30 5–35 10
Ireland 12.5 20–41 21
Israel 27 10–47 15.5
Italy 31.4 23–43 20
Japan 30 5–40 5 (consump)
Latvia 15 25 18
Lithuania 15 15 or 24 18
Luxemburg 29.63 6–38.95 15
Malta 35 15–35 18
Mexico 29 3–29 15
Monaco 33.33 0 19.6
Morocco 35 0–41.5 20
Montenegro 9 15 17
Netherlands 20–25.5 0–52 19
New Zealand 33 0–39 12.5 (gst)
Norway 28 28–51.3 25
Pakistan 35 7.5–35 15
Philippines 35 5–32 10
Poland 19 19–40 22
Portugal 26.5 10.5–42 21
Romania 16 16 19
Russia 24 13 18
Saudi Arabia 20 20 —
Serbia 10 10 or 14 18
Singapore 20 3.75–21 5
Slovakia 19 19 19
Slovenia 22 16–41 20
South Africa 29 18–40 14
(Continued)
Table 17.3
(Continued)
>
Country
Income Tax
VAT (%)
Spain 32.5 15–45 16
Sweden 28 0–56 25
Taiwan 25 6–40 5
Thailand 30 5–37 7
Turkey 20 15–35 18
United Kingdom 30 0–40 17.5
Ukraine 25 15 20
United States
of America 35 0–35 —
Vietnam 28 0–40 10
Zambia 35 10–30 17.5
Source: http://www.worldwide-tax.com/index.asp#partthree
VAT is essentially a form of sales tax. It is a multi-point and multi-stage tax, levied only
on the value addition to a product, at each stage of production and distribution chain. There
will be a deduction from taxes that were paid earlier in the chain. At present, sales tax is
levied at a single point either at the hands of a producer, distributor, or a wholesaler.
VAT has been defined as a tax on the sale of a commodity at every point in the series of
sales by the registered dealers, with the provision of credit of input tax paid at the previous
point of purchase, there of. As such, the VAT paid by the registered dealer would be deducted
and the balance be paid. As said by the Chairman of Madras School of Economics that in a
country with a federal constitution, the constituent states have to adopt a consumption (or
destination) type of indirect tax if a common market is to be precluded, and inter-state tax
exportation is to be minimised.
The implementation of VAT in the month of April is a very important step as all major
states are going to adopt it at the same time and have agreed on several common features.
It will be a landmark in the economic history of India. Once this is done, there will be two
VAT systems, one at the centre—the CENVAT, and the other at the state level. They will exist
side by side and efforts will be made to harmonize the two. CENVAT is applicable only at the
manufacturing stage whereas the state VAT is levied on the domestic trade transactions. The
adoption of VAT as the major system of domestic trade transaction is extremely important—
the VAT system enables the government to levy a tax on the principle of destination and only
on the value of consumption.
The constitutional position in India is that the central government can tax goods at the
manufacturing stage and services, where as the states can tax goods at all stages but only a few
services mentioned in the constitution (such as entertainment, transport of goods by road).
The states now claim that they should be given the power to levy taxes on services.
Background and justification of VAT in the existing sales tax structure, there are prob-
lems of double taxation of commodities and multiplicity of taxes, resulting in a cascading tax
burden. For instance, in the existing structure, before a commodity is produced, inputs are
first taxed; and then after the commodity is produced with the input tax load, the output is
taxed again. This causes an unfair double taxation with cascading effects. In the VAT, a set-off
is given for input tax as well as tax paid on previous purchases.
In the prevailing sales tax structure, there are in several states also a multiplicity of Value added tax (VAT), levied
taxes, such as turnover tax, surcharge on sales tax, additional surcharge, and so on. With only by the states, it is a multi-
introduction of VAT, these other taxes will be abolished. In addition, CST is also going to point, multi-stage sales tax, lev-
ied only on the value addition to
be phased out. As a result, the overall tax burden will be rationalized, and prices in general a product, at each stage of pro-
will also fall. Moreover, VAT will replace the existing system of inspection by a system of duction and distribution chain.
built-in self-assessment by the dealers and auditing. The tax structure will become simple
and more transparent. That will improve tax compliance and will also augment the revenue
growth.
SERVICE TAX
The journey of taxation of services began by selective taxation of just three services on
1 July, 1994. The first year collections now appear a very modest at ` 407 crore. After appear-
ing largely as just-another-tax for the first 8 years, with collections touching ` 3,302 crore
in 2001–02, service tax took some giant leaps in the next 7 years, both on the back of wider
coverage as well as increase in tax rate, reaching ` 60,941 crore in 2008–09.
Next two years saw the growth somewhat moderating with collections reaching ` 70,896
crore in 2010–11. The buoyancy began once again on the back of some policy initiatives and
service tax contributed ` 97, 444 crore during 2011–12, an increase of nearly 37 per cent over
the previous year.
While the revenue expectations were often exceeded in all these years the administra-
tive challenge began to assume unmanageable proportions. The newer additions to the list
of services often raised issues of overlaps with the previously existing services, confounding
both sides as to whether some activities were taxed for the first time or were already covered
under an earlier, even if a little less specific head.
Definition
‘Service’ has been defined in Clause (44) of the new section 65B and means –
• any activity
• for consideration
• carried out by a person for another
• and includes a declared service
The said definition further provides that ‘service’ does not include –
• any activity that constitutes only a transfer in title of (i) goods or (ii) immovable prop-
erty by way of sale, gift or in any other manner
• (iii) a transfer, delivery or supply of goods which is deemed to be a sale of goods
within the meaning of Clause (29A) of article 366 of the Constitution
• a transaction only in (iv) money or (v) actionable claim
• a service provided by an employee to an employer in the course of the employment
• fees payable to a court or a tribunal set up under a law for the time being in force
Service Tax Profiles (in alphabetical order)
S. No. Service Category

1. Advertising agency service
2. Advertisement—sale of space or time services
3. Air travel agent’s services
4. Airport services
5. Architect’s services
6. Asset management services by individuals
7. ATM operation, maintenance or management services
8. Auction service
9. Authorized service stations for motor vehicles servicing or repairs
10. Banking and other financial services
11. Beauty treatment services
12. Brand promotion services
13. Broadcasting services
14. Business auxiliary service
15. Business exhibition service
16. Business support service
17. Cable operator’s services
18. Cargo handling services
19. Chartered accountant’s (practising) services
20. Cleaning services
21. Clearing and forwarding agent’s services
22. Clearing and processing house services
23. Club’s or association’s membership services
24 Commercial training or coaching services
25. Commercial use or exploitation of any event service
26. Commodity exchange service
27. Company secretary’s (practising) services
28. Construction of residential complex service
29. Construction or renovation of commercial/industrial buildings/pipelines/
conduits services
30. Construction services – Preferential location and development
31. Consulting engineer’s service
32. Convention services
33. Copyright services
34. Cosmetic or plastic surgery service
(Continued)

35. Cost accountant’s (practising) services
36. Courier services
37. Credit card, debit card, charge card or other payment cards related
services
38. Credit rating agency’s services
39. Custom house agent’s services
40. Design services
41. Development and supply of content for telecommunication, advertising
and on-line information services
42. Dredging services
43. Dry cleaning services
44. Electricity exchange services
45. Erection, commissioning or installation service
46. Event management Service
47. Fashion designer service
48. Foreign exchange broking services
49. Forward contract service
50. Franchise services
51. Health club and fitness centre services
52. Health services
53. Information technology software services
54. Insurance auxiliary services concerning general insurance business
55. Insurance auxiliary services concerning life insurance business
56. Insurance business services (general insurance)
57. Insurance business services (life insurance)
58. Intellectual property services
59. Interior decorator’s services
60. Internet café’s services
61. Internet telecommunication services
62. Investment management service under ULIP
63. Legal consultancy services
64. Lottery and other games of chance services
65. Mailing list compilation and mailing services
66. Management or business consultant’s services
67. Management, maintenance or repair services for goods, equipments or
properties
68. Mandap keeper’s services
(Continued)

69. Manpower recruitment or supply agency’s services
70. Market research agency’s services
71. Medical records maintenance service
72. Mining service
73. Online information and database access and/or retrieval services
74. Opinion poll service
75. Outdoor caterer
76. Packaging services
77. Pandal or shamiana services
78. Photography services
79. Port services by major ports
80. Port services by other ports (minor ports)
81. Programme (TV or radio) services
82. Public relation service
83. Rail travel agent’s services
84. Real estate agent’s services
85. Recovery agent’s services
86. Registrar to an issue services
87. Rent-a-cab services
88. Renting of immovable property services
89. Scientific or technical consultancy services
90. Security agency’s services
91. Share transfer agent service
92. Ship management services
93. Site formation and clearance, excavation and earthmoving and
demolition services
94. Sound recording services
95. Sponsorship service
96. Steamer agent’s services
97. Stock broking services
98. Stock exchange service
99. Storage and warehousing services
100. Supply of tangible goods services
101. Survey and exploration of mineral services
102. Survey and map making services
103. Technical inspection and certification services
104. Technical testing and analysis services
(Continued)

105. Telecommunication services
106. Tour operator’s services
107. Transport of coastal goods and transport of goods through national water
way/inland water service
108. Transport of goods by air services
109. Transport of goods by road
110. Transport of goods by rail service
111. Transport of goods through pipeline/conduit services
112. Travel agent’s (other than air or rail) services
113. Travel by air services
114. Travel by cruise ship service
115. Underwriters services
116. Video tape production services
117. Works contract Services
C ase
The tribunal held that the bank was entitled to the exemption under the law. In the case
discussed above, it was a similar situation of trying to get an exemption through one’s own
scheme. But then, the funds earmarked for the investment were distinct and separate, the
tribunal came to the conclusion that the assessee was an independent entity and the scheme
floated by the assessee was distinct and separate.
Case Questions
1. Suggest your views on this case.
2. Do you support the decision taken by the tribunal?
India has a well-developed tax structure with the authority to levy taxes that are divided
between the union and the state governments. The union government levies direct taxes such
as personal income tax and corporate tax, and indirect taxes like custom duties, excise duties,
and CST. The states are empowered to levy state sales tax apart from various other local taxes
like entry tax, octroi, and so on. Taxation has always played an important role in the formu-
lation of the government’s industrial policy. One of the objectives of the recent economic
reforms is the rationalization of the tax structure in the country. In 1991, the government set
up a special committee, the Raja Chelliah Committee on tax reforms, to review the country’s
tax system. Its mandate was to make recommendations to make the tax system more elastic
and broad based, and to suggest means that are required for simplifying the existing laws and
regulations to facilitate a better enforcement and compliance. The recommendations made
by this committee envisaged simplified procedures and a rationalised rate structure. The gov-
ernment has implemented a large number of recommendations such as:
• drastic reduction in customs and excise duties
• lowering of corporate tax rates
• removing the distinction between widely held and closely held companies
• extending MODVAT to more industries
• simplifying income tax return-filing procedures
• levying taxes on services like insurance, stockbroking, and telephones
The government intends to substantially implement the committee’s recommendations in the
next few years. Other recommendations yet to be implemented include the introduction of
VAT and streamlining tax administration, appellate procedures, and procedures for searches
and raids. Tax revenue as percentage of GNP (gross national product) has been consistently
increasing with the lion’s share of the revenues that are increasingly attributable to indirect
taxes—particularly, customs and excise. The report given by the EC of state finance ministers
in the form of White Paper, is a result of collective efforts of all the states in formulating the
basic design of the state-level VAT through repeated and candid discussions in the EC of the
state finance ministers. The state-level VAT, as elaborated in this White Paper, has certain
distinct advantages over the existing sales tax structure.
The VAT will not only provide a full set-off for an input tax as well as tax on previous
purchases, but will also abolish the burden of several of the existing taxes, such as turnover
tax, surcharge on sales tax, additional surcharge, SAT, and so on. In addition, CST is also
going to be phased out.
As a result, the overall tax burden will be rationalized, and the prices, in general, will
fall. Moreover, VAT will replace the existing system of inspection by a system of built-in self-
assessment by traders and manufacturers. The tax structure will become simple and more
transparent. This will significantly improve tax compliance and will also help increase rev-
enue growth. While this state-level VAT has all these advantages, it is a state subject derived
from Entry 54 of the State List, for which the states are sovereign in taking decisions. On
these decisions on VAT, the states, through discussion in the EC, have found it in their in-
terests, to avoid unhealthy competition and have certain features of VAT to be common for
all the states. These features will constitute the basic design of VAT. At the same time, the
states will have freedom for appropriate variations that are consistent with this basic design.
This White Paper is a collective attempt of the states to strike a balance between this needed
commonality and the desired, federal flexibility in the VAT structure. The White Paper also
strikes a balance between what is possible in the VAT design to begin with and what can
be improved upon in the subsequent years as we gather more experience. The White Paper
further mentions how after working out a consensus on this VAT design, nearly all the states
either have finalised their VAT bills by now and are in the process of obtaining presidential
assent, or will reach that stage very soon. Even for one major state where there are some
ground-level problems, a positive interaction with the EC has recently opened up the
possibility of resolving most of these problems.
s u mma r y
These efforts of the states towards formulation of VAT de- his active support over the last eight months, when he not
sign and its implementation have received the full cooper- only helped to formulate the modality of central financial sup-
ation of the Finance Ministry, Government of India. At the port to the states for a possible loss of revenue in the tran-
same time, the Finance Ministry has never imposed their sitional years of implementation of VAT, but also took time
views on us. We, therefore, remain thankful to the former Un- off his busy schedule to participate with us in the campaign
ion Finance Ministers—Dr. Manmohan Singh, Mr. Yashwant for VAT in the states.
Sinha, and Mr. Jaswant Singh. We are specially grateful to It has always been fruitful to have an interaction with
Mr. P. Chidambaram, the present Union Finance Minister, for Dr. Parthasarathi Shome, the Advisor to the Union Finance
Minister, for his insightful observations on the analytical We remain thankful to them, and our mutual interaction will
structure of VAT as well as his references due to his vast take place regularly. Finally, this White Paper could be written
experience in the implementation of VAT. The Secretary, only on the basis of a lively support of the Finance Ministers
Revenue; the Additional Secretary, Revenue; and all the con- of the states, and with a constant help from the Finance
cerned officials of the Revenue Department of the Finance Secretaries and the Commissioners of Commercial Taxes of
Ministry have helped us by participating in the discussions the states. The Commissioners of Commercial Taxes have
whenever we requested them, and also by assisting in vari- often burnt their mid-night oil, and their contribution should
ous procedural matters. An interaction with Dr. Govinda Rao, be particularly recorded. Mr. Ramesh Chandra, the Member-
the Chairman of the Technical Experts Committee on VAT, Secretary of the EC had to carry on the difficult administrative
and other members of the Committee has also been useful. task in the functioning of the EC. We appreciate the efforts
We take this opportunity to thank all of them. Discussions of Mr. Chandra and the staff of the EC. Even after all these
with the representatives of trade organizations and cham- efforts, there may be some unavoidable shortcomings in this
bers of commerce and industry at the national level as well White Paper, which we will try to overcome as we learn more
as in the state level have been relevant in assessing the from the actual experience in implementing the VAT. With
ground-level difficulties. Together with them, we are deter- this background and the attitude, this White Paper is an ex-
mined to overcome these difficulties in implementing VAT in pression of the genuine commitment of the states to the
the states. implementation of VAT from April 1, 2005.
Key W o r d s
● Direct Tax ● Permanent Account Number (PAN) ● MODVAT
● Indirect Tax ● Corporate Tax ● CENVAT
● Assessment Year ● Set-off ● Capital Goods
● Total Tax ● Wealth Tax ● VAT
● Previous Year ● Excise Duties ● Service Tax
● Assessee ● Types of Excise Duty
● Capital Asset ● Customs Tariff
Q u est i o n s
1. Define income tax. Discuss its assessment proce- 7. What do you mean by corporate tax? Discuss the pro-
dure and income exempted from tax rates. visions of corporate tax in respect of set-off and carry
2. Explain how CENVAT is charged on capital goods. forward loss.
3. Discuss the process and steps for classification of 8. Write short notes on:
goods in central excise. a. Wealth Tax
4. Enlist the condition for liability of excise duty and b. Excise Duties
types of excise duty. c. Custom Tariffs
5. List down the provisions of CENVAT. d. Central Sales Tax Act, 1956
6. List down the highlights of the Union Budget, 2008 e. Reverse Charge
on custom tariff and income tax. Explain how VAT is
computed.
r efe r e n ces
n Balchandani, K. R. (2001). Business Law for Manage- n Pagare, D. (2005). Law and Practice of Income Tax, 27th
ment, 2nd revised ed. Hyderabad: Himalaya Publishing revised ed. New Delhi: Sultan Chand.
House. n Pagare, D. (2005). Tax Law, 13th ed. New Delhi: Sultan
n CBDT Department of India, www.surfindia.com Chand.
n Central Board of Direct Taxes (CBDT), http://finmin.nic.in n Pagare, D. (2006). Business Taxation, 7th ed. New Delhi:
n Datey, V. S. (2001). Indirect Taxes. New Delhi: Taxmann Sultan Chand.
Publications. n Shanbhag, A. N. (2001). In the Wonderland of Investment,
n Directorate General of Foreign Trade, 14th revised ed. Mumbai: Focus Popular Prakashan.
http://dgft.delhi.nic.in n Singhania, V. K. (2001 and 2002). Direct Taxes. New
n Government of India, http://indiabudget.nic.in Delhi: Taxmann Publications.
n http://mospi.nic.in
n Gulshan, S. S. and G. K. Kapoor (2006). Business Law
Including Company, 10th ed. New Delhi: New Age Inter- n http://finotax.com/income-tax/slabs
national Pub. n http://zeenews.india.com/business/budget-2013
n Income Tax Department, www.incometaxindia.gov.in n http://tax-india.com/service-tax/list-of-taxable-services-
n Ministry of Finance, http://finmin.nic.in in-india/
n Pagare, D. (2001). Indirect Taxes. New Delhi: Sultan
Chand.
18
C hapter
MRTP, FERA, and FEMA Act

>>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>>
• Monopolies and Restrictive Trade Practices • New Competition Policy 504
Act (Mrtp), 1969 491 • Case 514
• Foreign Exchange Regulation Act (Fera), • Key Words 515
1973 493
• Questions 515
• Foreign Exchange Management Act (Fema), • References 516
1999 499
MONOPOLIES AND RESTRICTIVE TRADE

PRACTICES ACT (MRTP), 1969
This Act was enacted to prevent the concentration of economic power to common detriment, This Act was enacted to prevent
control of monopolies, and prohibition of monopolistic and restrictive trade practices the concentration of economic
(MRTP) and matters connected therewith. power to common detriment,
control of monopolies, and
prohibition of monopolistic
OBJECTIVES and restrictive trade practices
(MRTP) and matters connected
• Regulation of monopolies therewith.
• Prevention of concentration of economic power

• Prohibit monopolistic trade practices
• Restrictive and unfair trade practices
• Controlling monopolistic trade practices (after amendment in 1991)
• Regulating restrictive and unfair trade practices (after amendment in 1991)
Prevention of Concentration of Economic Power

Under this enactment, any undertaking producing one-fourth or more of any type of goods
and having assets of more than ` 1 crore, is required to obtain clearance for any scheme of
expansion. Initially, for the purpose of computing, the total goods produced by the undertak-
ing, including goods that were exported, were also taken into account. By an amendment in
1980, goods which are exported are no longer taken into account while computing the total
goods produced. The amendment was in view of the objective of the enactment to control
such practices within India.
Monopolistic Trade Practices

Section 2(i) of the Act defines monopolistic trade practice while Section 31 provides for
investigation into such practices by the MRTP Commission, either on reference by the
central government or on receipt of information about the carrying on of such activities
by any such undertaking. Monopolistic trade practices such as maintenance of prices and
profits at unreasonable levels, arbitrary price increases, high expenditure on advertisement,
and high power salesmanship to maintain the undertaking in a monopoly situation, limiting
technical detriment to common detriment or allowing quality of goods to deteriorate, are
some of the situations which would call for investigation and action under this enactment.
Under Section 32 of the Act, such monopolistic trade practices are deemed to be prejudicial
to public interest.
Permitted Monopolistic Trade Practices

The central government may permit monopolistic practices if satisfied that it would be neces-
sary for defense purposes, to ensure maintenance of supply of essential goods/services, or to
give effect to any terms of an agreement to which the central government is a party.
Restrictive Trade Practices

Section 2(O) defines restrictive trade practices (RTPs), which may be investigated by the
MRTP Commission under Section 37 of the Act. RTPs include differential or discrimina-
tory incentives based on quantities, stipulation in agreement as to the prices that should be
charged on resale, territorial restrictions and restricting terms of guarantee, bumper prize
contests wherein the prices of goods are increased to cover the cost of prizes, announcing
loan facilities without a guarantor while charging guarantor’s commission, sale of goods for
a particular price and issue of cash memos for a lesser sum, display of price lists indicating
maximum recommended rates, and absence of indication that a lower price could be charged
thus encouraging the consumer.
MRTP and New Industrial Policy, 1991

The MRTP Act became effective in June 1970. With the emphasis placed on productivity in
The MRTP Act became effective
in June 1970. With the emphasis the sixth plan, major amendments to the MRTP Act were carried out in 1982 and 1984 in
placed on productivity in the order to remove the impediments to industrial growth and expansion. This process of change
sixth plan, major amendments was given a new momentum in 1985 by an increase of the threshold limit of assets.
to the MRTP Act were carried
With the growing complexity of industrial structure and the need for achieving econo-
out in 1982 and 1984 in order
to remove the impediments to mies of scale for ensuring higher productivity and competitive advantage in the international
industrial growth and expansion. market, the interference of the government through the MRTP Act in investment decisions
of large companies has become deleterious in its effects on the Indian industrial growth. The
pre-entry scrutiny of investment decisions by the so-called MRTP companies will no longer
be required.
Instead, the emphasis will be on controlling and regulating monopolistic, restrictive,
and unfair trade practices (UTPs) rather than making it necessary for the monopoly houses
to obtain prior approval of the central government for expansions; establishment of new
undertakings; merger, amalgamation, and take-over, and appointment of certain directors.
The thrust of policy will be more on controlling UTPs or RTPs.
The MRTP Act will be restructured by eliminating the legal requirement for prior
governmental approval for expansion of present undertakings and establishment of new
undertakings.
MRTP, FERA, and FEMA Act | 493
The provisions relating to merger, amalgamation, and take-over will also be repealed.
Similarly, the provision regarding restrictions on acquisition of and transfer of shares will be
appropriately incorporated in the Companies Act.
Simultaneously, the provisions of the MRTP Act will be strengthened in order to enable
the MRTP Commission to take appropriate action in respect of the monopolistic, restrictive,
and UTPs. The newly empowered MRTP Commission will be encouraged to require investiga-
tion suo moto or on complaints received from individual consumers or classes of consumers.
FOREIGN EXCHANGE REGULATION ACT

(FERA), 1973
This Act consolidates and amends the law regulating certain payments, dealings in foreign FERA applies to all citizens with-
exchange and securities, transactions indirectly affecting foreign exchange and the import in and outside of India and to
and export of currency for the conservation of foreign exchange resources of the country, and branches and agencies of com-
the proper utilisation thereof in the interests of the economic development of the country. panies/corporate bodies regis-
tered or incorporated in India. Its
This Act extends to the whole of India. It also applies to all citizens of India, outside India, to main objective is to consolidate
branches and agencies outside India and of companies or bodies corporate, registered, or incor- and amend the law regulating
porated in India. It shall come into force on such date as the central government may, by notifica- certain payments, dealings in
tion in the Official Gazette, appoint in this behalf, provided that different dates may be appointed foreign exchange and securi-
ties, transactions indirectly af-
for different provisions of this Act and any reference in any such provision to the commencement fecting foreign exchange and
of this Act shall be construed as a reference to the coming into force of that provision. the import and export of cur-
rency for the conservation of
the foreign exchange resources
Definitions of the country, and the proper
utilization thereof in the inter-
In this Act, unless the context otherwise requires ests of the economic develop-
ment of the country.
i. ‘Appellate Board’ means the Foreign Exchange Regulation Appellate Board, consti-
tuted by the central government under sub-section (1) of Section 52.
ii. ‘Authorized dealer’ means a person for the time being authorized under Section 6 to
deal in foreign exchange.
iii. ‘Bearer certificate’ means a ‘certificate of title to securities’ by the delivery of which
(with or without endorsement), the title to the securities is transferrable.
iv. ‘Certificate of title to a security’ means any document used in the ordinary course
of business as a proof of the possession or control of the security, or authorizing or
purporting to authorize, either by an endorsement or by delivery, the possessor of the
document to transfer or receive the security thereby represented.
v. ‘Currency’ includes all coins, currency notes, bank notes, postal notes, postal orders,
money orders, cheques, drafts, travellers’ cheques, letters of credit, bills of exchange,
and promissory notes.
vi. ‘Foreign currency’ means any currency other than Indian currency.
vii. ‘Foreign exchange’ means foreign currency and includes all deposits, credits, and
balances payable in any foreign currency, and any drafts, travellers’ cheques, letters
of credit, and bills of exchange—expressed or drawn in Indian currency but payable
in any foreign currency; and any instrument payable, at the option of the drawee
or holder thereof or any other party thereto, either in Indian currency or in foreign
currency, or partly in one and partly in the other.
viii. ‘Foreign security’ means any security created or issued elsewhere than in India, and
any security, the principal of or interest on, which is payable in any foreign currency,
elsewhere than in India.
ix. ‘Indian currency’ means currency which is expressed or drawn in Indian rupees
but does not include special bank notes and special one-rupee notes issued under
Section 28A of the Reserve Bank of India Act, 1934.
x. ‘Indian custom waters’ means the waters extending into the sea to a distance of 12
nautical miles measured from the appropriate base line on the coast of India and
includes any bay, gulf, harbour, creek, or tidal river.
xi. ‘Money-changer’ means a person for the time being authorized under Section 7 to
deal in foreign currency.
xii. ‘Overseas market’, in relation to any goods, means the market in a country outside
India and in which such goods are intended to be sold.
xiii. ‘Owner’, in relation to any security, includes any person who has the power to sell or
transfer the security, or who has the custody thereof or who receives, whether on his
own behalf or on behalf of any other person, dividends or interest thereon, and who
has any interest therein, and in a case where any security is held on any trust or divi-
dends or interest thereon, are paid into a trust fund, also includes any trustee or any
person entitled to enforce the performance of the trust, or to revoke or vary, with or
without the consent of any other person, the trust, or any terms thereof, or to control
the investment of the trust’s money.
xiv. ‘Person resident in India (PRI)’ means a citizen of India, who has, at any time after
25 March 1947, been staying in India but does not include a citizen of India who has
gone out of, or stays outside India, in either case
a. for or on taking up employment outside India, or
b. for carrying on outside India a business or vocation outside India, or
c. for any other purpose, in such circumstances as would indicate his/her intention
to stay outside India for an uncertain period;
or a citizen of India, who having ceased by virtue of paragraph (a) or paragraph (b)
or paragraph (c) of sub-clause (I) to be a resident in India, returns to, or stays in,
India, in either case
a. for or on taking up employment in India, or
b. for carrying on in India a business or vocation in India, or
c. for any other purpose, in such circumstances as would indicate his/her intention
to stay in India for an uncertain period;
or a person, not being a citizen of India, who has come to, or stays in, India, in
either case:
a. for or on taking up employment in India, or
b. for carrying on in India a business or vocation in India, or
c. for staying with his or her spouse, such spouse being a PRI, or
d. for any other purpose, in such circumstances as would indicate his/her intention
to stay in India for an uncertain period;
or a citizen of India, who, not having stayed in India at any time after 25 March
1947, comes to India for any of the purposes referred to in paragraphs (a), (b),
and (c) of sub-clause (iii), or for the purpose and in the circumstances referred
to in paragraph (d) of that sub-clause, or having come to India stays in India for
any such purpose and in such circumstances.
A person, who has, by reason only of paragraph (a) or paragraph (b) or para-
graph (d) of sub-clause (iii), been a resident in India, shall, during any period in
which he is outside India, be deemed to be not a resident in India.
xv. ‘Person resident outside India (PROI)’ means a person who is not a resident in India.
xvi. ‘Precious stones’ includes pearls and semi-precious stones and such other stones or
gems as the central government may for the purposes of this Act, notify in this behalf
in the Official Gazette.
xvii. ‘Prescribed’ means prescribed by rules made under this Act.
xviii. ‘Reserve Bank’ means the Reserve Bank of India (RBI).
xix. ‘Security’ means shares; stocks; bonds; debentures; debenture stock; government
securities as defined in the Public Debt Act, 1944; savings certificates to which the
Government Savings Certificates Act, 1959 applies; deposit receipts in respect of de-
posits of securities, and units or sub-units of unit trusts, and includes certificates of
title to securities, but does not include bills of exchange or promissory notes other
than government promissory notes.
Moneychangers
The Reserve Bank may, on an application made to it in this behalf, authorize any person to A moneychanger is any person
deal in foreign currency. An authorization under this section shall be in writing and authorized by RBI in writing, to
deal in foreign currency where
i. may authorize dealings in all foreign currencies or may be restricted to authorizing ‘foreign currency’ can be in the
dealings in specified foreign currencies only; form of notes, coins, or travel-
lers’ cheques; and ‘dealing’
ii. may authorize transactions of all descriptions in foreign currencies or may be means purchasing foreign
restricted to authorizing specified transactions only; currency in the form of notes,
coins, or travellers’ cheques, or
iii. may be granted with respect to a particular place where alone the money changer selling the same.
shall carry on his/her business;
iv. may be granted to be effective for a specified period, or within specified amounts;
v. may be granted subject to such conditions as may be specified therein.
Any authorization granted under sub-section (1) may be revoked by the Reserve Bank at any
time if it is satisfied that
i. it is in the public interest to do so; or
ii. the money changer has not complied with the conditions subject to which the
authorization was granted or has contravened any of the provisions of this Act or
of any rule, notification, direction, or order made there under, provided that no
such authorization shall be revoked on the ground specified in Clause (ii) unless the
money changer has been given a reasonable opportunity for making a representation
in the matter.
The provisions of sub-sections (4) and (5) of Section 6 shall, in so far as they are applica-
ble, apply in relation to a money changer as they apply in relation to an authorized dealer.
According to the Act, ‘foreign currency’ means foreign currency in the form of notes, coins,
or travellers’ cheques and ‘dealing’ means purchasing foreign currency in the form of notes,
coins, or travellers’ cheques or selling foreign currency in the form of notes or coins.
Authorized Dealers in Foreign Exchange

The Reserve Bank may, on an application made to it in this behalf, authorize any person to
deal in foreign exchange. An authorization under this section shall be in writing and
i. may authorize transactions of all descriptions in foreign currencies or may be estricted
to authorizing dealings in specified foreign currencies only;
ii. may authorize dealings in all foreign currencies or may be restricted to authorizing
specified transactions only;
iii. may be granted to be effective for a specified period, or within specified amounts;
iv. may be granted subject to such conditions as may be specified therein.
Any authorization granted under sub-section (1) may be revoked by the Reserve Bank at any
time if it is satisfied that
i. it is in the public interest to do so; or
ii. the authorized dealer has not complied with the conditions subject to which the au-
thorization was granted or has contravened any of the provisions of this Act or of any
rule, notification, direction, or order made thereunder, provided that no such autho-
rization shall be revoked on the ground specified in Clause (ii) unless the authorised
dealer has been given a reasonable opportunity for making a representation in the
matter.
Any authorised dealer shall, in all his/her dealings in foreign exchange and in the exercise
and discharge of the powers and of the functions delegated to him under Section 74, comply
with such general or special directions or instructions as the Reserve Bank may, from time
to time, think fit to give, and, except with the previous permission of the Reserve Bank, an
authorized dealer shall not engage in any transaction involving any foreign exchange, which
is not in conformity with the terms of his/her authorization under this section.
An authorized dealer shall, before undertaking any transaction in foreign exchange on
An authorized dealer before
undertaking any transaction in
behalf of any person, requires that person to make such declarations and to give such infor-
foreign exchange needs to en- mation as will reasonably satisfy him/her that the transaction will not involve, and is not
sure that the transaction is not designed for the purpose of, any contravention or evasion of the provisions of this Act or of
designed for the purpose of any any rule, notification, direction, or order made thereunder, and where the said person refuses
contravention or evasion of the
provisions of this act. to comply with any such requirement or makes only unsatisfactory compliance therewith,
the authorized dealer shall refuse to undertake the transaction and shall, if he/she has a rea-
son to believe that any such contravention or evasion as aforesaid is contemplated by the
person, report the matter to the Reserve Bank.
Restrictions on Dealing in Foreign Exchange

Except with the previous general or special permission of the Reserve Bank, no person other
than an authorized dealer shall in India, and no PRI other than an authorized dealer shall
outside India, purchase or otherwise acquire or borrow from, or sell, or otherwise transfer or
lend to or exchange with, any person not being an authorized dealer, any foreign exchange,
provided that nothing in this sub-section shall apply to any purchase or sale of foreign
currency effected in India between any person and a money changer. For the purposes of
this subsection, a person, who deposits foreign exchange with another person or opens an
account in foreign exchange with another person, shall be deemed to lend foreign exchange
to such other person.
Except with the previous general or special permission of the Reserve Bank, no person,
whether an authorized dealer or a money changer or otherwise, shall enter into any transac-
tion which provides for the conversion of Indian currency into foreign currency or foreign
currency into Indian currency at rates of exchange other than the rates for the time being
authorized by the Reserve Bank.
Where any foreign exchange is acquired by any person, other than an authorized dealer A person who has been permit-
or a money changer, for any particular purpose, or where any person has been permitted ted conditionally to buy foreign
conditionally to acquire foreign exchange, the said person shall not use the foreign exchange exchange and if he/she is not
so acquired otherwise than for that purpose or, as the case may be, fail to comply with any able to use it for the specified
purpose, then the said person
condition to which the permission granted to him/her is subject, and where any foreign shall sell the foreign exchange to
exchange so acquired cannot be so used or the conditions cannot be complied with, the said an authorized dealer or money-
person shall, within a period of 30 days from the date on which he comes to know that such changer within 30 days.
foreign exchange cannot be so used or the conditions cannot be complied with, sell the for-
eign exchange to an authorized dealer or to a money changer.
For the avoidance of doubt, it is hereby declared that where a person acquires foreign
exchange for sending or bringing into India any goods but sends or brings no such goods or
does not send or bring goods of a value representing the foreign exchange acquired, within a
reasonable time or sends or brings any goods of a kind, quality, or quantity different from that
specified by him at the time of acquisition of the foreign exchange, such person shall, unless
the contrary is proved, be presumed not to have been able to use the foreign exchange for the
purpose for which he acquired it or, as the case may be, to have used the foreign exchange so
acquired otherwise than for the purposes for which it was acquired. Nothing in this section
shall be deemed to prevent a person from buying from any post office, in accordance with any
law or rules made there under for the time being in force, any foreign exchange in the form
of postal orders or money orders.
Restrictions on Payments
1. Save as may be provided in and in accordance with any general or special exemption
from the provisions of this sub-section, which may be granted conditionally or un-
conditionally by the Reserve Bank, no person in, or a resident in, India shall
a. make any payment to or for the credit of any PROI;
b. receive, otherwise than through an authorized dealer, any payment by order or
on behalf of any person who is a resident outside in India. For the purposes of
this clause, where any person in, or a resident in, India receives any payment by
order or on behalf of any PROI through any other person (including an autho-
rized dealer), without a corresponding inward remittance from any place outside
India, then, such person shall be deemed to have received such payment other-
wise than through an authorized dealer;
c. draw, issue, or negotiate any bill of exchange or promissory note or acknowledge
any debt, so that a right (whether actual or contingent) to receive a payment is
created or transferred in favour of any PROI;
d. make any payment to, or for the credit of, any person by order or on behalf of any
PROI;
e. place any sum to the credit of any PROI;
f. make any payment to, or for the credit of, any person or receive any payment for,
or by order or on behalf of, any person as consideration for or in association with
(i) the receipt by any person of a payment or the acquisition by any person of
property outside India and (ii) the creation or transfer in favour of any person
of a right (whether actual or contingent) to receive payment or acquire property
outside India; and
g. draw, issue, or negotiate any bill of exchange or promissory note, transfer any
security or acknowledge any debt, so that a right (whether actual or contingent)
to receive a payment is created or transferred in favour of any person as consid-
eration for or in association with any matter referred to in Clause (f).
2. Nothing in sub-section (1) shall render unlawful
a. the making of any payment already authorized either with foreign exchange ob-
tained from an authorized dealer or a money changer under Section 8 or with
foreign exchange retained by a person in pursuance of an authorization granted
by the Reserve Bank;
b. the making of any payment with foreign exchange received by way of salary or
payment for services not arising from any business in, or anything done while in,
India.
3. Save as may be provided in, and in accordance with, any general or special exemp-
tion from the provisions of this sub-section, which may be granted conditionally or
unconditionally by the Reserve Bank, no person shall remit or cause to be remitted
any amount from any foreign country into India except in such a way that the remit-
tance is received in India only through an authorized dealer.
4. Nothing in this section shall restrict the doing by any person of anything within the
scope of any authorization or exemption granted under this Act.
5. For the purposes of this section and Section 19, ‘security’ includes coupons or
warrants representing dividends or interest and life or endowment insurance policies.
Blocked Accounts
1. Where an exemption from the provisions of Section 9 is granted by the Reserve Bank
in respect of payment of any sum to any PROI and the exemption is made subject to
the condition that the payment is made to a blocked account
a. the payment shall be made to a blocked account in the name of that person in
such manner as the Reserve Bank may, by general or special order, direct;
b. the crediting of that sum to that account shall, to the extent of the sum credited,
be a good discharge to the person making the payment.
2. No sum standing at the credit of a blocked account shall be drawn on except in
accordance with any general or special permission which may be granted condition-
ally or otherwise by the Reserve Bank.
3. In this section, ‘blocked account’ means an account opened, whether before or after
the commencement of this Act, as a blocked account at any office or branch in India of
a bank authorised in this behalf by the Reserve Bank, or an account blocked, whether
before or after such commencement, by order of the Reserve Bank.
From FERA to FEMA

In the wake of an acute shortage of foreign exchange in the country, the Government of India FERA (1973) categorized
enacted the Foreign Exchange Regulation Act (FERA) in 1973. Under this controversial piece foreign exchange law violators
of legislation, foreign exchange law violators (which sometimes included big names in the as criminals, and actions
Indian industry) were treated as criminals and dealt with sternly. against them were very strict. It
was replaced by FEMA (1999)
Realising that FERA was not in tune with the economic reforms initiated since 1991, which aimed at facilitating
the government replaced it with a new legislation—Foreign Exchange Management Act external trade and payment
(FEMA), 1999, which came into effect from 1 June 2000. FERA remained a nightmare for and law rotators were treated
27 years for the Indian corporate world. FEMA set out its objectives as ‘facilitating external as civil offenders rather than as
criminals.
trade and payment’ and ‘promoting the orderly development and maintenance of foreign
exchange market in India’.
Under FEMA, foreign exchange law violators are treated as civil off enders rather than
as criminals as was the case under FERA. Contravention of the provisions of FEMA invites
monetary penalties. Moreover, FEMA provides for a number of appellate authorities which
can be approached by the aggrieved party against whom penalties have been levied. Box 18.1
details the salient features of FERA and FEMA.
Box 18.1 FERA and FEMA
FERA FEMA
• FERA came into force on 1 January 1974. • FEMA was introduced by the Government of India in
• It laid emphasis on exchange regulation and the Parliament on 4 August 1998.
exchange control. • It lays emphasis on exchange management and
• It was necessary to obtain Reserve Bank’s facilitates external trade and payments.
permission, either special or general, in respect of • With the exception of Section (3), which relates to
most regulations thereunder. dealings in foreign exchange and so on, no other
• The draconian provisions of FERA gave unbridled provision of FEMA stipulates obtaining Reserve
power to the Enforcement Directorate to arrest any Bank’s permission.
person, search any premises, seize documents, • Unlike FERA, violation of FEMA will not attract
and start proceedings against any person for criminal proceedings. The contravention will be
contravention of FERA. A contravention under FERA treated as a civil offence.
was treated as a criminal offence.
FOREIGN EXCHANGE MANAGEMENT ACT

(FEMA), 1999
This Act consolidates and amends the law relating to foreign exchange with the objective
of facilitating external trade and payments and for promoting the orderly development and
maintenance of the foreign exchange market in India.
This Act extends to the whole of This Act extends to the whole of India. It shall also apply to all branches, offices, and
India. It shall also apply to all agencies outside India, owned or controlled by a PRI, and also to any contravention thereun-
branches, offices, and agencies der committed outside India by any person to whom this Act applies. It shall come into force
outside India, owned or con-
trolled by a PRI, and also to any
on such date as the central government may, by notification in the Official Gazette, appoint,
contravention thereunder com- provided that different dates may be appointed for different provisions of this Act, and any
mitted outside India by any per- reference in any such provision to the commencement of this Act shall be construed as a
son to whom this Act applies. reference to the coming into force of that provision.
Definitions
In this Act, unless the context otherwise requires
a. ‘Adjudicating Authority’ means an officer authorized under sub-section (1) of
Section 16.
b. ‘Appellate Tribunal’ means the Appellate Tribunal for Foreign Exchange established
under Section 18.
c. ‘Authorized person’ means an authorized dealer, money changer, off-shore bank-
ing unit, or any other person for the time being authorized under sub-section (1) of
Section 10 to deal in foreign exchange or foreign securities.
d. ‘Bench’ means a Bench of the Appellate Tribunal.
e. ‘Capital account transaction’ means a transaction which alters the assets or liabilities,
including contingent liabilities, outside India of persons who are resident in India or
assets or liabilities in India of persons who are resident outside India, and includes
transactions referred to in sub-section (3) of Section 6.
f. ‘Chairperson’ means the Chairperson of the Appellate Tribunal.
g. ‘Chartered accountant’ shall have the meaning assigned to it in Clause (b) of sub-
section (1) of Section 2 of the Chartered Accountants Act, 1949 (38 of 1949).
h. ‘Currency’ includes all currency notes, postal notes, postal orders, money orders,
cheques, drafts, travellers’ cheques, letters of credit, bills of exchange and promissory
notes, and credit cards or such other similar instruments, as may be notified by the
Reserve Bank.
i. ‘Currency notes’ means cash in the form of coins and bank notes.
j. ‘Current account transaction’ means a transaction other than a capital account trans-
action and without prejudice to the generality of the foregoing, such transaction
includes
i. payments due in connection with foreign trade, other current business, services,
and short-term banking and credit facilities in the ordinary course of b
usiness,
ii. payments due as interest on loans and as net income from investments,
iii. remittances for expenses of living parents, spouse, and children residing abroad,
and
iv. expenses in connection with foreign travel, education, and medical care of
parents, spouse, and children.
k. ‘Director of Enforcement’ means the Director of Enforcement appointed under sub-
section (1) of Section 36.
l. ‘Export’, with its grammatical variations and cognate expressions, means

i. the taking out of India to a place outside India any goods and
ii. provision of services from India to any person outside India.
m. ‘Foreign currency’ means any currency other than Indian currency;
n. ‘Foreign exchange’ means foreign currency and includes
i. deposits, credits, and balances payable in any foreign currency,
ii. drafts, travellers’ cheques, letters of credit, or bills of exchange, expressed or
drawn in Indian currency but payable in any foreign currency, and
iii. drafts, travellers’ cheques, letters of credit, or bills of exchange drawn by banks,
institutions, or persons outside India, but payable in Indian currency.
o. ‘Foreign security’ means any security, in the form of shares, stocks, bonds, deben-
tures, or any other instrument denominated or expressed in foreign currency, and
includes securities expressed in foreign currency, but where redemption or any form
of return, such as interest or dividends, is payable in Indian currency.
p. ‘Import’, with its grammatical variations and cognate expressions, means bringing
into India any goods or services.
q. ‘Indian currency’ means currency which is expressed or drawn in Indian rupees but
does not include special bank notes and special one-rupee notes issued under Section
28A of the Reserve Bank of India Act, 1934 (2 of 1934).
r. ‘Legal practitioner’ shall have the meaning assigned to it in Clause (i)
of sub-section (1) of Section 2 of the Advocates Act, 1961 (25 of 1961).
s. ‘Member’ means a Member of the Appellate Tribunal and includes the Chairperson
thereof.
t. ‘Notify’ means to notify in the Official Gazette and the expression ‘notification’ shall
be construed accordingly.
u. ‘Person’ includes—an individual, a Hindu undivided family (HUF), a company, a
firm, an association of persons (AOP) or a body of individuals (BOI), whether incor-
porated or not, every artificial juridical person, not falling within any of the preceding
subclauses, and any agency, office, or branch owned or controlled by such person.
v. ‘Person resident in India (PRI)’ means
i. a person residing in India for more than 182 days during the course of the pre-
ceding financial year but does not include
a. a person who has gone out of India or who stays outside India, in either case—
for or on taking up employment outside India, or for carrying on outside
India a business or vocation outside India, or for any other purpose, in such
circumstances as would indicate his/her intention to stay outside India for an
uncertain period.
b. a person who has come to or stays in India, in either case, other than—for or
on taking up employment in India, or for carrying on in India a business or
vocation in India, or for any other purpose, in such circumstances as would
indicate his/her intention to stay in India for an uncertain period; any person
or body corporate registered or incorporated in India: an office, branch, or

agency in India—owned or controlled by a PROI; an office, branch or agency
outside—India; owned or controlled by a PRI.
w. ‘Person resident outside India (PROI)’ means a person who is not a resident in India.
x. ‘Prescribed’ means prescribed by rules made under this Act.
y. ‘Repatriate to India’ means bringing into India the realised foreign exchange and the
selling of such foreign exchange to an authorized person in India in exchange for
rupees, or the holding of realised amount in an account with an authorized person
in India to the extent notified by the Reserve Bank, and includes use of the realized
amount for discharge of a debt or liability denominated in foreign exchange, and the
expression ‘repatriation’ shall be construed accordingly.
z. ‘Reserve Bank’ means the Reserve Bank of India constituted under sub-section (1) of
Section 3 of the Reserve Bank of India Act, 1934 (2 of 1934). In this Section,
i. ‘Security’ means shares, stocks, bonds and debentures, government securities as
defined in the Public Debt Act, 1944 (18 of 1944), savings certificates to which
the Government Savings Certificates Act, 1959 (46 of 1959) applies, deposit re-
ceipts in respect of deposits of securities and units of the Unit Trust of India es-
tablished under sub-section (1) of Section 3 of the Unit Trust of India Act, 1963,
(52 of 1963) or of any mutual fund and includes certificates of title to securities,
but does not include bills of exchange or promissory notes other than govern-
ment promissory notes or any other instruments which may be notified by the
Reserve Bank as security for the purposes of this Act.
ii. ‘Service’ means service of any description which is made available to poten-
tial users and includes the provision of facilities in connection with banking,
financing, insurance, medical assistance, legal assistance, chit fund, real estate,
transport, processing, supply of electrical or other energy, boarding or lodging
or both, entertainment, amusement or the purveying of news or other informa-
tion, but does not include the rendering of any service free of charge or under a
contract of personal service.
iii. ‘Special Director (Appeals)’ means an officer appointed under Section 18.
iv. ‘Specify’ means to specify by regulations made under this Act and the expression
‘specified’ shall be construed accordingly.
v. ‘Transfer’ includes sale, purchase, exchange, mortgage, pledge, gift , loan, or any
other form of transfer of right, title, possession, or lien.
Authorized Person
The Reserve Bank may, on an application made to it in this behalf, authorize any person to
The Reserve Bank may, on an
application made to it in this be known as the authorized person to deal in foreign exchange or in foreign securities, as
behalf, authorize any person to an authorized dealer, money changer or off-shore banking unit, or in any other manner as
be known as the authorized per- it deems fit. An authorization under this section shall be in writing and shall be subject to
son to deal in foreign exchange
the conditions laid down therein. An authorization granted under sub-section (1) may be
or in foreign securities, as
an authorized dealer, mon- revoked by the Reserve Bank at any time if the Reserve Bank is satisfied that it is in public
eychanger or off-shore banking interest it does so; or the authorized person has failed to comply with the condition subject to
unit, or in any other manner as which the authorization was granted or has contravened any of the provisions of the Act or
it deems fit.
any rule, regulation, notification, direction, or order made thereunder, provided that no such
authorization shall be revoked on any ground referred to in Clause (b) unless the authorized
person has been given a reasonable opportunity of making a representation in the matter.
An authorized person shall, in all his/her dealings in foreign exchange or foreign secu-
rity, comply with such general or special directions or orders as the Reserve Bank may, from
time to time, think fit to give, and, except with the previous permission of the Reserve Bank,
an authorized person shall not engage in any transaction involving any foreign exchange or
foreign security, which is not in conformity with the terms of his/her authorization under
this section. An authorized person shall, before undertaking any transaction in foreign
exchange on behalf of any person, require that person to make such declaration and to give
such information as will reasonably satisfy him/her that the transaction will not involve, and
is not designed for the purpose of any contravention or evasion of the provisions of this Act
or of any rule, regulation, notification, direction, or order made thereunder, and where the
said person refuses to comply with any such requirement or makes only unsatisfactory com-
pliance therewith, the authorized person shall refuse in writing to undertake the transaction
and shall, if he has reason to believe that any such contravention or evasion as aforesaid is
contemplated by the person, report the matter to the Reserve Bank.
Any person, other than an authorized person, who has acquired or purchased foreign
exchange for any purpose mentioned in the declaration made by him/her to the authorized
person under subsection (5), does not use it for such purpose or does not surrender it to the
authorized person within the specified period or uses the foreign exchange so acquired or
purchased for any other purpose for which the purchase or acquisition of foreign exchange
is not permissible under the provisions of the Act or the rules or regulations or direction or
order made thereunder shall be deemed to have committed contravention of the provisions
of the Act for the purpose of this section.
Important Concepts Under FEMA

FEMA, 1999 replaced Foreign Exchange Regulation Act, 1973 (FERA) with effect from FEMA, 1999 replaced Foreign
1 June 2000. The replacement was a great sigh of relief for the people as FERA was unduly Exchange Regulation Act, 1973
(FERA) with effect from 1 June
stringent in its criminal provisions. FEMA is a civil law and proactive in its outlook com-
2000. The replacement was a
pared to FERA. The thrust of FEMA is to ‘manage’ the scarce foreign exchange resources of great sigh of relief for the peo-
the country rather than to ‘control’ them as was prevalent under FERA. FEMA met the need ple as FERA was unduly strin-
of the day in the changed economic scenario of India, especially since 1991. gent in its criminal provisions.
Applicability of FEMA
FEMA is applicable to the whole of India. The expression ‘whole of India’ would indicate that
the provisions of the Act are applicable to all transactions that are taking place in India. Thus,
any person who is present in India at the time of transaction has to comply with the provi-
sions of FEMA. FEMA is applicable to all branches, offices, and agencies outside India that
are owned or controlled by a PRI. Thus, FEMA has retained its extra-territorial jurisdiction,
as under FERA.
Illustration: If an Indian company opens a branch in New York, the United States, that
branch will become a resident of India and, therefore, all restrictions applicable to Indian
residents for overseas transactions are equally applicable to such a branch. Then, right from
opening of a bank account to entering into any transaction of capital nature (e.g., acquisition
of premises), it will need prior approval from RBI (subject to exemptions/general permis-
sions granted by RBI under various notifications).
NEW COMPETITION POLICY

In October 1999, the Government of India appointed a High Level Committee on competi-
tion Policy and Competition Law to advise a modern competition law for the country in line
with international developments and to suggest a legislative framework, which may entail a
new law or appropriate amendments to the MRTP Act. The Committee presented its Compe-
tition Policy report to the Government in May 2000 [the report will be referred to hereinafter
as High Level committee 92000]. The draft competition law was drafted and presented to the
Government in November 2000. After some refinements, following extensive consultations
and discussions with all interested parties, the Parliament passed in December 2002 the new
law, namely, the Competition Act, 2002.
To achieve objectives, the Competition Commission of India endeavours to do the
following:
• Make the markets work for the benefit and welfare of consumers.
• Ensure fair and healthy competition in economic activities in the country for faster
and inclusive growth and development of economy.
• Implement competition policies with an aim to effectuate the most efficient utiliza-
tion of economic resources.
• Develop and nurture effective relations and interactions with sectoral regulators to ensure
smooth alignment of sectoral regulatory laws in tandem with the competition law.
• Effectively carry out competition advocacy and spread the information on benefits of
competition among all stakeholders to establish and nurture competition culture in
Indian economy.
Components of Competition Act 2002

The rubric of the new law, Competition Act, 2002 (Act, for brief) has essentially four
compartments :
1. Anti-Competition Agreements
2. Abuse of Dominance
3. Combinations Regulation
4. Competition Advocacy
1. Anti-Competition Agreements
Firms enter into agreements, which may have the potential of restricting competition. A scan
of the competition laws in the world will show that they make a distinction between hori-
zontal and vertical agreements between firms. The former, namely the horizontal agreements
are those among competitors and the latter, namely the vertical agreements are those relating
to an actual or potential relationship of purchasing or selling to each other. A particularly
pernicious type of horizontal agreements is the cartel. Vertical agreements are pernicious,
if they are between firms in a position of dominance. Most competition laws view vertical
agreement generally more leniently than horizontal agreements, as, prima facie, horizon-
tal agreements are more likely to reduce competition than agreements between firms in
a purchasers seller relationship, an obvious example that comes to mind is an agreement
between enterprises dealing in the same product or product. Such horizontal agreements,
which included membership of cartels, are presumed to lead to unreasonable restrictions of

competition and are therefore presumed to have an appreciable adverse effect on competi-
tion. In other words, they are per se illegal. The underlying principle in such presumption
of illegality is that the agreements in question have an appreciable anti-competitive effect.
Barring the aforesaid four types of agreements, all the others will be subject to the rule of
reason test in the Act.
2. Abuse of Dominance
Dominant position has been appropriately defined in the Act in terms of the position of
strength, enjoyed by an enterprise, in the relevant market, in 46 India, which enables it to
(i) operate independently of competitive forces prevailing in the relevant market; or (ii) affect
its competitors or consumers or the relevant market, in its favour. Section 4 enjoins, no
enterprise shall abuse its dominant position. Dominant position is the position of strength
enjoyed by an enterprise in the relevant market which enables it to operate independently of
competitive forces prevailing in the market or affects its competitors or consumers or the rel-
evant market in its favour. Dominant position is abused when an enterprise imposes unfair
or discriminatory conditions in purchase or sale of goods or services or in the price in pur-
chase or sale of goods or services. Again, the philosophy of the Competition Act is reflected
in this provision, where it is clarified that a situation of monopoly per se is not against public
policy but, rather, the use of the monopoly status such that it operates to the detriment of
potential and actual competitors. At this point it is worth mentioning that the Act does not
prohibit or restrict enterprises from coming into dominance. There is no contract whatsoever
to prevent enterprises from coming into or acquiring position of dominance. All that the
Act prohibits is the abuse of that dominance position. The Act therefore targets the abuse of
dominance and not dominance per se. This is indeed a welcome step, a step towards a truly
global and liberal economy.
3. Combinations
The Competition Act also is designed to regulate the operation and activities of combina-
tions, a term, which contemplates acquisitions, mergers or amalgamations. Thus, the opera-
tion of the Competition Act is not confined to transactions strictly within the boundaries of
India but also such transactions involving entities existing and/or established overseas.
Herein again lies the key to understanding the Competition act. The intent of the legisla-
tion is not to prevent the existence of a monopoly across the board. There is a realization in
policy-making circles that in certain industries, the nature of their operations and economies
of scale indeed dictate the creation of a monopoly in order to be able to operate and remain
viable and profitable. This is in significant contrast to the philosophy, which propelled the
operation and application of the MRTP Act, the trigger for which was the existence or im-
pending creation of a monopoly situation in a sector of industry, subsequently, that the com-
bination has an appreciable adverse effect on competition. There is a rider that the CCI shall
not initiate an inquiry into a combination after the expiry of one year from the date on which
the combination has taken effect.
4. Competition Advocacy
In line with the High Level Committee‘s recommendation, the Act extends the mandate of the
Competition Commission of India beyond merely enforcing the law (high Level Committee,
2000). Competition advocacy creates a culture of competition. There are many possible
valuable roles for competition advocacy, depending on a country’s legal and economic
c ircumstances. The Regulatory Authority under the Act, namely, Competition Commission
of India (CCI), in terms of the advocacy provisions in the Act, is enabled to participate in the
formulation of the country‘s economic policies and to participate in the reviewing of laws
related to competition at the instance of the central government. The central government can
make a reference to the CCI for its opinion on the possible effect of a policy under formula-
tion or of an existing law related to competition. The Commission will therefore be assuming
the role of competition advocate, action proactively to bring about government policies that
lower barriers to entry, that promote deregulation and trade liberalization and that promote
competition in the market place.
Table 18.1 depicts the difference between competition Act of 2002 and MRTP Act 1969.
Table 18.1
Differences between
> S.No. MRTP Act, 1969 Competition Act, 2002
Competition Act 2002 1. Based on the pre-reforms scenario Based on the post-reforms scenario
and MRTP Act 1969
2. Based on size as a factor Based on structure as a factor
3. Competition offences implicit or not Competition offences explicit and
defined defined
4. Complex in arrangement and language Simple in arrangement and language
and easily comperehensible
5. 14 per se offences negating the 4 per se offences and all the rest
principles of natural justice subjected to rule of reason
6. Frowns upon dominance Frowns upon abuse of dominance
7. Registration of agreements compulsory No requirement of registration of
agreements
8. No combinations regulation Combination regulated beyond a high
threshold limit
9. Competition Commission appointed by Competition Commission selected by a
the government Collegium (search committee)
10. Very little administrative and financial Relatively more autonomy for the
autonomy for the Competition Competition Commission
Commission
11. No competition advocacy role for the Competition Commission has
Competition Commission competition advocacy role
12. No penalties for offences Penalties for offences
13. Reactive and rigid Proactive and flexible
14. Unfair trade practices covered Unfair trade practices omitted
(consumer for a will deals with them)
15. Does not vest MRTP Commission to Competition Law seeks to regulate
inquire into cartels of foreign origin in a them
direct manner
16. Concept of Group Act had wider import Concept has been simplified
and was unworkable
Competition Act, 2002 and the Regulation of

Mergers
Prior to the Competition Act, 2002, the Companies Act, 1956 and the Monopolies and
restrictive trade Practices Act, 1969 (before the 1991 amendments) are the statutes, which
r egulate mergers. MRTP Act, 1969 still had powers under provisions relating to restrictive
trade practices (RTP) and monopolistic trade practices (MTP) to take action against merger
that was anticompetitive but due to amendment in 1991 in the MRTP Act for making easy
the liberalization process it failed to completely control the unfair mergers.
On 28 August 2009 the Ministry of Corporate Affairs issued a notification pursuant to
which the Monopolies and restrictive Trade Practices Act 1969 was repealed and replaced
by the Competition Act 2002 with effect from 1 September 2009. The Competition Act
attempts to make a shift from curbing monopolies to curbing practices that have adverse
effects on competition both within and outside India ($125 million) to notify the Competi-
tion Commission before acquiring a company outside India.
Regulatory Provisions of Competition Act, 2002

According to the present amended act it is mandatory for any company to notify mergers
when the combined assets or turnover are beyond the threshold limits provided in section 5
of the Competition Act The act makes it mandatory to give notice to the commission within
30 days of the decision of the parties’ boards of directors or of execution of any agreement or
other document for effecting the combination. The terms ‘agreement’ and ‘other document’
are not defined. The general industry perception is that a memorandum of understanding or
a letter of intent will qualify as an ‘agreement.’
Current Account and Capital Account

Transactions
Under the FERA regime, the thrust was on regulation and control of the scarce foreign
exchange, whereas under the FEMA, the emphasis is on the management of foreign exchange
resources. Thus, there is a clear shift in focus from control to management. Therefore, under
FERA it was safe to presume that any transaction in foreign exchange or with a non-resident
was prohibited unless it was generally or specially permitted. FEMA has formally recognized
the distinction between current account and capital account transactions. Two golden rules
or principles in FEMA are mentioned as follows:
• all current account transactions are permitted unless otherwise prohibited, and
• all capital account transactions are prohibited unless otherwise permitted.
Current Account Transactions

India is signatory to the WTO (World Trade Organization) Agreement. As a part of its obli-
gation under the WTO Agreement, India has relaxed (not removed) its exchange control reg-
ulations on current account transactions. The term ‘current account transaction’ is defined
under Section 2(j) to mean ‘a transaction other than a capital account transaction and with-
out prejudice to the generality of the foregoing, such transaction includes
1. payments due in connection with foreign trade, other current business, services, and
other short-term banking credit facilities in the ordinary course of business,
2. payments due as interest on loans and as net income from investments,
3. remittances for living expenses of parents, spouse, and children residing abroad,
4. expenses in connection with foreign travel, education, and medical care of parents,
spouse, and children.’
Explanation: As discussed earlier, this concept is unique to FEMA and was not found in
FERA. When it is said that current account transactions are free from controls in India, it
does not imply that any amount of remittance is permitted for a single transaction. Section 5
authorizes the central government to impose restrictions on the above transactions. Exercis-
ing this authority, the central government has issued Notifiation No. GSR 381(E) entitled as
the FEM (current account transactions) Rules, 2000, dated 3 May 2000, according to which-
drawal of foreign exchange is prohibited for:
1. transactions specified in Schedule I, or
2. travel to Nepal and/or Bhutan, or
3. transactions with a person who is a resident in Nepal or Bhutan.
As far as the above categories (b) and (c) are concerned, it may be noted that Indian rupee is
a widely accepted currency in these countries and hence, drawal of foreign exchange is not
permitted for travel to and transactions with these countries. Schedule II of the said Noti-
fication lists transactions, which require prior approval of the Government of India, except
when the exchange is drawn from RFC/EEFC accounts. Schedule III of the said Notification
lists transactions, which require prior approval of the RBI. In some cases, prior permission
is required only if the transaction value exceeds the limits specified therein except where the
exchange is drawn from RFC/RFC(D) accounts. (Refer Annexure I of this chapter for the
items covered by Schedule I, II, and III.)
RBI has liberalized the remittances permissible under the current account transactions
vide Circular No. 76, dated 24 February 2004. Following transactions are permissible under
the automatic route without any monetary ceiling:
1. Remittance by artistes, for example, wrestler, dancer, entertainer, and so on.
2. Remittance for securing insurance for health from a company abroad.
3. Short-term credit to overseas offices of Indian companies.
4. Remittance for advertisement on foreign television channels.
5. Remittance of royalty and payment of lump sum fee, provided the payments are in
conformity with the norms as per Item No. 8 of Schedule II, that is, royalty does not
exceed 5 per cent on local sales and 8 per cent on exports, and lump sum payment
does not exceed US$2 mn.
6. Remittance for use of trademark/franchise in India.
It may be noted from the above that interest and other income on investments are only cov-
ered as current account transactions. Therefore, the principal amount of investment can be
remitted abroad, only if it has been invested on repatriation basis. Any current account trans-
action that is not regulated or prohibited is permitted by an implication.
Capital Account Transactions

Section 2(e) defines ‘capital
Section 2(e) defines ‘capital account transactions’ to mean ‘a transaction which alters the
account transactions’ to mean assets or liabilities, including contingent liabilities, outside India of a PRI, or assets or liabili-
‘a transaction which alters the ties in India of persons who are residents outside India, and includes transactions referred to
assets or liabilities, including in sub-section (3) of Section 6’. (Refer Annexure 2 for Capital Account Transactions specified
contingent liabilities, outside
India of a PRI.’
in Section 6[3].)
Section 6(3) contains 10 subclauses covering a wide range of transactions, viz., FDIs
in India, overseas direct investments (ODIs) from India, borrowing or lending in foreign
exchange and in Indian rupees, various kinds of bank accounts, immovable property in India
and abroad, guarantees, and so on. For each category, the RBI has issued separate notifications.
Distinction Between Capital Account and

The distinction between the two types of transactions needs to be understood from the
viewpoint of ‘balance of payments’ of the country. There is a difference between our normal
understanding of a ‘capital asset’ or a ‘capital expenditure’ and a ‘capital account transaction’
per se. For example, import of machinery on payment of cash or on normal credit terms of
the vendor will be regarded as the current account transaction. The importer may capitalize it
in his/her account books and claim depreciation, thereon. As far as the country is concerned,
it is a ‘trade transaction.’
However, if the same machinery is imported on deferred credit basis or is funded out of
ECB, and so on, the credit beyond 12 months (as less than 12 months again would fall within
the definition of ‘current account transactions’) would result in the creation of the long-term
liability outside India and, therefore, be termed as a ‘capital account transaction.’ A word of
caution here is that, the meaning of ‘alteration of assets or liabilities’ is not properly defined
and, therefore, leads to different interpretations. In order to be in the right side of the law,
it is advised that, in case of doubt, the matter may be referred to the Reserve Bank of India.
Table 18.2 shows illustrative list of current and capital account transactions.
Nature of Transaction Current A/C Capital A/C <Table 18.2

Illustrative List of
Import of machinery If imported on If imported on suppliers’ Current and Capital
COD basis credit or funded out of Account Transactions
foreign loans.
Import and export of
goods on credit Yes –
Payment for Web hosting Yes –
Payment for consultancy Yes –
Remittance of
(a) interest on loans/
investments Yes –
(b) dividend Yes –
(c) rental from immovable property – –
(d) capital gains on
(i) movable assets -- Yes
(ii) immovable property -- Yes
Loans/borrowings other than
from banks (whether short
term or long term) – –
(Continued)
Table 18.2
(Continued)
> Nature of Transaction Current A/C Capital A/C
Short-term working capital
from bank Yes –
Term loan from bank/F1
(Formula 1) – Yes
Living expenses of parents,
spouse, and children Yes –
Expenses in connection
with foreign travel, education
and medical care of parents,
spouse, and children Yes –
Investments in securities
(whether in India by a non-resident
or outside India by a resident) – Yes
Investments in immovable
property (whether in India
by a non-resident or outside
India by a resident) – Yes
List of Current Account Transactions for which Drawal of Foreign Exchange is not
Permitted
1. Remittance out of lottery winnings.
2. Remittance of income from racing/riding, and so on, or any other hobby.
3. Remittance for purchase of lottery tickets, banned/prescribed magazines, football
pools, sweepstakes, and so on.
4. Payment of commission on exports made towards equity investment in joint ventures/
wholly owned subsidiaries abroad of Indian companies.
5. Remittance of dividend by any company to which the requirement of dividend
balancing is applicable. (The condition of dividend balancing is not applicable
presently.)
6. Payment of commission on exports under Rupee State Credit Route, except commis-
sion up to 10 per cent of invoice value of exports of tea and coffee.
7. Payment related to ‘Call Back Services’ of telephones.
8. Remittance of interest income on funds held in Non-resident Special Rupee Scheme
account.
9. Travel to Nepal and/or Bhutan.
10. Transaction with a person who is a resident in Nepal and/or Bhutan. (RBI has the
power to relax this prohibition.)
11. Remittance towards participation in lottery schemes involving money circulation or
for securing prize money/awards, and so on.
List of Current Account Transactions for which Prior Approval of RBI is Required
1. Release of exchange exceeding US$10,000, or its equivalent in one FY (April to
March), for one or more private visits to any country (except Nepal and Bhutan).
2. Gift remittance exceeding US$50,000 per remitter/donor per annum.
3. Donation exceeding US$50,000 per remitter/donor per annum.
4. Exchange facilities exceeding US$100,000 per persons going abroad for employment.
5. Exchange facilities for emigration exceeding US$100,000 or the amount prescribed
by the country of emigration.
6. (a) Remittance for maintenance of close relatives abroad exceeding net salary (after
deduction of taxes, contribution to provident fund, and other deductions) of a
person, who is a resident but not a permanent resident in India and is a citizen
of a foreign state other than Pakistan or is a citizen of India, who is on deputa-
tion to the office or branch or subsidiary or joint venture in India of such foreign
company.
(b) Exceeding US$100,000 per year, per recipient, in all other cases.
Explanation: For the purpose of this term, a PRI on account of his employment
or deputation of a specified duration (irrespective of length thereof) or for a
specific job or assignment; the duration of which does not exceed three years, is a
resident but not a permanent resident.
7. Release of foreign exchange, exceeding US$25,000 to a person, irrespective of period
of stay, for business travel, or attending a conference or specialized training or for
maintenance expenses of a patient going abroad for medical treatment or check-up
abroad, or for accompanying a patient as an attendant in going abroad for medical
treatment/check-up.
8. Release of exchange for meeting expenses for medical treatment abroad, exceeding
the estimate from the doctor in India.
9. Release of exchange for studies abroad, exceeding the estimates from the institution
abroad, or US$100,000 per academic year, whichever is higher.
10. Release of exchange for commission to agents abroad, for sale of residential flats/
commercial plots in India, exceeding 5 per cent of the inward remittance per transac-
tion, or US$25,000, whichever is higher.
11. Remittances exceeding US$1mn per project for consultancy services procured from
abroad, subject to the applicant submitting documents to the satisfaction of the
authorized dealer.
12. Remittance exceeding US$100,000 for reimbursement of incorporation expenses.
13. Remittance exceeding US$5,000, or its equivalent, for small-value remittances.
Note: The above restrictions shall not apply on the use of International Credit Card for mak-
ing any payment by a person towards meeting expenses while such person is on a visit outside
India.
Regulation and Management of

Foreign Exchange
Dealing in Foreign Exchange
According to the clause as otherwise provided in this Act, rules or regulations made there-
under, or with the general or special permission of the Reserve Bank, no person shall deal in
or transfer any foreign exchange or foreign security to any person not being an authorized
person; or make any payment to or for the credit of any PROI in any manner; or receive oth-
erwise through an authorised person, any payment by order or on behalf of any PROI in any
manner. For the purpose of this clause, where any person in, or a resident in, India receives
any payment by order or on behalf of any PROI through any other person (including an au-
thorized person), without a corresponding inward remittance from any place outside India,
then, such person shall be deemed to have received such payment otherwise than through
an authorized person.
According to another clause for those who enter into any financial transaction in India,
‘Financial transaction’ means
making any payment to, or as consideration for or in association with acquisition or creation or transfer of a right to
for the credit of any person, acquire, any asset outside India by any person. For the purpose of this clause, ‘financial
or receiving any payment for, transaction’ means making any payment to, or for the credit of any person, or receiving any
by order or on behalf of any
person, or drawing, issuing, or
payment for, by order or on behalf of any person, or drawing, issuing, or negotiating any bill
negotiating any bill of exchange of exchange or promissory note, or transferring any security or acknowledging any debt.
or promissory note, or transfer-
ring any security or acknowledg-
ing any debt.
Holding of Foreign Exchange
According to the clause as otherwise provided in this Act, no PRI shall acquire, hold, own,
possess, or transfer any foreign exchange, foreign security, or any immovable property situ-
ated outside India.

Any person may sell or draw foreign exchange to or from an authorized person if such sale or
drawal is a current account transaction, provided that the central government may, in public
interest and in consultation with the Reserve Bank, impose such reasonable restrictions for
current account transactions, as may be prescribed.
Capital Account Transactions

1. As per the Act, that is, subject to the provisions of subsection, any person may sell or
draw foreign exchange to or from an authorized person for a capital account transaction.
2. The Reserve Bank may, in consultation with the central government, specify any class
or classes of capital account transactions which are permissible; and the limit up to
which the foreign exchange shall be admissible for such transactions, provided that
the Reserve Bank shall not impose any restriction on the drawal of foreign exchange
for payments that are due on account of amortization of loans or for depreciation of
direct investments in the ordinary course of business.
3. Without prejudice to the generality of the provisions of subsection, the Reserve Bank
may, by regulations, prohibit, restrict, or regulate the following:
i. transfer or issue of any foreign security by a PRI;
ii. transfer or issue of any security by a PRI;
iii. transfer or issue of any security or foreign security by any branch, office, or an

agency in India of a PROI;
iv. any borrowing or lending in foreign exchange in whatever form or by whatever
name called;
v. any borrowing or lending in rupees in whatever form or by whatever name
called between a PRI and a PROI;
vi. deposits between persons who are resident in India and persons who are resident
outside India;
vii. export, import, or holding of currency or currency notes;
viii. transfer of immovable property outside India, other than a lease not exceeding
five years, by a PRI;
ix. acquisition or transfer of immovable property in India, other than a lease not
exceeding five years, by a PROI;
x. giving of a guarantee or surety in respect of any debt, obligation, or other liabil-
ity incurred
i. by a PRI and owed to a PROI or
ii. by a PROI.
4. A PRI may hold, own, transfer, or invest in foreign currency, foreign security, or any
immovable property situated outside India if such currency, security, or property was
acquired, held, or owned by such person when he/she was a resident outside India or
inherited from a person who was a resident outside India.
5. A PROI may hold, own, transfer, or invest in Indian currency, security, or any immov-
able property situated in India, if such currency, security, or property was acquired,
held, or owned by such person when he/she was a resident in India or inherited from
a person who was a resident in India.
6. Without any prejudice to the provisions of this section, the Reserve Bank may, by
regulation, prohibit, restrict, or regulate establishment in India of a branch, office, or
other place of business by a PROI for carrying on any activity relating to such branch,
office, or other place of business.
Export of Goods and Services

1. Every exporter of goods shall
i. furnish to the Reserve Bank or to such other authority a declaration in such form
and in such manner as may be specified, containing true and correct material
particulars, including the amount representing the full export value or, if the
full export value of the goods is not ascertainable at the time of export, the value
which the exporter, having regard to the prevailing market conditions, expects to
receive on the sale of the goods in a market outside India;
ii. furnish to the Reserve Bank such other information as may be required by the
Reserve Bank for the purpose of ensuring the realisation of the export proceeds
by such exporter.
2. The Reserve Bank may, for the purpose of ensuring that the full export value of the
goods or such reduced value of the goods as the Reserve Bank determines, having
regard to the prevailing market conditions, is received without any delay, direct any
exporter to comply with such requirements as it deems fit.
3. Every exporter of services shall furnish to the Reserve Bank or to such other authori-
ties a declaration in such form and in such manner as may be specified, containing
the true and correct material particulars in relation to payment for such services.
Realization and Repatriation of Foreign Exchange

Unless otherwise provided in this Act, where any amount of foreign exchange is due or has
accrued to any PRI, such person shall take all reasonable steps to realize and repatriate to
India such foreign exchange within such period and in such manner as may be specified by
the Reserve Bank.
Exemption from Realization and Repatriation in

Certain Cases
The provisions of Sections 4 and 8 shall not apply to the following, viz.
Exemption from realization and i. possession of foreign currency or foreign coins by any person up to such limit as the
repatriation is granted in cer- Reserve Bank may specify;
tain cases where RBI sets up
the limits and the transactions ii. foreign currency account held or operated by such person or class of persons and the
are compliant with the same. limit up to which the Reserve Bank may specify;
iii. foreign exchange acquired or received before 8 July 1947, or any income arising or
accruing thereon which is held outside India by any person in pursuance of a general
or special permission granted by the Reserve Bank;
iv. foreign exchange held by a PRI up to such limit as the Reserve Bank may specify, if
such foreign exchange was acquired by way of a gift or inheritance from a person
referred to in Clause (c), including any income arising therefrom;
v. foreign exchange acquired from employment, business, trade, vocation, services,
honorarium, gifts, inheritance, or any other legitimate means up to such limit as the
Reserve Bank may specify; and
vi. such other receipts in foreign exchange as the Reserve Bank may specify.
C ase
Mr. Alex and Mr. Murthy are planning to start a business in Mumbai. Mr. Alex wants to
invest ` 3 crore and Mr. Murthy ` 2 crore in the business. While Mr. Murthy is a resident of
India, Mr. Alex is a resident of the United States. They want to start the business in partner-
ship, but Mr. Alex wants to buy his own land for the business purpose in Mumbai. For this he
is ready to invest more than ` 50 lakh. Mr. Murthy suggests to Mr. Alex that it is not easy to
buy land in Mumbai in the latter’s name.
It would be better to buy the land and all assets required for the business in his,
Mr. Murthy’s, name because Reserve Bank may prohibit any borrowing or lending in rupees
between a PRI and PROI and under Section 6 of FEMA. Reserve Bank may by regulation,
prohibit, restrict, or regulate the establishment in India of a branch office, or other place of
business by a PROI, for carrying on any activity relating to such branch, office, or other place
of business. Therefore, Mr. Murthy suggests, that Mr. Alex, should just invest the money
alone. Whatever assets they buy will be owned by Mr. Murthy alone. Mr. Alex does not agree
with this suggestion of Mr. Murthy. He says, ‘We will buy all assets in partnership as we are
starting a business in partnership.’
Case Questions
1. Do you support the suggestion of Mr. Murthy?
2. Do you think that the suggestion of Mr. Murthy is correct?
3. Give correct suggestions to Mr. Alex for starting a business in India.
Key W o r d s
● Monopoly ● Foreign Security ● Repatriation
● Monopolistic and Restrictive Trade ● Currency ● Appellate Board
Practices (MRTPs) ● Overseas Market ● Indian Custom Waters
● Restrictive Trade Practices (RTPs) ● Money changers ● FEMA
● Authorized Dealer ● Blocked Accounts ● FERA
● Bearer Certificate ● Security ● MRTP
● Foreign Exchange ● Authorized Person ● Goods
Q u est i o n s
1. What were the objectives of the MRTP Act, 1969? 7. What are the objectives of New Competition Act
2. Describe the recent amendments made in the 2002?
MRTP Act. 8. In what sense the Competition Act 2002 is better
3. ‘After the 1991 amendment, the MRTP Act has than MRTP 1969 Act?
become toothless to control the concentration of 9. List down the different transactions that come under
economic power.’ Discuss. current account and capital account.
4. Discuss the provisions and objectives of the Foreign 10. Write short notes on:
Exchange Regulation Act (FERA), 1973. a. Applicability of FEMA
5. Discuss the provisions of the Foreign Exchange Man- b. Residential Status
agement Act (FEMA), 1999.
6. Describe the important concepts under FEMA.
r efe r e n ces
n Bretty, J. F. and S. Samuelson (2000). Business Law n Saravanvel, P. and S. Sumathi (2004). Business Law for
for a New Century, 2nd ed. Mason, OH, US: Thomson/ Management. Mumbai: Himalaya Publishing House.
South-Western Publishing. n ——— Legal Aspects of Business, 1st ed. Hyderabad:
n Bulchandani, K. R. (2002). Business Law for Manage- Himalaya Publishing House.
ment. Mumbai: Himalaya Publishing House. n Savilson, D. V., B. Knowles, and L. Forsytte (2003).
n Datt, R. and K. P. M. Sundharam (2004). Indian Business Law: Principles and Cases in the Legal Environ-
Economy. Delhi: Sultan Chand. ment, 7th ed. Mason, OH, US: Thomson/South-Western
n http://exim.indianart.com Publishing.
n Sen, A. K. (2001). Commercial Law and Industrial Law.
n Kapoor, N. D. (2002). Elements of Mercantile Law, 25th
revised ed. New Delhi: Sultan Chand. Kolkata: World Press.
n Tuteja, S. K. (1998). Business Law for Managers, 5th ed.
n Maheshwari, S. N. (2004). Business Regulatory Frame-
work, 2nd ed. Himalaya Publishing House. New Delhi: Sultan Chand.
n www.fema.gov/help
n Mann, R. A. and B. S. Robert (2004). Business Law and
the Regulation of Business, 7th ed. Mason, OH, US: n www.fema.gov/emergency/reports/2008
Thomson/South-Western Publishing. n www.google.com/mrtp&competition article
n Miller, R. L. and G. A. Jentz (2005). Business Law Today, n www.wikipedia.org/wiki/Competition_Commission_
6th ed. Mason, OH, US: Thomson/South-Western Pub- of_India
lishing.
n Prasad, M. (2002). Principles of Business Law and
Management, 2nd ed. Hyderabad: Himalaya Publishing
House.
19
C hapter
Business Ethics
>>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>>
• Ethics and Values 517 • Impact of Globalisation on
Business Ethics 530
• Relevance of Ethics in Business 518
• Benefits of Ethical Business 519 • Business Ethics as Competitive
Advantage 531
• Importance of Business Ethics 520 • Business Ethics in India 532
• Values in Business 521 • Case 533
• Inculcating Values in Management 521 • Summary 533
• Categories of Business Values 522 • Key Words 534
• Need for Ethics in Global Change 523 • Questions 534
• Managing Ethics 523 • References 534
Ethics and Values

Some say ‘Knowledge is Power’. I believe that actual power lies in the character of a person.
Human and ethical values constitute the ‘wealth’ of a character. Ethics is nothing but the de- Ethics is nothing but the degree
gree of faith that one bestows upon oneself. Ethics involves learning what is right or wrong. of faith that one bestows upon
According to Wayne Mondy, ‘Ethics is the discipline dealing with what is good and bad, oneself. Ethics involves learning
or right and wrong, or with moral duty and obligation’. Ethics is concerned with right and what is right or wrong.
wrong, good and bad, and virtue and vice.
Ethics, ‘ethicus’ in Latin, is derived from the word ‘ethos’, meaning character and man-
ners. Ethics is thus a science of morals and principles. Moral principles are actions that carry
the best consequence for everyone concerned. For instance, ‘Never break a promise’, ‘Treat
everyone fairly’, and ‘Always tell the truth’. Ethics refer to the code of conduct that guides an
individual in dealing with a situation. It relates to the social rules that influence people to be
honest in dealing with the other people.
The objectives of ethics are to study human behaviours and make evaluative assessments
about them as moral or immoral, and establish moral standards and norms of behaviour.
Values that guide us of how we ought to behave are considered as moral values, for example,
values such as respect, honesty, fairness, and responsibility. Statements about how these values
are applied are sometimes called ‘moral or ethical principles’.
Values are general beliefs concerning what is good or bad and desirable or not desir-
able, which are shared by individuals and organisations in societies. They are not directed
towards any specific elements but are used to access a broad range of objects and situations.
For example, someone who believes that honesty is important will likely to act honestly in
most situations (a cashier being honest while dealing with money). An employee who val-
ues a sense of accomplishment will generally, try to do his best in each task for which he is
responsible.
Values are important character- Values are important characteristics that influence individual and organisational
istics that influence individual behaviours. The way an individual’s cognitive structure (a person’s mind) works is by values
and organisational behaviours. that influence his beliefs. These beliefs form a person’s attitude and subsequently, the person’s
attitude heavily influences his behaviour. Values are sometimes also confused with ‘code of
conduct’, but these two are different entities. Codes merely represent rules and regulations of
what to do and what not to do. Values go beyond stating the dos and don’ts. Values are what
underline codes; values are the foundation of codes.
Values not only enhance the Values not only enhance the quality of life of the individuals of society, but they also make
quality of life of the individuals the society, and thereby the world, a better place to live. Value-based actions and decisions
of society, but they also make ensure the welfare of all people belonging to the society. Various social institutions like fami-
the society, and thereby the
world, a better place to live. Val-
ly, school, other extra-curricular bodies like sports club, debating, painting, singing, religion,
ue-based actions and decisions and society or community play an important role in inculcating values in individuals. Some
ensure the welfare of all people common personal/organisational values include the following:
belonging to the society.
• Honesty and truth
• Respect
• Self-fulfilment
• Sense of accomplishment
• Social responsibility
• Security/stability
• Courage
• Generosity
• Creativity
• Patience
• Humility
• Loyalty
• Simplicity
A person with all these values has equanimity. Such a person can mobilise his own and other’s
energy and can help to accomplish wonders.
Relevance of Ethics in Business

Business ethics has come to be considered as a management discipline, especially since the
birth of the social responsibility movement in the 1960s. In that decade, the social awareness
movement caused businesses to use their massive financial and social influence to address
issues such as poverty, crime, environmental protection, rights, public health, and education.
Commerce became more complicated and dynamic over time. Organisations realised that
they needed more guidance to ensure that their dealings supported the common good and
did not harm others. Thus, the concept of business ethics was born. The concept has come
to mean various things to various people, but generally it has come to mean what is right or
wrong in business and doing only what is right. This is with regard to the effect of products/
services and the relationship with stockholders.
Business Ethics | 519
Business Ethics is Nothing but Application of Ethics in Business The need for business ethics
springs from the philosophy
Since business exists and operates within a society and is a part of the subsystem of the that since business operates
society, its functioning must contribute to the welfare of the society. Arguments against busi- and exists within the society
ness ethics say that since business is an economic entity, it should have nothing to do with and is a part of the subsystem
of society, its functioning must
morals or with ethics. This view has changed drastically over the years, and more and more contribute to the welfare of the
companies are resorting to ethical means of conducting themselves and doing business. society.
The Tata group of companies is an example of a company that follows ethical business
practice. In India the credit of following business ethics goes to J.R.D Tata. Ethics for the Tata Ethics for the Tata group means
group means conducting business in a manner which is fair and just to employees, suppli- conducting business in a man-
ers, and shareholders, and with a concern for the community in which it operates. However, ner which is fair and just to em-
ployees, suppliers, and share-
often profits and social responsibilities are at cross-purposes. Organisational growth can be holders, and with a concern
hastened by unethical practices, but it reduces the long-term frame of work to short-term. for the community in which it
Subsequently, the organisation may lose its face in society and its existence may be ques- operates.
tioned by the actions it upholds.
Benefits of Ethical Business

1. Maintains a moral cause in turbulent times.
2. Cultivates strong teamwork and productivity.
3. Supports employee growth and meaning.
4. Helps to ensure that policies are legal.
5. Helps to avoid criminal acts of ‘omission’ and can lower fines.
6. Helps to manage values associated with quality management and strategic planning.
7. Promotes a strong public image.
8. Improves trust in relationships.
9. Legitimises managerial actions.
10. Strengthens the coherence and balance of the organisation’s culture.
11. Cultivates a greater sensitivity towards the impact of the enterprise’s values and
messages.
12. Every significant management decision has an ethical value dimension.
13. There exists a clear vision and picture of integrity throughout the organisation. A business needs to remain
ethical for its own good. Unethi-
Thus, only the ethical companies that discharge their social responsibilities have survived cal actions and decisions may
yield results only in the very
competition and turbulent changes all through the years. They have contributed to social short run. For a long existence
welfare and have continued to flourish undiminished. If business ethics form a part of the and sustained profitability, a
corporate culture, ultimately the customer would be called upon to bear the cost of the ethi- business is required to conduct
cal practices of the organisation. Moreover, employees, executives, and stockholders will feel itself ethically and run its activi-
ties on ethical lines. Ethics give
proud to belong to an ethical organisation. That feeling generates goodwill, loyalty, pride, and rise to an efficient economy. It
peace of mind—all of which cannot be calculated accurately in terms of money. is not the government or the
A business needs to remain ethical for its own good. Unethical actions and decisions law which will protect society;
may yield results only in the very short run. For a long existence and sustained profitability, a ethics alone has the power to
protect it.
business is required to conduct itself ethically and run its activities on ethical lines. All over
the world, there is a growing realisation that ethics is important for any type of business and
for achieving the growth of any society. Ethics give rise to an efficient economy. It is not the
government or the law which will protect society; ethics alone has the power to protect it.
Today, a mass awareness has been built about the desirability and, indeed, the necessity of
incorporating ethical practices in business conduct. In future, this is bound to be more neces-
sary than ever before.
Importance of Business Ethics

1. The power and influence of business in society is greater than ever before. Evidence
suggests that many members of the public are uneasy with such developments.
Business ethics helps us to understand why some things happen strangely, what their
implications might be, and how we should address such situations.
2. Business has the potential to provide a major contribution to our society, in terms of
producing the products and services that we want, providing employment, paying
taxes, and acting as an engine for the economic development, which are just a few
examples. How, or indeed whether, this contribution is made raises significant ethical
issues that go to the heart of the social role in business in the contemporary society.
3. Business malpractices have the potential to inflict an enormous harm on individuals,
on communities, and on the environment itself ultimately. By helping us to under-
stand more about the causes and consequences of these malpractices, Business Ethics
seeks, as the Founding Editor of the Journal of Business Ethics has suggested, ‘to
improve the human condition’.
4. The demands being placed on business that it should be ethical, by its various stake-
holders, are constantly becoming more and more complex and challenging. Business
ethics provides the means to appreciate and understand these challenges more clearly,
so that the firms can meet these ethical expectations more effectively.
5. Few business people have received formal business ethics education or training.
Business ethics can help to improve ethical decision making by providing managers
with the appropriate knowledge and tools that allow them to correctly identify, diag-
nose, analyse, and provide solutions to the ethical problems and dilemmas they are
confronted with.
6. Ethical infractions continue to occur in business. For example, in a recent UK survey
of ethics at work, one in four employees said that they had felt the pressure to com-
promise their own or their organisation’s ethical standards, and one in five employees
had noticed that the behaviour by their colleagues had violated the law or did not
accord with the expected ethical standards.
7. Business ethics can provide us with the ability to assess the benefits and the problems
that are associated with different ways of managing ethics in organisations.
8. Finally, business ethics is also extremely interesting in that it provides us with knowl-
edge that transcends the traditional framework of business studies and confronts us
with some of the most important questions that are faced by the society. The subject
can, therefore, be richly rewarding to study as it provides us with knowledge and
skills, which are not simply helpful for doing business; but rather, by helping us to
understand the modern societies in a more systematic way, and advance our ability
to address life situations far beyond the classroom or the office desk.
Values in Business
The CEO of a large back-office software company in the United States was indicted. The
primary crime was that he personally backdated contracts to make the quarterly figures look
good and meet market expectations in regard to the company performance. In another case,
a star employee of an investment-banking firm managed stock offerings, and was considered
powerful enough to make both markets and companies. Those were the heady days of the
technology-market bubbles. He was charged with giving stocks, not in initial public offerings,
to the personal accounts of executives of potential client firms in the hope that his firm would
get their business in return. The executives who received these chunks of stock made large
sums of money when the company went public and the stock price rose.
Without the sophistication of financial engineering, we would call this as ‘corruption’.
Business news reporting relates to corruption, sabotage, bribery, and so on. Businesses also
face other problems like depression at workplace, restless and bankrupt minds of employees,
increase in absenteeism, workplace violence, and so on. To tackle such problems, every effort
must be made by the top management to inculcate values in the employees. Values are the best Values are the best means in
means in routine life for purification of the mind and heart. Today’s business requires value- routine life for purification of
driven management combined with the requisite skills. The effectiveness in the performance of the mind and heart. Today’s
business requires value-driven
managers and workers is a function of values and skills. Human values support the established management combined with
business values such as service, communication, excellence, innovation, creativity, and coordina- the requisite skills.
tion. Human values help to create good interactions. They reduce conflicts and disputes at work-
place. The following are some organisational or business values for a group of service executives:
1. Contribute to society and humanity.
2. Be fair; do not discriminate on the basis of race, sex, religion, and other parameters.
3. Do not suppress the voice of conscience even if it means sacrificing achievements.
4. Honour human proprietary rights.
5. Work selflessly to the extent possible for a healthy psychological approach to work life.
Inculcating Values in Management

‘Values should be an integral part of corporate mission and objectives. Else, there should ‘Values should be an integral
be a separate statement for values. They should be expressively mentioned in the strategic part of corporate mission and
intent’. An organisational mission statement that truly reflects the vision and values shared objectives. Else, there should
be a separate statement for
by everyone within the organisation. It not only creates tremendous commitment from the values. They should be expres-
employees but also creates a great bond of unity among them. Employees themselves create sively mentioned in the strate-
a frame of reference, a set of criteria, or guidelines, by which they govern themselves. If that gic intent’.
kind of situation is truly created, then there is no need for others to direct, control, or criticise
employees, for they create the ultimate corporate excellence, where the employees govern
their own activities, performance, and behaviour. Take, for instance, the mission and value
statement of Bharat Heavy Electricals Limited (BHEL). Box 19.1 gives instances of Arthur
Anderson and many other US firms, which neglected the basic ethical values.
Mission
To be a leading Indian engineering enterprise providing quality products, systems, and serv-
ices in the fields of energy, transportation, industry, infrastructure, and other potential areas.
Box 19.1 Lesson from America

In the United States, Arthur Anderson, a well-respected analysts of the dot-com era have lost their jobs and
and venerable auditing firm with an international are likely to face prosecution for selling shares, with a
presence, which was considered responsible for non- rosy picture, to ordinary investors. A number of leading
disclosure of vital financial information relating to Enron, Wall Street bankers have paid out tonnes of money as
faced serious criminal charges from the government for their research analysts wrote biased company research
obstruction of justice; and a large number of shareholder reports to induce ordinary investors to subscribe for
suits, has been closed. Several high-profile executives such shares. Many established auditing firms in the
from Enron and Worldcom who are responsible for United States are facing legal action from their clients for
Enron’s collapse are in jail. Many of the technical professional negligence and improper and wrong advice.
Values
• Meeting commitment that was made to external and internal customers.
• Foster bearing, creativity, and speed of response.
• Respect for dignity and potential of individuals.
• Loyalty and pride for the company.
• Team playing.
• Zeal to excel.
• Integration and fairness in all matters.

The members of the management team and the union leaders must be regularly exposed to
spiritualisation seminars and workshops, meditations, introspections, common prayers, and
Individuals should be encour- so on. The organisation should inculcate the sprit of giving rather than taking. Individuals
aged to subdue their ego, should be encouraged to subdue their ego, overcome to some extent their selfishness, anger,
overcome to some extent their jealousy, greed, hatred, partiality, and such other negative aspects. Organisations must strive
selfishness, anger, jealousy,
greed, hatred, partiality, and
for the internal growth of their employees rather than concentrating only on their skills and
such other negative aspects. proficiency to bring about a radical change in thought, speech, and actions of employees,
which needs discipline and conscious and well-directed effort.
Categories of Business Values

Managerial Values
These are values that are important for personal and organisational life. Examples of mana-
gerial values include honesty, loyalty, truth, and gentleness. Any management decision and
strategy must be based on these values.
Leadership Values
These values form the very basis of the company. Examples include transparency, truth,
friendliness, fairness, and equality. These values characterise a true leader.
Organisational Values
Social responsibility, nondiscrimination, satisfaction of the customer, and quality product/
services are some examples of organisational values. Much importance is also given to the
voice of the conscience and selfless work.
Need for Ethics in Global Change

Science and technology set us on the path of development and liberated us from servitude
to nature. But science and technology also brought about phenomenal industrialisation at
the cost of indiscriminate and ruthless exploitation of nature. Liberalization of economy
resulted in cut-throat competition in business. Today’s market situation has become very
dynamic. A business earns more profit in a short period, resulting in increased exploitation
of customers, employees, and nature.
Misleading and false advertisements; defective and contaminated products; price war; The need for ethics has be-
delay in paying corporate taxes, duties, and other dues like electricity bills; bribing public come even more pertinent with
servants; and corrupting the democratic structure of the country—thus, business has no re- the advancement in science
and technology, and the in-
sponsibility towards society. Take the example of cosmetic companies. Many cosmetic com- dustries have benefitted from
panies manufacture products that contain a cocktail of chemicals, which cause irreversible such development, like that of
damage to the skin, nails, hair, and eyes. Badly researched and poor-quality cosmetics and in the cosmetic industries, soft-
drink companies, and medicine
toiletries cause unimaginable damage, sometimes even causing skin diseases and cancers.
companies, as a lot of these
The alleged presence of fluoride in toothpaste is another instance. Internationally reput- products can be harmful to the
ed soft drinks have been found to contain pesticides. Deodorants contain aluminium, zinc body, on the whole.
and zirconium salts, antiseptics, perfume, propellant, alcohol, and formaldehyde that cause
irritations to sensitive skin. Paracetamol is yet another example. If taken regularly for head-
aches, can aggravate the headache and even lead to liver or kidney damage, but this informa-
tion is not written on the product. Some pediatric multivitamins deteriorate even during the
period of their use, which speaks of their quality. Many cosmetic and medical products are
put in the market without any kind of testing.
Businesses today exist only to maximise their profits. These profits can be earned in
numerous ways, even through black marketing, hoardings, and adulteration. But no business No business can exist without
can exist without the acceptance and the sanction of the society in which it carries out its activi- the acceptance and the sanc-
ties. And to get a sanction from the society, a business should be ethical and socially responsible. tion of the society in which it
carries out its activities.
A business can, thus, maximise its profits and do good for the society in which it operates.
An example of a group of industries that has rendered important social service and
believes in the Indian ethos is the Hero group. BHEL has implemented a number of welfare
schemes not only for its employees, but also for the people living in the places it is located in.
Other examples of such companies are the Aditya group, Choksh’s Asian Paints, NDDB, and
TVS. These companies practise business ethics in all their dealings with customers and the
public at large.
Managing Ethics
Leaders and managers require more practical information about managing ethics. Managing
Organisations can manage eth-
ethics in the workplace holds tremendous benefit for both leaders and managers, as it benefit ics in their workplaces by estab-
both of them, morally and practically. This is particularly true today, when it is critical to lishing an ethics management
understand and manage highly diverse values in the workplace. Organisations can manage programme.
‘Typically, ethics programs con- ethics in their workplaces by establishing an ethics management programme. Brian Schrag,
vey corporate values, often us- the Executive Secretary of the Association for Practical and Professional Ethics, clarifies,
ing codes and policies to guide ‘Typically, ethics programs convey corporate values, often using codes and policies to guide
decisions and behaviour, and
can include extensive training
decisions and behaviour, and can include extensive training and evaluating, depending on
and evaluating, depending on the organisation’.
the organisation’.
Benefits of Managing Ethics as a Programme

There are numerous benefits in formally managing ethics as a programme rather than as a
one-shot effort when it appears to be needed. Generally, ethics programmes:
• Establish organisational roles to manage ethics.
• Schedule the ongoing assessment of ethics requirements.
• Establish the required operating values and behaviours.
• Align the organisational behaviours with operating values.
• Develop an awareness and sensitivity to ethical issues.
• Integrate ethical guidelines and decision making.
• Structure mechanisms to resolving ethical dilemmas.
• Facilitate the ongoing evaluation and updates to the programme.
• Help to convince employees that attention to ethics is not just a knee-jerk reaction to
get out of trouble but to improve public image.
Guidelines for Managing Ethics in the Workplace

The following guidelines ensure that the ethics management programme is operated in a
meaningful fashion:
Recognise that managing eth- 1. Recognise that managing ethics is a process. Ethics is a matter of values and associated
ics is a process. Ethics is a behaviours. Values are discerned through the process of ongoing reflection. Therefore,
matter of values and associ- ethics programmes may seem more process-oriented than most of the management
ated behaviours. Values are
discerned through the process
practices. Managers tend to be sceptical of process-oriented activities, preferring in-
of ongoing reflection. stead the processes that are focused on deliverables with measurements. However,
experienced managers realise that the deliverables of standard management practices
(planning, organising, motivating, controlling) are only tangible representations of
the very process-oriented practices. For example, the process of strategic planning
is much more important than the plan produced by the process. The same is true for
ethics management. Ethics programmes do produce deliverables, for example, codes,
policies, and procedures; budget items, meeting minutes, authorisation forms, news-
letters; and so on. However, the most important aspect from an ethics management
programme is the process of reflection and dialogue that produces these deliverables.
2. The bottom line of an ethics programme is accomplishing preferred behaviours in
the workplace. As with any management practice, the most important outcome is
behaviours preferred by the organisation. The best of ethical values and intentions are
relatively meaningless unless they generate fair and just behaviours in the workplace.
That is why, practices that generate lists of ethical values, or codes of ethics, must also
generate policies, procedures, and training that translate those values to appropriate
behaviours.
3. The best way to handle ethical dilemmas is to avoid their occurrence in the first place. The best way to handle ethi-
That is why, practices such as developing codes of ethics and codes of conduct are cal dilemmas is to avoid their
so important. Their development sensitises employees to ethical considerations and occurrence in the first place.
That is why, practices such
minimises the chances of unethical behaviour occurring in the first place. as developing codes of ethics
4. Make ethics decisions in groups, and make the decisions public, as appropriate. This and codes of conduct are so
important. Their development
usually produces better-quality decisions by including diverse interests and perspec- sensitises employees to ethical
tives, and increases the credibility of the decision process and outcome by reducing considerations and minimises
suspicion of unfair bias. the chances of unethical behav-
iour occurring in the first place.
5. Integrate ethics management with the other management practices. When develop-
ing the statement of values during strategic planning, include ethical values preferred
in the workplace. When developing personnel policies, reflect on what ethical values
should be most prominent in the organisation’s culture and then design policies to
produce these behaviours.
6. Use cross-functional teams when developing and implementing the ethics
management programme. It is vital that the organisation’s employees feel a sense of
participation and ownership in the programme if they are to adhere to its ethical
values. Therefore, include employees in developing and operating the programme.
7. Value forgiveness. This may sound rather religious or preachy; but it is probably, the
most important component of any management practice. An ethics management
programme may at first actually increase the number of ethical issues to be dealt
with, because people are more sensitive to their occurrence. Consequently, there may
be more occasions to address people’s unethical behaviour. The most important in-
gredient for remaining ethical is trying to be ethical. Therefore, help people to recog-
nise and address their mistakes and then, support them to continue to try operating
ethically.
8. Note that trying to operate ethically and making a few mistakes is better than not Note that trying to operate
trying at all. Some organisations have become widely known for operating in a highly ethically and making a few mis-
ethical manner, for example, Johnson and Johnson and Hewlett-Packard (HP), to takes is better than not trying
name two. Unfortunately, it seems that when an organisation achieves this strong at all.
public image, some business ethics writers place it on a pedestal. All organisations
comprise of people, and people are not perfect. However, when a mistake is made by
any of these organisations, they have a long way to fall. In our increasingly critical
society, these organisations are accused of being hypocritical and social critics soon
pillory them. Consequently, some leaders may fear sticking their necks out publicly
to announce an ethics management programme. Box 19.2 gives the key factors that
contribute to the best ethical environment.
Box 19.2 Ethical Environment

The following factors may influence the ethical • The ethical code acquired within the organisation
environment in an organisation: • The individual inspiration source
• The ethical vision of the management which may • The managerial character and ethical deduction
need a review
• The workplace environment and the compulsion to
• The holistic human values the organisation has follow the ethical norms
developed
Key Roles and Responsibilities in Ethics

Management
Depending on the size of the
Depending on the size of the organisation, certain roles may prove useful in managing eth-
organisation, certain roles may ics in the workplace. These can be full-time roles or part-time functions, which could be
prove useful in managing eth- assumed by someone already in the organisation. Small organisations certainly will not have
ics in the workplace. These can the resources to implement each of the following roles, using different people in the organi-
be full-time roles or part-time
functions assumed by some- sation. However, the following functions point out responsibilities that should be included
one already in the organisation. somewhere in the organisation:
Small organisations certainly
will not have the resources to 1. The organisation’s CEO (Chief Executive Officer) must fully support the programme.
implement each the following If he/she is not fully behind the programme, employees will certainly notice—and
roles, using different people in
the organisation.
this apparent hypocrisy may cause such cynicism that the organisation may be
worse off than having no formal ethics programme at all. Therefore, the CEO should
announce the programme, and also should champion its development and imple-
mentation. Most important, he/she should consistently aspire to lead in an ethical
manner. If a mistake is made, he/she should admit it.
2. Consider establishing an Ethics Committee at the board level. The Committee would
be charged to oversee the development and operation of the Ethics Management
Programme.
3. Consider establishing an Ethics Management Committee. It would be charged with

implementing and administrating an Ethics Management Programme, includ-
ing administering and training of policies and procedures, and resolving ethical
dilemmas. The committee should comprise senior officers.
4. Consider assigning/developing an Ethics Officer. This role is becoming more com-

mon, particularly in larger and more progressive organisations. The ethics officer is
usually trained about matters of ethics in the workplace, particularly about resolving
ethical dilemmas.
5. Consider establishing an Ombudsperson. The ombudsperson is responsible for co-

ordinating the development of the policies and procedures to institutionalise moral
values in the workplace. This position usually is directly responsible for resolving
ethical dilemmas by interpreting the existing policies and procedures.
6. Note that one person must ultimately be responsible for managing the ethics manage-
ment programme.
Ethics Tools
Code of Ethics
A code of ethics specifies the

A code of ethics specifies the ethical rules of operation. It is the ‘thou shalt not’s’. In the later
ethical rules of operation. It is 1980s, the Conference Board in New Delhi, a leading business membership organisation,
the ‘thou shalt not’s’. found that 76 per cent of corporations that were surveyed had codes of ethics. Some business
ethicists disagree that codes have any value. Their general opinion is that too much focus is
put on the codes themselves, and that the codes themselves are not influential in managing
the ethics in the workplace. Many ethicists note that it is the developing and continuing dia-
logue around the code’s values that is most important.
Developing Codes of Ethics

Note that if your organisation is quite large, for example, if it includes several large pro-
grammes or departments, you may want to develop an overall corporate code of ethics and
then a separate code to guide each of your programmes or departments. Also note that
the codes should not be developed by the Department of Human Resources or the Legal
Department alone, as is done too often. Codes are insufficient if they are intended only to Codes are insufficient if they
ensure that policies are legal. All the staff must see the ethics programme being driven by are intended only to ensure
the top management. Note that the codes of ethics and codes of conduct may be the same that policies are legal. All the
staff must see the ethics pro-
in some organisations, depending on the organisation’s culture and operations and on the gramme being driven by the
ultimate level of specificity in the code(s). top management.
Guidelines for Developing Codes of Ethics

Review if any values need to adhere to relevant laws and regulations; this ensures your
organisation is not (or is not near) breaking any of them. If you are breaking any of them,
you may be far better off to report this violation than to try hiding the problem. Often, a
reported violation generates more leniency than an outside detection of an unreported viola-
tion. Increase priority on values that will help your organisation operate to avoid breaking
these laws and to follow necessary regulations. Review which values produce the top three or
four traits of a highly ethical and successful product or service in your area, for example, for There is a need for constant
review of values and identi-
accountants: objectivity, confidentiality, accuracy, and so on. Identify which values produce fication of values needed to
behaviours that exhibit these traits. address issues at more places,
Identify values that are needed to address the current issues in your workplace. Appoint also keeping in mind the find-
one or two key people to interview key staff to collect descriptions of all major issues in ings of such values, during stra-
tegic planning.
the workplace. Collect descriptions of behaviours that produce the issues. Consider which
of these issues is ethical in nature, for example, issues pertaining to respect, fairness, and
honesty. Identify the behaviours needed to resolve these issues. Identify which values would
generate those preferred behaviours. There may be values included here that some people
would not deem as moral or ethical values, for example, team-building and promptness; but
for managers, these practical values may add more relevance and utility to a code of ethics.
Identify any values needed, based on the findings during a strategic planning. Review
information from your SWOT analysis (identifying the organisation’s strengths, weaknesses,
opportunities, and threats). What behaviours are needed to build on strengths, shore up
weaknesses, take advantage of opportunities, and guard against threats? Consider any top
ethical values that might be prised by stakeholders. For example, consider expectations of
employees, clients/customers, suppliers, founders, members of the local community, and
others. Collect from the above steps, the top 5 to 10 ethical values that are high priorities in
your organisation. Examples of ethical values might include the following list of ‘Six Pillars of
Character’ developed by the Josephson Institute of Ethics, the United States:
a. Trustworthiness: honesty, integrity, promise-keeping, loyalty.
b. Respect: autonomy, privacy, dignity, courtesy, tolerance, acceptance.
c. Responsibility: accountability, pursuit of excellence.
d. Caring: compassion, consideration, giving, sharing, kindness, loving.
e. Justice and fairness: procedural fairness, impartiality, consistency, equity, equality.
f. Civic virtue and citizenship: law abiding, community service, protection of
environment.
Codes of Conduct
‘Codes of conduct specify ac- ‘Codes of conduct specify actions in the workplace and codes of ethics are general guides to
tions in the workplace and codes decisions about those actions’, explains Craig Nordlund, the Associate General Counsel and
of ethics are general guides to Secretary at HP. He suggests that codes of conduct contain examples of appropriate behav-
decisions about those actions’,
iour to be meaningful.
Developing a Code of Conduct

Note that if your organisation is quite large, for example, includes several large programmes
or departments, you may want to develop an overall corporate code of conduct, and then a
separate code to guide each of your programmes or departments. Consider the following
guidelines when developing codes of conduct:
1. Compose your own code of ethics; attempt to associate with each value, two example
behaviours that may reflect each value. Generally, the critics of codes of ethics assert
that the compositions appear vacuous as many people list only the ethical values and do
not clarify or supplement these values by associating examples of related behaviours.
2. Identify the key behaviours that are needed to adhere to the ethical values proclaimed
in your code of ethics, including the ethical values that are derived from the review of
key laws and regulations, ethical behaviours needed in your product or service area,
behaviours to address current issues in your workplace, and behaviours needed to
reach the strategic goals.
3. Include wordings that indicate that all the employees are expected to conform to
the behaviours specified in the code of conduct. Add wordings that will indicate the
respective people, whom the employees can approach if they have any questions.
4. Obtain reviews from the key members of the organisation. Be sure that your legal
department reviews the drafted code of conduct.
5. Announce and distribute the new code of conduct (unless you are waiting to announce
it along with any associated policies and procedures). Ensure that each employee has
a copy and the list or index of postcodes in each employee’s bay or office.
6. Update the code at least once in a year. The most important aspect of codes is devel-
You may be better off gener- oping them and not the code itself. The continued dialogue and reflection around
ating your own code of ethics ethical values produces ethical sensitivity and consensus. Therefore, revisit your
from scratch, rather than re- codes at least once a year—preferably, two or three times a year.
viewing examples from other
organisations. All ethical values 7. Note that you cannot include preferred behaviours for every possible ethical dilemma
are attractive to include in a
that might arise.
code; however, you are most
interestedin those that provoke 8. Examples of topics typically addressed by codes of conduct include preferred style of
behaviours needed in your or-
ganisation at this time. You may dress, avoiding illegal drugs, following instructions of superiors, being reliable and
want to include quite different prompt, maintaining confidentiality, not accepting personal gifts from stakeholders as
ethical values next year. a result of the company rule, avoiding racial or sexual discrimination, avoiding conflict
of interest, complying with laws and regulations, not using organisation’s property for
Note that, as with the codes of personal use, not discriminating against race or age or sexual orientation, and report-
ethics, you may be better off ing illegal or questionable activity. Try to go beyond these traditional legalistic expecta-
generating your own code of tions in your codes—adhere to what is ethically sensitive in your organisation as well.
conduct from scratch, rather
than reviewing examples from Note that, as with the codes of ethics, you may be better off generating your own code of
other organisations.
conduct from scratch, rather than reviewing examples from other organisations. All ethical
values are attractive to be included in a code; however, you are most interested in those that
provoke behaviours needed in your organisation during the corresponding period of time.
You may like to include quite different ethical values in the succeeding years.
Policies and Procedures
1. Update the policies and procedures to produce behaviours that are preferred from the
code of conduct, including, for example, personnel, job descriptions, performance
appraisal forms, management-by-objectives (MBO) expectations, standard forms,
checklists, budget-report formats, and other relevant control instruments to ensure
conformance to the code of conduct. In doing so, try to avoid creating ethical dilem-
mas such as conflicts of interest or infringing on the employees’ individual rights.
2. There are numerous examples of how organisations manage values through use of
policies and procedures. For example, we are most familiar with the value of social
responsibility. To produce behaviour aligned with this value, organisations often in-
stitute policies such as recycling the waste, donating to local charities, or paying em-
ployees to participate in the community events. In another example, a high value on
responsiveness to customers might be implemented by instituting policies to return
phone calls or to repair any defective equipment within a certain period of time.
Consider the role of job descriptions and performance appraisals. For example, an
advanced technology business will highly value technical knowledge, creativity, and
systems thinking. They use job descriptions and performance appraisals to encourage
behaviours aligned with these values, such as rewarding advanced degrees, patents,
and analysis and design skills.
3. Include policies and procedures to address ethical dilemmas, like to select a method,
which is the most appropriate one to your organisation’s culture and operations.
4. Include policies and procedures to ensure training of employees on the ethics man-
agement programme. Refer the following section ‘Training’.
5. Include policies and procedures to reward ethical behaviour and impose consequences
on unethical behaviour.
6. Include a ‘grievance policy’ for the employees in order to use that to resolve the disa-
greements they face with the supervisors and staff.
7. Consider establishing an ethics ‘hotline’. This function might best be provided by
an outside consultant, for example, a lawyer. Or, provide an anonymous ‘tip’ box in
which the personnel can report suspected unethical activities, and can do so safely on
an anonymous basis.
All staff must be aware of and
8. Once in a year, review all the personnel policies and procedures. If yours is a small act in full accordance with
organisation, consider including all the staff during this review. Allot a whole day policies and procedures (this
for all the staff to review the policies and procedures, and suggest their opinions and is true, whether policies and
changes too. procedures are for ethics pro-
grammes or personnel man-
agement). This full accordance
Training requires training about policies
and procedures. Orient new
1. The ethics programme is essentially useless unless all the staff members are trained employees to the organisation’s
about what it is, how it works, and their roles in it. The nature of the system may invite ethics programme during new-
employee orientation.
suspicion if not handled openly and honestly. In addition, no matter how fair and
p-to-date is, a set of policies, the legal system will often interpret the same (rather
u
than written policies) as ‘de facto policy’. Therefore, all the staff members must be
aware of and act in full accordance with policies and procedures (this is true, whether
policies and procedures are for ethics programmes or personnel management). This
full accordance requires training about policies and procedures. Orient new employ-
ees to the organisation’s ethics programme during new-employee orientation.
2. Review the ethics management programme in management-training experiences.
3. Involving the staff in review of codes is strong ethics training.
4. Involving the staff in review of policies (ethics and personnel policies) is strong ethics
training.
5. One of the strongest forms of ethics training is practised in resolving complex ethical
dilemmas. We should see to it that all the staff use any of the three ethical-dilemma-
resolution methods and apply them to any of the real-to-life ethical dilemmas.
6. Include ethical performance as a dimension in the performance appraisals.
Impact of Globalisation on
Business Ethics
Globalisation has brought Globalisation has brought about a greater involvement with ethical considerations and most
about a greater involvement importantly, achieving a competitive advantage through business ethics. Globalisation and
with ethical considerations and business ethics are inter-linked as they affect a company’s ability to commit to its sharehold-
most importantly, achieving a ers, in particular to external investors, and preserve the trust needed for further investment
competitive advantage through
business ethics. and growth.
It is increasingly important for companies to deal with ethics as a ‘corporate strategy’
that, if uniquely implemented, could achieve competitive advantage for the company rather
than waiting to react to possible ethical issues of importance to the targeted stakeholders.
It is the necessity of being an ethically proactive company rather than being an ethically
reactive company. As the speed of comparable, tangible assets acquisition accelerates and
the pace of imitation quickens, firms that want to sustain distinctive global competitive ad-
vantages need to protect, exploit, and enhance their unique intangible assets, particularly
integrity.
Globalisation, as defined in terms of the deterritorialisation of economic activities, is
particularly relevant for business ethics, and this is evident in three main areas—culture, law,
and accountability. In the context of business ethics, this controversy over localisation plays
a crucial role. After all, corporations—most notably multinational corporations (MNCs)—
are at the centre of the public’s criticism on globalisation. They are accused for exploiting
workers in the developing countries and destroying their environment and, for abusing their
economic power by engaging the developing countries in a so-called ‘race to the bottom’.
This term describes a process whereby the MNCs pitch the developing countries against each
other by allocating foreign direct investment (FDI) to those countries that can oar them the
most favourable conditions in terms of low tax rates, low levels of environmental regulation,
and restricted workers’ rights. However true these accusations are in practice, there is no
doubt that globalisation is the most current and demanding arena in which corporations
have to define and legitimate the ‘right or wrong’ of their behaviour. Box 19.3 lists the impact
of globalisation on business ethics.
Box 19.3 Impact of Globalisation on Business Ethics
Heads Ethical Impacts of Globalisation

Shareholders Globalisation provides potential not only for greater profitability, but also for greater
risks. Lack of regulation of global capital markets leading to additional financial risks
and instability.
Employees Corporations outsource production to the developing countries in order to reduce costs
in the global marketplace—this not only provides jobs but also raises the potential for
exploitation of employees through poor working conditions.
Consumers Global products not only provide social benefits to consumers across the globe but may
also meet protests against cultural imperialism and Westernisation. Globalisation can
bring cheaper prices to customers, but vulnerable consumers in the developing countries
may also face the possibility of exploitation by MNCs.
Suppliers and Suppliers in the developing countries face regulations from MNCs through supply-chain
competitors management. Small-scale indigenous competitors are exposed to powerful global
players.
Civil society (pressure Global business activities bring the company in direct interaction with local communities,
groups, NGOs, local with a possibility for erosion of traditional community life; globally active pressure groups
communities) emerge with an aim to ‘police’ the corporation in countries where governments are weak
and tolerant.
Government and Globalisation weakens the governments and increases the corporate responsibility
regulation for jobs, welfare, maintenance of ethical standards, etc. Globalisation also confronts
governments with corporations having different cultural expectation about issues such
as bribery, corruption, taxation, and philanthropy.
Business Ethics as Competitive

Advantage
Business ethics as a competitive advantage involves effective building of relationships with a Business ethics as a competi-
company’s stakeholders, based on its integrity that maintains such relationships. An integral tive advantage involves effec-
approach to business can yield strengthened competitiveness: it facilitates the delivery of tive building of relationships
with a company’s stakeholders,
quality products in an honest, reliable way. This approach can enhance work life by making based on its integrity that main-
the workplace more fun and challenging. It can improve relationships with stakeholders and tains such relationships.
can instil a more positive mindset that fosters creativity and innovations among the stake-
holders.
The purpose of ethics is to enhance our lives and relationships, both inside and outside of
the organisation. As the competitive environment with globalisation could be characterised
by the ‘game metaphor’ rather than the ‘war metaphor’, it is increasingly important to include
ethics in the corporation’s strategy and potentially implement it in a way that achieves a com-
petitive advantage for the company and adds value to the stakeholders. The game metaphor
sees competition in business as an exciting game, in which each competitor strives to achieve
excellence, satisfy customers, and succeed, as a result. The motive in this type of game is not
to drive out the competition, but to work hard, play by the rules of the game, and do one’s best
in order to succeed.
Business Ethics in India

Business in the Indian context Business in the Indian context has changed drastically in the 1990s when globalisation
has changed drastically in the and FDI inflows have created immense prosperity in some segments, while many areas
1990s when globalisation and are underdeveloped with hunger, starvation, and marginalisation of the most vulnerable
FDI inflows have created im-
segments of our society. The gap continues to widen both in urban and rural India. What
mense prosperity in some seg-
ments, while many areas are then are the practical steps forward? Business cannot work in isolation of the country
underdeveloped with hunger, context nor can they be islands of excellence where there are starvation deaths, homeless-
starvation, and marginalisation ness, and farmers’ suicides; and lack of livelihoods and access to services. Corporate India
of the most vulnerable seg-
ments of our society.
must respond much more effectively and work for a more inclusive work environment and
society.
Companies are normally expected to invest 3 per cent to 5 per cent of their profits into
corporate responsibility (CR) programmes. The present scenario ranges from 0.1 per cent
to 2 per cent, and an exceptional 14 per cent by Tata Steel. However, companies can give
and, as such, have given their skills and expertise—‘giving’ need not always be measured
in just financial terms, as can be seen in the Tsunami last year. Emergencies and Disaster
Relief seems to be an area where corporate India also responds. Contributions in cash and
kind flowed into non-profit organisations (NPOs), to the PM’s relief fund, and some directly.
The role of the private sector was seen as positive and encouraging, and this could be en-
hanced by a sharing of core competency and expertise by the corporate sector. Just one large
garment exporter in Chennai, Ambattur Clothing Limited (ACL) is quietly rebuilding the
Government Hospital (GH) at Nagapattinum, with a contribution of few crore, while provid-
ing a State-of-the-Art Health Centre to its employees and their families. Given the context
of outsourcing, the attention of small- and medium enterprises (SMEs) and supply/assembly
chains to labour norms, employee welfare, health, safety and quality standards, and internal
governance and disclosures, need to be emphasised as much as CR.
In India, CR is not merely a
In India, CR is not merely a function of wealth or size of a company. Although India has
function of wealth or size of a the lowest level of per capita income among the seven Asian countries when compared to
company. South Korea, Thailand, Singapore, Malaysia, Philippines, and Indonesia, it has the highest
level of CR practices. Education, health, and community development are some of the most
popular areas of CR engagement followed by natural resource management, information
technology (IT), and livelihood-based activities. Many companies cite constraints and chal-
lenges in practising CR, such as the overall absence of policy and the linkage between CR and
financial success, lack of capacity and comprehension to implement CR, and mechanisms
to measure, monitor, and evaluate in discharging their responsibility. These are some of the
areas where non-profits and foundations working in CR today have a significant role to play.
A number of corporates have set up their own in-house foundations, for example, Infosys,
The corporates are created by Nandy, and so on. The corporates are created by the society and, therefore, must have a vision
the society and, therefore, must beyond profits; and immediate stakeholders and more companies need to take a stand on
have a vision beyond profits; issues such as communal violence, female foeticide, misuse of technology, human rights,
and immediate stakeholders
and so on. Presently, only eight Indian companies report on the Global Reporting Initiative.
and more companies need to
take a stand on issues such It has been stated that a KPMG survey in India found that about 35 per cent of rupee losses
as communal violence, female due to fraudulence take place because of inflated expense accounts. Managerial hostility to
foeticide, misuse of technology, whistle-blowing is a barrier to corporate governance. Business ethics has been a much-talked
human rights, and so on.
about term in the recent days, and attempts have been made to even include it in the syllabus
of business administration courses.
C ase
Mr. Vaidya is the owner of an advertising agency. He is a person who always believes in
business ethics. He always designs an advertising campaign on genuine market analysis,
based on the whole scientific truth of the product. But suddenly, he has been suffering finan-
cial losses due to his decision to stick to the truth. He has lost his regular customers because
he always puts in his advertisement design, the ethics that he follow. In the cases of cosmetics
and pharmaceuticals, he always checks the contents and laboratory reports, or some times
the reports from the quality control department itself. However, now when he needs finance
desperately and the agency is on the verge of closure, an internationally reputed cosmetic
company is willing to give him their advertisement contract. This contract has created hope
among the employees of his advertisement agency.
Mr. Vaidya asked the company to submit a report about all its products, in which they
have to give information about the content and its significance. Mr. Vaidya found that nail
polishes are based on nitrocellulose, which is a highly inflammable synthetic substance,
chemically related to guncotton, an explosive. Nail polish solvents are narcotic if inhaled in
high concentration and can act on the nervous system.
As soon as he came to know of the side effects of the contents of nail polishes, Mr. Vaidya
cancelled the contract. He desperately needed money, but it would mean compromising on
the ethical standards of his past reputation. Even then, his managers forced him to accept
the contract because if the agency closes down there is no meaning in being ethical. The
company also has a responsibility towards its employees. Now, Mr. Vaidya is fixed in a moral
dilemma.
Case Questions
1. Is it ethical to play with the goodwill and, more importantly, the health of the public?
2. Is it ethical to play with the financial health of the company, go bankrupt, and force
the employees on the street? Discuss.
SUMMARY
Ethics is an area dealing with a moral judgement regarding problems like cut-throat competition, price war, corruption
voluntary human conduct. Today, there is a great interest in at workplace, and so on. Thus, in such a dynamic situation,
the application of ethical practices in business. No business, today’s businesses require a value-based management. Any
however great or strong or wealthy it may be at present, management should carefully inculcate values and ethics in
can exist by unethical means, or in total disregard of its its practices.
social concern for a very long. Thus, the business needs,
in their own interest, should remain ethically and socially Some tools are available for managing ethics at the work-
responsible. place, such as code of ethics, code of conduct, and training.
Ethics and values must be an integral part of management Today, mass awareness has been built into the desirability
and work culture to reduce exploitation of customers, society, and, indeed, the necessity of incorporating ethical practices
shareholders, and nature. Modern businesses are large and in business conduct. In future, this is bound to be more nec-
complex, catering to national and even global markets, and essary than ever before.
KEY WORDS
● Ethics ● Cross-functional Teams ● Ethics Committee
● Business Ethics ● Trustworthiness ● Organisational Values
● Values ● Ethics Training ● Leadership Values
● Codes of Ethics ● Ethical Dilemma ● Managerial Values
● Codes of Conduct ● Ethics Management
● Ethics Tools ● Ethics Officer
QUESTIONS
1. Describe what do you understand by business ethics. 4. List some personal and organisational values, and
Are ethics necessary in the present context? suggest some strategies to inculcate values in the
2. Explain the importance of values in business. management.
3. What tools are available to manage ethics at the 5. Why do you need value-based management in global
work place? Explain. societies?
REFERENCES
n Avadhani, V. A. (2004). Global Business, 2nd ed. n Mondy, W. (2007). Human Resource Management,
Mumbai: Himalaya Publishing House. 10th ed. Prentice-Hall.
n Bandyopadhyay, P. (2007). ‘Business Ethics and n Radhakrishnan, S. (2008). ‘Putting Ethics on the Busi-
Profits’, March 10, 2007, http://www.indianmba.com ness Agenda’, Business Line, April 14, 2008, Online
edition, http://www.thehindubusinessline.com
n Bhatia, S. K. and A. Ahmed (2004). Business Ethics and
Corporate Governance. New Delhi: B.R. World Books. n Subramanyan, S. (2002). ‘Business Ethics: Precept
Easier than Practice’, Business Line, October 8, 2002,
n Boatright, J. R. (2004). Ethics and the Conduct of Online edition, http://www.thehindubusinessline.com
Business, 4th ed. New Delhi: Pearson Education.
n Velasquez, M. G. (2004). Business Ethics: Concept and
n Caroselli, M. (2003). Ethics of Business Professional Cases, 5th ed. New Delhi: Pearson Education.
Development Sources. Singapore: Thomson.
n Wolfe, J. (2003). The Global Business Game: A Simulation
n Crane, A. and D. Maattern (2007). Business Ethics, in Strategic Management and Internal Business, 2nd ed.
Online edition, http://www.bookgoogle.co.in New Delhi: Thomson.
n McNamara, C. Complete Guide to Ethics Manage- n Woodrad, N. (2008). ‘Managing Ethics is a Continuous
ment; An Ethic Tool kit for Managers, http://www. Process’, The Financial Express, June 7, 2008, Online
managementhelp.org edition, http://www.financialexpress.com
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Corporate Governance
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• Definition 536 • Code of Conduct for Corporate
• The Need and Importance of Corporate Governance 551
Governance 536 • Measures to Improve Corporate Conduct 552
• Problems of Corporate Governance 537 • Corporate Governance and India 552
• Best Practices in Corporate Governance: • Challenges Before Managers 554
An Indian and International • Corporate Governance and Some Indian
Position Review 537 Organisations 555
• The Board—Key to Good Corporate • Regulatory Framework of Corporate
Governance 539 Governance in India 556
• Disclosure and Transparency: Partners of • Case 559
Good Governance 540
• Summary 561
• Executive and Non-Executive Directors 541
• Key Words 561
• Brief Review of Overseas Development on • Questions 561
Governance Issues 542
• The Search for a New Approach to Corporate • References 561
Governance 548
The economic and financial crises, which began in 1998 in certain Asian countries and spread to The economic and financial
other regions of the world, as well as the recent spectacular bankruptcy cases all over the world, crises, which began in 1998
underline the need for a reliable and transparent management system. A system of checks and in certain Asian countries and
spread to other regions of the
balances needs to be put in place among shareholders, directors, auditors, and management. world, as well as the recent
There is now an increasing realisation among the modern and progressive companies that only spectacular bankruptcy cases
ethics and corporate social responsibility make a good business sense. An ethical and socially all over the world, underline the
responsible company generally conforms to the standards of good corporate governance. Good need for a reliable and trans-
parent management system.
governance is essential for building goodwill and credibility, managing companies efficiently
and transparently, and preventing a variety of corporate crimes like embezzlement, money
laundering, kickbacks, expense-account pending, and price-bid rigging.
The sound corporate governance practices have become critical to worldwide efforts to
stabilise and strengthen global capital markets and protect investors. Corporate governance
enables corporations to realise their corporate objectives, protect shareholder rights, meet
legal requirements, and demonstrate to a wider public how they are conducting their busi-
ness. Researches show that investors from all over the world indicate that they will pay a large
premium for companies with an effective corporate governance. One such study conducted
by the McKinsey Quarterly found that institutional investors in emerging market companies
would be willing to pay as much as 30 per cent more for shares in companies with good gov-
ernance. Furthermore, it showed that companies with better corporate governance had higher
price to book ratios, demonstrating that investors do, indeed, reward good performance.
Definition
1. Corporate governance is concerned with holding the balance between economic and
social goals and between individual and communal goals. The corporate governance
framework is there to encourage the efficient use of resources equally, for account-
ability, for the stewardship of those resources. The aim is to align as nearly as possible
the interests of individuals, corporations, and the society.
2. This is a system by which companies are run, and the means by which they are
responsive to their shareholders, employees, and the society.
Corporate governance is the 3. The system by which companies are directed and controlled; boards of directors are
system by which companies are responsible for the governance of companies.
directed and controlled.
4. Corporate governance is also concerned with the ethics, values, and morals of a
company and its directors.
5. The role of corporate governance is to ensure that the directors of a company are
subject to their duties, obligations, and responsibilities to act in the best interest of
their company, to give direction, and to remain accountable to their shareholders and
other beneficiaries for their actions.
6. Corporate governance is the relationship among corporate managers, directors, and
providers of equity, people, and institutions who save and invest their capital to earn
a return.
The Need and Importance of

It is the increasing role of foreign institutional investors (FIIs) in the emerging economies
that has made the concept of corporate governance a relevant issue today. In fact, the expres-
sion was hardly in the public domain. In the increasingly close interaction of the economies
of different countries lies the process of globalisation. The increasing concern of FIIs is that
The increasing concern of FIIs
is that the enterprise in which the enterprise in which they invest should not only be effectively managed but should also
they invest should not only be observe the principles of corporate governance. In other words, the enterprises will not do
effectively managed but should anything illegal or unethical. This need for reassurance is felt by the FIIs due to the fact that
also observe the principles of there have been cases of dramatic collapse of enterprises which were apparently doing well
corporate governance.
but which were not observing the principles of corporate governance.
In India, corruption is an all-embracing phenomenon. In this, if the respective players in
the field were to adopt healthy principles of good corporate governance and avoid corruption
in their transactions, India could really take a step forward to becoming a less-corrupt coun-
try and improving its rank in the Corruption Perception Index listed by the Transparency
International. Therefore, there is a need of corporate governance because of the following
factors:
• liberalization and deregulation all over the world have given greater freedom in
management. This would imply greater responsibilities.
• players in the field are many. Competition brings in its weakness in standards of
reporting and accountability.
Corporate Governance | 537
• The market conditions are increasingly becoming complex in the light of global
d
evelopments like World Trade Organization (WTO) and removal of barriers/
reduction in duties.
• The failure of corporates due to lack of transparency, disclosures, and instances of
falsification of accounts/embezzlement, and the effect of such undesirable practices
in other companies.
Corporate governance is important for the following reasons:
• It lays down the framework for creating a long-term trust between companies and the
external providers of capital.
• It improves strategic thinking at the top level by inducting independent directors,
who bring in a wealth of experience and a host of new ideas.
• It rationalises the management and monitoring of risk that a firm faces globally.
• It limits the liability of top management and directors, by carefully articulating the
decision-making process.
• It has long-term reputation effects among key stakeholders, both internally
(employees) and externally (clients, communities, political/regulatory agents).
Problems of Corporate
Governance
Supply of accounting information: The financial accounts form a crucial link in enabling
the providers of finance to monitor directors. Imperfections in the financial reporting proc-
ess will cause imperfections in the effectiveness of corporate governance. This should, ideally,
be corrected by the working of the external auditing process.
Demand for information: A barrier to shareholders using good information is the cost
of processing it, especially to a small shareholder. The traditional answer to this problem is
the efficient market hypothesis (EMH) (In finance, the EMH asserts that financial markets
are efficient.), which suggests that the shareholder will have a free ride on the judgements of
larger professional investors.
Monitoring costs: In order to influence the directors, the shareholders must combine with
others to form a significant voting group which can pose a real threat of carrying resolutions
or appointing directors at a general meeting.
Best Practices in Corporate

Governance: An Indian and
International Position Review
The best practices in the field of corporate governance may broadly be grouped under four
categories: those relating to corporate boards and directors, those concerning operational
management and control, those dealing with credibility and transparency of reporting, and
those bearing upon shareholder democracy and minority protection. The current position
Best practices in the field of as recommended by industry bodies, mandated by regulators, and legislated by the existing
corporate governance are cor- law is reviewed in this part, suitably drawing upon the international experience wherever
porate boards and directors, appropriate, pointing to the potential areas for further improvement.
operational management and
control, credibility and transpar-
ency of reporting, shareholders Corporate Boards and Directors
democracy, and protection of
minority interests. Reference has been already made to the critical positioning of the board of directors in the
corporate form of organisation. In the United Kingdom, the Cadbury Report placed the
corporate board at the centre stage of the governance system which it described as the one
Corporate board is at the centre
stage of the governance system
by which companies are directed and governed. Given the fiduciary relationships that corpo-
which it described as the one by rate directors are subject to, there is an overwhelming need to ensure that they discharge
which companies are directed their responsibilities to the best of their abilities to protect and promote the interests of all
and governed. shareholders. At the same time, there is also a pressing need to delineate the directing and
managing aspects of governance. It is in this perspective that the role, responsibility and
accountability, constitution, structure, independence, competence, remuneration, empower-
ment, and evaluation of corporate boards and their directors need to be considered.
Operational Management and Control

While a competent and independent board of directors is a prerequisite to ensure that created
wealth is applied for the benefit of all shareholders, the board and the executive management
of the company have to address in the first place, the all-important task of creating and pro-
tecting such wealth and wealth-creating assets and resources. The policy-making structures
The policy-making structures
and managerial and operational and managerial and operational processes that help achieve these objectives are, indeed, the
processes that help achieve key constituents of good corporate governance.
these objectives are, indeed, the
key constituents of good corpo-
rate governance. Reporting and Disclosure
1. The company law in India requires a company’s board to provide an annual report to
its shareholders. The minimum contents of the report and matters requiring disclo-
sure have been prescribed, as have been the formats in which the company’s financials
are to be prepared, audited, and submitted to the shareholders. The auditors’ report is
a significantly detailed document and is required to be actually read out at the annual
general meetings of the shareholders. Considering the less-than-satisfactory attend-
ance and even worse levels of participation by the shareholders at such meetings,
there is a case for removing this requirement altogether.
2. The shareholders are required to decide on a number of matters and it is important
that the company provides its shareholders adequate information to enable them to
exercise their votes. The company law again provides for explanatory statements to
be provided to shareholders on certain key matters that require approval by a special
resolution.
Shareholder Democracy and Protection of

Corporations are owned in a
legal sense by shareholders Minority Interests
who subscribe to their equity
capital on the basis of a public 1. Corporations are owned in a legal sense by shareholders who subscribe to their equity
offer or a private placement, capital on the basis of a public offer or a private placement, in either case relying upon
in either case relying upon the the stated objectives of the company in the offer document. They exercise their rights
stated objectives of the com-
pany in the offer document.
in the general meetings of the shareholders of the company. Usually (and in India,
actually), their voting rights are proportional to their shareholding. The current
company law requirements mandate a 75 per cent majority in certain matters and
a simple majority in other cases, of those present and voting (personally or through
duly recorded proxies) in the meeting. A ‘show of hands’ is usually enough for the
chair to determine if a resolution has the required majority. There is, of course, a
provision for poll in case of any doubts or when demanded by eligible shareholders.
2. Owing to their initial and ongoing reliance on information provided by the company
and those responsible for its governance, the shareholders seek and are entitled to
some protection from being deceived or unfairly treated by those in the operational
control. Reporting and disclosure requirements and best practices are developed to
meet this need. More importance is also attached to protecting the interests of minor-
ity shareholders on the basis that by themselves, individually, they may not have the
resources to do so. But what is important to note in this context is that no protection Protection of shareholder
is justified or to be expected by any shareholder, including the minority shareholder, interests should, therefore, be
applicable to matters relating
in respect of the equity risk that he/she takes, when investing in risky instruments to transparency in accounting
like the company shares. Securities and Exchange Board of India (SEBI) requirements and reporting, majority oppres-
for highlighting risk factors in equity offers is an example of how potential investors sion, biased management,
should be made aware of the nature and extent of the risks involved in investing. non-conforming to obligatory
requirements, and so on, but
Protection of shareholder interests should, therefore, be applicable to matters relating certainly not to issues arising
to transparency in accounting and reporting, majority oppression, biased manage- from a normal business risk
ment, non-conforming to obligatory requirements, and so on, but certainly not to that equity investments are
issues arising from a normal business risk that equity investments are subject to. subject to.
The Board—Key to Good

An effective board of directors is the linchpin of good corporate governance. The ‘board of
directors’ constitute the representatives of the shareholders and are expected to provide cor-
porate leadership and strategic and competent guidance, independent of the management
of the company. In India, the board of directors generally comprise promoters, directors, In India, a board of directors
professional directors, and institutionally nominated directors. generally comprise promoters,
directors, professional direc-
tors, and institutionally nomi-
Board Constitution nated directors.
1. The board should be composed of qualified individuals of integrity with diversity of

experience. At a minimum, qualified means a good working knowledge of corporate
finance.
2. Each board member should be able to devote sufficient time to his/her duties and
responsibilities.
3. The boards should be composed of a substantial number of independent directors.
The boards should disclose their criteria for independence to their shareholders and
stakeholders.
4. The board committees on compensation, audit, and nomination should consist only
of independent directors. The executive session of the board should also comprise
only independent directors.
5. For family-owned business, outside directors are essential to ‘ask the hard questions’
to family owners, where the relationship between the business and family may be
blurred.
Board Responsibility
1. Approve a core philosophy and mission
2. Monitor and evaluate the corporate performance
Core responsibility of the board 3. Monitor and evaluate the corporate strategy
of directors is to monitor and
evaluate corporate performance.
4. Review and approve material transactions not in the course of ordinary business
5. Determine the executive compensation
6. Evaluate the senior management performance
7. Manage the Executive Director/CEO succession
8. Communicate with the shareholders
9. Evaluate the board’s performance
Disclosure and Transparency:

Partners of Good Governance
Disclosure and transparency
Disclosure and transparency are the partners of good governance; they demonstrate the
of financial and non-financial quality and reliability of information—financial and non-financial, provided by management
information of a company is re- to lenders, shareholders, and public. The two factors enable the investor to take informed
quired for good corporate gov- decisions; it is essential that all the relevant information is made available to the shareholders.
ernance.
In developed countries like the United States, all the information that companies are
required to share with shareholders/investors/public is available at the click of a mouse. The
In developed countries like US EDGAR (Electronic Data Gathering and Retrieval) systems allow the issuer companies to
the United States, all the
information that companies
file all the relevant information in a secured manner electronically.
are required to share with It is mandatory for US companies to file information electronically through EDGAR.
shareholders/investors/public Investors/shareholders can retrieve the information simply by accessing the system on the
is available at the click of a Internet. A similar facility has been made available to Indian investors through the EDIFAR
mouse.
(Electronic Data Information Filing and Retrieval) system. However, a wide range of infor-
mation filed by companies with exchanges is still not available on EDIFAR in a structured,
user-friendly manner.
Why Disclosure and Transparency Matter?

1. Empirical evidence indicates that high standards of transparency and disclosure can
have a material impact on the cost of capital.
2. Reliable and timely information increases confidence among decisionmakers within
the organisation and enables them to make good business decisions, thereby directly
affecting growth and profitability.
3. Information also affects decisionmakers outside the entity-shareholders, investors,
and lenders who must decide where and at what risk to place their money.
4. The information a company provides should show decisionmakers and outside

interests, whether and to what extent corporations meet legal requirements.
5. Disclosure helps public understanding of a company’s activities, policies, and
performance with regard to environmental and ethical standards, as well as its rela-
tionship with the communities where the company operates.
6. Disclosure and transparency, as well as proper auditing, serve as a deterrent to fraud
and corruption, allowing firms to compete on the basis of their best offering and to
differen-tiate themselves from firms which do not practise good governance.
7. Research has demonstrated that disclosure and transparency also enhance stock
market liquidity.
Essential Features
Disclosure should include material information, that is, information whose omission or mis- Disclosure should include ma-
statement could influence the economic decisions taken by the users on factors as follows: terial information, information
whose omission or misstate-
1. Company objectives; ment could influence the eco-
nomic deci-sions taken by the
2. Major share ownership and voting rights; shareholders.
3. Members of the board and key executives;

4. Governance structure—in particular, the division of authority among shareholders,
management, and board members;
5. The company’s financial and operating results. The audits should be conducted by
an independent auditor in order to provide an objective assurance that the financial
statements have been properly prepared and presented;
6. Material issues affecting employees and other stakeholders;
7. Managerial compensation;
8. Related party transactions; and
9. Foreseeable risk factors.
Executive and Non-Executive Directors

A board can have both executive and non-executive directors. Executive directors are those The board of directors comprise
who are in whole-time appointment or are entrusted with the day-to-day operations of a executive and non-executive
company. Non-executive directors are from outside the company and work on a part-time directors. Executive directors
basis, after periodic intervals, when required and attend the board meetings. Such directors are those who are in whole
time appointed, and non-
are retained because of their professional advice, external contacts, or for their objective and executive directors are from
independent opinion in board meetings. outside the company.
The liabilities of non-executive directors are the same as that of executive directors in the
‘eyes of law’. A person cannot be a director in more than 20 companies (excluding private lim-
ited companies which are subsidiaries of a public limited company, and unlimited companies
or non-profit organisations). The whole-time (executive) directors, like the employees of a
company, get a monthly remuneration. The part-time (non-executive) directors get a sitting
fee (per meeting) for attending board meetings and remuneration as a small percentage of
the net profits of the company (if its articles so provide).
Brief Review of Overseas Development

on Governance Issues
The United States
The corporate governance in
The corporate governance in the United States is the Anglo-Saxon system, which is based on
the US is the Anglo-Saxon sys- the individual and short-term market orientation. Historically speaking, the US ownership
tem, which is based on the in- and governance structure, by and large, is dominated by large public corporations, most of
dividual and short-term market which have dispersed shareholders with small percentage holdings and relatively little, or
orientation.
no voice, in corporate governance. It is interesting to note how such a fragmented corporate
ownership structure came up in the United States. The primary reason for the prevailing
form of American business is a matter of international, historical economic revolution. Ini-
tially, the American corporations raised money from the small investors and over a period,
these corporations witnessed a shift in the ownership pattern from the fragmented one to the
ownership of domestically located institutions. A 100 years of latent American financial his-
tory is a witness to these developments. However, ownership concentration of power in the
hands of institutions has become a matter of challenge to corporate governance.
It is difficult to evolve any panacea which could cure the ailments of American cor-
porate governance. An increased institutional power could lead to political pressure for
more government intervention, which has tended not to work poorly elsewhere. The United
States being the focus of investments and international trade is capable of absorbing multiple
governance system. The policy prescription for the United States, therefore, by researchers
has been that they should be thrown open to more competition and the resulting forces will
provide a direction for good governance.
The development of the US securities markets suggests that they developed to a remarka-
ble degree during the 19th century. While the origin of the New York Stock Exchange (NYSE)
dates back to 1792, it was not until after the Civil War that the market grew significantly, with
railroads constituting a significant portion of the early listings. By 1880, the trading volume
reached sufficient levels for a continuous auction market system to be instituted, and securi-
ties of the growing industrial sector began to be listed.
The NYSE rules required annual The NYSE rules required annual financial reports, and encouraged quarterly reports as
financial reports, and encour- well, all before adoption of the securities laws. Offering disclosures of new issues were rough-
aged quarterly reports as well, ly similar to the current S-1, S-2, and S-3 registration statement standards though they lacked
all before adoption of the secu-
rities laws. the overlay of trivial detail that the Stock Exchange Commission (SEC) has since mandated.
Even at this early date the NYSE was competing on a ‘quality margin’, as evidenced by the
fact that its best practices in the prospectus area were used as the basis for the mandatory
regulation that followed. Even so if these markets had been left unregulated, we would have
expected a competition on quality margins to have continued, and these standards would
have embraced thousands of new issuers who sought public capital over the decades.
The accounting standards that
The accounting standards that are employed today have been left largely in the hands of
are employed today have been the private sector, with only a minimal interference from the SEC. With the onset of regula-
left largely in the hands of the tion, these essentially private standards were mandated and refined through SEC regulation
private sector, with only a mini- to provide for the most detailed disclosure and financial reporting requirements in the world.
mal interference from the SEC.
If they are to be faulted, it is because too much, rather than too little, information is required
to be disclosed.
The US capital markets rise in excess of $1 tn per year, which has been estimated to be
more than the combined total of all other capital markets. In 1980, the market capitalisa-
tion of the NYSE exceeded the combined capitalisation of the exchanges in Tokyo, London,
ontreal, Frankfurt, Toronto, and Paris. While the American markets are less dominant
M
today, this comparison demonstrates the lead that the United States had in the development
of an efficient capital market for many decades. In short, the US capital market is an effi-
cient capital market. Liquidity in these markets is relatively high, even for smaller companies,
when compared to liquidity and transparency that attracted large foreign investors to the
US markets.
The United Kingdom

The corporate governance system in the United Kingdom (UK) is also based on individual- The corporate governance
ism, competition, short-termism, and a belief in the market-oriented capitalism. The key system in the United Kingdom
is also on individualism, com-
players in this model are the institutional investors, particularly the big insurance companies
petition, short-termism, and a
and pension funds. Until recently, these owners of the British industry have played merely a belief in the market-oriented
passive role in the companies they own. capitalism.
This passive role started to change in the late 1980s when the extent of merger and
acquisition activity removed the executive management further from any effective share-
holder control. This undermined to an even greater extent any concept of shareholder
democracy that still existed, alienating shareholders from the decision-making process. This,
along with management buy-outs, leveraged buy-outs, and general capital restructuring, has
obliged the institutional investors to play a more active role in their involvement in the cor-
porate matters. Indeed, institutional shareholders are increasingly seen as having the capacity
to decide whether power remains with the executive management. Stratford Sherman sees
power slowly shifting back to shareholders again. Hence, there is clearly a new willingness in
institutional investors to influence actively the management of the companies they own. This
has shown itself in investment protection committees and institutional shareholder commit-
tees, which have also helped to increase the shareholder protection.
In the United Kingdom, over 2,000 companies are quoted on the stock exchange out of
a total population of around 500,000 firms. Almost 80 per cent of the largest 700 companies
are quoted on the stock exchange, and the value of companies quoted on the stock exchange
is around 81 per cent of the gross domestic product (GDP). Approximately, two-thirds of the
equity of quoted UK companies is held by institutions.
However, this pattern of ownership is by no means universal; on the contrary, it appears
to be an exception rather than a rule. Although the United States has more quoted compa-
nies than the United Kingdom, in most other countries, particularly in Europe, the number
of quoted companies is far less. In Germany, for example, there are fewer than 700 quoted
companies and in France less than 500. In both the countries, the value of quoted com-
panies amounts to only 25 per cent of GDP. In short, the quoted companies in Germany
and France account for a much smaller fraction of total corporate activity than those in the
United Kingdom and the United States.
In the United Kingdom and the United States, moreover, ownership is widely dispersed In the United Kingdom and the
among a large number of institutions or individuals. Most of the equity of the quoted UK United States, moreover, owner-
companies is held by institutions, but no one institution owns a substantial share of equity ship is widely dispersed among
a large number of institutions or
of any one company. In the United States, the largest category of corporate shareholders is individuals.
individual.
In most of the continental Europe, however, ownership is much more concentrated. The
takeover market in the United Kingdom is very active. During the merger wave in the begin-
ning of the 1970s and in the end of the 1980s, as much as 4 per cent of the total UK capital
stock was acquired by a takeover or merger in one year. Furthermore, it has been estimated
that about 25 per cent of takeover in the 1980s were ‘hostile’.
Germany
Germany has 171 large quoted companies dominated by different groups of investors—banks,
investment institutions, companies, government, and others. Although the bank holdings
aggregate only 5.8 per cent, yet their role in controlling the corporate activities is significant
when compared to the control exercised by the direct equity holders. The ownership indica-
tors of new firms reveal that investments have been generally made in quoted companies and
other corporate owners are generally not treated as partners; banks and insurance companies
often have substantial interests. Institutional investors play a vital role in the corporate deci-
sion making. The German system of corporate governance, therefore, can be described as an
insider system.
The German capital market The German capital market developed into an efficient security market primarily because
developed into an efficient secu- of the role played by the big German banks. The banks retarded the development of the
rity market primarily because of security markets by exercising control over corporate proxy machinery. Further, the German
the role played by the big Ger-
banks held shares of their clients in their own name and held them for saving tax. Whenever
man banks. The banks retarded
the development of the security a shareholder wishes to sell his share, he prefers to sell to another customer of the same bank
markets by exercising control as it would be treated as an intra-bank transaction and will not result into a taxable affair.
over corporate proxy machinery. High transaction cost gave further boost to such transactions.
Barriers to entry to capital markets were first created in 1884 when the German law
restricted corporate access to the stock exchanges. This was accomplished by increasing the
minimum size of a public offering and the length of time a company had to be in existence
before it could list its shares on an exchange. Such restrictions on listing, by forcing smaller
companies to deal with the banks, ensured that only debt would become the dominant form
of financing in Germany, and not equity, as in the case of the United States.
At the same time, the big banks which are both the relevant markets as well as the un-
derwriters, appear to use their market power over secondary trading activity to dominate the
primary markets for new issues and the underwriting process in most instances. The banks
are said to underprice new issues to assure ‘success’, and also charge relatively high under-
writing fees. And their combined positions as major stock holders, creditors, and underwrit-
ers provided them with an opportunity for insider trading, which was not legally prohibited
until 1994.
Disclosure standards in Disclosure standards in Germany are also not up to the US standards. The German
Germany are also not up to Accounting System appears to provide far less information than the US system. A wide vari-
the US standards. The German ety of accounting methods are available to German firms that make comparisons difficult if
Accounting System appears
to provide far less information
not impossible. The German corporations can freely create reserves that can be used to mask
than the US system. earnings dips in bad years. It is hard to believe that accounting standards that permit huge
reserves to be declared as current profits at the management’s discretion can provide the
same transparency as German Accounting system Assessment Programmes (GAAP) reports.
German stock markets remain relatively small and illiquid when compared to American
markets. Only about 2,800 German corporations are stock corporations (AGs), while the
vast majority, approximately 220,000 are limited liability companies without tradable shares
(GmbHs). Only a small number of firms, approximately 650, have shares traded on the
exchanges. Even many of those companies are not actively traded, and they have floats that
are less than one-half of their outstanding shares. Only 100 firms are widely held.
As a result of big bank domi- As a result of big bank dominance and weak capital markets, the frequency with which
nance and weak capital mar- the German companies resort to public capital markets is much lower than that of in the
kets, the frequency with which
the German companies resort
United States. The German corporations are forced to borrow from banks to a far greater
to public capital markets is extent than their American counterparts, with two obvious consequences. Firstly, the debt-
much lower than that of in the equity ratios in Germany are much higher than in the United States. Secondly, it has been
United States. suggested that banks have charged German corporations excessive rates for borrowing, thus
restricting the growth of the German industry. These characteristics hardly describe a mature The German system of corpo-
and developed capital market by the US standards. Finally, no market for corporate control rate governance is based on a
exists in Germany to cure even the most extreme monitoring problems. two-tier management structure,
comprising the Vorstand and
The German system of corporate governance is based on a two-tier management struc- the Aufsichtsrat.
ture, comprising the Vorstrand, or the management board, which is entrusted with the day-
to-day running of the company; and the Aufsichtsrat, or the supervisory board, whose job
Vorstrand is also called ‘man-
is to supervise the management board, when necessary, and to participate in the long-term agement board’, which is
strategic decisions. This helps to prevent the abuses of the management-dominated boards entrusted with the day to day
in the unitary board system of the Anglo-Saxon model. On the supervisory board, there are running of the company.
both shareholder and employee representatives, controlling the managing board, increasing
accountability to a greater range of stakeholders, reducing institutional pressures upon the Aufsichtsrat, or the supervisory
board, whose job is to supervise
board of directors towards short-term decisions, and allowing for a longer-term strategic
the management board.
planning.
This system of corporate governance has the longer-term interests of the company at
heart. The longer-term interests of the company are demonstrated in greater investment in
plant, equipment, and intangible assets. As a result, less emphasis is placed on the share divi-
dend. This low return on shareholdings is not seen as a problem by the major shareholders in
the German industry, the banks, which have other business relationships with the companies
they invest in. Apart from their shareholdings, the German banks are also creditors and help
the debt-finance industry. However, this acceptance of a low return on the stock market may
be about to change with the rising influence of the international institutional investor.
In conclusion, while the German corporate governance system with its supervisory
board, with both shareholder and employee representatives on it, is in many ways a superior
governance system to that in the Anglo-Saxon model, it has some inherent problems too.
Such a system ignores the interests of small shareholders, is over-secretive, and is ill-designed
to cope with the pressures of international investment or the global market for companies.
The biggest influence will be international force; in other words, the shaping of corporate
governance by the globalisation of the financial and corporate markets. Despite these prob-
lems, which are solvable, the advantages of the German system of corporate governance, like
that of the Japanese system, can be seen in its use of industrial groupings, implicit contract-
ing, and extensive cross-shareholding, which are all relationship-oriented, and finally in the
financial sector’s close links with the industry.
Two-tier Board in Industries

1. Supervisory board—supervises the management board
Representatives of shareholders
Representatives of employees
Paradox: Wider accountability releases short-term pressures and allows more strate-
gic thinking
2. Management board—runs company
3. Longer-term orientation
4. Stable investment
Plant
Equipment
Training
5. Lower return to shareholders

6. Close relationships to banks (80 per cent of votes)
7. Low reliance on capital markets
8. Shareholders’ activism or hostile takeovers, rare
Briefly speaking, Germany lags Briefly speaking, Germany lags behind the United States and the United Kingdom in terms
behind the United States and of corporate disclosure. The following matters will be or are being addressed by a regulatory
the United Kingdom in terms of or legislative action:
corporate disclosure.
1. Accounting standards will be tightened.
2. Insider dealing is being made a criminal offence.
3. Restrictive voting structure will be dismantled.
4. Proper takeover legislation will be introduced; in particular, extending the require-
ment to report holdings in other companies.
The cumulative effect of these changes will be to weaken the board’s influence and increase
the power of the institutional investors.
There are many signs that elements of the German system will change over the coming
years. As Germany struggles under a severe recession (exacerbated by the costs of integrating
East Germany into the Republic), there is an increasing criticism of Germany’s closed-door
system of management, and an even more urgent need to look beyond Germany for new
capital. These forces are likely to have a far-reaching effect on the German corporate govern-
ance:
1. German banks are reconsidering their stakes in the German companies.
2. German and foreign shareholders are challenging the German practice of voting
rights restrictions.
3. The generally lenient financial disclosure requirements in Germany may about to
be changed. In order to bolster Frankfurt as an ‘international financial centre’, for
example, the German federal government proposed a legislation that was debated
in the Bundestag in the autumn of 1992, which is more implemented. Included in
the ‘finanzplatz Deutschland’ package is a proposal for a new federal supervisory
agency for the securities industry and proposed legislation that outlaws insider
trading.
German institutions are likely to improve their standards of financial disclosure.
Japan
The system of corporate governance in Japan is, perhaps, the most remote and exotic when
compared with any of the developed country. This is primarily because this system heavily
relies on trust and on the relationship-oriented approach to corporate governance. Japanese
corporations conduct their business without building defences and, that is why, they con-
centrate on the long-term interests of the company and invest in research and development,
capital, employee training, and skills development. While hostile takeovers are unusual, par-
ticularly foreign ones, mergers are more common. They tend to be with business in the same
industry and often within the same group. This is, particularly, likely to occur if a group
member is in financial difficulties, resulting in a merger with another company in the group.
However, recently, Japanese companies have started diversifying into unrelated areas, often
resulting in conflicts of interest among the different stakeholders. Another important fea-
ture of the Japanese corporate governance is the reliance on the cross-shareholdings. Nearly, Reliance of Japanese Corpo-
200 tn yen of stock is held under reciprocal shareholding agreements. The governance shows rate Governance is on cross-
that the influence of such a mechanism is decreasing and corporate governance in Japan shareholding and institutional
shareholding.
is in transition. The growing competition in the capital market is also likely to change the
Japanese corporate governance. The big institutions have started realising their obligations to
maximise the shareholders’ value. Thus, the long-term institutional shareholdings and cross-
shareholdings of shares by several groups of companies, which used to guarantee the man-
agement of a reliability-based control of a company, may no longer be as reliable as before.
It is worth noting that now corporate governance issues have become conspicuous in Japan,
which is becoming fully integrated with the international financial world, and the country
has to learn to adopt both social and regulatory system. How it handles these changes and
improves the aspirations of the investing communities will be a matter of interest and impor-
tance for the international investing community.
The salient features of the corporate governance in Japan are as follows:
1. Heavy reliance on trust and implicit contracting
2. Relationship-oriented approach
3. Close ties to banks
4. Web of cross-shareholdings (200 tn yen)
5. Long-term investment orientation
Research and development
Capital investment
Employee skills
6. Many stakeholders—long-term interests
7. Transition
Mergers
Speculations
Recession
It is worth noting that following the excesses of 1980 and financial scams that were witnessed It is worth noting that follow-
in the political system, several amendments were made in the Japanese Commercial Code ing the excesses of 1980 and
permitting shareholders to have an access to the company books. Shareholders have also financial scams that were wit-
nessed in the political system,
been given the right of filing suits. These changes were introduced in October 1993. From a several amendments were
corporate governance perspective, these developments are likely to have profound effects on made in the Japanese Commer-
the corporate behaviour. The supremacy of the role of internal auditors in Japan has also been cial Code permitting sharehold-
ers to have an access to the
questioned, particularly after noticing the disbursement of large sums of money to politicians company books.
and bureaucrats. In 2000–02, the research studies on the working of the corporates have also
revealed that there is an external pressure on managements to enhance financial returns to
the shareholders. Further, the slowdown in the economy is compelling Japanese corporations
to raise money from international players, and this is likely to bring about a change, in the
rules of the corporate governance.
The Search for a New Approach

to Corporate Governance
The search for a new approach to corporate governance resulted in the setting up of the Tead-
way Commission (US), Cadbury Committee (UK), King Committee (South Africa), National
Task Force on Corporate Governance (India), and Naresh Chandra Committee (India).
Teadway Commission (US)

Teadway Commission (US) The National Commission on Fraudulent Financial Reporting (NCFFR), or Teadway
placed a great emphasis on the Commission, placed a great emphasis on the composition and functioning of boards to en-
composition and functioning of sure fairness in financial reporting to protect the interests of the investors in a company.
the board of directors.
While the audit committees were first suggested as channels of communication between the
external auditors and the board of directors in the 1930s, in its October 1987 report, the
Teadway Commission recommended that the SEC mandates all public companies to form
audit committees, composed exclusively of independent directors.
Cadbury Committee (UK)

The Cadbury Committee on the financial aspects of corporate governance examined the issue
of corporate governance primarily from the point of view of the shareholders of a company.
The Cadbury Committee Report, published in December 1992, emphasised good practice
concerning the responsibilities of executive and non-executive directors, the role of auditors,
and links among shareholders, boards, and auditors. In addition to highlighting the need for
and the role of audit committees, the report emphasised the need for institutional investors to
play a more active role in ensuring a better corporate governance. It called upon institutions
to take greater interest in the composition of boards, and to use their voting rights to develop
a more constructive relationship between the managers and the owners of companies.
King Committee (South Africa)

The King Committee (South The King Committee was set up to develop a code of ethics for business enterprises in
Africa) was set up to develop the context of South Africa. Unlike the Cadbury Committee, its terms of reference were wide
a code of ethics for business and included consideration for the disadvantaged communities. The report of the committee
enterprises.
published in November 1994, in addition to highlighting the role of the boards, auditors, and
audit committees, on lines similar to the Cadbury Committee, contained recommendations
on ensuring an effective worker participation in decision making, adopting affirmative action
programmes as part of the business plans, and respecting the interests of the constituents
with no contractual links with the company. The last would specially require a company to
recognise its accountability and responsibility towards environmental matters.
National Task Force on Corporate

Governance (India)
The National Task Force on Corporate Governance was set up by the Confederation of
Indian Industries (CII), under the chairmanship of Rahul Bajaj, to evolve a code for a de-
sirable corporate governance in India. The report of the task force was published in April
1996. Using the argument that shareholders are residual claimants, the task force accepted
maximising the long-term shareholder value as the objective of a ‘good’ corporate governance.
The recommendations of the task force pertained to the composition and functioning of the
board of directors, corporate disclosure (both financial and non-financial norms) facilitating
the corporate takeover by allowing the capital market to play its due role in improving the
corporate governance, and the role of creditors and financers.
Naresh Chandra Committee Report, 2002

The Committee was appointed by the SEBI to make recommendations on the representation The Naresh Chandra Commit-
of independent directors on company boards and the composition of audit committees. The tee (India) was appointed to
Committee in its report that was submitted in December 2002, has taken forward some of make recommendation on the
the recommendations of the Kumar Mangalam Birla Committee. The major highlights and representation of independent
directors and composition of
recommendations of the committee report are as follows: audit committees.
• It makes no distinction between a board with an executive chairman and a board with
a non-executive chairman.
• It is sufficient to have a compulsory rotation of audit partners in every five years.
• Independent directors should play a larger role to ensure that corporate governance
practices are improved and that the interest of stockholders other than promoters are
protected.
• There should be an increased level of disclosure by a company and its auditors. The
disciplinary mechanism for audit and related professionals should be overhauled.
• At least 50 per cent of the directors on the board of any listed company and unlisted
public limited company with paid up share capital and free reserve of ` 10 crore or
more or turnover of ` 50 crore or more should be independent. The boards of these
companies should have at least four independent directors. The audit committees of
these companies should be entirely made up of independent directors.
Narayana Murthy Committee (India)

Another committee on corporate governance was constituted by SEBI, under the chairman-
ship of N. R. Narayana Murthy in the year 2003 to suggest how best to further improve the
corporate government practices. The suggestions of the committee are as follows:
1. Defying the regulatory push, that is, detailed requirements have been laid down in
these reports to ensure a good corporate governance. This includes requirements re-
garding composition of the board of directors, minimum number of independent
directors on the board, minimum number of meetings of the board in a year, and
setting up of audit committees.
2. Need more disclosures.
3. Genuinely independent directors.
4. The corporate governance code is supposed to be enforced through the listing agree-
ment with exchanges.
Recommendations of Narayana Murthy Committee

SEBI constituted a committee on corporate governance under the chairmanship of
N. R. Narayana Murthy. The Committee included representatives from stock exchanges,
chambers of commerce and industry, investor associations, and professional bodies, and it
debated on key issues and made recommendations. The mandatory recommendations of

the Committee are as follows:
1. Audit committees of publicly listed companies should be required to review the
following information mandatorily:
i. Financial statements and draft audit report including quarterly/half-early finan-
cial information
ii. Management discussion and analysis of financial condition results of operations
iii. Reports relating to compliance with laws and to management
iv. Management letters of internal control weaknesses issued by statutory/internal
auditors
v. Records of related pay transactions
2. Disclosure of accounting treatment: In case a company has followed a treatment
different from the one prescribed in an accounting standard, companies should be
given a reasonable period of time within which to cure the qualifications raised by
SEBI/Stock Exchanges. Mere explanations from companies will not be sufficient.
3. Audit qualification: Companies should be encouraged to move towards a regime
of unqualified financial statement. Non-mandatory recommendations should be
reviewed at an appropriate juncture to determine whether the financial reporting
climate is conducive to a system of filing only unqualified financial statements.
4. Risk management—board disclosure: A procedure should be in place to inform
the board members about risk assessment and minimisation procedures. These pro-
cedures should be periodically reviewed to ensure that the executive management
controls risk by means of a properly defined framework. The management should
place a report before the entire board of directors in every quarter by documenting
the business risks that are faced by the company, measures to address and minimise
such risks, and any limitations to the risk-taking capacity of the corporation. These
documents should be formally approved by the board.
5. Training of board members: Companies should be encouraged to train their
board members in the business model of the company as well as the risk profile of the
business parameters of the company, their responsibilities as directors, and the best
way to discharge them.
6. Use of proceeds of IPO: Companies raising money through initial public offer-
ings (IPOs) should disclose to the audit committee, the uses/applications of funds by
major capital (capital expenditure, sales and marketing, working capital, and so on)
on a quarterly basis. On an annual basis, the company should prepare a statement of
funds that are utilised for purposes other than those stated in the offer document/
prospectus. The statement should be certified by independent auditors of the com-
pany. The audit committee should make appropriate recommendations to the board
The recommendations of
Narayana Murthy Committees to take steps in this matter.
are emphasised on audit com-
mittee audit qualification, and 7. Written code of conduct for the executive management: It should be obligatory
code of conduct. for the board of the company to lay down the code of conduct for all board members
and the senior management of a company. The code of conduct shall be posted on the
Website of the company. All board members and the senior management personnel
shall affirm compliance with the code on an annual basis. The annual report of the
company shall contain a declaration to this effect signed by the CEO and COO.
8. Nominee directors—exclusive of nominee directors from the definition of

independent directors: The committee recommends that there shall be no nomi-
nee directors. Where an institute wishes to appoint a director on the board, such
appointment should be made by the shareholders. An institutional director so
appointed shall be subject to the same liabilities as any other director. Similarly, a
nominee of the government on public sector companies should be elected and shall
be subject to the same responsibilities and liabilities as the director.
9. Internal policy on access to audit committees: The personnel who observe an un-
ethical or improper practice (not necessarily a violation of law) should be able to
approach the audit committee without necessarily informing their supervisors. The
companies should take measures to ensure that this right of access is communicated
to all employees through internal circulars and so on. The employment and other per-
sonnel policies of the company shall contain provisions protecting ‘whistle blowers’
from unfair termination and other prejudicial employment practices.
10. Whistle blower policy: Companies should annually affirm that they have not de-
nied any personnel an access to the audit committee of the company and that they
have provided protection to the ‘whistle blower’ from unfair termination and other
unfair or prejudicial employment practices. The appointment, removal, and terms
of remuneration of the chief internal auditor must be subject to review by the au-
dit committee. Such affirmation shall form a part of the board’s report on corporate
governance that is required to be prepared and submitted together with the annual
report.
Code of Conduct for Corporate

Governance
SEBI prescribes that there should be a conduct for the board of director. It shall be obligatory Code of conduct are guidelines
for the board of a company to lay down the code of conduct for all board members and the for all board members and the
senior management of a company. This code of conduct shall be posted on the Website of the senior management of a com-
company. pany, which are obligatory on
them.
All board members and the senior management personnel shall affirm compliance with
the code of conduct. The annual report of the company shall contain a declaration to this
effect signed by the CEO and COO. While drafting the code of conduct for corporate govern-
ance for the entire corporate sector, the following aspects can be kept in view:
• Prescribing of ethical values which are universally acceptable
• Providing for highest standards of functioning as board of directors in an impartial
and objective manner
• Ensuring transparency in functioning
• How requisite care and diligence has to be ensured in functioning
• Encouraging discipline
• Avoiding conflict of interests
• Ensuring confidentiality
• Providing of requisite incentives for efficient and effective functioning
• Respecting one another

• Loyalty to the organisation
• Providing motivation
In this context, a reference can be made to the Organisation for Economic Co-operation and
Development (OECD), which has prepared guidelines for multinational enterprises. These
guidelines provide principles and standards for good practice consistent with applicable laws.
The general policies of the OECD lay down that enterprises should contribute to economic,
social, and environmental progress with the view to achieving sustainable development and
respect for human rights of those affected by their activities, consistent with the host govern-
ment’s international obligations and commitments. Something on these lines can be thought
of for the corporate governance code. In short, the code of conduct must enthuse the board of
directors and the executives of the company to set goals to arrive at the most right decisions
in the interest of the company and ultimately of the country.
Measures to Improve Corporate

Conduct
The paradigm shift in the approach to corporate governance is quite evident in the recom-
mendations by committees on the issue in the context of four different countries. Some of the
measures that were suggested for improving corporate conduct are as follows:
1. Improving financial disclosure norms;
2. Making relevant non-financial disclosures mandatory;
Financial and non-financial dis- 3. Making the management more accountable towards fulfilling its responsibility to
closure norms, composition, society at large;
and functioning of company
boards are measures to im- 4. Changing the composition and functioning of company boards, with greater propor-
prove corporate conduct. tion of competent non-executive directors;
5. Formation of audit committees consisting exclusively of non-executive independent
directors;
6. Suggesting ways of effective involvement of institutional investors in the management
and conduct of the affair of a company; and
7. Facilitating a free play of market forces in securing a change of management.
Corporate Governance and India

Since 1991, instances of hos- India is a vast, vibrant economy. It has a wide array of corporate structures including inde-
tile takeovers, insider trading,
issue of duplicate shares (Reli- pendent firms and those owned by business groups, families, and multinationals. Given this
ance), Harshad Mehta Scam special mix of corporate entities, how can ‘corporate governance best practices’ possibly
(rigging of prices), and Ketan apply to such a diverse universe of corporate structures, with such a wide range of ownership
Parikh (KP) Scam have emaci- patterns? Since 1991, instances of hostile takeovers, insider trading, issue of duplicate shares
ated the credibility of the stock
market in India. Every disaster (Reliance), Harshad Mehta Scam (rigging of prices), and Ketan Parikh (KP) Scam have ema-
was a good learning experience ciated the credibility of the stock market in India. Every disaster was a good learning experi-
followed by new regulations. ence followed by new regulations.
Despite having rules and regulations, a doubt arises as to the reliability of the regulations.
Undoubtedly, corporate governance is more a matter of heart (commitment) than that of the
mind (compliance). Private interests, however, digress from the social good and continue
to produce, using polluting technology, unfair means, and ignoring the cost to society. The
liberalization of Indian capital markets enabled the Indian companies to invest abroad, and
thus, opened up the country to foreign investments. During the 1990s, the corporate gov-
ernance in India grew by leaps and bounds. Pratip Kar, Executive Director, SEBI, describes
several reasons for the dramatic increase in corporate governance in India.
• Economic reforms that allowed the growth of free enterprise and free private invest-
ment opportunities.
• Exposure of domestic private and public sector companies to greater domestic and
foreign competition, which has multiplied choices for consumers and compelled
increases in efficiency.
• The growing reliance placed by private and public sector companies on capital In India, the growing reliance
arkets, underpinning the need for better disclosure and better investor services.
m placed by private and public
sector companies on capital
• The consequential changes in the shareholding pattern of private and public sector markets, underpinning the
companies. need of corporate governance.
• The growing awareness of investors and investor groups of their rights.

• The growing importance of institutional investors and public financial institutions,
gradually asserting and transforming themselves in their new role as ‘active share-
holders’ rather than as ‘lenders’.
• The stock exchanges becoming increasingly conscious of their roles as self-regulatory
organisations and exploring the possibility of using the listing agreement as a tool for
raising the standards of corporate governance.
• The establishment of a comprehensive regulatory framework for the securities
arkets, with the setting up of SEBI as the statutory regulatory body for the securi-
m
ties markets to protect the rights of investors and to regulate the markets.
While India suffered a spate of stock market ‘scams’ in 2001 which shook the investors’ con-
fidence, the United States had no shortage of its own variety of fraud and mismanagement
cases. Companies like Enron, Arthur Anderson, and Worldcom have fallen under the weight
of poor corporate governance. This should open our eyes to the fact that Indian companies,
however big, need to follow good corporate governance practices to stay afloat.
Issues of corporate governance have been hotly debated in the United States and Europe Issues of corporate governance
over the last decade or two. In India, these issues have come to the force only in the last have been hotly debated in the
couple of years. For example, the corporate governance code proposed by the CII is mod- United States and Europe over
the last decade or two. In India,
elled on the lines of the Cadbury Committee (Cadbury, 1992) in the United Kingdom. On these issues have come to the
account of the interest generated by the Cadbury Committee Report, the CII, the Associated force only in the last couple of
Chambers of Commerce and Industry (ASSOCHAM) and, the SEBI constituted commit- years.
tees to recommend initiatives in the corporate governance. The main objective of it was to
develop and promote a code for corporate governance to be adopted and followed by Indian
companies, be they in the private sector, the public sector, banks or financial institutions, all
of which are corporate entities. The CII published India’s first comprehensive code on cor-
porate governance (Desirable Corporate Governance: A Code) in 1998. This Code was well
received by Indian corporates and many of its recommendations became part of the subse-
quent regulations.
The corporate governance rep- The corporate governance represents the value framework, the ethical framework, and
resents the value framework, the moral framework under which business decisions are taken. In other words, when invest-
the ethical framework, and the ments take place across national borders, the investors want to be sure that not only is their
moral framework under which
business decisions are taken. capital handled effectively and adds to the creation of wealth, but the business decisions are
also taken in a manner which is not illegal or involving any moral hazard.
In the Indian context, the need for corporate governance has been highlighted because
of the scams occurring frequently since the emergence of the concept of liberalization from
1991. We had the Harshad Mehta Scam, KP Scam, UTI Scam, Vanishing Company Scam,
Bhansali Scam, and so on. In the Indian corporate scene, there is a need to induct global
standards so that at least while the scope for scams may still exist, it can be at least reduced to
the minimum. Following are the two steps that have been implemented so far in this regard:
Kumar Mangalam Birla Committee

First Step in the Intended Direction
A committee was set up by SEBI under the Chairmanship of Kumar Mangalam Birla to pro-
mote and raise standards of corporate governance. The Committee in its report observed that
The strong Corporate Governance is indispensable to resilient and vibrant capital mar-
kets and is an important instrument of investor protection. It is the blood that fills the
veins of transparent corporate disclosure and high quality accounting practices. It is
the muscle that moves a viable and accessible financial reporting structure.
The recommendations of the The recommendations of the Kumar Mangalam Birla Committee led to the inclusion of
Kumar Mangalam Birla Com- Clause 49 in the Listing Agreement in the year 2000.
mittee led to the inclusion of
Clause 49 in the Listing Agree-
ment in the year 2000. National Foundation for Corporate
Governance (NFCG)
Second Step in the Intended Direction
The Ministry of Company Affairs has recently set up National Foundation for Corporate
Governance (NFCG) in partnership with CII, Institute of Company Secretaries of India
After many initiatives that were
(ICSI), and Institute of Chartered Accountants of India (ICAI). Functions of NFCG are
taken for a good corporate gov- mainly creating an awareness regarding benefits of implementation of good corporate gov-
ernance like Naresh Chandra ernance practices and providing key inputs for developing laws and regulations.
Committee 2002, Narayan Mur- After many initiatives that were taken for a good corporate governance like Naresh
thy Committee 2003, and the
very recent SEBI, the J.J. Irani
Chandra Committee 2002, Narayan Murthy Committee 2003, and the very recent SEBI, the
Committee on company law has J.J. Irani Committee on company law has recommended that one-third of the board of a listed
recommended that one-third of company should comprise independent directors in the year 2005 and should give full liberty
the board of a listed company to the shareholders and owners of the company to operate in a transparent manner. SEBI
should comprise independent
directors in the year 2005 and revised Clause 49, on the basis of the recommendations of the J.J. Irani Committee, which is
should give full liberty to the in effect from January 1, 2006.
shareholders and owners of the
company to operate in a trans-
parent manner.
Challenges Before Managers
It would help a great deal if the advocates of corporate governance were to appreciate the
challenges that stand before managers. The current business environment calls for a much
stronger leadership and speedier decisions than at any time in the past. While globalisation
offers new opportunities, it has enormously raised risks and uncertainties too. Coping with
these has brought all CEOs to the centre stage and often have encouraged the centralisation
of key decisions. Although several managers have built great organisations and rewarded the
shareholders, many have fallen victim to glorification. Even a cursory study of managerial
excellence models would show that these are far from the durable than that are made out by
the management gurus, who are keen to produce books.
In addition to glorification of the individual manager, what has aggravated the problem
is performance-based reward. Financial recognition is, indeed, an important motivation for Financial recognition is, indeed,
managerial excellence but it has gone overboard. At some point in this process, the value base an important motivation for
of manager has changed and financial compensation is the ‘sole motivator’. What has created managerial excellence but it
has gone overboard.
enormous psychological stress is measurement of ‘performance’ by investors and securities
analysts on the basis of quarterly results. These developments constitute the principal expla-
nation of a widespread dishonesty in the form of fudging of financials and creative account-
ing. Seldom can a business create ‘shareholder value’ quarter after quarter. Excessive risk,
expensive and exciting mergers, and ruthless restructuring (downsizing) have all emerged as
measures of managerial excellence, and basis of limitless rewards, without, as passage of time
has revealed, creating any lasting value for businesses, stakeholders, and the society at large.
Corporate Governance and some

Indian Organisations
Tata Chemicals
The foundations of corporate governance at Tata Chemicals are rooted in transparent disclo-
sure norms, which enable the company to adopt best practices initiatives. Tata Chemicals en-
sures that the company’s corporate business and financial developments are communicated
in a timely and unbiased manner to its shareholders and other stakeholders, complying with
regulatory requirements and international best practices. The members of the board of the
Tata Chemicals meet regularly during the financial year. Tata Chemicals has constituted three
board committees, which are as follows:
Audit Committee: The committee reviews internal audit reports and makes recom- Tata Chemicals (India) has
mendations to the board. Its terms of reference includes meeting auditors regularly to obtain constituted three board com-
their reviews, seek clarifications, identify the weaknesses, and act as a link between the board mittees, i.e., audit committee,
remuneration committee, and
and the auditors. grievance committee.
Remuneration Committee: Its broad duties are to determine and recommend to the
board, the compensation payable to executive directors, appraisal of the performance of the
managing director, and to determine and advise the board about the payment of annual com-
mission/compensation to the non-executive directors.
Shareholders/investor Grievance Committee: It was set up to look into the redres-
sal of requests and complaints from the investors/shareholders, such as delay in transfer of
shares/debentures, non-receipt of dividend, annual report, and so on. The Chairman of the Tata
Group, Ratan Tata, bagged the ‘Corporate Governance Award’ for the year 2001–02 instituted
by the Government of India. The award is given to individuals with an exemplary performance
in the field of corporate governance, with a strong code of ethics and excellence in performance.
Infosys
Infosys Foundation, the philanthropic arm of Infosys Technologies Limited, came into ex-
istence on December 4, 1996, with the objective of fulfilling the social responsibility of the
company by supporting and encouraging the underprivileged sections of the society. In a

short span of time, the foundation has implemented numerous projects in its chosen areas.
By the late 1990s, Infosys By the late 1990s, Infosys Technologies Limited clearly emerged as one of the best managed
Technologies Limited clearly companies in India. Its corporate governance practices seemed to be better than those of
emerged as one of the best many other companies in India. Because of its good-governance practices, Infosys has been
managed companies in India. the recipient of many awards.
Wipro
Wipro started its operations in 1946 as a solvent oil extraction and vanaspati manufac-
turer and remained focused on the traditional business till mid-1970s. During the 1970s,
Wipro initiated efforts to diversify from the commoditised and price-sensitive solvent oil/
vanaspati market. The company’s entry into hydraulic engineering marked its first attempt
at diversification; its foray into the IT segment in the early 1980s proved to be more success-
ful. Thus, Wipro’s IT business (software services and hardware) has grown to be the largest
contributor to its revenue and profits. In FY 2003, the IT business accounted for close to
90 per cent of Wipro’s total revenue and 95 per cent of its profit before interest and taxes.
As on March 31, 2003, Wipro had investments in 15 joint-venture subsidiaries, covering a
range of business, including business process outsourcing (BPO) and hydraulic and medical
equipment. Investment Information and Credit Rating Agency (ICRA) assigned an SVG1
(Scalable Vector Graphics Format) rating to the stakeholders value creation and governance
practices of Wipro in 2004. The SVG1 rating implies that in ICRA’s current opinion, the
rated company belongs to the highest category on the composite parameters of stakeholder
value creation and management. It is, however, not a certificate of statutory compliance or a
comment on the rated company’s future financial performance, credit rating, or stock price.
Wipro is the first and currently, the only company to be assigned the highest SVG1 rating
by ICRA.
Wipro’s sound corporate gov- The rating reflects Wipro’s sound corporate governance practices as is evident from the
ernance practices is evident composition of its board of directors (with independent directors forming the majority), the
from the company’s improving increasing and active involvement of the board in strategic issues, and the company’s improv-
transparency and disclosure
standards. ing transparency and disclosure standards. Besides, the rating also reflects Wipro’s emphasis
on and adherence to ethical practices.
The success of Wipro lies in its approach to corporate governance. It is based on practis-
ing the highest degree of transparency and sharing relevant information with stakeholders
quickly and in a format that is easy to understand and act upon. Examples of this approach
include publishing the consolidation of results and segment-wise reporting from mid-1980s
Wipro has practised environ-
and constitution of an Audit Committee many years before it became mandatory. Shoulder-
mental management to ensure ing its social responsibility, Wipro has focused on bringing about many positive changes
an optimal use of natural re- in the area of quality through its initiatives. As the first software services company in India
sourcessuch as water, power, which is ISO 1400 certified, it has practised environmental management to ensure an optimal
and paper.
use of natural resources such as water, power, and paper.
Regulatory Framework of Corporate

Governance in India
In India, company law, security law, financial institutions, and credit-rating agencies play an
important role in controlling the corporate governance.
Company Law
The Companies Act, 1956 was enacted on the recommendations of the Bhaba Committee
that was set up in 1950 with the object to consolidate the existing corporate laws and to pro-
vide a new basis for the corporate operation in independent India. With enactment of this
legislation in 1956, the Companies Act, 1913 was repealed. The Companies Act, 1956 has
since then provided the legal framework for corporate entities in India. Important amend-
ments introduced in the year 2000 to Sections 217 and 292 of the Companies Act, 1956
(made applicable from December 13, 2000) set the tone for corporate governance in the
country. The changes made are related to the following:
1. The Directors’ responsibility statement.
2. Formation of audit committee.
3. Guidelines from the Department of Public Enterprises on the corporate governance
of Central public sector enterprises.
4. SEBI’s guidelines on corporate governance for listed companies.
5. Independent directors on the board of listed government companies.
6. Constitution and composition of audit committee in listed government companies.
7. Non-official directors on the board of unlisted government companies.
8. Corporate governance in statutory corporations.
Securities Law
Historically, most matters relating to the rights of shareholders were governed by the com-
pany law. Over the last few decades, in many countries, the responsibility for protection of
investors has shifted to the securities law and the securities regulators at least in case of large
listed companies. In India, the SEBI was set up as a statutory authority in 1992, and it has
taken a number of initiatives in the area of investor protection.
SEBI Initiatives for Strengthening Corporate Governance

As a regulator, SEBI has initiated several measures through amendments in the listing agree-
ment. Some of these are as follows:
1. Strengthening of disclosure norms for IPO following the recommendation of Kumar
Mangalam Birla Committee.
2. Providing information in the Director’s Report for utilisation/end use of funds and
variation between projected and actual use of funds.
3. Declaration of unaudited quarterly results.
4. Mandatory appointment of a Compliance Officer for monitoring the share-transfer
process and ensuring the compliance with rules and regulations.
5. Dispatch of a copy of complete balance sheet to every investor household and
arbitrage copy of balance sheet to all shareholders.
Under the SEBI Act, 1992, SEBI has extensive powers to issue directions to market partici-
pants on a wide range of subjects, many of which relate to corporate governance.
Corporate Governance Through Listing Agreement

With the introduction of Clause With the introduction of Clause 49 in the Listing Agreement, the issue of corporate govern-
49 in the Listing Agreement, the ance has acquired centre stage. In its constant endeavour to improve the standards of cor-
issue of corporate governance porate governance in India, SEBI, in October 2002, constituted a Committee on Corporate
has acquired centre stage.
Governance under the Chairmanship of N. R. Narayana Murthy. Based on the recommenda-
tions of the said Committee and public comments received thereof, SEBI issued a circular on
August 26, 2003 revising Clause 49 of the Listing Agreement, to review the progress of the
corporate sector in meeting the norms of corporate governance and to determine the role
of companies in responding to rumour and other price-sensitive information circulating in
the market, in order to enhance the transparency and integrity of the market players and
participants.
Major changes have been made to the definition of ‘independent directors’, strengthen-
ing the responsibilities of Audit Committee, improving the quality of financial disclosures,
and finally, the board as a whole has been tasked with the adoption of a formal code of
conduct for the senior management and the certification of financial statements issued by
the CEO or the CFO. SEBI in the revised Clause 49 of the Listing Agreement had mandated
that at least 50 per cent of the board of a listed company comprise independent directors.
The capital market regulator had made it clear that corporate India should comply with the
Accordingly, companies are revised Clause 49 by December 31, 2005. Accordingly, companies are now required to form
now required to form various various committees like a ‘nomination committee’, ‘compensation committee’, ‘governance
committees like a ‘nomination committee’, and other committees to adhere to corporate governance.
committee’, ‘compensation
committee’, ‘governance com-
Similarly, the law requires the Nomination Committee of the board to be composed en-
mittee’, and other committees tirely of independent directors, who will be responsible for the evaluation and nomination
to adhere to corporate gover- of board members. In India, the responsibilities of Audit Committee include scrutiny of the
nance. company’s annually audited financial statements, appointment of external auditors, inter-
acting with internal auditors, and issues relating to internal controls that are existing in the
company.
Governance by Financial Institutions

The Financial Institutions have also taken responsibility in enforcing corporate governance in the
companies where they have substantial stakes. They insist companies on the following factors:
1. Making adequate disclosures,
2. Moving towards internationally accepted accounting standards,
3. Maintaining distinction between the CEO and Chairman, wherever applicable, and
4. Holding regular meetings with proper recording and dissemination of proceedings.
The financial institutions have also implemented new norms for appointment of Nominee
Directors, which have drastically cut down the total number of such directors on the com-
pany’s board.
Two of the leading credit-rating Role Played by Credit-rating Agencies

agencies—Credit Rating Infor-
mation Services of India Lim- Two of the leading credit-rating agencies—Credit Rating Information Services of India
ited (CRISIL) and ICRA have Limited (CRISIL) and ICRA have prepared a comprehensive instrument for rating the good
prepared a comprehensive
instrument for rating the good
corporate governance practices of the listed companies. The instrument will enable the secu-
corporate governance practices rities market regulator to judge the compliance status of the corporate on parameters such as
of the listed companies. effective creation, management, and distribution of investors’ wealth.
C ase
Reliance Industries Ltd (RIL)
Reliance Industries Ltd. (RIL) is India’s largest private sector company. The Reliance Group
was founded by Dhirubhai H. Ambani. He set up the Reliance Textile Industries in 1967.
Mukesh Ambani and Anil Ambani are the two sons of Dhirubhai Ambani.
The group’s activities span over exploration and production of oil and gas, refining and
marketing, petrochemicals, textiles, financial services, insurance, power, telecom, and info-
com services. The group exports its products to more than 100 countries all over the world.
RIL emerged as India’s most admired business house, for the fourth successive year in a TNS
(Taylor Nelson Sofres) mode survey for 2004.
RIL was one of the pioneers in the country in implementing the best international prac-
tices of corporate governance. In recognition of this pioneering effort, the ICSI bestowed on
the company the National Award for Excellence in Corporate Governance for 2003. In July
2002, Dhirubhai Ambani passed away. In September 2004, the board decided to give all the
financial decision-making power to Mukesh. Anil allegedly protested.
On November 18, 2004, Mukesh hinted at the ownership issues, which was in the private
domain, and the markets reacted strongly. RIL share prices dropped from ` 572 to ` 454, and
` 3,400 crore of market capitalisation was shared off. Anil Ambani criticised the corporate
governance practices of RIL. The battle between Mukesh and Anil Ambani over serious cor-
porate governance issues affecting RIL shifted from the media to the RIL boardroom.
The Anil Ambani Camp said a 500-page note detailing huge corporate failures by RIL
had been sent to the RIL board three days before its meeting on January 18, 2005. Finally,
RIL decided to buy back the equity shares to solve this conflict. On January 11, 2005, a Joint
Director in the Finance Ministry’s Department of Economic Affairs wrote a letter to SEBI
asking it to ‘look into the matter’ of a ‘note received from Shri Anil D. Ambani regarding the
buyback of equity shares of up to ` 3,000 crore by Reliance Industries Ltd’.
The Ministry wanted to be kept informed about the SEBI findings. Anil Abani’s note
was written on a plain sheet of paper instead of his official letterhead or under his insignia
as a Member of Parliament. He had also publicly voiced his objection to the share buyback
just before the board meeting that decided the issue. In the meeting itself which was the ap-
propriate forum for raising objections, he did not file a formal dissent note; instead, he made
a presentation to the board and merely abstained from voting. The other charges that Anil
Ambani listed in his letter to the Finance Ministry were ‘leaked’ to the media by what was
euphemistically referred to as the ‘Anil Ambani Camp’. This was probably the first time in the
Indian corporate history that a Vice-Chairman and Managing Director (MD) has written to
the government demanding an investigation against a company while he continued to hold
important fiduciary positions in the top management.
The action raises important issues about corporate governance and the responsibility of
senior management towards the company as well as its shareholders. Before going into these
issues, here is a gist of concerns that Anil Ambani wants the Finance Ministry to investigate
through SEBI, ostensibly in order to protect the ‘integrity of the capital market and the in-
terests of RIL’s 30 lakh investors’. Firstly, he alleged that RIL’s statutory public announcement
of the share buyback on December 29, 2004, failed to reveal that SEBI was investigating the
insider trading and price manipulation of RIL shares before the buyback and that the two
major stock exchanges were investigating its compliance with listing norms. (For the record,
SEBI did force RIL to make additional disclosures, but not necessarily all those that Anil
Ambani had demanded.)
Secondly, he alleged that RIL had failed to reveal the fact the SEBI was investigating a
complaint by Mr. S. Gurumurthy into the ownership and financing of a web of 400 compa-
nies which own RIL shares. Interestingly, Anil Ambani claimed that these ‘investigations are
in progress’. In fact, he first reported Mr. Gurumurthy’s allegation about a ‘gigantic fraud’ by
RIL in February 2002 and SEBI did not even bother to initiate an investigation into those
charges. Instead, SEBI went on to exonerate RIL of all charges of manipulation and insider
trading in its controversial sale of its 10 per cent stake in Larsen & Toubro (L&T) of which
nearly 6 per cent was acquired through open-market purchase just two weeks before the
Block Deal with Grasim.
A third issue raised by Anil Ambani was that ‘two unknown individuals’ were reported
to be in control of the 20 per cent promoter stake in RIL valued at ` 20,000 crore. He further
said that the buyback would increase the RIL promoter holding by a further 2 per cent using
` 3,000 crore of shareholders’ funds, and that there was a major public controversy over the
classification of a 12 per cent stake in RIL valued at ` 10,000 crore, which actually belonged
to RIL’s 30 lakh investors and not the promoters.
Ambani’s final point was that the ‘major issues of ownership, management, corporate
governance, transparency, and disclosures in RIL have publicly surfaced in relation to trans-
actions between Reliance and Reliance infocom’, which were not disclosed in the advertise-
ment. All these charges indeed merit investigation. Newer revelations about a series of friends
and corporate entities who seemed to have RIL Infocom shares at Re 1 each, also raised seri-
ous questions about why the publicly listed company ended up paying a high price for its
` 12,000 crore investment and whether RIL shareholders have been badly shortchanged in
the process.
But RIL had never been a stranger to serious controversy, and until the end of July 2004
(when many of his powers were curtailed through a board resolution), Anil Ambani was
part of the top management, privy to all confidential information, and, in fact, the group’s
public face. He presented its financial results to the media and analysts, and even collected a
clutch of good governance awards on its behalf. That is why his sudden activism on behalf of
the shareholders did not ring true, although it was in the public interest. Anil Ambani was
clearly at liberty to wage a war against his brother over his share of the RIL family holding
and to fight for the management control if he believed that he had been unfairly ousted. But
the governance issue raised by his damaging revelations and many allegations are clearly at
conflict with his role as the Vice-Chairman and MD of Reliance. If these charges are true, reg-
ulatory action can only damage RIL’s valuation and destroy the shareholders’ wealth instead
of protecting their interests. If RIL had been a professionally managed company instead of a
family-controlled group, would Anil Ambani had been allowed to remain a Director when
he was fighting a war against several people in the top management? Also, if a company is a
distinct and separate legal entity in the eyes of the law, can a Board Director, or in this case
the Vice-Chairman and MD, retain his official status while working against its interest? And
can he continue to get hefty salary from the company?
There are some governance issues too that were raised by Anil Ambani’s action and
allegations, and they need to be openly debated by peer-group industry bodies and corporate
governance experts. But what can one really expect when injuries of these very peer groups
have showered the group with ‘corporate excellence’ (award ICSI in 2003) and ‘corporate
social responsibility’ award (Golden Peacock by the Institute of Directors in 2004)?
Case Question
Do you think this issue had happened in RIL because of lack of corporate governance?
SUMMARY
Corporate Governance is a system of structuring, operating, trends unleashed in the process of reforms led to a renewed
and controlling a company with a view to achieving long-term interest and a need for good governance in the country’s
objectives to satisfy shareholders, creditors, employees, corporate sector.
customers, and suppliers with the legal and regulatory re- There is a widely held belief that the standards of corporate
quirements apart from meeting the environmental and so- governance must match with the spirit of the new economic
cial obligations. Good governance is the primary duty of the policy and reforms so that the interests of the various stake-
board. It is responsible for setting standards and ensuring holder groups, particularly the shareholders and lenders, are
that the company achieves them. adequately protected. Some of the major efforts in the direc-
There have been many cases of excessive debt financing tion of prescribing codes of good governance are as follows:
laced with fraud, generosity with which they reward their 1. Teadway Commission (US)
leading executives, disproportionate pay increases for execu-
tives, and procedures which have been less than transpar- 2. Cadbury Committee (UK)
ent. In the train of these and many a scandal, there have 3. King Committee (South Africa)
been increasing and violent demand for greater transparency
4. National Task Force on Corporate Governance
and good corporate governance.
(India)
In India, the interest in corporate governance was revived
5. Naresh Chandra Committee (India)
with the onset of the process of economic reforms in 1991.
Deregulation, privatization, marketisation, and globalisation 6. Narayana Murthy Committee (India)
KEY WORDS
● Corporate Governance ● Shareholders ● Two-tier Board
● Board of Directors ● Grievance ● Risk Management
● Executive Directors ● Remuneration ● Stock Exchanges
● Non-executive Directors ● Audit Committee ● Nominee Directors
● Recession ● Whistle Blower Policy ● Money Laundering
● Capital Market ● Initial Public Offering (IPO) ● Takeover
QUESTIONS
1. Comment upon the state of corporate governance in 4. What are the central concerns of the different com-
India. mittees formed for corporate code?
2. What are the measures of good governance? 5. Why is it important for a modern corporate organisa-
3. What is the role of the board of directors in corporate tion to follow the prevailing governance code?
governance?
REFERENCES
n Agarwal, N. P. and S. C. Jain (2003). Corporate Gover- n Asish, K. B. (2008). ‘Corporate Governance and Audit’,
nance. Jaipur: Indus Valley Pub. Business Standard, June 12, 2008, Online edition,
http://www.business-standard.com
n Arya, P. P., B. B. Tandon, and A. K. Vashisht (2003). n Balasubramanian, N. (2005). ‘Corporate Governance in
Corporate Governance. New Delhi: Deep and Deep India Traditional and Scriptural Perspective’, Chartered
Publications. Secretary, 2(3), 279.
n Bedi, S. (2004). Business Environment. New Delhi: Excel n Machraja, H. R. (2004). Corporate Governance. Mumbai:
Books. Himalaya Publishing House.
n Blair, M. M. and M. J. Roe (eds) (1999). ‘Employees n Michael, V. P. (2001). Globalisation, Liberalization and
and Corporate Governance’, Washington: Brooking Insti- Strategic Management. Mumbai: Himalaya Publishing
tutions Press (Chicago online edition, www.brookings. House.
edu.), http://www.corpgov.net/library n Munshi, S. and B. P. Abraham (2004). Good Gover-
n Chandra, R. (2002). Corporate Management. Delhi: nance, Democratic Societies and Globalisation. New
Kalpaz Pub. Delhi: Sage.
n Narayana Murthy, N. R. (2003). ‘Report of the SEBI Com-
n Desai, A. A. (2003). ‘Towards Meaningful Corporate
mittee on Corporate Governance’, February 8, 2003,
Governance’, Chartered Secretary, 33.
http://www.sebi.gov.in
n Gupta, S. L. (2001). Contemporary Issues in Corporate n Pandey, T. N. (2003). ‘Naresh Chandra Committee on
Restructuring. New Delhi: Anmol Pub. Auditor’s Role in Corporate Governance’, Chartered
n Ira, M. and P. W. MacAvoy (2007). ‘The Recurrent Crisis Secretary, 33, 464.
in Corporate Governance’, California: Stanford Univer- n Prahalad, H. (2002). Computing for the Future.
sity Press (Jordon online edition, www.sup.org.), http:// New Delhi: Tata McGraw-Hill.
www.amazon.com
n Rao, P. (2003). ‘Emaging Trends in Corporate Gover-
n Jain, R. B. (2004). Corruption-free Sustainable Develop- nance’, Chartered Secretary, 33, 1147.
ment: Challenges and Strategies for Good Governance. n Reed, D. and S. Mukherjee (2004). Corporate Gover-
New Delhi: Mittal Pub. nance, Economic Reforms, and Development: The Indian
n Ketan, D. (2008). ‘Corporate Governance Norms Promote Experience. New Delhi: Oxford University Press.
Outbound Investments’, The Financial Express, April 3, n Scholes, J. (2001). Exploring Corporate Strategy Text
2008, Online edition, http://www.financialexpress.com and Cases, 4th ed. Delhi: Prentice-Hall.
21
C hapter
Social Responsibility of
Business
>>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>>
• Origin and Growth of Concept 563 • Emerging Perspectives for Corporate
• Meaning and Definition 564 Social Responsibility 576
• Definition Through Various Dimensions 565 • Social Responsibility of Business
in India 576
• The Need for Social Responsibility of
Business 566 • Case 578
• Social Responsibilities of Business Towards • Summary 579
Different Groups 567 • Key Words 580
• Barriers to Social Responsibility 573 • Questions 580
• Corporate Accountability vis-à-vis Social • References 580
Responsibility 574
• Challenges for Social Responsibility of
Business 575
Origin and Growth of Concept

Although the subject ‘social responsibilities of business’ in its present form and content has Although the subject ‘social re-
gained popular attention only in the recent years, its origin can be traced back to the evolu- sponsibilities of business’ in its
tion of the concept of a welfare state. As the pace of industrialisation quickened, employers present form and content has
gained popular attention only in
became more and more concerned with the loss of productive efficiency due to avoidable the recent years, its origin can
sickness or accident or stoppages of work due to bad personal relationships. This gave rise to be traced back to the evolu-
the idea of a welfare state, which was further strengthened by the growth of democracy and tion of the concept of a welfare
of respect for human dignity during the last 150 years. state.
Any extension of democracy has always produced an extension of popular education. As
soon as the newly enfranchised are in a position to make their demands effectively felt, what
they ask of their governments is social security, protection against the cruel hazards of life,
and help for the destitute. Accordingly, as the electorate widens, so the rulers have to provide
as a political necessity, provisions for the aged, compensation for the disablement at work,
relief during sickness and unemployment, and wage legislation. The framework of a welfare
state and with it the concept of social responsibility have thus come to stay in many countries The changing image of busi-
of the world. ness in the recent years has
lent further support to the idea
The changing image of business in the recent years has lent further support to the idea of
of social responsibility. Some
social responsibility. Some public opinion polls of the 1960s and 1970s in the United States public opinion polls of the
have left the businessmen disenchanted. These polls have revealed that a businessman is 1960s and 1970s in the United
viewed as an individual who does not care for others, who ignores social problems, who States have left the business-
men disenchanted.
preys upon the population, who exploits labour, and who is a selfish money grabber.
On the other hand, until these opinions were unveiled, a businessman in America
believed that others viewed him as he viewed himself, as a practical, down-to-earth, hard-
working, broadminded, progressive, interesting, and a competitive, free enterpriser. He
believed that the society looked up at him as a self-sacrificing community leader, pillar of
society, generous to a fault, great supporter of education, and patron of the arts—in short, the
salt of the earth. Indeed, the businessman in the pre-poll days thought of himself as a happy
mix of Plato, Gandhi, and Churchill.
In India too, the businessman has been under incessant attack both by the government
and the public. Many reports of the Indian Government, such as the P.C. Mahalanobis Com-
mittee Report on the Distribution of Income and Levels of Living (1964), K.C. Dasgupta
Report on Monopolies (1965), Prof. Hazari’s Report on the Industrial Licensing System
(1966), and the Dutta Committee Report on Industrial Licensing Policy (1969) are very criti-
cal of the unethical role of an Indian businessman today.
Meaning and Definition

The real meaning of social responsibility with reference to business enterprises has to be
Business is an economic understood first to see the correlation of business with the social responsibility. ‘Business’ is
activity to earn profit for the an economic activity to earn profit for the owner, and ‘social responsibility’ means serving
owner, and social responsibility community without any expectation. Now the question that arises is, why is there a need for
means serving community with-
out any expectation.
a business to serve the community? Business is expected to create wealth, create markets,
generate employment, innovate and produce sufficient surplus to sustain its activities, and
improve its competitiveness. Society is expected to provide an environment in which a busi-
ness can develop and prosper, allowing investors to earn returns. Business depends for its
survival and long-term prosperity on the society to provide the resources—people, raw mate-
rials, services, and infrastructure. These inputs from the society help to convert raw materials
into profitable goods/services. While the society provides the means of exchange, trained
manpower, legal and banking system, infrastructure like roads, schools, hospitals, and so
on, business provides products and services, direct and indirect employment, and income
generation in terms of wages, dividend, taxes, interest, and the like.
The long-term sustainability of any business requires business–society connection. In
addition to the above, with the advent of the joint stock company, society grants to business
two special rights to assist it in performing its role. The first is ‘potential immorality’ and the
second is ‘limited liability’. In return for these special privileges, business has a responsibility
to fulfil to the society/community at large. Acharya Vinoba Bhave said
Business was considered to be next to King. The King was known as Shahenshah while
business was known as Shah as common word, first Shah has a duty towards public as
King, that is, government and the other Shah has also a duty towards society being part
of Shahenshah.
In the age of globalisation, corporations and business enterprises have crossed the national
In India and elsewhere, there
boundaries to become international. Business enterprises have been using natural resources
is a growing realisation that in a big way of maximisation of their profits. Business enterprises intervene in so many areas
business enterprises are, af- of social life, and hence their responsibility towards society and environment has emerged.
ter all, created by society and In India and elsewhere, there is a growing realisation that business enterprises are, after all,
must, therefore, serve it and
not merely profit from it. Thus,
created by society and must, therefore, serve it and not merely profit from it. Thus, the role of
the role of business in a society business in a society has been put under ‘corporate social responsibility (CSR)’.
has been put under ‘corporate India is a democratic welfare state. It wants to achieve welfare through democratic means.
social responsibility (CSR)’. Business organisations which fit in with such a specification would have a better scope to
Social Responsibility of Business | 565
s urvive and grow here. In order to make themselves suitable for such a business environment,
they should foster a corporate objective of maximising the social benefit. This must be con-
sidered as the social responsibility of business. It means that every business enterprise has a
responsibility to take care of the society’s interests.
Every business organisation must be sensitive to social needs. The society provides the
basis, scope, and demand for the business organisation and appreciates the responsiveness of
the organisation to the problems that it faces. The problems can either be social, economic,
or political; natural calamities; poverty; or unemployment. The government organisations,
social institutions like nongovernmental organisations (NGOs), and socially conscious indi-
viduals cater to the social needs. Unlimited resources, manpower, and greater vision would
be required to tackle the problems that face every society. Business organisations, which form Business organisations, which
an important part of the society, and control a conspicuous share of the resources of the so- form an important part of the
ciety must, therefore, be responsive to the social needs. While a domestic company has a pri- society and control a conspicu-
ous share of the resources of
mary responsibility towards the local society, a multinational company (MNC) or a foreign the society must, therefore, be
company too needs to have some responsibility towards the social needs of its host country. responsive to the social needs.
Social responsibility, therefore, is the company’s mission to be responsive to social needs
by earmarking a part of its resources so that they may be allocated for achieving social goals
and tackling social problems. This is particularly so because of the societal approach of busi-
ness that influences the business philosophy and vision of the organisation. In the context of
globalisation of business, every company must shape itself to be socially oriented in a global
perspective. This is, perhaps, the reason for the success of Japanese companies.
Social responsibility of a business house enables it to establish a good corporate image.
Social responsibility need not always mean patronising a social project; there are many other
areas where social responsibility can be fulfilled. If an organisation takes up a project for
distributing sweets to slum-dwellers during the festival of Diwali, after amassing substantial
wealth over the years through black market, hoarding, and other unfair means, it cannot be
reckoned as a social responsibility. On the contrary, providing proper products at proper
prices in proper places to the proper customer is a social responsibility.
Definition Through Various Dimensions

Social responsibility is a nebulous idea and hence, it is defined in various ways. Adolph Berle Social responsibility is the man-
defined social responsibility as the manager’s responsiveness to public consensus. This means ager’s responsiveness to public
that there cannot be the same set of social responsibilities applicable to all countries at all consensus.
times. These would be determined in each case by the customs, religions, traditions, level
of industrialisation, and a host of other norms and standards about which there is a public
consensus at any given time in a given society.
According to Keith Davis, the term ‘social responsibility’ refers to two types of busi-
ness obligations: (a) the socio-economic obligation and (b) the socio-human obligation. The The socio-economic obligation
socio-economic obligation of every business is to see that the economic consequences of its of every business is to see that
actions do not adversely affect the public welfare. This includes obligations to promote em- the economic consequences of
its actions do not adversely af-
ployment opportunities, to maintain competition, to curb inflation, and the like. The socio- fect the public welfare.
human obligation of every business is to nurture and develop human values (such as morale,
cooperation, motivation, and self-realisation in work).
Every business firm is part of a total economic and political system and not an island,
without foreign relations. It is at the centre of a network of relationships to persons, groups,
and things. The businessman should, therefore, consider the impact of his actions on all to
which he is related. He should operate his business as a trustee for the benefit of his employ-
ees, investors, consumers, the government, and the general public. His task is to mediate
among these interests, to ensure that each gets a square deal, and that nobody’s interests are
unduly sacrificed to those of others.
By the term CSR, what is generally understood is that a business enterprise has an ob-
ligation to the society that extends beyond its narrow obligation to its owner or sharehold-
ers. Although CSR as a concept is appreciated by corporates and the civic world, there is no
universally accepted definition for CSR. Most definitions of CSR focus towards a company’s
overall impact on the society and stakeholders.
According to the London Benchmarking Group Model, ‘Business Basics’, in the context
of CSR, related as to how the company does its business and whether it is sensitive about
the impact of its business on the society and the plane. That is, societal and environmen-
tal returns apart from financial returns—the so-called ‘tripple bottom line reporting’—are
socio-economic obligation and the socio-human obligation. The other factors are as follows:
Philanthropy: Intermittent support; wide range of causes; in response to needs and
appeals of charitable and community organisations; in partnership with companies, custom-
ers, and suppliers.
Social investment: Long-term and strategic involvement in community partnership;
limited range of social issues chosen by the company; to protect long-term corporate interest
and enhance its reputation.
Commercial: Compliance with law; ethical business practices: concern for the environ-
ment and consideration of the interest of various stakeholders such as customers, supply
chain, employees, and the community at large. According to him, CSR is a culture and should
be integrated with all the phases of a corporation.
CSR is a culture and should be
If one goes into the depth of the above definition, under CSR culture, the business has
integrated with all the phases to be run not only for economic profits that is, financial returns for shareholders, but also
of a corporation. considering the actual and the potential impact on the community where it operates and
on the society as a whole to have long-term sustainable development of the business. So, the
company has to consider the varied interest of the other stakeholders.
The Need for Social Responsibility

of Business
There are many situations where the social responsibility of business becomes necessary, as
follows:
1. A societal approach to business is the contemporary business philosophy, which
demands business organisations to be responsive to social problems.
2. As a result of the globalisation of business, global companies and MNCs operate in a
In order to establish good cor- big way in their host countries. In order to establish a good corporate image, they in-
porate image, business organi- clude social responsibility as a corporate objective. Indigenous companies are forced
sations should include social to follow suit for maintaining their corporate identity.
responsibility as a corporate
objective. 3. In the terms and conditions of collaboration agreements, very often, social welfare
terms are included which necessitates the collaborating company to take up the social
responsibility of business.
4. On the basis of legal provisions, companies have to concentrate on social problems.
For example, an industrial organisation in India must obtain a certification from the
Pollution Control Board.
5. Corporate donations to social welfare projects of approved NGOs are exempted from
income tax in India.
6. An organisation’s commitment to social responsibility creates a good corporate
image, and thereby, a better business environment.
7. Social responsibility of business enables the organisation to improve its product
positioning, and thereby, improve its market share.
8. Very often, when a situation demands due to natural calamities, accidents and so on,
for example, gas leak at the Union Carbide plant in Bhopal, wherein the company had
to monetarily compensate through medical treatment.
9. For extraneous considerations, some organisations are sometimes forced to take up
social responsibility.
10. The organisational culture of certain organisations makes it necessary for them to
take up the social cause as their moral responsibility.
Box 21.1 details the ‘Virtue Matrix’.
Box 21.1 The ‘Virtue Matrix’

The virtue matrix depicts the forces that generate CSR. Civil Foundation (Instruments)
The bottom two quadrants of the matrix are the civil Behaviour in the civil foundation does no more than
foundation, which consist of norms, customers, and meet the society’s baseline expectations. Because it
laws that govern corporate practice. Companies engage explicitly serves the cause of maintaining or enhancing
in these practices either by choice or in compliance with the shareholders’ value, this behaviour can be described
the government. as instrumental. Corporate innovations in the socially
responsible behaviour occur in the frontier, the matrix’s
Frontier
upper two quadrants.
(Intrinsic)
The motivation for these innovative practices, at least
Strategic Structural initially, tends to be intrinsic; corporate managers
Choice Compliance engage in such conduct for its own sake, rather than to
enhance the shareholders’ value.
Social Responsibilities of Business

Towards Different Groups
Responsibility Towards the Customers
In a competitive market, the customer is the ‘king’ and is the company’s first priority as the In a competitive market, the
company exists for the customers only. Earlier, the product-selling approach was the basic customer is the ‘king’ and is the
approach of the managers who were considered capable when they were able to create a company’s first priority as the
company exists for the custom-
demand. When a salesperson was able to sell refrigerators even to Eskimos, he was considers only.
ered very successful. Although the demand creation is not totally out of the scope of a sales
person even today, the manager’s real job now is to identify the actual demand and target cus-
tomers, and to project a product that would provide maximum satisfaction to the customer
needs. The Toyota management’s ‘customer-first philosophy’ has paid them rich dividends.
There are many Japanese corporations which strive towards customer satisfaction. On
the contrary, developments in many Indian organisations indicate customer exploitation.
For example, the Air Traffic Controllers (ATC) of Indian airports, who are very highly paid
employees, went on strike four times in 1997 during the United Front regime. The ATC
Guild was successful in putting out-of-gear the control operations. Another interesting as-
pect about the ATC agitation was that the Indian Airlines made a claim of crore of rupees
as compensation of losses during the ATC strike between November 1–19, 1997, from the
Airport Authority of India. (Both organisations fall under the Civil Aviation Ministry of the
Government of India). To be precise, social responsibility of an organisation must primarily
be accepted and felt by the employees of an organisation.
Talking of the Japanese peo- Talking of the Japanese people’s commitment to customer satisfaction, the customer-first
ple’s commitment to customer philosophy is widely fostered by the employers of Japanese corporations, and they take up the
satisfaction, the customer-first
responsibility of customer satisfaction. The Kyoto-based electronic and ceramic company,
philosophy is widely fostered
by the employers of Japanese Kyocera is developing a new production process to produce and market products, which fit
corporations, and they take up in perfectly with today’s consumer lifestyle. Their workers fully cooperate with the manage-
the responsibility of customer ment for improving production methods constantly with a view to maximising the customer
satisfaction.
satisfaction. With such a work culture, it is no wonder that the Japanese corporations have
emerged successful in fulfilling and maximising the customer satisfaction. Their workforce
stands by them to take up any challenge without grumbling. Naturally, customer-oriented
products such as high-definition TVs, solar-powered appliances, fuel-efficient automobiles,
latest consumer electronics, recyclable cars, and the like which have been introduced by the
Japanese corporations, at affordable prices for customers, have been the result of the success
of Japanese employees also.
Responsibility of business to- In order to satisfy the customers, a proper quality product needs to be designed and pro-
wards the customer is to produced using proper quality materials, appropriate technology, and well-trained, motivated,
vide proper quality product at a and committed human resources, and sold too at a fair price. Among all the factors, human
fair price. resource is the most crucial one. This is the reason why global corporations and multination-
als give top priority to human resources development and management.
Social Responsibility to Prospects

Prospects are the possible or ‘Prospects’ are the possible or probable customers, that is, ‘expected customers’. It is always
probable customers. safer on the part of a company to identify its existing customers, and make a forecast about
the expected customers. Welfare programmes which benefit the prospective customers
may convert potential customers to actual customers. At the product-planning stage, every
company thinks in terms of the existing market and then, the expected market. Taking into
account the needs, wants, tastes, and preferences of the existing market and the expected
market, would enable the product to offer maximum satisfaction to the buyers.
When a company opts to take up a social welfare project, it may think in terms of priori-
ties. Although the customers and the prospects are in the mind of the project planner, priori-
ties must be chiefly taken into account. An organisation may not be able to do all that it wants
to do on account of various constraints and changing situations. On the contrary, it is always
better to do one or a few most important things. It means that the most urgent things must
be given first priority. As there is often a danger of fixing wrong priorities, the project plan-
ner must take extreme care to choose appropriate priorities. Unless the priorities are proper,
accomplishments cannot be proper.
Setting up wrong priorities may mean that the most appropriate task is abandoned. The
most urgent tasks must, therefore, be taken up first within the stipulated time frame, with
the available resources, capabilities, and manpower. Very often, there is a possibility of ne-
glecting difficult tasks and choosing the easier ones. This may result in assigning priorities
to comparatively unimportant tasks at the cost of urgent ones. It is very important for any It is very important for any com-
company to decide what needs to be tackled first, what next, what last, and what never at all. pany to decide what needs to
This is more true in respect of social welfare projects. be tackled first, what next, what
last, and what never at all. This
is more true in respect of social
Social Responsibility to Community welfare projects.
A company is a part of the community or the immediate society where it exists. Hence, it has
a great responsibility to be conscious and concerned with the community welfare. A com-
munity is a part of the society at large which provides the immediate social environment to
the company. The company must, therefore, be committed to the welfare of the environment,
since it has an important social role to play in the community.
There are two important aspects of such a social role. One, that the company should lend Responsibility of a company
a positive assistance to community objectives and secondly, it should not be instrumental to towards the community lies in
environment degradation. This calls for initiating a pollution-free and environment-friendly community welfare and environ-
mental welfare.
technology, conservation of the surrounding ecological environment, social afforestation,
preventing emission of fumes and effluents, and so on; not only to satisfy the government or
legal provisions, but because of a commitment to the community welfare and environmental
protection. Making extra efforts for industrial safety is another way of protecting the com-
munity. When the gas tragedy at the Union Carbide plant in Bhopal resulted in loss of human
lives and permanent invalidation of many people from around the factory, the importance of
improving industrial safety and reducing occupational and industrial hazards came to atten-
tion. Protecting the community and preventing it from the industrial hazards is the greatest Protecting the community and
responsibility of the industrial establishments. preventing it from the industrial
Fumes and effluents emitted from the factories result in environmental pollution and hazards is the greatest respon-
sibility of the industrial estab-
pollution of the nearby rivers which supply human beings and cattle with water. This leads to lishments.
health hazards in the community. The Supreme Court of India recently ordered the closure
of a number of industrial units on these grounds. It is not only a social responsibility, but
also the bounden duty on the part of every industrial enterprise to follow rigid policies and
implement practices to prevent health hazards to the employees of the organisation, on the
one hand, and to the community and society at large, on the other. A meeting of the Occupa-
tional Health and Safety Centre (OHS Centre), Delhi in 1999 expressed a great concern and
anxiety in the increasing occupational hazards. Every industrial unit must make provisions
to prevent safety hazards before it starts its operations. There must be an inbuilt arrangement
to ensure occupational and environmental safety.
When people from around the Ion Exchange plant at Ambernath (near Mumbai) felt
suffocated in the evenings, not much thought was given to it. When Mr. B. N. Shetty, a worker
at the plant, died on January 5, 1990, from cancer, it raised the eyebrows of at least some
people in the community around the factory. In the same factory, nine cancer deaths had
occurred in the past. Hence the community raised an alarm, with 130 workers going on strike
on January 5, 1990. Obviously, there was a valid reason for raising an alarm about the safety
hazards in the company’s vicinity.
Industrial units need to gear up to help the community to solve the unemployment and Industrial units need to gear up
other socio-economic problems. If an industrial unit is able to provide employment to the to help the community to solve
unemployment and other socio-
people of its immediate society, it would be a useful step towards solving unemployment, economic problems.
poverty, underdevelopment, social backwardness, and so on. However, it is not appropriate
to uphold a policy of ‘sons of the soil’ in the interest of the company’s efficiency. A good Business houses can set up
business enterprise can do its best to assist its community in solving various socio-economic educational institutions, social
service institutions, technical
problems. Successful business houses can set up educational institutions, social service
education centres, hospitals,
institutions, technical education centres, hospitals, and health programmes in its com- and also assist the people dur-
munity. They can also assist people during natural calamities like earthquakes and floods ing natural calamities.
Box 21.2 The MMC Family

The Marsh and McLennan Companies (MMC) is a 1. Family relationship management programme
global professional services firm with annual revenues 2. Psychological and emotional counselling
of $10 bn and approximately, 58,000 employees are
3. Enhanced benefits
serving clients in more than 100 countries.
4. Financial assistance
On September 11, 2001, MMC had 1,908 people
working in or visiting offices in the twin towers of the 5. Financial counselling
World Trade Center (WTC). In the aftermath of the 6. Family advocacy
terrorist attacks on September 11, 2001, victims’ 7. Remembrances
families had faced a variety of immediate needs and
long-term ones. MMC worked quickly to provide a
responsive set of benefits and services. They include
in their communities, making social responsibility substantially conspicuous. Many busi-

ness organisations are instrumental in providing assistance to the community indirectly, by
creating indirect employment opportunities for the people—putting up shops, townships,
transport development, housing colonies, new social and religious institutions, cultural de-
velopments, markets, and so on. For example, the once-remote village of Jamshedpur has
attained a place of pride in the world map of today with the headquarters of Tata Iron and
Steel Company (TISCO) there.
It is imperative to note here that ‘community development’ has been an important area
where the corporate sector has made invaluable contributions in the past, not only in India but
also throughout the world. All the economically developed nations today once lagged behind
in terms of development. The contribution of the corporate sector has played a tremendous
role in developing the respective communities in all these economies. The corporate sector
in India is also very conscious about its social responsibility. The Confederation of Indian
Industries (CII) conducted a seminar on ‘Corporate Social Performance’ and an exhibition
of NGOs in Mumbai in February 1998, clearly highlighting its concern for the community
development. Along with globalisation, there is an added awakening in the corporate circles
to initiate industries’ contribution for community development (refer to Box 21.2).
Responsibility to Human Resources

An organisation’s social responsibility is first visible in its approach to its internal environ-
ment. The internal environment of an organisation primarily consists of its human resources.
A company’s policy which does not care for the welfare of its people may not be able to care
The primary responsibility of a for its external environment—the society. The primary responsibility of a business firm is
business firm is to look after the to look after the welfare of its people. It means that a business enterprise must be willing to
welfare of its employees. maintain the dignity of every employee as a human being, provide adequate opportunities for
every individual to develop to his maximum potential, and match the organisational objec-
tives with individual development needs. It should enable every employee to satisfy his needs
and aspirations.
Fair wages, proper organisa-
Responsibility to employees stems from a proper organisational philosophy and human
tional climate, and good career resource policy. Fair wages, proper organisational climate, conducive working conditions,
prospects—all such aspects good career prospects, proper human resource development facilities, a proper environment
enable an organisation’s work- for need satisfaction including self-actualisation needs, are essential. All such aspects enable
force to gain a sense of belong-
ing and confidence.
an organisation’s workforce to gain a sense of belonging and confidence. Jamshedji Tata’s
vision of management as early as 1907 was almost identical.
The TISCO which started its operation in 1911, is one of the largest single private
sector enterprises in India and a leading producer of steel. It has fostered the philosophy
of ‘managing human resources with human considerations’ as a prerequisite to managing
business well from its very inception. Human considerations at TISCO are reflected in their
policies and programmes. Some of their welfare schemes read as follows:
1. An eight-hour shift was first introduced in India in 1912 while it was not practised
even in the home of scientific management.
2. Free medical aid for employees and their family members was started in 1915, while
the ESI Act itself was passed in India only in 1948.
3. A welfare department was established and welfare activities were introduced in 1917,
while statutory welfare provisions were introduced in the Factories’ Act only in 1948.
4. A school for the children of TISCO workers was established in 1917, though such a
provision is not statutorily enforced even till date.
5. Workers’ provident fund, leave with pay, and accident compensation were introduced
in 1920, though the Employees’ Provident Fund Act itself was passed only in 1952.
6. A technical training institute was established in 1921 for providing adequate training
for its workers.
7. Maternity Benefit Scheme has been operative at TISCO from 1928, though a Maternity
Benefit Act was passed by the government only in 1961.
8. Bonus was introduced in 1934, while a uniform bonus condition was introduced by
the government itself only in the Payment of Bonus Act in 1965.
9. A retirement gratuity was introduced by TISCO in 1937, while the Payment of
Gratuity Act itself was passed by the government only in 1972.
10. An ex-gratia payment for road accidents was introduced by the company in 1979.
Companies like Cadbury Brothers and Unilever are well known among the global organisa-
tions that are operating in India, for their employee welfare policies. Housing schemes, trans-
port facility, recreation, games and sports facility, workers’ education, counselling and career
guidance, career development, proper organisational climate and culture. . . . So goes the list
of items which an organisation can include in its employee welfare programmes in addition
to the statutory welfare programmes.
First of all, recognising the worth and contribution of an organisation’s people must be
accepted as an important task to provide justice to its people. Social responsibility of a busi- Social responsibility of a busi-
ness can be primarily expressed through responsibility to its own people, on the one hand ness can be primarily expressed
and to its customers, on the other; without which no organisation can make claims of social through responsibility to its own
people, on the one hand and
responsibility. to its customers, on the other;
without which no organisation
can make claims of social re-
Responsibility to Society and Ecological sponsibility.
Environment
An organisation owes social responsibility not only to the immediate social framework called
community but to the society at large and the ecological environment itself. In a global busi-
ness environment, the whole globe can be the society for an organisation. The countries or
the cities wherever a company operates (its products move), or is expected to operate—all
such places or people may come under the company’s society. It can also include its sup-
pliers, dealers, wholesalers, and retailers. The company has social responsibility to all such
constituents of its society. While it can be a good paymaster to its suppliers, it can maintain a
proper supply line and terms and conditions with its dealers, wholesalers, and others. It can
also help the society to tackle its social problems. MNCs which operate in India, for exam-
ple, make their contribution for socio-economic development of the economically weaker
sections, participate in the natural problem-solving, and even adopt villages for concentrated
development activities. Almost all MNCs which operate in countries other than their own
countries of origin make a tremendous contribution to the socio-economic development of
their host countries, which is really commendable.
Responsibility to Government
Social responsibility of a business may include a business firm’s responsibility to the govern-
Responsibility of a business ment also. A business enterprise has a responsibility to the government. It can pay its taxes,
enterprise towards the govern- duties, and so on, to the government, honestly taking into consideration the organisation’s
ment is to pay taxes and duties commitment to the government, especially on the social projects. Moreover, business firms
in time, cooperate with the gov-
ernment in their social policies,
constructively cooperate with the government in their social policies and programmes. For
and to follow all laws laid down example, corporate contribution to the Prime Minister’s Relief Fund is tremendous.
by the government. Business organisations that are good taxpayers and wholeheartedly participate in the
government social welfare projects, gain better corporate image indicating that this respon-
sibility can be considered as a social responsibility of business. There are some firms which
are tax evaders. Firms which break laws cannot be called as socially conscious firms. There
are various categories of law—industrial law, trade law, labour law, anti-pollution law—which
have to be abided by the business enterprises. Law-abiding corporate entities are bound to
fulfil their responsibility to the government.
Social Responsibility to Global Business

Environment
Globalisation of business has become an essential condition of business in the contemporary
business environment. Global markets, global operation and technology, global corporate
citizenship, and global policies and strategies—all make a global business environment.
Every business organisation has a responsibility to adhere to the conditions of such a global
environment. Global business environment provides for a free-market operation with a per-
fect competition. A firm that operates globally has to appreciate the mechanisms of a global
business environment. Even an indigeneous firm operating indigeneously has to adhere
to the global business environment. That is why every firm, whether operating globally or
indigeneously, has its social responsibility to the global environment.
The global social responsibil-
The global customer needs a globally approved quality, a globally competitive pricing, a
ity of a business enterprise is globally approved technology, and so on, which may be related to a global social responsibil-
to fulfil global customer needs ity. Even a company which operates, indigeneously has to maintain global quality standards if
with a globally approved quality it wants to remain in the global market environment. For example, an indigeneously operat-
at a globally competitive price.
ing foundry which manufactures castings (gear boxes) for an automobile, which operates in
the global market, must maintain the global quality and precision. There is a possibility that
the units may fail and become sick if they are not able to maintain global quality standards
and global social responsibility.
Due to globalisation, a larger, faster, and greater growth of industrialisation is expected
in the future resulting in a greater social responsibility being demanded from the business
enterprises. There would exist a possibility for more takeovers, acquisitions, and mergers,
resulting in the emergence of giant enterprises, which may make larger allocations for social
welfare projects with the objective of gaining a greater corporate image and penetration.
Companies with low social responsibility investment may even become unpopular in the
eyes of the society in the future years.
As a result of the entry of large business houses and multinationals in the social arena, a
number of innovative projects for the social development are bound to be introduced in the
future. Particularly, on account of the entry of many large industrial enterprises and extensive
industrial operations, there would be a possibility of greater pollution and environmental
degradation. Companies are, therefore, expected to gain a greater social consciousness. On
the contrary, greater government regulations are also expected to be introduced for ensuring
the social responsibility of business. As a result, there would emerge a greater social awaken-
ing in the industrial circles towards this end.
Barriers to Social Responsibility

Although social responsibility of business is the globally accepted task of every business Every business organisation has
organisation, there are some obstacles which hinder the effective fusion of the social welfare some obstacles which hinder the
objective with the corporate policy. These obstacles can be considered as ‘barriers’ to social effective fusion of the social
welfare objective in the corpo-
responsibility. A business organisation is a social entity, and it has a responsibility to its so-
rate policy.
ciety which consists of its customers, its own human resources, its community and environ-
ment, and the society at large. Certain organisations accept their social responsibility, but
certain others pay only a lip service to it. Some are of the opinion that it is the responsibility
of the government to care for the social welfare of its citizens.
Business organisations are heavily taxed for social projects. Some of the barriers to
the social responsibility of business include an urge for profiteering, desire for an excessive
accumulation of wealth, low profitability, collective exploitation problems, frequently chang-
ing government mechanism, important commitments by trade unions, and the need for
tackling other important internal issues, which prevent from allocation of funds, extortion
and corruption, recession, depression, and so on. Profitability is important for any business
to survive. But profiteering at the cost of customers and the community is not good. Tempta-
tion for profiteering encourages businessmen to exploit the customers by reducing quality,
hiking prices, black marketing, hoarding, no investment on social responsibility, and so on.
The desire for profitability and excessive wealth motivates businessmen to amass wealth The desire for profitability and
by all means, resulting in an exploitation of even their own workforce and customers. Social excessive wealth motivates busi-
responsibility is never a necessary proposition for them. The only objective of their business nessmen to exploit the work-
force and customers.
is to multiply the profit and gather wealth at any cost, which is a great barrier to the social re-
sponsibility of business. Low profitability or a no-profitability situation in business prevents
any business firm from concentrating its attention on social responsibility. It may even pose
a question mark on its very survival. In such a situation, no business firm would be in a posi-
tion to concentrate on the social responsibility, even if it has the inclination to do so. Such
situations are not rare in businesses.
Collective exploitation by the trade unions often compels a business organisation to
drain out its profit, and even eat up the capital. This is a very normal phenomenon in the
Indian businesses. Trade unions, by virtue of their collective strength, hold the entire or-
ganisation at ransom to realise their exorbitant claims. Many industrial units turn sick in this
The need for tackling internal
process, affecting the social responsibility. The need for tackling other internal problems may problems, frequently changing
very often become the priority of some organisations. They are forced to postpone the social governments, and law profit-
responsibility needs. Capital problems, low cash flow, commitments to financial institutions, ability in business are some
financial strain, fresh investment and modernisation needs, and so on, sometimes affect the important barriers in the social
responsibility.
company’s capability to divert its funds towards the social welfare projects. Box 21.3 shows
the UN panel to monitor MNC’s on human rights issues.
Box 21.3 UN Panel to Monitor MNCs on Human Rights Issue

The United Nations Human Rights Panel has urged of human rights unveiled its draft norms on the
a concern that the UN members, transnational responsibilities of transnational corporations and other
corporations, and other business enterprises that violate business enterprises, which called the United Nations
international human rights law should be investigated to monitor all business compliances with international
and censured. treaties governing human rights, labour environment,
consumer protection, and anti-corruption laws. The
In a resolution passed in August 2003, the 26-member norms also provide guidelines for companies operating in
UN sub-commission on the promotion and protection the conflict zones like Iraq.
The frequently changing gov- The frequently changing governments lead to instability and inconsistency in policies,
ernments lead to instability and resulting in uncertainties in the realm of business. The situation in India during 1996–98
inconsistency in policies, result-
is an example, during which period three governments (under Mr. Atal Bihari Vajpayee,
ing in uncertainties in the realm
of business. Mr. Deve Gowda, and Mr. Inder Kumar Gujral) failed, resulting in instability in the nation
and in the business environment. Industrial production went down, GNP declined, share
markets crashed, inflation increased, and an economic turmoil prevailed everywhere. The so-
cial welfare investment by Indian business was the lowest during this period when compared
to the last 25 years. When uncertainty prevails in a business, any firm would think twice be-
fore making any commitment towards an additional investment on the social responsibility.
Business firms may face important commitments other than social projects very often, while
their resources are always limited. For example, on account of globalisation, modernisation
needs have become indispensable in many industrial units, while their resources have remained
the same. While their existing commitments including commitments to their financial institu-
tions remain unchanged, additional commitments have to be made for additional investments
on modernisation. Financial institutions, at times, do not hesitate even to pressurise the indus-
trial units. In such situations, it is natural that the industrial organisations may hesitate to divert
their funds to any other project including social projects.
On many occasions, industrial and business organisations become the target of extor-
tion and corruption from many quarters, including political pressures, unscrupulous social
elements, and even corrupt government officials and politicians. While the resources are lim-
ited, business organisations are compelled to oblige to such elements for their very existence.
Such extra commitments can be adjusted only against the social welfare funds, a regular
feature in the Indian businesses today.
A couple of giant organisations have suggested setting up of special funds to meet the
demands from politicians. The small- and medium enterprises (SMEs) find it practically dif-
Problems like recession and ficult to survive after meeting the exorbitant demands from extortionist and corrupt elements
depression, which affect the in administration and politics. Problems like recession and depression, which adversely affect
behaviour and expenditure,
affects the social welfare pro-
economic activities, affect the resource mobilisation ability of business enterprises consider-
gramme of business organisa- ably. They have, therefore, to be very prudent in their economic behaviour and expenditure
tions. decisions. This again affects the social investment decision.
Corporate Accountability vis-À-vis

Social Responsibility
We have discussed about the responsibility of business to its society, since a business firm is
a part of the latter. The social aspect of business demands that the business should not ad-
versely affect the living conditions of the members of the society, on the one hand but should
facilitate good living standards by providing whatever is possible within its purview, on the
other. This is the ‘social responsibility’ of business. Corporate accountability, on the other Corporate Accountability is the
hand, is the accountability of business to its various constituents—owners (shareholders), accountability of business to its
financiers (financial institutions), employees, government, and customers. Business has a various constituents like share-
sort of legal obligation to all these constituents; and hence, accountability can be considered holders, financers, employees,
and customers.
as a compulsory state of responsibility to the constituents of a business.
Every organisation is answerable to its owners and financiers, on the one hand and to
its employees and workforce, on the other; for its performance and social contribution. It is
accountable to the government since the latter has a regulatory role, while its accountability
to the consumers comes into play because the goods and services are produced for the sake of
the consumers and customers. A contractor who builds a housing complex is accountable to
his buyers and users because they would be the first victims in case of any untoward incident.
Thus, social responsibility and corporate accountability are not identical terms. They repre-
sent two different aspects of the company’s responsibility. Primarily, a business is accountable Business is accountable to its
to its constituents, on the one hand and responsibility to itself, on the other. constituents, on the one hand
The social responsibility of a business primarily goes with the company’s very operation and responsibility to itself, on
the other.
itself, for maintaining proper product quality, proper product pricing, timely distribution,
and after-sales service; proper advertising and extending information; proper customer edu-
cation, and so on. The company should also make it a point not to misguide any customer The company should also make
during the course of advertising, information giving, and demand creation. it a point not to misguide any
The social responsibility of a business can also be explicit in specific social welfare customer during the course of
advertising, information giving,
projects taken up by the company. Many companies extend financial investments towards
and demand creation.
these projects. Some of the social welfare projects of TISCO have already been mentioned
earlier. Apeejay Group operates educational institutions for the welfare of the society, while
Hindustan Lever Ltd. (HLL) has adopted many villages. ITC has sponsored sports and games.
Indian Petrochemical Corporation Ltd. (IPCL) Gujarat Refinery, and Gujarat State Fertilizer
Company have jointly constructed a 56-km-long, effluent disposal channel in Baroda at a
cost of about ` 13 crore. There are many such examples of corporate, social welfare projects. As a result of the globalisa-
tion process, there would be
As a part of the global movement on environmental protection, there is an awakening a greater thrust on the social
in India also. As a result of the globalisation process, there would be a greater thrust on the responsibility of business and
social responsibility of business and environmental protection in the years to come. Social environmental protection in the
performance of every organisation can be evaluated with the help of a social audit. years to come.
Challenges for Social Responsibility

of Business
The challenges to a further awareness, dissemination, and adoption of social responsibility
practices among enterprises stem from insufficient factors, as follows:
• Knowledge about the relationship between social responsibility and business
performance (the ‘business case’);
• Consensus between the various parties involved in an adequate concept, taking into
a ccount the global dimension of social responsibility; in particular, the diversity in
domestic policy frameworks in the world;
• Teaching and training about the role of social responsibility, especially in commercial
and management schools;
• Awareness and resources among SMEs;
• Transparency, which stems from lack of generally accepted instruments to design,
manage, and communicate social responsibility policies;
• Consumers’ and investors’ recognition and endorsement of social responsibility

behaviours; and
• Coherence in public policies.
Emerging Perspectives for Corporate

Social Responsibility
There are three emerging perspectives that inform CSR. They are as follows:
One, a business perspective that recognises the importance of ‘reputation capital’ for
capturing and sustaining markets. Seen thus, CSR is basically a new business strategy to
reduce the investment risks and maximise the profits by taking all the key stakeholders into
confidence. The proponents of this perspective often include CSR in their advertising and
social marketing initiatives.
The second is an eco-social perspective. The proponents of this perspective are the new
generation of corporations and the new-economy entrepreneurs who created a tremendous
amount of wealth in a relatively short span of time. They recognise the fact that social and
environmental stability and sustainability are two important prerequisites for the sustainabil-
ity of a market in the long run. They also recognise the fact that increasing poverty can lead
to social and political instability. Such socio-political instability can, in turn, be detrimental
to business, which operates from a variety of socio-political and socio-cultural backgrounds.
Seen from the eco-social perspective, CSR is both a value and a strategy to ensure the sus-
tainability of a business. It is a value because it stresses the fact that business and markets are
essentially aimed at the well-being of the society. It is a strategy because it helps to reduce
social tensions and facilitate the markets.
For the new generation of corporate leaders, optimisation of profits is the key, rather
than the maximisation of profit. Hence, there is a shift from accountability to ‘shareholders’
to accountability to ‘stakeholders’ (including employees, consumers, and affected communi-
ties). There is a growing realisation that long-term business success can only be achieved by
companies that recognise that the economy is an ‘open subsystem of the earth’s ecosystem,
which is finite, non-growing, and materially closed’.
There is a third and growing perspective that shapes the new principles and practice
of CSR. This is a rights-based perspective of the corporate responsibility. This perspective
stresses that consumers, employees, affected communities, and shareholders have a right to
know about corporations and their businesses. Corporations are private initiatives, true, but
CSR is qualitatively different increasingly they are becoming public institutions whose survival depends on the consum-
from the traditional concept ers, who buy their products and shareholders, who invest in their stocks. This perspective
of corporate philanthropy. It stresses accountability, transparency, and social and environmental investment as the key
acknowledges the debt that a
aspects of CSR.
corporation owes to the com-
munity within which it operates, CSR is qualitatively different from the traditional concept of corporate philanthropy. It
as a stakeholder in the corpo- acknowledges the debt that a corporation owes to the community within which it operates,
rate activity. as a stakeholder in the corporate activity.
Social Responsibility of Business in India

Today, CSR goes far beyond the old philanthropy of the past—donating money to good
causes at the end of the financial year—and is, instead, an all-year-round responsibility that
companies accept for the environment around them, for the best working practices, for their
engagement in their local communities, and for their recognition that brand names depend
not only on quality, price, and uniqueness but on how cumulatively they interact with the
companies’ workforce, community, and environment. Now businesses need to move towards
a challenging measure of corporate responsibility, where we judge results not just by the input
but by its outcomes.
In India, CSR has evolved to encompass employees, customers, stakeholders, and sustain-
able development or corporate citizenship. The spectrum of CSR includes a number of areas
such as human rights, safety at work, consumer protection, climate protection and caring for
the environment, and sustainable management of natural resources. From the perspective of
employees, CSR activities include providing health and safety measures, preserving employee
rights, and discouraging discrimination at the workplace. This helps in fostering a healthy
environment within the company.
Looking at the strategy adopted by the companies for social responsibility, it is inter-
esting to note that Hindustan Unilever Limited has dovetailed the CSR strategy into their
overall business strategy; thereby, it achieves the twin objectives of business as well as
social responsibility. The philosophy of this company is its commitment to all the stake-
holders—consumers, employees, the environment, and the society. The initiatives, that
are accorded priority, are sustainable, have long-term benefits and an ongoing business
purpose. An example in this regard is the ‘Shakti’ programme, which aims at empower-
ing rural women through a critically needed additional income by equipping and training
them to become an extended arm of the company’s operation. On the other hand, Godrej
Industries views CSR initiatives as a philanthropy that was started by their founders and
continues even today. Even its competitor Procter and Gamble (P&G) has a different view
regarding CSR. P&G believes in building the community in which it lives and operates by
supporting the ongoing development of the community. Social projects are based on its
motto ‘Business with a Purpose’.
There are also groups like Reliance ADAG, which emphasised the need to be socially
responsible, and further stated that they evaluate and assess each critical business decision
or choice from the point of view of diverse stakeholders’ interest, driven by the need to mini-
mise risk; and to proactively address long-term social, economic, and environmental costs
and concerns. CSR is not an occasional act of charity or contribution to a school, hospital,
or an environmental NGO, but an ongoing commitment that is integrated into the objectives
and strategy of the core business. Even though they have not spelled out the initiatives, the
approach is similar to Hindustan Unilever Ltd.
In case of Tata Steel, the CSR is based on the principle of its founder Jamestji Tata, who In case of Tata Steel, the CSR
said that the progress of an enterprise, the welfare of the people, and the health of the en- is based on the principle of its
terprise were inextricably linked. The wealth and the generation of wealth have never been founder Jamestji Tata, who said,
that the progress of an enter-
ends in themselves, but a means to an end, for the increased prosperity of India. Companies prise, the welfare of the people,
are taking initiatives for developing the infrastructure in the rural areas, for example, TATA and the health of the enterprise
Motors provides desks, benches, chairs, tables, cupboards, electrical fittings, and educational were inextricably linked.
and sports material to various primary schools in Singur. The company has also planned
similar programmes to upgrade the school infrastructure and is also planning to set up a
computer laboratory in one of the high schools. Similarly, TVS Electronics was involved in
CSR during the Tsunami to provide relief measures to the victims. They have also partici-
pated with the government to improve sanitation in a village called Tiruvidenthai. Such ini-
tiatives will help in improving the conditions of rural people. Satyam Foundation of Satyam
Computer Services Ltd., Infosys Foundation of Infosys Technologies Ltd., and GE Founda-
tion of the General Electric Company are exemplary instances of the philanthropic commit-
ment of the corporate sector in India. Irrespective of the profits they make, these foundations
are aiming at uplifting of the poor and enhancing the standard of life in the rural sector.
CSR offers manifold benefits CSR offers manifold benefits both internally and externally to the companies involved
both internally and externally to in various projects. Externally, it creates a positive image among the people for its company
the companies involved in vari- and earns a special respect among its peers. It creates short-term employment opportunities
ous projects.
by taking various projects like construction of parks, schools, and so on. Keeping in view the
interests of the local community, the work brings a wide range of business benefits.
C ase
Envopeace vs Suns Pvt. Ltd.
White unfurling banners said ‘Suns Stop Poisoning Our Food’, the activists said they were
determined to stay chained till the senior-level management answered their questions. This
was the situation at the front door of Suns Pvt. Ltd. on a Thursday. And the war between the
activists of the environmental NGO, Envopeace and Suns Pvt. Ltd. began.
Envopeace was protesting the alleged field trials by Suns Agro (a wholly owned subsidi-
ary of Suns Pvt. Ltd.) of the genetically modified organism, AAA, as well as the company’s
refusal to answer critical questions repeatedly posed by the NGO. Envopeace says it has asked
the company in India to clarify certain issues including why the Suns was using the same
gene, which was proved fit only for animal feed, to feed people in the country. Envopeace
also asked what biosafety and health-safety assessments have been conducted so far and what
were their results too. What did Suns do with the genetically modified plants, seeds, and
produce from the fields, and whether the firm can provide an assurance that the genetically
modified organism has not already entered the food chain. Envopeace says the matter is not
an issue limited to agroscience, but one that is crucial to public health safety as the gene pro-
tein is suspected of being a human allergen.
In the United States, the field trials were abandoned when AAA-laced corn found its way
into talco shells and other items meant for human consumption. This AAA corn was owned
by a subsidiary of Suns Pvt. Ltd., Stars, and was marked under the name LINKS. AAA had
made an appearance in the Indian scene in March 2003, when a food-aid shipment from
two US-based aid agencies was suspected of being contaminated with LINKS corn. At that
time, the Genetic Engineering Approval Committee demanded that the United States and the
aid agencies provide a certification stating that the consignment did not contain any LINKS
corn. The Indian government rejected the shipment when no certificate was forthcoming on
this issue.
A press release from Suns Pvt. Ltd called the allegation by Envopeace as ‘baseless’. The
head of corporate communication at Suns said, ‘I can categorically say we have never done
any trials involving AAA’. But the campaigners of Envopeace India said, ‘There is documen-
tary evidence in the form of article in one of the newspapers in which the Department of
Biotechnology of Suns Agro had conducted field trials of cabbage and cauliflower with AAA’.
It was evening when the company issued a statement to Envopeace which was similar
to the press release calling the statement ‘lies’. Envopeace says that the matter has not ended
and they will confront the company with the Department of Biotechnology Report at an
agreed-on meeting on Wednesday. Is Suns Pvt. Ltd’s sole responsibility is only to maximise
the profit? Or, must they consider the social and ethical implications of their decisions?
Case Analysis
Yes, business management must consider the social and ethical implications of its decisions.
The business enterprise is a total system within itself. At the same time, it is a subsystem
within the social superstructure and the universe. CSR is seriously considering the impact of
the company’s decisions and actions on the environment and the society. The dependence of
any business on its social and ecological environment is so complete that the very existence,
survival, and growth of any enterprise depends upon its acceptance by the society and the
environment. Then, automatically, they can maximise their profit by using their goodwill in
the society.
So, Suns Pvt. Ltd. should stop their alleged trial of the genetically modified organism,
AAA, which is actually fit for animal feed only, for it is a human allergen. The company
should conduct biosafety and health-safety assessments and also disclose the results to the
public. Here the management should remember that they also have some responsibility to-
wards the society, because there may be a chance that this genetically modified organism has
entered the food chain, which is really harmful for the health of the general public.
Here Envopeace’s stand is right. Not only should businesses to be socially responsible but
such type of social organisations should be socially aware as well. The government, in its turn,
should support the social organisations by revising laws and corporate codes. Therefore, Suns
Pvt. Ltd. should stop their alleged field trials of the AAA, if it is really harmful for the health
of the society.
SUMMARY
The term ‘social responsibility of business’ refers to two A business organisation operates within the precincts of
types of business obligations. Firstly, a business should see the society. While its immediate society, where it operates,
that the economic consequences of its actions do not ad- provides it the environment, material, manpower, market,
versely affect the public welfare. Secondly, it should develop and so on; the whole global society provides for it the global
human values such as morals, cooperation, motivation, and corporate citizenship, and ensures its facilities in terms of
self-actualisation at work. environment and market perspective, and exposure to tech-
nology and integration with priorities in the global business
There are four views about a businessman’s responsibility scenario. The social responsibility of a business organisation
to the community. According to the first view (communist), consists of its responsibility to its consumers and custom-
a businessman can never voluntarily act in a socially reers, its immediate society (community), its human resources
sponsible manner. Hence, social responsibilities should be (people), its society at large, the ecological environment, the
imposed on him through force or legislation. According to government, and its global business environment.
the second view (capitalist), a businessman should not be
asked to discharge social responsibility, as it is not his busi- Globalisation has come to stay; community-socialist set
ness. His business is to make profits only. According to the up which divided the globe in the past has become irrele-
third view (pragmatic), a businessman should no doubt earn vant now. Every nation on the globe is striving to integrate
his profits, but should also voluntarily assume some social its economy with the global economy. India is also on the
responsibility. According to the fourth view (trusteeship), a threshold of globalising its economy. Many global corpora-
businessman should hold everything in trust, and carry on tions are now operating in India, and many others are on the
his business as a trustee, for the benefit of the community. road to Indian market, while many Indian companies prepare
themselves to go abroad. Those who are still satisfied to
A businessman’s social responsibilities are towards his con- continue their operation in India alone are too in a global
sumers, workers, shareholders, and the State, ultimately. market, as India itself has become a part of the global mar-
There are a number of ways in which he can discharge these ket. Thus, every business activity, either Indian or foreign,
responsibilities. His social performance can be evaluated by should have identical objectives and scope; and social re-
means of social audits. Many business organisations in India sponsibility of business must be an important objective of all
have contributed greatly in the area of social responsibility. business enterprises.
KEY WORDS
● Corporate Social Responsibility ● Ecological Environment ● Social Infrastructure
(CSR) ● Globalisation ● Organisational Climate
● Philanthropy ● Hoarding ● Depression
● Human Resources ● Corporate Accountability ● Social Audit
● Nongovernmental Organisation ● Community ● Employee Welfare Programmes
(NGO)
QUESTIONS
1. Explain what you understand by the concept of ‘social 2. Describe in detail the social performance of business
responsibility of business’. Why should businesses in India.
develop a sense of social responsibility? Discuss.
REFERENCES
n (2007) ‘India Inc on Global CSR Drive’, Business n Gupta, S. K. (2005). ‘Creating Shareholders Value
Standard, August 31, 2007, Online edition, http://www. Through Corporate Social Responsibility’. New Delhi:
business-standard.com Consultancy Development Center, Vol. 9, March 3, 2005,
n Agarwal, R. (2003), ‘Corporate Social Responsibility: Online edition, http://www.dsir.gov.in
A Critical Perspective from India’, http://www.toxicslink. n Jagdish (2004). Social Welfare in the Twenty-First Centu-
org/ ry: Issues, Critique and Relevance. New Delhi: Akansha.
n Archana, V. (2007), ‘CSR as a Core Competence’, n Michale, V. P. (1999). Globalisation, Liberalization and
usiness Line, June 4, 2007, Online edition, http://
B Strategic Management, 1st ed. New Delhi: Himalaya
www.thehindubusinessline.com Publishing House.
n Bhatia, S. K. (2002). Business Ethics and Manage- n Mohanty, J. (2005). Teaching of Ethics: New Trends and
rial Values: Concepts, Issues and Dilemmas in Shaping Innovations. New Delhi: Deep and Deep Publications.
Ethical Culture for Competitive Advantage of Organisa- n Prakasham, S. (2001). Essentials of Social Ethics:
tions. New Delhi: Deep and Deep Publications. Concept, Issues and Challenges. New Delhi: Rajat Pub.
n Bureau (2004), ‘CSM Releases Guide on Corporate n Raghavan, B. S. (2007), ‘Measuring CSR of India’s
Social Responsibility’, Business Line, October 09, 2004, orporates’, Business Line, June 18, 2007, Online
C
Online edition, http://www.thehindubusinessline.com edition, http://www.thehindubusinessline.com
n Chidambaram, K. and V. Alagappan (2003). Business n Sareen, S. (2001). Ethics Management. New Delhi:
Environment. Delhi: Vikas Publishers. Sarup.
n Giri, A. K. (2005). Reflections and Mobilisations: n Sengupta, S. S. (2004). Business–Social Partnership:
Dialogues with Movements and Voluntary Organisations. An International Perspective. Jaipur: Aalekh Pub.
New Delhi: Sage.
n Sharma, S. P. (2004). Basic Principles of Education.
n Gupta, S. K. (July 2004). ‘Creating Shareholders Value New Delhi: Kanishka.
Through Corporate Social Responsibility’, Executive
Chartered Secretary, The Journal for Corporate Profes- n Verma, S. B. (2004). Environmental Law, Pollution and
sionals by the Institute of Company Secretaries of India. Management. Jaipur: University Book House.
22
C hapter
Liberalization
>>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>>
• Background 581 • Liberalization and Growth of Indian
• Policy Changes 582 Economy 603
• Economic Liberalization 582 • Issues and Challenges 604
• Meaning of Liberalization 582 • Case 608
• The Path of Liberalization 583 • Key Words 609
• Reform Achievements 595 • Questions 609
• Industrial Growth 598 • References 609
• Liberalization—An Assessment 602
Background
The emergence of independent India on August 15, 1947, was the beginning of a new, glorious
era in the history of our country. The Government of India set up the Planning Commission
in 1950 to assess the country’s needs of material capital and human resources in order to
formulate plans for their more balanced and effective utilisation. Since 1950–51, India has
passed through 10 five-year plans and several annual plans, and is now in the Eleventh Five-
Year Plan. The role of the private sector was fairly significant in the plan frame up to the Third
Five-Year Plan, but became somewhat eclipsed during the 1960s and 1970s as a result of the
increasing dominance of populist and socialist postures. The Sixth Plan was marked by the
return of the private sector into the plan frame on a low key. This trend continued during
the Seventh Plan. This plan registered an unprecedented high growth rate of 5.6 per cent of
the gross domestic product (GDP), and much of it was accounted for by the private sector
strides in the manufacturing and services. The financial and balance of payments (BoP) The financial and balance of
crises, which the nation faced from the beginning of the 1990s, compelled the acceptance of payments (BoP) crises, which
deregulation; a reduced role for public sector, making the public sector efficient and surplus the nation faced from the begin-
ning of the 1990s, compelled
generating; and much greater reliance, in general, on the private sector, for industrial and
the acceptance of deregulation;
infrastructure development. a reduced role for public sec-
Meanwhile, despite the impressive growth performance of the 1980s serious budgetary tor, making the public sector
and fiscal deficits of the government and severe pressure on the country’s BoP position led efficient and surplus generat-
ing; and much greater reliance,
to a critical economic and financial situation by 1991, further aggravated by political uncer- in general, on the private sec-
tainty. By the time there was a new government at the Centre in June 1991, there was no other tor, for industrial and infrastruc-
alternative but to introduce a new deregulatory and liberal economic regime, thereby drasti- ture development.
cally reducing the government’s licensing and regulatory functions. This was the rationale be-
hind the sweeping changes in industrial and trade policies brought about by the Narasimha
Rao government in 1991 and 1992.
Policy Changes
The first Industrial Policy Resolution of 1948 was inspired by the vision of building India
rapidly into a modern industrial economy, generating employment, removing socio-economic
disparities, and attaining self-reliance. The Industrial Policy Resolution of 1956 focused more
sharply on achieving rapid growth by according a due place to the small industry.
The subsequent policy changes of 1973, 1980, and 1985 emphasised the need for promot-
ing competition in the domestic market and technological upgradation. The public sector was
given a leading role in the First and Second Five-Year Plan for setting up basic industries and
infrastructure facilities. Because of the scarcity of capital, the private sector was not assigned
a substantive role in the development of infrastructure facilities such as power, railways, steel,
and other core sectors. For the first time, in 1973, an attempt was made in the industrial
policy statement to allowinvestment from large industrial houses and foreign companies in
high-priority industries. Small-scale, tiny, and cottage industries were also encouraged and
were given a bigger role in the development of industry.
It was in 1980 that the need was felt for promoting competition in the Indian industry
by permitting import of technology and facilitating modernisation. Again it was during this
period that emphasis on export promotion got a big boost. By the end of the Sixth Plan, the
Indian industry had gained considerable competence and was able to meet the emerging
challenges in the world economy. Recognising the need for consolidating Indian industry’s
In India, during the period
1985–90, attempts were made strength in the Seventh Plan (1985–90), a number of policy and procedural changes were
to give autonomy to the public brought about with a view to increasing productivity, reducing costs, and improving quality.
sector by removing policy con- A beginning was made to open up the economy to competition. Attempts were also made
straints. during this period to give autonomy to the public sector by removing policy constraints.
Economic Liberalizations
India has been facing grave economic crises and external pressure for foreign exchange
(forex). There was an internal debt trap from 1986. There were several liquidity crises. India
was almost on the brink of defaulting on international payments which would have tarnished
our image in the international market. Its monetary system, particularly the forex situation,
was in a precarious position when the Narasimha Rao government took over in June 1991.
Narasimha Rao government Dr. Manmohan Singh, the then Union Finance Minister, had the great task of introducing
took over in June 1991, and ways and means for the recovery of the ailing monetary system. Changing the exchange rate
initiated the liberalization pro-
cess which some people call as structure was, therefore, the first weapon in his hand.
Raonomics, some as Manmo- The foreign exchange reserves (FER) were not sufficient even for a few weeks’ import
hanomics, and some others as of essential goods. Any import cuts would have crippled the economy. The country had,
Rao-Mohanomics. therefore, to attract forex, on the one hand and increase exports, backed by decreased im-
ports, on the other hand. Liberalization was thought to be the only weapon for this purpose.
In view of the above situation, the government initiated the liberalization process. Some peo-
ple call it as ‘Manmohanomics’, some as ‘Raonomics’, and some others as ‘Rao-Mohanomics’.
Meaning of Liberalization
The term ‘economic liberalization’ means and includes mainly the following:
1. Dismantling of industrial licensing system built over the previous four decades,
2. Reduction in physical restrictions on imports and also in the rate of import duties,
Liberalization | 583
3. Reduction in controls on forex—both current and capital account,

4. Reform of the financial system,
5. Reduction in the levels of personal and corporate taxation,
6. Reduction in restrictions on foreign investments (direct and portfolios),
7. Opening up of areas hitherto reserved for public sector (basic industries, power,
transport, banking, etc.),
8. Partial privatization of public sector units (PSUs) (with or without passing on majority
control to private shareholders),
9. Softening of MRTP (Monopolies and Restrictive Trade Practices ACT) regulations, and
10. Making various sectors of the Indian economy competitive on the global economic
platform by making them produce quality goods in a cost-effective manner.
Liberalization does not mean simply inviting a number of foreign companies or multina-
tional corporations (MNCs) on whatever terms with whatever objectives in mind and in
whatever sector, indiscriminately. By implication, economic liberalization suggests that the
entire opening up of the economy should ultimately be for building up strength of our own.
Hence, inviting foreign companies/MNCs should be a means and not an end. Liberaliza-
tion means removal of control and not of regulations. Liberalization does not imply any
secret deals behind the curtain. On the contrary, it does mean the elements of transparency
and accountability in the functioning and procedures relating to the various sectors of the
economy.
The Path of Liberalization

The path of liberalization accepted to dismantle the walls of restrictions in India, which has Liberalization means disman-
been multi-pronged. First of all, the government had to release the economy from the restric- tling of industrial licensing, by
tive rules and regulations framed by the bureaucrats in the garb of the socialistic pattern of softening MRTP regulation, and
reduction in restrictions of for-
society, which had retarded economic growth for the last four decades. Then, India needed
eign investment.
to establish a very different image, that of a market-oriented economy, in the eyes of the for-
eign governments and investors, besides sustaining a private sector-friendly image within the
country. On the other hand, the Government of India needed to be successful in effectively
checking the twin problems of unemployment and inflation.
The real task before the government has been two-fold: firstly, to win the confidence
of the foreign investor; and secondly, to allay the fears of the Indian public about the entry
of foreign investors into India in a big way and the government’s capability (rather willing-
ness) to effectively check the problems of inflation and unemployment. When globalization
became the order of the day, nations adopted the path of liberalization. India could not isolate
itself from this trend. It was, therefore, appropriate on the part of the Government of India to
institute and implement a strategy for economic liberalization. Some of the measures adopt-
ed in connection with the liberalization strategy include the following:
1. Relief to foreign investors,
Liberalization strategy of India
2. Devaluation of the Indian rupee, include devaluation of Indian
rupee, new industrial and trade
3. New Industrial Policy, policy, relief to foreign inves-
tors, and LERMS.
4. New Trade Policy,
5. Removal of import restrictions,

6. Budgetary policy,
7. Liberalised Exchange Rate Management Systems (LERMS),
8. Memorandum to International Monetary Fund (IMF),
9. Liberalization of NRI remittances,
10. Encouraging foreign tie-ups,
11. Narasimhan Committee Report,
12. FERA and MRTP relaxation,
13. Decontrol of steel,
14. Redefining SEBI’s role,
15. Privatization of public sector,
16. Simplification of industrial licensing,
17. Banking and financial sectors reforms, and
18. GATT Agreement.
Relief to Foreign Investors

As a part of the liberalization process initiated in the New Industrial Policy of 1991, the
Indian government wanted to attract more foreign investments. Hence in place of majority
Foreign investments were
of Indian equity holdings, foreign investments were allowed to the tune of 51 per cent, in
allowed to the extent of July 1992. In its notification of June 30, 1992, the Department of Industrial Development
51 per cent in July 1992. prescribed that an existing company that wishes to raise the foreign equity up to 51 per cent
may do so as a part of an expansion plan, provided such a plan is in high-priority industries
shown in Annexure III to the statement on industrial policy. The increase in the equity level
must result from the expansion of the equity base of the existing company, and the increased
equity money must be remitted in forex.
Although the proposed expansion must be in the high-priority industries, the company
need not be exclusively engaged in the items listed in Annexure III. Companies are allowed
to expand the equity base of the existing company by raising foreign equity up to 51 per cent
without an expansion programme. The foreign equity must be remitted in forex. Before the
company passes a special resolution proposing a preferential allocation of the required vol-
ume of equity to the foreign investor, the approval of the Reserve Bank of India (RBI) must be
obtained. Financial institutions holding equity in such companies should obtain the Finance
Ministry’s advice to support such proposals. On the basis of the guidelines of the Securities
and Exchange Board of India (SEBI), a company should make issues at a price determined by
the shareholders in a special resolution.
The government is still stressing the social goals enshrined in the Constitution, which are
to be achieved through the dynamic methods and techniques available today, for which for-
eign investment, collaboration, and technological partnership with the developed world, are
necessary. In order to tackle the problems like retrenchment emerging out of the New Indus-
trial Policy, the government proposed in the 1991–92 Budget a National Renewal Fund for
the setting up of which ` 200 crore was earmarked. The state governments and the Industry
are also expected to contribute to this fund. This is expected to develop into a ‘mighty social
safety net’.
The policy of liberalising foreign investment paid off tremendously. During the period
from August 1991 to December 1992, foreign investments to the tune of ` 42.9 bn were
approved according to the annual report of the Union Ministry of Industry for the year
1992–93. During 1992 as many as 1,520 foreign collaboration agreements were approved, During 1992, as many as 1,520
which included 692 foreign equity approvals amounting to ` 39.9 bn, as against the foreign foreign collaboration agree-
investment approvals of merely ` 1.2 bn in 1990 and ` 5.3 bn in 1991. Under the automatic ments were approved in India.
approval, the RBI approved a foreign investment of ` 9.2 bn between September 16, 1991 and
Under the automatic approval,
December 31, 1992. An important aspect of these foreign investments was that more than the RBI approved a foreign
80 per cent of the foreign direct investment (FDI) were the priority sector. investment of ` 9.2 bn between
Another important source of foreign investment is the Non-Resident Indian (NRI). September 16, 1991 and
December 31, 1992.
Remittances of NRIs from other countries are provided protection. This even amounted to
immunity on black money being laundered overseas and brought back home as gift via the
NRI conduit. The Commerce Minister’s visit to the UAE (United Arab Emirates) in November
1991 also convinced the gulf Indians about remittances to India. The inflow of gulf money to
the tune of about US$6 mn to US$7 mn a day, turned to be a bonanza for the Indian econo-
my. The deadline announced by the Finance Minister, that is, November 30, 1991, resulted in
a tremendous inflow of forex. The import of gold by NRIs by paying nominal import duties
in forex was also important in respect of the inflow of forex. Thus, liberalization of foreign
investment helped India to tide over the difficulties for forex.
Devaluation of Indian Rupee

In order to pave the way for liberalization, Indian currency was devalued by 22.5 per cent at In 1992, Indian currency was
two stages in short intervals. It was expected to improve exports substantially while curtail- devalued by 22.5 per cent at
ing imports. However, exports have not gone up substantially as expected. On the contrary, two stages in short intervals.
inflation went up by about 3 per cent, while revenue from import duty declined. However,
positive effects are expected in the long run.
New Industrial Policy

As a part of liberalization, the Government of India announced a new industrial policy in
two parts, on July 24, 1991, and August 6, 1991, respectively. Box 22.1 explains the objectives
of the same. And some of the major aspects of the policy are given as follows:
1. Industrial licensing is dispensed with except in 18 items including coal, petroleum, In 1991, industrial licensing is
sugar, motor cars, cigarettes, hazardous chemicals, drugs and pharmaceuticals, and dispensed with except in 18
some luxury items. items.
2. DFI up to 51 per cent of equity is allowed in high-priority industries, departing from

the 40 per cent limit of foreign equity participation prescribed in the FERA (Foreign
Exchange Regulation Act).
Box 22.1 Objectives of Industrial Policy, 1991

1. To regulate the economy in a substantial manner, 4. To encourage the growth of entrepreneurship, and
2. To remove weaknesses or distortions of the earlier 5. To upgrade technology to match the standards of
policies, international competitors.
3. To maintain sustained growth in productivity and
employment,
3. The threshold limits of the assets of MRTP companies and dominant undertakings
have been removed. Emphasis is to be placed on controlling and regulating monopo-
listic, restrictive, and unfair trade practices. Newly empowered MRTP Commission
is authorised to initiate investigations suo moto or on complaints received from
individual consumers or classes.
4. Automatic clearance introduced for import of capital goods, provided forex require-
ment for such import are met through foreign equity.
In the New Industrial Policy, 5. Automatic permission for foreign technology agreements in high-priority industries
1991, automatic permission for up to ` 1 crore was granted.
foreign technology agreements
in high priority industries up to 6. Foreign equity proposals need not be accompanied by foreign technology agreement.
` 1 crore was granted.
7. Existing and new industrial units are provided with broadbanding facility to produce
any article, so long as no additional investment in plant and machinery is involved.
Exemption from licensing will apply to all substantial expansion of existing units.
Box 22.2 describes the broadbanding facility in detail.
8. Pre-eminent role of public sector in eight core areas including arms and ammuni-
tions, mineral oils, rail transport, and mining of coal and minerals will continue.
9. Part of government’s shareholding in public sector is proposed to be disinvested,
which will be offered to mutual funds, financial institutions, general public, and
workers.
10. Chronically loss-making PSUs to be referred to the Board for Industrial and Financial
Reconstruction (BIFR) for formulation of revival schemes.
11. A simplified procedure for new projects was introduced to manufacture goods not
covered by the compulsory licensing. Even a substantial expansion of a project needs
to submit a memorandum in the prescribed form to the secretariat for industrial
approvals.
12. Decisive contribution was expected from foreign investments including foreign
corporate bodies, foreign individuals, and NRIs.
13. Industrial policy for the small-scale sector announced on of August 6, 1991, provided
a four-point scheme to provide financial support to this sector.
New Trade Policy

The Government of India enunciated a new trade policy in support of its liberalization policy
in 1991. The trade regime was liberalised by streamlining and strengthening the advance
licensing system and decanalising 16 export and 20 import items. A new package of incentives
Box 22.2 Broad Banding

Broad banding refers to an increase in the number of An industrial licence for the manufacture of motorcycles,
items that a licensed industry can produce within the when broad banded as two-wheelers, would include
licensed range of products. This facility is provided by scooters and mopeds as well.
specifying a broad or a generic product group rather than
specific products within a general category.
was also provided for 100 per cent export processing zones (EPZs). Some important aspects
of the trade policy statement made by Mr. P. Chidambaram, the then Union Commerce
Minister in the Lok Sabha are given as follows:
1. As a whole, promotion of export, moderation of growth of imports, and simplifica-
tion of procedures are the general objectives of the 1991 trade policy.
2. Advance licensing system was strengthened. (Provision of substantial manufacturing
activity as a basic requirement for advance licence was dispensed with. Procedures
have been streamlined and the number of documents has been reduced.)
3. A ‘transferrable advance licence’ scheme for general area has been introduced in the In the new trade policy, a
items like textiles, engineering goods, and leather goods. transferable advance licence
scheme for general area has
4. Exporters are allowed to dispose the materials imported against advance licences by been introduced.
way of replenishment (REP) without prior approval in cases where no MODVAT
(modified value added tax) facility was availed of on the domestic material that was
used in exports.
5. Considerable reduction in licensing and in the number and types of licenses has been
outlined.
6. Supplementary licences for import of items in Appendices 3, 4, and 9 of the Import
Export Policy (1990–93) have been abolished.
7. Additional licences issued to export houses and trading firms as an incentive earlier
have been abolished with effect from April 1, 1992.
8. Procedure for obtaining bank guarantees and legal undertakings from different cat-
egories of exporters has been liberalised.
9. It was decided to appoint a high-level committee to outline modalities for eliminating
restrictions and licensing.
10. Sixteen items of exports including castor oil, coal and coke, polyethylene (ID) colour,
picture tubes and assemblies of colour TV containing colour TV picture tubes,
khandsari, molasses, sugar, iron, ore-grade bauxite, and exposed cinematographic
films, video tape, and cinema films are reanalysed.
11. Sixteen import items are decanalised and placed under REP for import against exim Six import items are deca-
scrips, and another six import items are decanalised and put under Open General nalised and put under OGL in
Licence (OGL). India in 1991.
12. Export houses, trading houses, and star trading houses are given leeway to import a
wide range of items against additional licences.
Trade policy is an important arm of the liberalization policy, since trade among various
countries is the crux of global business. Import restrictions practised in India were required
to be removed for making liberalization more meaningful. The government, therefore, acted
in this direction also. Box 22.3 clearly gives a list of industrial clusters or locations to enhance
all the plans of the government.
Removal of Import Restrictions

While encouraging exports, the Government of India made efforts to facilitate and streamline
imports too. Globalization of business necessitated countries to liberalise their economies
to freely import goods and services from other countries. Numerous developing countries
Box 22.3 Industrial Clusters

The Government of India initially identified 19 industrial 9. Store cluster: Kishangarh, Rajasthan
clusters/locations under the Industrial Infrastructure 10. Textiles cluster: Tirupur, Tamil Nadu
Upgradation Scheme of the Department of Industrial
11. Pump, motor and foundry cluster: Coimbatore,
Policy and Promotions, to enhance the competition of
Tamil Nadu
domestic industries by providing quality infrastructure.
12. Ceramic pottery cluster: Khurja, Uttar Pradesh
The list of industrial clusters is as follows:
13. Glass cluster: Ferozabad, Uttar Pradesh
1. Auto components cluster: Vijaywada, AP
14. Food-processing cluster: Arunachal Pradesh
2. Pharmaceutical cluster: Hyderabad, AP
15. Food-processing cluster: Guwahati, Assam
3. Chemical cluster: Vapi, Gujarat
16. Textile cluster: Panipat, Haryana
4. Auto components cluster: Pune, Maharashtra
17. Wood-based cluster: Srinagar, Jammu &
5. Gems and jewellery cluster: Surat, Gujarat
Kashmir
6. Steel and metallurgy cluster: Jaipur, Rajasthan
18. Pharma/auto cluster: Pritampura, Madhya
7. Textile cluster: Ludhiana, Punjab Pradesh
8. Wool and woollen garments cluster: Amritsar, 19. Engineering cluster: Kolkata, West Bengal
Punjab
have already come out of their trade wars, regionalism, and protectionism. Korea, Mexico,
Indonesia, Malaysia, Morocco, Thailand, and Turkey are some examples. East European
countries have dramatically opened up their economies while the republics of the former
Soviet Union have already followed suit. Countries like Argentina, Vietnam, Pakistan, and
Peru have initiated the reform process. Capitalist market economies (though they practice
some kind of trade barriers) have provided opportunities for many countries like Japan
and Korea. Obviously, countries like India could not, therefore, remain in their cocoon of
protectionism any more.
Import restrictions were, therefore, partially withdrawn in India in accordance with the
global trends in the New Trade Policy of July 1991. The margin requirement for imports was
reduced and the need for a prior clearance by the RBI waived. These measures, however,
did not encourage imports considerably. Hence, further relaxations were demanded by
importers. Imports of capital goods up to ` 50 lakh is allowed against free forex as per the
If the importer is able to ar- RBI import relaxation order of November 15, 1991. Similarly, if the importer is able to ar-
range for the supplier’s credit range for the supplier’s credit for 360 days, import of capital goods upto a value of ` 1 crore
for 360 days, the import of will be permissible, according to the new policy. Import of capital goods of value beyond
capital goods up to a value of
` 1 crore will be permissible ` 1 crore will be permissible if the supplier’s long-term credit for two years or more is availed
according to new trade policy. or if the importer is a 100 per cent export-oriented unit (EOU) or a unit assuming export
obligations.
The government further decided in January 1992 to do away with licensing on import
of capital goods under the scheme of DFI upto 51 per cent of foreign equity in high-
priority areas. When forex for import of capital goods would be fully covered by foreign
equity, import of OGL capital goods, non-OGL capital goods, and restricted capital goods,
In the transparent EXIM would be allowed without a specific licence. A clearance for this purpose will be issued by
announced by the Government the RBI.
of India in March 1992, the
Central government made the In the transparent Export–Import (EXIM) Policy announced by the Government of
trade free from control, barring India in March 1992, the Central government made the trade free from control, barring
a small negative list. a small negative list. Import of capital goods and raw materials were further liberalised.
This EXIM policy envisaged limited number of restrictions and fewer administrative con-
trol measures, while a greater freedom of trade was provided. One notable aspect of this
EXIM policy is that consumer goods imports were still under restrictions. Import of three
items (tallow, animal rennet, and ivory) were banned, eight items canalised, and 68 items
restricted. Import facilities were provided for the tourism industry, sports organisations, and
hotels. While conspicuous liberalization of trade was introduced, the most notable aspect of
this policy was a ‘five year term’ fixed for the new policy, which would help the liberalization
to be consistent for some time to come. Despite the commendable effort for liberalization of
imports and exports, consumer goods were kept under control, a move widely criticised by
the exponents of free trade.
There emerged a widespread feeling in the trade circles that the government plans to
liberalise the import of consumer goods too in a course of time. On the eve of the General The government of India
Agreement on Tariffs and Trade (GATT, December 16, 1993), concluded in Geneva, the reduced the import duties of
Government of India reduced the import duties of 17 textile products from 85 per cent to 17 textile products from 85
per cent to 40 per cent in 1993.
40 per cent, perhaps, as a token of its intention to liberalise consumer products also.
Budgetary Policy
The Central Budget for 1991–92, which was initiated in the face of deteriorating economic
condition and increasing forex crises, started a moderate process primarily to solve impend-
ing problems, restore the economy on a strong footing, and to initiate a liberalization proc-
ess. A spending discipline was introduced, import duties were reduced, and measures were
adopted to achieve structural changes. On account of a subsidy cut and additional tax pro-
posals, the prices of fertilisers and consumer products increased. Licensing was scrapped in
the industrial policy declared along with the 1991–92 budget, except in 18 items including
coal, sugar, petroleum, motor cars, cigarettes, hazardous chemicals, drugs, pharmaceuticals,
and luxury goods. MRTP and FERA liberalizations were also initiated.
The liberalization process initiated in the 1991–92 budget continued in the following
budgets. Partial convertibility of the rupee was introduced in place of the exim scrip in the
budget of 1992–93, which acted as an important initiative in liberalization. Full convertibil-
ity on current account, which was announced in the budget of 1994–95, can be considered
as a clear improvement on the partial convertibility announced on February 29, 1992. While
gold bonds were floated, NRIs and Indians returning from abroad were allowed to import
a maximum of 5 kg of gold if the cost of gold and import duty were paid by forex earnings.
Another important measure towards liberalization in the 1992–93 budget was the abolition
of government control over capital issues, while a flat rate of 40 per cent tax was fixed on
firms. In fact the budgets of 1992–93 and 1993–94 were investment-oriented budgets, while
the 1994–95 budget aimed at boosting the industrial activities. A new fund for technology
development and application was proposed in the 1994–95 budget, while modernisation
of capital market backed by the establishment of a model National Stock Exchange (NSE)
was proposed. In order to stimulate investment, the minimum lending rate was reduced by
1 per cent.
Full convertibility on current account also facilitated the strategies chalked out by the
Indian government to fulfil the forex requirements. Meanwhile, the forex earners and export-
ers stood permitted to retain upto 25 per cent of their forex receipts in the forex accounts in
place of the earlier 15 per cent. As a special incentive for the ones that are fully EOUs and
units in EPZs, as well as the electronic hardware and software technology parks, 50 per cent
retention was permitted in the 1994–95 budget. An amendment to the Companies’ Act was
also proposed in accordance with the liberalization envisaged.
Liberalized Exchange Rate Management

System (LERMS)
LERMS was announced by the
Another important milestone on the path of liberalization is the Liberalised Exchange Rate
RBI on February 29, 1992, and Management System (LERMS) announced by the RBI on February 29, 1992. The exchange
the rupee became convertible control regulations were liberalised, and the rupee became convertible for all approved
for all approved external trans- external transactions with effect from March 1, 1992. Under LERMS, exporters and those
actions.
who receive remittances from abroad will be able to sell the bulk of their forex receipts at
market-determined rates. Similarly, those who needed to import goods and services or
Under LERMS, exporters and undertake travel abroad will be able to buy forex at market-determined rates from the author-
those who receive remittance ised dealers, subject to the transactions being eligible under the liberalised trade and exchange
from abroad will be able to sell
the bulk of their forex receipts control regime. However, in respect of certain specified priority imports and transactions, a
at market-determined rates. provision has been made in the scheme for making available the forex at the official rate.
According to LERMS, all receipts under current account transactions (merchandise
export and invisible receipts) should be surrendered to authorised dealers, 60 per cent of
which will be exchanged at free market rate and 40 per cent at the RBI’s official rate. In place
of partial convertibility, full convertibility on current account was introduced in the budget
of 1994–95, which came into effect on August 20, 1994. In respect of the travellers proceed-
ing abroad, the entitlement in currency notes was raised from US$100 to US$500 and later to
US$2,000 in August 1994. Exporters are eligible for forex that is not exceeding 12.5 per cent
of the invoice value by way of agency commission. They are also entitled to settlement of
quality claims not exceeding 15 per cent of the invoice value, and for sundry personal- and
commercial remittances not exceeding US$100 for any purpose. Thus, the liberalization
process has been backed by liberalised forex regulations.
Memorandum to IMF
To tide over the forex problem that arose due to India’s adverse BoP position, repayment
of IMF loan, and to opt for an emergency loan from IMF, India wanted to have a safety net
arrangement with the IMF. IMF wanted the Government of India to reduce its budgetary
and fiscal deficit, as well as the rate of inflation, which may affect the recovery of loans. The
reform programme initiated by the Government of India was, therefore, viewed by the IMF
with a great interest, particularly in the context of India’s request for an immediate Compen-
satory Contingency Finance Facility (CCFF) of US$220 mn.
The objectives of a memoran- Hence, a memorandum was sent to IMF, with detailed targets for reducing fiscal deficit and
dum to IMF were to reduce fis- inflation, as well as for raising FER over a period of three years. A reorganisation in the financial
cal deficit and inflation, as well sector was indispensable for this purpose. This required legislative measures to reform the tax
as to raise FER over a period of
three years. and fiscal reign, lowering of tariff barriers, phasing out of subsidies, and reforming the SEBI.
Although the opposition criticised the measures as a ‘sellout’ to IMF, the measures
had almost a magical effect of tiding over the forex crises faced by India. It helped to ease
forex tension and improve India’s position from an ‘over drawn’ country to an ‘under drawn’
nation. In 1993, India’s SDR (Special Drawing Right) was under drawn by about half a billion
US dollars. India’s image improved in the global business canvas, and its liberalization pro-
gramme began to be viewed as a positive sign of economic advancement. Globalization has
become reality in India also. IMF has again acted as the ‘Lender of the last resort’.
NRI Remittances
As a result of the improvement of India’s position, NRI remittances also improved. Moreover,
the government pinned much hopes on NRIs for forex remittances. Hence, as a part of the
liberalization process, incentives were offered to the NRIs to improve their forex remittances. NRI investment schemes in
NRI forex bank accounts, convertibility of forex in market rates, forex gift schemes, gold India like NRI forex bank ac-
import policy, and so on, facilitated an inflow of forex through NRIs. NRI investment counts, convertibility of forex
in market rates, forex gift
schemes announced by the government aimed at increasing the inflow of foreign capital schemes, gold import policy,
through them. etc.
Liberalised NRI investment policy announced by the government on October 28, 1991,
also permitted NRIs and Overseas Corporate Bodies (OCBs) to invest up to 100 per cent for-
eign equity in high-priority industries including hotels, tourism-related industry, shipping,
hospitals, and so on. The government assured the NRIs and OCBs full benefits of repatria-
tion of capital invested and income accrued in such proposals. Imports of capital goods also
included foreign equity. NRIs are allowed special privileges in the foreign investment policy.
Existing schemes like 100 per cent investment by the NRIs in 100 per cent EOUs, and
investment for the revival of sick units still continue. In addition, NRI equity holding up to
100 per cent is allowed in export-oriented deep-sea fishing industry, oil exploration serv-
ices, and advanced diagnostic centres, with full repatriation benefits. Automatic approvals Automatic approvals are
are allowed for NRI and OCB proposals for investment, provided the foreign equity covers allowed for NRI and OCB pro-
the forex requirements for import of capital goods. The plant and machinery proposed to be posals for investment, provided
imported must be new and not second-hand. For the import of such capital goods, no indig- the foreign equity covers the
forex requirements for import
enous clearance will be required. of capital goods. The plant
Repatriation based on the dividend payments must be balanced by export earnings over and machinery proposed to be
a period of seven years from the start of commercial production. However, such balancing imported must be new and not
will not be required after seven years. The proposed projects must be located beyond an area second-hand. For the import of
such capital goods, no indige-
of 25 kms from the periphery of the standard urban area limits of a city with a million popu- nous clearance will be required.
lation. NRI and OCB investments according to this scheme will be exempted from Sections
26 (7), 28, 29, and 31 of FERA. In the industries requiring compulsory licensing and certain
items reserved for the small-scale sector, as well as other industries excepting those reserved
for public sector, NRIs and OCBs are permitted to make a 100 per cent equity participation
with full repatriation benefits.
NRIs and OCBs are allowed to make investments on items reserved for the small-scale
sector, provided the export obligation condition is satisfied. Similarly, in order to encourage
NRIs to make investments, they are allowed to import capital goods financed by their own
resources abroad without any indigenous clearance, provided they are not covered under
Appendix I of Part A of the EXIM policy, 1990–93. In accordance with the EXIM policy, even
second-hand capital goods will be allowed on a case-by-case basis. The government’s NRI
Investment Policy has paid off considerable dividends since NRI and OCB investments have
gone up by unprecedented amounts, thus speeding up the pace of globalization.
Encouraging Foreign Tie-ups

Single-window clearance is
Among the various measures adopted by the government to facilitate the liberalization proc- applicable to proposals for for-
ess, liberal policies adopted for foreign tie-ups are also worth mentioning. Foreign techni- eign investment and authorisa-
cal and financial collaboration agreements are substantially liberalised by the government. tion for issue of shares under
the FERA, 1973.
Single-window clearance facility was introduced by the government through the RBI in
September 1991 to facilitate collaboration between Indian and foreign companies. Single-
This liberal approach was
window clearance is applicable to proposals for foreign investment, authorisation for issue of complementary to the simpli-
shares under the FERA, 1973, exemption from the operation of FERA, and confirmation of fied procedures for the new
import of capital goods covered by the foreign equity. projects, for the manufacture of
This liberal approach was complementary to the simplified procedures for the new articles that are not covered by
compulsory licensing launched
projects, for the manufacture of articles that are not covered by compulsory licensing by the Union Ministry of Indus-
launched by the Union Ministry of Industry in August 1991. The effect was spectacular. try in August 1991.
The Annual Report of the Ministry of Industry for the year 1992–93 revealed that as many
as 1,520 foreign collaboration agreements were approved in 1992, more than 32 times the
foreign collaboration approvals of 1990 and more than seven times the foreign investment
approvals in 1991. Collaboration also became a common phenomenon in India with even
government projects opting for collaboration with foreign organisations.
Take the proposal for setting up the communication highway, the nationwide high-speed
datacom network to transmit voice and data across the country. A combination of satellite
communication facilities, optics, and microwave repeaters to get the trade details transmitted
quickly all over the country, was proposed to be set up. Once the communication highway is
established, the communication set-up will be highly useful for stock-trading settlements of
the NSE. The Stockholding Corporation of India Ltd. can use the system for its depository
network, while infrastructure leasing and financial services and inter-bank associations can
also make use of it extensively.
This telecommunication facility via satellite is proposed to be established as an inde-
pendent company—as a joint venture with a foreign collaborator, who can provide an in-
ternational level of communication through fail-safe technology. The sponsors of the NSE
were appointed the promoters of the communication highway company. Proposals were also
studied for collaboration with AT&T of the United States, or Australian Telecom (Telestral),
or US Vent of Denver (Colorado). It was also considered to set up an independent, private
satellite in collaboration with a foreign company. Thus, foreign collaboration has become a
common phenomenon in India.
In consonance with the liberal norms of tie-ups, the industrial approval procedure was
simplified. The Union Ministry of Industry has introduced simplified procedures for new
projects to manufacture articles, not covered by compulsory licensing. Such new projects or
even the substantial expansion of a project required only a memorandum to be submitted in
the prescribed form to the Secretariat for industrial approvals. This scheme has considerably
facilitated and supported India’s liberalization process.
Narasimhan Committee Report

In accordance with the liberalization process, the banking system also had to undergo
Narasimhan Committee report liberalization. The Narasimhan Committee Report must be considered in this context. The
recommended a reorganisation report recommended a reorganisation of the public sector banks, solving the problem of
of the public sector banks, solv- bad debts and freedom of operation of foreign banks. It also recommended the setting up of
ing the problem of bad debts a supervisory board to monitor the functioning of the nationalised banks, while they were
and freedom of operation of
foreign banks. given autonomy. Partial privatization of financial institutions was also viewed as a necessity.
Providing greater freedom for the operation of foreign banks was an important recommen-
dation to facilitate foreign investment in India.
FERA and MRTP Relaxation

Industrial policy measures in As a part of the liberalization announced in 1991, industrial policy measures were initiated
1991 were initiated by the Gov- by the government to liberalise the MRTP and FERA regulations. The most important aspect
ernment of India to liberalise of the liberalization of MRTP regulations is the removal of threshold limits of assets of MRTP
the MRTP and FERA regulations.
companies and dominant undertakings. At the same time, in order to regulate MRTP com-
panies and to check restrictive and unfair trade practices, the MRTP Commission is author-
ised to initiate investigations suo moto or on complaints received from consumers or classes
of people. The MRTP Act was amended to totally remove the pre-entry restrictions on the
establishment of new undertakings and expansion of the existing firms.
Important changes were also made in FERA, 1973, in order to encourage foreign invest- Important changes were
ments in India. FERA companies are allowed to have foreign equity holdings upto 51 per cent also made in FERA, 1973, in
in high-priority areas. OCBs and NRIs are allowed even 100 per cent foreign equity in high- order to encourage foreign
investments in India. FERA
priority industries including hotels, tourism-related industry, shipping, hospitals, and so on, companies are allowed to have
with full benefit of repatriation in addition to the existing 100 per cent foreign equity on foreign equity holdings upto 51
EOUs, and investment for the revival of sick units. While MRTP amendments were brought per cent in high-priority areas.
in through an ordinance in September 1991, changes in FERA were announced by the RBI in
January 1992. (These measures have been examined in detail elsewhere.)
FERA companies are granted greater freedom to operate in India, since restrictions on
internal operations have been removed. They are allowed to acquire property, raise fixed
deposits internally, and to have stakes in other companies. Even foreign brands and logos are
permitted. It means that FERA companies are now treated almost at par with Indian com-
panies. It is a great motivation for foreign corporate giants to operate freely in India. This is
a conspicuous milestone in the liberalization process that facilitates globalization in India.
(MRTP and FERA too are examined in detail elsewhere.)
Decontrol of Steel
Steel decontrol can also be considered a measure on the part of the government in the lib- Steel decontrol can also be con-
eralization package. Price control on steel imposed in India, in the past, has been removed sidered a measure on the part
while distribution control in favour of the priority sector, small-scale industries, and exports of the government in the liberal-
ization package.
stands retained. The removal of price control may affect the prices in a competitive market.
But the immediate price increase was checked by the government, by asking the integrated
steel plants in India not to raise the price till the budget of 1992–93. Freight charges were
also not immediately affected. The Steel Authority of India (SAIL), a public sector giant
and one of the most important players in the steel market of India, was asked by the Prime
Minister not to increase prices even after the budget so as to retain the price level despite
the decontrol.
Redefining SEBI’S Role

By an ordinance, SEBI was given legal powers but not autonomy. The Union Finance
Ministry and the Department of Company Affairs play a more prominent role now. On ac-
count of the huge security scandal, stock exchanges in the country suffered a great setback.
The index rose only 700 points during the year 1993, though there was a large inflow of
foreign capital to the tune of US$750 mn. SEBI, therefore, introduced certain regulatory SEBI introduced regulatory
measures as follows: measures like capital adequacy
norms for brokers, and forward
1. Capital adequacy norms for brokers. trading was banned.
2. In the benami share scandal unearthed by the Income Tax Department, SEBI
supported the brokers.
3. Huge reforms package in the primary market. SEBI allowed merchant-banking fees
to be negotiated, issued a code of conduct, and announced a set of penalty points
against erring merchant bankers. It also freed issue prices.
4. It forced more transparency on the part of promoters.
5. Forward trading was banned.
6. A system of limited carry-forward transactions.
7. It called for a greater degree of diligence, competence, and responsibility on the part
of lead managers and underwriters. It insisted that failure to meet underwriting or
sub-underwriting liability should invite penal provisions by the regulatory body.
(Contractual obligations for financial liability between issuers and underwriters
should be legally settled.)
8. Unit Trust of India (UTI) was brought under the regulatory supervision of SEBI.
UTI was brought under the SEBI
in 1993. In spite of all such measures, it is still felt that SEBI is not very effective.
Privatization of Public Sector

As a part of the liberalization
As a part of the liberalization process, the government had to review the role of the public
process, the government had sector and the government’s investment in it, particularly in the context of exorbitant losses
to review the role of the public accumulated by many of the PSUs. It was observed that 54 PSUs had accumulated a loss of
sector and the government’s ` 8,494.04 crore as on March 31, 1991. These chronically sick PSUs were asked to approach
investment in it, particularly in
the context of exorbitant losses the BIFR for a review. It was in this context that the Planning Commission had called for a
accumulated by many of the re-examination and reorientation of the government’s role in the public sector. The paper on
PSUs. ‘Financial Dimensions and Macro Para-meters of the Eighth Plan’ (1992–97) suggested that
the role of the public sector should be very selective.
Simplification of Industrial Licensing

In pursuance of the liberalization process initiated by the Government of India, liberalization
In pursuance of the liberaliza-
tion process initiated by the was announced in industrial licensing vide the industrial policy tabled in both the houses of
Government of India, liberaliza- Parliament on July 24, 1991. Various types of industrial approvals have been substantially
tion was announced in indus- liberalised, and a Notification to this effect (Notification No. 477 [E] of July 25, 1991) was is-
trial licensing vide the industrial
policy tabled in both the houses
sued by the Department of Industrial Development under the Industries (Development and
of Parliament on July 24, 1991. Regulation) Act, 1951.
Industrial licensing was done away with, except in respect of 18 items. It was mentioned
in the Notification that ‘industrial undertakings have been exempted from the operation
of Section 10, 11, 11A, and 13 of the I (D&R) Act, 1951, subject to fulfilment of certain
conditions’. Section 10 refers to the requirement of registration of the existing industrial
units. Section 11 refers to the requirement of licensing new industrial undertakings. Section
11A deals with licences for the production of new articles. Section 13 refers, inter alia, to the
requirement of licensing for effecting a substantial expansion.
Banking and Financial Sector Reforms

In order to facilitate liberalization and to establish a positive rapport with the World Bank
in the context of the grave forex crises, banking and financial sector reforms were also ini-
India allowed private banks and tiated. Regulations in India’s financial sector and directions to banks for greater financial
foreign financial institutions to discipline were issued. Private sector banks including foreign banks were encouraged to op-
acquire up to 20 per cent stake erate in India. Permission was also granted by RBI to set up new private banks, and foreign
in the private sector and NRIs
financial institutions were allowed to acquire up to 20 per cent stake in the equity of private
up to 40 per cent.
sector banks while NRIs were permitted up to 40 per cent stake. Certain principles and policy
parameters were communicated by the World Bank to guide the decisions on the Finan-
cial Sector Adjustment Loan (FSAL). The World Bank also expected an action on the part
of the government on the recommendations of the Narasimhan Committee and Malhotra
Committee about liberalization of the financial sector before the completion of the Uruguay
Round of GATT negotiations.
Restructuring of the bank management systems, giving greater operational autonomy

to the nationalised and private banks, including foreign banks and financial institutions, is
in consonance with the interests of the World Bank. A market-based interest-rate regime
and a reduction of rate would also be appreciated by the World Bank. The statutory liquid-
ity ratio (SLR) and cash reserve ratio (CRR) were also expected to be reduced, while greater
autonomy was to be given to nationalised banks. Stringent action would also be taken against
the chronically loss-making nationalised banks. The RBI also initiated steps to reduce lend-
ing by sick banks, and to set up an asset reconstruction fund for the weakest banks. Thus, the
liberalization process initiated by the Government of India has been supported by manifold
measures to speed up the globalization of business in the country.
Reform Achievements
It is said that every crisis situation provides us with an equally challenging opportunity. The
decision to grab the opportunity offered by the BoP crisis in 1991 immediately began to yield
results, as certain fundamental changes in the approach to the strategy for economic devel-
opment were made. The foreign sector was specifically targeted by the early reforms and the
forex policies were gradually liberalised; the foreign trade was encouraged by introducing a
series of reforms; the customs duty regime was rationalised to match the global scenario; the
industrial policy was revamped; and the PSUs were specifically chosen to vanguard the proc-
ess of industrial sector reforms. When we take stock of the achievement of the economy over
the past few years, it appears that the achievements in terms of growth of the GDP are not to
the extent expected. The following facts and figures refer to the performance of the economy
and achievements of reform.
GDP Growth Trend

In 1991, the country was told that the process of liberalization would help India achieve
higher growth targets. Table 22.1 shows no significant improvement in the 1990s over the
1980s. This is true for the economy as a whole and for major sectors as well. Table 22.2 details
on the annual average growth rate of industrial production. In sharp contrast to this, the
Indian policy structure has been altered drastically. The growth rates in various crops in the
post-reform period have been slowing down as against the pre-reform period. The growth
rate of the index of agricultural production in the post-reform period is just half of what it
was in the pre-reform period.
The share of public sector investment in agriculture has been falling in the post-reform
period. ‘This has happened mainly because a large proportion of public expenditure has been
going into current expenditure in the form of increased level of subsidy for food, irrigation,
Sector 1981–82 to 1990–91 1993–94 to 2001–02 < Table 22.1

Annual Average Growth
General index 7.8 6.6 Rate of Industrial
Production
a. Manufacturing 7.6 7.0
b. Electricity 9.0 6.0
c. Mining and quarrying 8.3 3.5
Source: Handbook of Statistics on Indian Economy, 2002–03, RBI.

Table 22.2
Annual Average Growth
> Sector 1981–82 to 1990–91 1993–94 to 2001–02
Rate of Industrial a. Basic goods 7.0 5.4
Production—USE-based
b. Capital goods 11.5 6.1
Classification
c. Intermediate goods 5.9 7.6
d. Consumer goods 6.7 7.3
i. Durables 13.9 12.4
ii. Non-durables 5.5 5.8
General index 7.8 6.6
Source: Handbook of Statistics on Indian Economy, 2002–03, RBI.
Table 22.3
GDP Growth (at Factor
> Year GDP Growth Rate
Cost) at 1993–94 Prices 1981–82 6.2
1990–91 5.2
1991–92 1.5
1992–93 4.5
1993–94 6.0
1994–95 7.0
1995–96 7.3
1996–97 7.5
1997–98 4.8
1998–99 6.5
1999–2000 6.1
2000–01 4.4
2001–02 (Quick) 5.6
2002–03 4.3
(Revised advance)
Annual Average GDP Growth Rate
1980–81 to 1990–91 5.6
1990–91 to 2000–01 5.6
Source: Handbook of Statistics on Indian Economy, 2000, RBI, and National Accounts Statistics, 2003.
fertilizer, electricity, credit, and other inputs rather than creation of assets’. The annual growth
rates of production of various development programmes in the post-reform period slowed
down in comparison to the pre-reform period. Table 22.3 and 22.4 gives a clear picture to
support the fact.
Declining Savings and Investment

Investment (Gross Capital Formation [GCF]) and savings as a percentage of GDP declined
or were stagnant as reflected in Table 22.5.
Years Agriculture Growth Industry Growth Service Growth Total GDP < Table 22.4
India’s Real GDP Growth
(in %) (in %) (in %) Growth
Rates (Factor Cost)
1990–2000 2.67 5.96 11.19 7.59
2000–01 –0.01 6.03 5.37 4.30
2001–02 6.01 2.61 6.88 5.52
2002–03 –6.60 7.21 6.97 3.99
2003–04 9.05 7.32 8.06 8.06
2004–05 0.18 9.81 8.13 6.97
2005–06 5.14 9.72 10.91 9.48
2006–07 4.16 12.17 10.06 9.57
2007–08 5.80 9.67 10.27 9.32
2008–09 0.09 4.44 9.98 6.72
2009–10 0.81 9.16 10.50 8.59
2010–11 7.94 9.16 9.75 9.32
2011–12 3.65 3.49 8.20 6.21
2012–13 1.79 3.12 6.59 4.96
Source: CSO, RBI, Ministry of Finance; 15th March 2013, Data Book for DCH; 22nd April, 2013
Year Gross Domestic Savings Gross Domestic Capital Formation < Table 22.5
Saving and Investment
(as % of GDP) (as % of GDP) Rates
1990–91 23.1 26.3
1991–92 22.0 22.5
1993–94 22.5 23.1
1995–96 25.1 26.8
1996–97 23.2 24.5
1997–98 21.5 25.0
1998–99 22.0 23.0
1999–2000 22.3 23.3
2000–01 22.4 23.4
2001–02 23.1 24.2
2002–03 23.5 24.7
2003–04 26.9 29.1
2004–05 32.82 32.41
2005–06 34.65 33.44
2006–07 35.66 34.60
2007–08 38.11 36.82
2008–09 34.30 32.02
2009–10 36.48 33.69
2010–11 36.84 34.02
2011–12 35.00 30.81
2012–13 35.40 31.80
Source: CSO, RBI, Ministry of Finance; 15th March 2013, Data Book for DCH; 22nd April, 2013.
Taxes and Subsidies—Reduced Role of State

While under SAP (Structural Adjustment Programme), developing countries are being
advised to reduce subsidies and the role of government in the economy, more than half
of the total expenditure of the developed countries goes towards subsides. In the case of
United Kingdom, the share increased from 52 per cent to 58 per cent. On the other hand,
during the same period, India reduced its subsidies from 43 per cent to 40 per cent. (refer to
Table 22.5.)
Poverty and Inequality

According to the Planning Commission of India, the incidence of poverty climbed down
from 30.51 per cent in 1993–94 to 26.1 per cent in 1999–2000, a fall of 4.41 percentage points
The total number of people in a six-year period. It cannot be looked upon as a great success of reforms because the decline
below poverty line remained of percentage point in poverty incidence from 36.20 per cent in 1987–88 to 30.51 per cent in
almost the same in 1999–2000 1993–94, exactly a six-year period, was 5.69. The total number of people below poverty line
as it was in 1993–94. remained almost the same in 1999–2000 as it was in 1993–94.
Contrary to the statistical jugglery by the Planning Commission, the estimates of National
Sample Survey Organisation (NSSO) show that the incidence of rural poverty increased from
37.27 per cent in 1993–94 to 42.25 per cent in 1998, and that of urban poverty increased
from 32.36 per cent to 34.58 per cent, in the same period. According to Tendulkar and Sen,
The rural poverty in India
increased from 39.7 per cent the incidence of rural poverty increased from 39.7 per cent in 1993–94 to 44.9 per cent in
in 1993–94 to 44.9 per cent 1998, and that of urban poverty went up from 30.9 per cent in 1993–94 to 31 per cent
in 1998, whereas the urban in 1997–98. Keeping in view the decline in employment growth rate in the economy, in
poverty increased from 30.9 general and that in agriculture and allied activities and rural employment, in particular, the
per cent to 31.0 per cent in
1997–98. NSSO estimates seem more near reality.
The incidence of non-income poverty (deprivations other than the fulfilment of the basic
necessities of life—minimum of food, clothing, shelter, and water—such as in relation to
health, education, sanitation, insurance against mishaps, etc.), if taken into account, perhaps,
would be much higher in India. Argentina and Mexico also experienced a higher incidence
of poverty after the reforms.
Industrial Growth
Delicensing to Free Industry from Licence
and Permit Raj
Despite all this, the rate of growth of industrial production during the period from 1981–82
to 1990–91 was higher than that in the post-reform period from 1993–94 to 1999–2000.
For saleable steel and cement, the growth rates in the post-reform period were higher than in
the pre-reform period. In the case of petroleum refinery products, the situation has improved
only in 1999–2000, but for the period from 1993–94 to 1998–99, the growth rate was only
3.9 per cent. In the case of coal, electricity, and petroleum, the growth rates in the post-
reform period did not fare well, due to being lower than those of the pre-reform period.
Deteriorating Balance of Trade

The balance of trade (imports less exports) was expected to improve with decontrol of imports
of raw material, machinery, and equipment besides offering a healthy global competition to
force the Indian industry to adopt modernisation and achieve a higher productivity. With an
improvement in the health of Indian industry, the SAP of liberalization was meant to help
India to achieve a higher growth in its exports. The facts are revealed in Table 22.6.
Declining Rupee Value

Adoption of SAP would, it was asserted, stabilise Indian currency after two initial devalu-
ations. A dollar could be bought for less than ` 20 at the end of 1990–91. In April 2001, a
US$ was worth nearly ` 47. The value of Indian currency had been consistently falling during
1995–01.
(US$ mn)
Year Merchandise Merchandise Trade Balance < Table 22.6

India’s Exports, Imports,
Exports FOB Imports CIF
and Trade Balance
1990–91 18,477 27,914 –9,431
1991–92 18,266 21,064 –2,798
1992–93 18,869 24,316 –3,447
1993–94 22,683 26,730 –4,056
1994–95 26,855 33,904 –9,049
1995–96 32,311 41,670 –11,359
1996–97 34,133 48,948 –14,815
1997–98 35,680 51,187 –15,507
1998–99 34,298 47,544 43,246
1999–2000 38,285 55,383 –17,098
2000–01 43,895 61,483 –17,590
2001–02 47,693 70,280 –22,587
2002–03 46,450 72,495 –24,045
Years Exports Imports Trade Deficit
(US$bn) % YoY (US$bn) % YoY (US$bn)
2003–04 66.3 23.3 80.0 24.1 –13.7
2004–05 85.2 28.5 118.9 48.6 –33.7
2005–06 105.2 23.4 157.1 32.1 –15.9
2006–07 128.9 22.6 190.7 21.4 –61.8
2007–08 166.2 28.9 257.6 35.1 –91.5
2008–09 189.0 13.7 308.5 19.8 –119.5
2009–10 182.4 –3.5 300.6 –2.6 –118.2
2010–11 250.5 40.4 381.1 27.6 –1306
2011–12 309.8 20.9 499.5 30.3 –189.8
2012–13 291.2 –6.0 479.6 –4.0 –188.4
Sources: BoP statistics.
CSO, RBI, Ministry of Finance; 15th March 2013, Data Book for DCH; 22nd April, 2013.
Mounting External Debt and Liabilities

In spite of relying on non-debt creating, and capital flows like FDI and portfolio capital,
India’s external debt went up from ` 163,001 crore at the end of 1990–91 to ` 429,271 crore
by March 2000, an increase of ` 266,270 crore. Even this rise does not fully reflect the reality
because the total external liabilities shot up phenomenally. For instance, the latest available
data indicate that India’s foreign liabilities rose by ` 244,546 crore within six years of liberali-
zation, that is, between March 1991 and March 1997. Out of this, as much as ` 191,561 crore,
or about two-thirds, was on account of the private sector.
Disastrous Consequences of the Entry of MNCs

It was argued that FDI was needed to build industrial infrastructure and achieve higher man-
ufacturing capabilities. For enabling this to happen, FERA was revised and in all aspects,
FERA has no validity any longer. Foreign investors are welcome irrespective of the economic
activity proposed to be undertaken. It could be trade or non-priority production; no insist-
ence on having a local partner or any expectation of locating industry in a backward state;
nor any conditions like export obligation or net contribution to India’s forex. The investment
proposals are cleared for the asking. The result can be seen in Tables 22.7–22.9. In practice, a
significant part of the FDI inflows were directed at consumer items. Very little has gone into
infrastructure development.
Table 22.7
FDI Inflows in India from
> Sr. No. Financial Year Total FDI Flows %age Growth over
(April–March) previous year
April 2000 to Jan 2013
Financial Years 2000–2001 to (in US $ terms)
(Amount in US $ 2012–2013
million)
1. 2000–2001 4,029 –
2. 2001–2002 6,130 (+) 52%
3. 2002–2003 5,035 (–) 18%
4. 2003–2004 4,322 (–) 14%
5. 2004–2005 6,051 (+) 40%
6. 2005–2006 8,961 (+) 48%
7. 2006–2007 22,826 (+) 146%
8. 2007–2008 34,843 (+) 53%
9. 2008–2009 41,873 (+) 20%
10. 2009–2010(P) (+) 37,745 (–) 10%
11. 2010–2011(P) (+) 34,847 (–) 08%
12. 2011–2012(P) 46,553 (+) 34%
13. 2012–2013(P) 30,824 –
(up to January 2013)
Cumulative Total 284,039 –
(From April 2000 to January 2013)
Source: Databook for DCH; 22nd April, 2013.

Sr. No. Country Amount of FDI Inflows %age with total FDI < Table 22.8
Country-wise FDI Equity
Inflows (+)
Inflows from April 2000
In ` Crore In US $ million to February 2013
1. Mauritius 338,257.43 73,139.05 38.14
2. Singapore 88,418.46 19,136.14 9.98
3. United Kingdom 80,397.43 17,537.30 9.15
4. Japan 69,410.11 14,424.51 7.52
5. U.S.A. 50,811.95 11,100.75 5.79
6. Netherlands 41,378.96 8,781.38 4.58
7. Cyprus 32,159.78 6,858.38 3.58
8. Germany 24,300.32 5,257.55 2.74
9. France 16,860.78 3,572.28 1.86
10. U.A.E. 11,289.35 2,419.22 1.26
11. Switzerland 11,002.94 2,355.74 1.23
*Selected countries with FDI inflow more than 1%.

Source: Databook for DCH; 22nd April 2013.
Ranks Sector %age to total inflows < Table 22.9

Sectors Attracting
(in terms of US$)
Highest FDI Equity
1. Service Sector 20% Inflows
2. Construction Development: 12%
Townships, Housing, Built-up Infrastructure
3. Telecommunications 7%
(Radio, Paging, Cellular mobile, Basic
telephone services)
4. Computer software and hardware 6%
5. Drugs and Pharmaceuticals 5%
6. Chemicals (Other than fertilizers) 5%
7. Power 4%
8. Automobile Industry 4%
9. Metallurgical Industries 4%
10. Hotel and Tourism 4%
Source: Data Book for DCH 22nd April 2013

Note:
(i) Services sector includes Financial, Banking, Insurance, Non-Financial/Business, Outsourcing, R&D,
Courier, Tech. Testing and Analysis.
(ii) FDI Sectoral Data has been revalidated in line with that of the RBI, which reflects minor changes in
FDI figures (increase/decrease) as compared to the earlier published sectoral data.
Liberalization—An Assessment
The overall post-liberalization growth of Indian economy has not been inspiring. India lifted
its growth rate during the 1990s but is still underperforming. India will not be able to achieve
the average annual growth of 9 per cent targeted for this decade, unless radical reforms are
carried out. The liberalization process in the country has not been able to take off in the real
The liberalization process in
India has not been able to take sense because the instrument of change, that is, the bureaucracy has not been reformed. In
off in the real sense because the reform process, the role of bureaucracy should have been that of a facilitator. The entire
the instrument of change, that bureaucratic administrative set-up at the Centre and the states needs to be looked into and
is the bureaucracy has not
been reformed.
redesigned to be in consonance with the liberalization philosophy.
The reforms would ensure that specialised departments like finance, health, science,
and technology are headed by persons of sound knowledge in their fields. Most jobs today
require professionalism and specialisation. The formulation of policies in areas like insur-
ance, banking, foreign trade, and telecom, require an in-depth understanding of the subject.
In the United States, specialists like lawyers, economists, and financial experts provide the
necessary expertise and also the latest inputs to the government so that it would be able to
formulate the best possible policy.
If the Indian industry is going to be competitive in price, cost, and quality, it must pro-
vide a level-playing field in technology transfers, infrastructure, interest on finance, labour
reforms, government regulations, custom tariffs on imports, taxes of Central and state gov-
ernments, and so on. The reforms would invariably involve a restructuring of the administra-
tive set-up, which would ensure an optimal utilisation of resources for the benefit of citizens.
The administration needs to play the role of a facilitator by providing infrastructure and
ensuring that the basic minimum needs of the citizens expected from the government are
fulfilled within the available resources.
The bureaucracy should be made to face competition. If it does not alter its ways, then
sooner or later, the forces of change generated by the economic reforms would do so. The review
of the past policies followed during the first 40 years of planning reveals that there was no
Table 22.10
Difference between
> 1990–91 1991–92 2012–2013
1991 and 2013 1. GDP growth rate (%) 5.3 1.4 5
2. Foodgrains Output (Mn tones) 176.4 168.4 250.1
3. Central Fiscal Deficit (% of GDP) 7.8 5.6 5.2
4. Annual Inflation Rate of WPI (%) 10.3 13.7 6
5. Current Account Deficit ($bn) 9.7 1.2 87.8
5.1 Proportion of GDP (%) 3 0.3 4.8
6. Forex Reserves ($ bn) 5.8 9.2 292.6
7. Import of reserves in months 2.5 5.3* 7
8. External debt ($ bn) 92.7 @
390
8.1 Debt-Service Ratio 25.4 @
5.9
8.2 Short-term Debt to total (%) 3.9@ 44.2#
8.3 Short-term debt to reserves (%) 39.4@ 33.1
8.4 Debt to GDP (%) 33.8 @
21.2
@
1993–94; * in July 1991 reserves were adequate to meet a fortnight’s import.
#
Residual maturity. It was 24.8% for original Maturity.
Source: Reserve Bank of India.
a lternative to the present policy of economic reforms. The very purpose of the liberalization
was to remove unnecessary controls and regulations, liberating the trade and industry from
unwanted restrictions, and to make various sectors of the Indian economy competitive on the
global economic platform by making them produce quality goods in a cost-effective manner.
Liberalization does not mean simply inviting a good number of foreign companies or Liberalization does not mean
MNCs on whatever terms with whatever objectives in mind and in whatever sector, indis- simply inviting a good number
criminately. By implication, economic liberalization suggests that the entire opening up of of foreign companies or MNCs
on whatever terms with what-
the economy should ultimately be for building up the strength of our own. Hence, invit-
ever objectives in mind and
ing foreign companies should be a means and not the end. Liberalization means removal in whatever sector, indiscrimi-
of controls, and not of regulations. Liberalization does not imply any secret deals; on the nately.
contrary, it does mean the elements of transparency and accountability in the functioning
and procedures relating to the economy.
Privatizations in India have given rise to controversy and criticism. The sale proceeds of Privatizations in India have
public undertakings are being utilised for meeting the operating expenses or curtailing the given rise to controversy and
budgetary deficit, instead of creating health and education facilities for the general public criticism. The sale proceeds of
and development of infrastructure for trade and industry. Further, the government is not public undertakings are being
utilised for meeting the operat-
making any effort to privatise the loss-making PSUs. Instead, it is privatising the profit- ing expenses or curtailing the
making public enterprises that are beneficial for the welfare of general public, for example, budgetary deficit, instead of
Balco. Privatization of loss-making units would definitely reduce the financial burden on the creating health and education
government. The top 10 loss-making public sector enterprises (PSEs) are RINL, HFC, FCI, facilities for the general public
and development of infrastruc-
DTC, IA, HEC, IDPL, HSL, HPC, and HSCL. The government should let the management of ture for trade and industry.
the profit-making PSE function autonomously for improving their performance. In 1992–93,
the top 10 profit leaders of PSEs were IOC, NTPC, ONGC, MTNL, SAIL, BPCL, NSML,
HPCL, MMTC, and BHEL.
The current comfortable FER primarily reflect short-term capital flow from the FIIs,
which can vanish as easily as they appeared. These are not money flow; their sudden depar-
ture to greener pastures has wrecked havoc on many Third-World economies. Non-economic Non-economic developments,
developments, political instability, and communal frenzy together contributed to slowing political instability, and commu-
down the pace of economic growth. The government should tackle the situation firmly, for nal frenzy together contributed
to slowing down the pace of
which it requires political will.
economic growth. The govern-
In substance what has been achieved so far is impressive, but is not very encouraging. ment should tackle the situa-
India has lost its status as the 10th largest industrial power in the world in the course of last tion firmly, for which it requires
two decades or more. India’s share in the global exports is just 0.7 per cent. India cannot political will.
attain growth in exports while continuing with stringent controls and licensing of imports in
the name of providing protection to domestic industries and thereby, betting these domestic
industries lose their competitive character.
Thus, under the present circumstances, there is no reverse to economic reforms;
whatever be the policy reforms and restructuring programmes, if they are to be adopted The government should take a
firm stand on and review the
in the Indian economy, they must have the adaptability to Indian soil. They must also WTO restrictions pertaining to
serve the interest of the general masses. The government should take a firm stand on and agriculture, small-scale sector,
review the WTO restrictions pertaining to agriculture, small-scale sector, investment, investment, and trade-related
intellectual property rights.
and trade-related intellectual property rights.
Liberalization and Growth of Indian

Economy
In analysing the growth record of the Indian economy, various scholarly attempts have
been made to identify the turning point from the ‘traditional’ low growth to the ‘modern’
high growth since the 1980s. The simple ordering of the data provides a somewhat different
picture of the continued slow acceleration in growth except for the decade of the 1970s. What
or Who can explain this continued acceleration? The secular uptrend in domestic growth is
clearly associated with the consistent trends of increasing domestic savings and investment
over the decades.
Gross domestic savings (GDS) have increased continuously from an average of
9.6 per cent of gross domestic product (GDP) during the 1950s to almost 35 per cent of GDP
at present; over the same period, the domestic investment rate has also increased continu-
ously from 10.8 per cent in the 1950s to close to 36 per cent by 2006–07. A very significant
A very significant feature of
these trends in savings and feature of these trends in savings and investment rates is that the Indian economic growth
investment rates is that the has been financed predominantly by domestic savings. The recourse to foreign savings—
Indian economic growth has equivalently, current account deficit (CAD)—has been rather modest in the Indian growth
been financed predominantly
process. We may also note that the two decades, 1960s and 1980s, when the CAD increased
by domestic savings.
marginally towards 2 per cent of GDP, were followed by a significant BoP and economic
crises.
The long-term upward trends in savings and investment have, however, been inter-
spersed with phases of stagnation. In particular, during the 1980s, the inability of the govern-
ment revenues to keep pace with the growing expenditure resulted in the widening of the
overall resource gap. Accordingly, the public sector savings–investment gap, which averaged
3.7 per cent of GDP during the period from 1950–51 to 1979–80, widened sharply dur-
ing the 1980s, culminating in a high level of 8.2 per cent of GDP in 1990–91. The result-
ant, that is, the higher borrowing requirements of the public sector led the government to
tap the financial surpluses of the household sector through enhanced statutory preemptions
from the financial intermediaries at the below-market-clearing interest rates. As fiscal defi-
cits began to widen in the 1970s, periodic increases in the SLR were resorted to finance the
rising fiscal gap, indicative of the financial repression regime in place. The SLR was raised
from 20 per cent in the early 1950s to 25 per cent by 1964, and it remained at that level for
the rest of the decade. Beginning in the 1970s, the SLR came to be used more actively, and it
was raised in phases reaching 34 per cent by the late 1970s. The process continued during the
1980s as fiscal deficits expanded further, and the SLR reached a high of 38.5 per cent of net
demand and time liabilities (NDTL) of the banking system in September 1990.
The growing fiscal imbalances of the 1980s spilled over to the external sector and were
also reflected in the inflationary pressures. Along with a repressive and weakening finan-
cial system, the above factor rendered the growth process of the 1980s increasingly unsus-
tainable. The external imbalances were reflected in a large and unsustainable CAD, which
reached 3.2 per cent of GDP in 1990–91. As the financing of such a large CAD through nor-
mal sources of finance became increasingly difficult, it resulted in an unprecedented external
payments crisis in 1991 with the foreign currency assets dwindling to less than $1 bn. The
financing problem was aggravated by the fact that the deficit was largely financed by debt
flows up to the late 1980s, reflecting the policies of the time, which preferred debt flows to
equity flows. Indeed, equity flows were almost negligible till the early 1990s. Moreover, a sig-
nificant part of the debt flows during the late 1980s was of a short-term nature in the form of
bankers’ acceptances; such flows could not be renewed easily in view of the loss of confidence
following the BoP crisis.
Issues and Challenges

What have we learnt from this review of Indian economic growth and the macro-economic
management over the past 50–60 years? How do we go forward to ensure the continuation of
the growth momentum that was achieved in recent years?
Firstly, Indian economic growth has been largely enabled by the availability of domestic Firstly, Indian economic growth
savings. The continuous acceleration of its growth over the decades has been accompanied has been largely enabled by the
by a sustained increase in the level of domestic savings, expressed as a proportion of GDP. availability of domestic savings.
Moreover, interestingly, despite all the shortcomings and distortions that have existed in the
evolving financial sector in India, the efficiency of resource use has been high with a long-
term, incremental capital output ratio (ICOR) of around 4 per cent, which is comparable
to the best achieving countries in the world. Hence, in order to achieve the 10 per cent +
growth, we need to encourage the continuation of growth in savings in each of the sectors:
households, private corporate sector, public corporate sector, and the government.
Secondly, the recent acceleration in growth has been enabled by a surge in the private Secondly, the recent accelera-
sector investment and the corporate growth. This, in turn, has become possible with the im- tion in growth has been enabled
provement in fiscal performance reducing the public sector’s draft on private savings, thereby by a surge in the private sector
investment and the corporate
releasing resources to be utilised by the private sector. For the growth momentum to be growth.
sustained, it will, therefore, be necessary to continue the drive for fiscal prudence at both the
Central and State-government levels.
Thirdly, the generation of resources by the private corporate sector through an enhance- Thirdly, the generation of
ment of their own savings, has been assisted greatly by the reduction in nominal interest resources by the private corporate
rates, which has become possible through a sustained reduction in inflation, brought about sector through an enhancement
of their own savings, has been
by prudent monetary policy. Indian inflation, though low now by our own historical stand-
assisted greatly by the reduction
ards, is still higher than the world inflation, and hence, needs to be brought down further. in nominal interest rates.
It is only when there is a further secular reduction in inflation and inflation expectations over
the medium term, that Indian interest rates can approach international levels on a consistent
basis. Hence, it is necessary for us to improve our understanding of the structure of inflation
in India—how much can be done by monetary policy, and how much through other actions
in the real economy—so that leads and lags in the supply and demand in the critical sectors
can be removed, particularly in the infrastructure. Sustenance of high levels of corporate
investment are crucially conditioned by the existence of low and stable inflation, enabling
low and stable, normal and real, interest rates.
Fourthly, whereas the fiscal correction has gained a credible momentum in the recent Fourthly, whereas the fiscal cor-
years, some of it has been achieved by a reduction in the public investment. Whereas a desir- rection has gained a credible
able shift has taken place from public to private investment in sectors essentially producing momentum in the recent years,
private goods and services, and there is a move towards public–private partnerships (PPP) in some of it has been achieved
by a reduction in the public
those that have both public-good and private-good aspects, it is necessary to recognise that investment.
public investment is essential in sectors producing public services. Continued fiscal correction
through the restructuring and reduction in subsidies and continued attention to the mobilisa-
tion of tax revenues are necessary to enhance public sector savings that can then finance an in-
crease in the levels of public investment. If this is not done, private corporate sector investment
would be hampered, and the leads and lags in the availability of necessary public infrastructure
would also lead to inflationary pressures and lack of competitiveness. Efficiency in the alloca-
tion and usage of resources would be helped greatly by better, basic infrastructure in both rural
and urban infrastructure: much of it would need enhanced levels of public investment.
Fifthly, a major success story in the Indian reforms process has been the gradual open-
Fifthly, a major success story in
ing of the economy. On the one hand, trade liberalization and tariff reforms have provided the Indian reforms process has
an increased access to Indian companies to the best inputs available globally at almost world been the gradual opening of the
prices. On the other hand, the gradual opening has enabled Indian companies to adjust economy.
adequately to be able to compete in the world markets and with imports in the domestic
economy. The performance of the corporate sector in both the output growth and profit
growth in the recent years is a testimony to this. It is, therefore, necessary to continue with
our tariff reforms until we reach the world levels, beyond the current stated aim of reaching
levels in the Association of South-East Asian Nations (ASEAN) Community.
As has been mentioned, the Indian CAD has been maintained at around 1 per cent to
1.5 per cent, historically and in the recent years. The current level of capital flows suggests that
some widening of the CAD could be financed without great difficulty: in fact, the Eleventh
Plan envisages a widening to levels approaching 2.5 per cent to 3.0 per cent. This would need
to be watched carefully if it emerges: we will need to ensure that such a widening does not
lead to softening of international confidence, which would then reduce the capital flows.
It is interesting to note that some empirical studies do not find evidence that greater
It is interesting to note that
some empirical studies do not openness and higher capital flows lead to higher growth. These authors find that there is a
find evidence that greater open- positive correlation between current account balances and the growth among non-industrial
ness and higher capital flows countries, implying that a reduced reliance on foreign capital is associated with a higher
lead to higher growth. These
growth. Alternative specifications do not find any evidence of an increase in the foreign capi-
authors find that there is a posi-
tive correlation between cur- tal inflows directly boosting growth. The results could be attributed to the fact that even
rent account balances and the successful developing countries have limited absorptive capacity for foreign resources, either
growth among non-industrial because their financial markets are underdeveloped, or because their economies are prone to
countries, implying that a re-
duced reliance on foreign capi-
overvaluation caused by rapid capital inflows. Thus, a cautious approach to capital account
tal is associated with a higher liberalization would be useful for macro-economic and financial stability.
growth. On the other hand, Henry (2007) argues that the empirical methodology of most of the
existing studies is flawed as these studies attempt to look for permanent effects of capital
account liberalization on growth, whereas the theory posits only a temporary impact on the
growth rate. Once such a distinction is recognised, empirical evidence suggests that opening
the capital account within a given country consistently generates economically large and
statistically significant effects, not only on economic growth, but also on the cost of capi-
tal and investment. The beneficial impact is, however, dependent upon the approach to the
opening of the capital account; in particular, on the policies in regard to liberalization of debt
and equity flows. Recent research demonstrates that liberalization of debt flows—particularly
Recent research demonstrates
that liberalization of debt flows— short-term, dollar-denominated debt flows—may cause problems. On the other hand, the
particularly short-term, dollar- evidence indicates that countries are deriving substantial benefits from opening their equity
denominated debt flows—may markets to foreign investors (Henry 2007).
cause problems.
Our approach in regard to the capital account has made a distinction between debt and
equity, with a greater preference for liberalization of equity markets vis-à-vis debt markets.
Equity markets provide risk capital and this can be beneficial for growth. On the other hand,
opening up of the domestic debt markets to foreign investors in the face of inflation and
Opening up of the domestic
debt markets to foreign inves- interest differentials, as is the case in India at present, can lead to large amount of arbitrage
tors in the face of inflation and capital. In view of higher domestic interest rates, open debt markets can attract large amount
interest differentials, as is the of capital flows and add further to the existing volume of capital flows, which are in any case
case in India at present, can
lead to large amount of arbi-
well above the financing requirement of the country. If the debt markets were open, such
trage capital. excess capital flows would have to be necessarily sterilised by the RBI in order to maintain
domestic macro-economic and financial stability. This would further add to the sterilisa-
tion costs already being borne by the country’s financial sector and the government. Thus,
the debt flows into India are subject to ceilings and such ceilings, would be appropriate till
wedges on account of higher inflation and interest rates narrow significantly.
Finally, we need to recognise Finally, we need to recognise that the enhanced levels of savings and investments, and
that the enhanced levels of enhanced levels of capital flows and trade, all necessitate an efficient system of financial inter-
savings and investments, and mediation. For household savings to grow further, households will need to see the continua-
enhanced levels of capital flows
tion of adequate, nominal and real returns. The efficiency of financial intermediation is then
and trade, all necessitate an
efficient system of financial of the essence that financial savings are, indeed, intermediated to their best uses.
intermediation. As in the past, domestic savings are expected to finance the bulk of the investment
requirements. In this context, the banking system will continue to be an important source of
financing and there would be a strong demand for bank credit. Although bank credit has wit-
nessed a sharp growth since 2003–04 onwards, it needs to be recognised that the credit–GDP
ratio still remains relatively low. Moreover, a significant segment of the population remains
excluded from banking services. As the growth process strengthens and becomes more in-
clusive, it is expected that the demand for financial products could continue to witness a high
growth in the coming years. Thus, it is likely that the growth in bank credit and monetary
aggregates could be higher than what might be expected from historical relationships and
elasticities, in view of the ongoing structural changes. This, however, raises critical issues for
the Central bank such as the appropriate order of monetary/credit expansion. In the absence
of a yardstick, excessive growth in money supply could potentially show up in inflationary
pressures over a course of time, given the monetary lags. Indeed, recent inflationary pres-
sures across the globe are attributable, in part, to global liquidity glut. In the absence of infla-
tionary pressures as conventionally measured, excessive money and credit growth could also
lead to asset price bubbles, with adverse implications for banking sector stability and lagged
conventional inflation. Thus, the RBI will have to face ongoing challenges to provide an ap-
propriate liquidity to the system so as to ensure a growth in a non-inflationary environment.
This raises the critical issues of clarity in reading signs of inflation, asset prices, and systemic
liquidity from monetary/credit expansion.
On the sectoral phase, a key issue is that of agricultural growth. In fact, the historical On the sectoral phase, a key
review suggests strongly that the periods of overall slow growth have invariably been charac- issue is that of agricultural
terised by a slow agricultural growth, even in the recent years when the weight of agriculture growth. In fact, the historical
in GDP has reduced considerably. review suggests strongly that
the periods of overall slow
The Eleventh Five-Year Plan projects the sectoral growth rates at around 4 per cent for growth have invariably been
agriculture sector, 10 per cent for the services sector, and 10.5 per cent for the industry sec- characterized by a slow agri-
tor (with manufacturing growth at 12 per cent). While the targets for industry and services cultural growth, even in the re-
cent years when the weight of
sectors are achievable, sustaining agricultural growth at around 4 per cent for achieving the
agriculture in GDP has reduced
growth target of 9 per cent during the Eleventh Plan would be a major challenge, particularly considerably.
because this sector is constrained by several structural bottlenecks such as technology gaps,
timely availability of factor inputs, lack of efficient markets for both inputs and outputs, as
well as continued policy distortions. Notwithstanding some improvement in the agricultural
performance in the recent years, production and productivity of major crops continue to be
influenced by rainfall during the sowing seasons. Therefore, apart from institutional support,
the immediate requirement is to improve irrigation facilities through higher public invest-
ment and augment the cropped area, as well as yield, through various other methods. This
will need public investment and a better management.
Improved agricultural performance is not only important for sustaining growth but also Improved agricultural perfor-
for maintaining low and stable inflation. Volatile agricultural production and lower food mance is not only important
stocks internationally are beginning to raise growing concerns about rising food prices, infor sustaining growth but also
for maintaining low and stable
fluencing an overall inflation, both globally and in India. In the medium term, therefore, inflation.
efforts would have to be directed towards not only improving the crop yields but also putting
in place a market-driven incentive system for agricultural crops, for a durable solution to
address the demand-supply mismatches and tackle food inflation. Sustained improvement
in crop yields requires an enhanced focus on the revitalisation of agricultural research and
developmental extension.
Coming to infrastructure, the Planning Commission has estimated that infrastructure
investment ought to grow from the current levels of around 4.6 per cent of GDP to 8 per cent
of the same for sustaining the 9 per cent real GDP growth as envisioned in the Eleventh
Plan. Thus, the investment in infrastructure is expected to rise by over 3 percentage points
of GDP over the Plan period; over the same period, the Planning Commission anticipates
that the overall investment rate of the Indian economy should grow by 6 percentage points.
In other words, almost one-half of the total increase in the overall investments is expected to
be on account of the infrastructure requirements. For such an increase in the infrastructure
The sustained growth in private i nvestment to take place over the Plan period, both public and private sector investment will
sector infrastructure invest- need to grow much faster than in any previous period.
ment can take place in only The sustained growth in private sector infrastructure investment can take place in only
those sectors that exhibit
those sectors that exhibit adequate return, either on their own or through PPP. The perform-
adequate return, either on their
own or through PPP. ance of the telecom sector has exhibited this convincingly. A renewed focus on the levy of
adequate user charges is, therefore, necessary, for policy measures that provide stability to the
In this context, it needs to be flow of infrastructure revenues (Mohan 2004).
recognised that the use of In this context, it needs to be recognised that the use of foreign currency-denominated
foreign currency-denominated
borrowings to fund domestic
borrowings to fund domestic infrastructure projects runs the risk of currency mismatches
infrastructure projects runs the in view of the fact that the earnings of such projects are in domestic currency. Thus, large,
risk of currency mismatches in unanticipated currency movements can render such unviable projects, thereby endangering
view of the fact that the earn- the future investments. Caution, therefore, needs to be exercised in the foreign funding of
ings of such projects are in
domestic currency.
infrastructure projects, unless appropriately hedged.
C ase
A government decision to exempt personal computers (PCs) from excise duty would make
imported computers significantly cheaper, making it more attractive for companies to import
a complete unit than to have the same, assembled or manufactured in India, after importing
components and inputs. The industry sources said that the price of an imported computer
could be about 8 per cent lower than its locally manufactured version.
At present, Dell is a prominent player that imports computers for sale in India. The other
players including HP and IBM import components and inputs and assemble them here. The
domestic manufacturers such as HCL and Zenith too import components and inputs. The
fully finished PCs are cheaper to import in the present context when compared to the locally
manufactured ones because of the anomaly arising from the 16 per cent countervailing duty
(CVD) on the key components that go into a PC.
Estimates show that fully imported PCs could be cheaper by as much as 2.5 per cent–
3 per cent. The industry says that the budget announcement fully exempts PCs from excise or
CVD, but leaves the CVD on components and inputs like monitors, keyboards, and mouse
unchanged at 16 per cent. PC players get tax benefits, which is the difference between the duty
paid on importing the items and excise duty. In a case where the import of components and
inputs continue to attract CVD, the advantage is taken away, they point out. This, in turn, has
led to a situation detrimental to PC manufacturing in the country.
According to the Manufacturers Association for Information Technology (MAIT), as
much as 90 per cent of the market comprises PCs that are either assembled or manufactured
in India. The balance 10 per cent are imported ones. The industry warns that if the situation
is not rectified, it would encourage more players to shelve assembling operations and start
importing PCs, in effect reversing the manufactured to imported PC ratio. The biggest losers
would be the Indian players.
The hardware companies are, however, hopeful of a resolution. Asked whether Acer
would prefer to import rather than assemble here, its General Manager said, ‘We are watch-
ing the situation. We would like the government to set right the anomaly by removing the
CVD on components and are optimistic that by the middle of next week, some correction
would be effected as MAIT has already taken up the issue with the Government’.
The industry is demanding that the CVD on all components, as well as the input that go
into the components should be brought down to zero. ‘This has already started happening, as
players have orders pending which they cannot ship’, the sources said. However, the removal of
CVD on components and inputs may prove to be difficult as some of these are dual-usage items.
As MAIT continues hectic parlays with the officials of IT departments, major players
including HCL and HP are still unwilling to talk about the issue. Wipro InfoTech, however,
feels that though the budget announcement has reduced the price differential between the
imported PC and the locally manufactured PC to a certain extent, the imported computers
will still be expensive when compared to their locally manufactured counterparts. ‘The cost of
logistics, transportation, distribution, service charges still remain. The removal of 8 per cent
excise will not have any significant impact on the prices of WIPRO PCs’, General Manager of
PC Business, Wipro InfoTech said.
Case Question
Do you support the decision of the government?
KEY WORDS
● Liberalization ● SEBI ● External Debt
● Privatization ● Industrial Licensing ● External Liabilities
● Remittances ● Financial Sector ● Multinational Corporations (MNCs)
● Foreign Exchange (forex) ● Statutory Liquidity Ratio (SLR) ● Stock Market
● Foreign Direct Investment (FDI) ● Cash Reserve Ratio (CRR) ● Import Restrictions
● Exchange Rate ● Banking Reforms ● New Trade Policy
● Foreign Equity ● Balance of Trade
● Foreign Tie-ups ● Rupee Value
QUESTIONS
1. What do you mean by liberalization? Discuss the 5. Critically analyse the impact of liberalization on the
causes leading to the adoption of liberalization by the Indian economy.
Government of India. 6. Has the Indian economy benefitted by liberalization?
2. Discuss the process of liberalization. If yes, discuss the areas where the economy benefit-
3. State the provisions of the New Industrial Policy in ted.
the liberalization process. 7. Is there any threat to the Indian economy due to
4. What are the provisions of the New Trade Policy with liberalization? Discuss.
reference to liberalization?
REFERENCES
n Adhikari, M. (2001). Global Business Management: In n Michael, V. P. (2001). Globalisation, Liberalization and Stra-
an International Economic Environment. New Delhi: tegic Management. Mumbai: Himalya Publishing House.
Macmillan. n Patel, I. G. (1998). Economic Reform and Global Change.
n Batra, G. S. and R. C. Dangwal (1999). Globalisation and New Delhi: Macmillan.
Liberalization: New Developments. New Delhi: Deep and n Roger, B. (2003). International Business. New Delhi:
Deep Publications. Pearson Education.
23
C hapter
Privatization and
Disinvestment of PSUs
>>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>>
• Public Sector Enterprises (PSEs)—The • The New Disinvestment Policy and
Necessity 610 Programme 625
• A Decade of Performance 611 • Case 630
• Concept, Meaning, and Objectives of • Summary 632
Privatization 613 • Key Words 632
• Disinvestment Strategies 615 • Questions 632
• The Board for Reconstruction of Public • References 632
Sector Enterprises (BRPSE) 624
Public Sector Enterprises (PSEs)—The

Necessity
The formation of public sec- The formation of public sector enterprises (PSEs) in India was essential during the early
tor enterprises (PSEs) in India 1950s. There were various problems confronting the country that needed a solution through
was essential during the a systematic and planned approach. India was basically an agrarian economy with a weak
early 1950s. There were vari- industrial base, low level of savings, inadequate investment, and an absence of infrastructural
ous problems confronting the
country that needed a solu- facilities. A significant proportion of the population was below the ‘poverty line’. This created
tion through a systematic and considerable inequalities in income, levels of employment, as well as regional imbalances
planned approach. in economic achievements. It was, thus, a logical conclusion—India needed to accelerate
its economic growth and maintain the growth over a long time period. The Central and
State government’s intervention was inevitable because the private sector, in the early 1950s,
neither had the necessary resources to augment long-gestation projects nor the managerial
and scientific skills to implement long-term projects. In view of the above, some of the major
objectives for setting up of PSEs include the following:
1. Ensure rapid economic growth and industrialisation of the country and create the
necessary infrastructure for the economic development,
2. Promote redistribution of income on wealth,
3. Create employment opportunities,
4. Assist the development of small-scale and ancillary industries,
5. Promote import substitutes, and save and earn foreign exchange for the economy,
and
6. Earn return on investment and thus, generate resources for development.
Privatization and Disinvestment of PSUs | 611
Thus, the priorities of the government were removal of poverty, better distribution of income, The priorities of the government
expansion of employment opportunities, removal of regional imbalances, accelerated growth of were removal of poverty, better
industrial production, enhanced utilisation of economic resources, and also a wider ownership distribution of income, expansion
of employment opportunities,
of economic power. Discounting the aforementioned social and strategic motives, it became a removal of regional imbalances,
pragmatic compulsion to deploy the PSEs as an instrument for a self-reliant economic growth. accelerated growth of industrial
The predominant considerations for a continued large-scale investment in the public production, enhanced utilisation
sector were focused towards accelerating growth in the core sectors such as railways, tele of economic resources, and also
a wider ownership of economic
communications, nuclear power, and defence. Also a large number of PSEs were consumer- power.
oriented industries, such as drugs, hotels, food industries, and so on. The rationale for setting
up such enterprises was to ensure an easier availability of important products and services The predominant consider-
and to create a springboard for the emerging areas like tourism. A large number of private ations for a continued large-
companies were taken up by the government to protect the employment of labour that is at scale investment in the public
sector were focused towards
stake and also to sustain production. PSEs of India are, therefore, a heterogeneous mix of
accelerating growth in the
infrastructural companies, companies manufacturing consumer goods, and that engaged in core sectors such as railways,
trade and services. telecommunications, nuclear
power, and defence.
A Decade of Performance
The aggregate turnover of PSEs witnessed a CAGR of 14.9 per cent between 1991–92 and
2001–02. The operating income was almost 117.06 per cent of the total capital employed The aggregate turnover of PSEs
during the period. During the fiscal year 2001–02, the growth in turnover was the highest witnessed a CAGR of 14.9
in enterprises that were producing and selling goods when compared to the service-based per cent between 1991–92
and 2001–02. The operating
sectors. Sectors like petroleum, power, coal and lignite; transportation services; industrial income was almost 117.06
development and technical consultancy services; financial services; telecommunication per cent of the total capital
services; chemicals and pharmaceuticals; steel; the fertilizers; and contract and construc- that was employed during the
tion, recorded a significant increase in the turnover, whereas the sectors like mining and ores period.
witnessed a significant decline in revenues.
The manufacturing sector of public sector units (PSUs) witnessed a decline in the efficiency
rates when compared to its peers in the private sector during the financial years between
1990– 91 and 2001–02. The aggregate cost of production of PSUs as a percentage of sales in-
creased to an extent of 80 per cent during this period. The various inefficiencies in the raw
material usage, high wages and salaries component, and higher debt component made the PSUs
non-cost effective in comparison with its peers in the private sector. The aggregate expense due
to wages and salaries, interest costs, and power costs of the PSUs is around 60 per cent of the
aggregate turnover of the manufacturing PSU companies. In contrast, the private companies
have a lesser burden on all the three counts, which adds up to just over 16 per cent. The wages,
salaries, and other benefits form the highest cost component (23.3 per cent) for PSUs, whereas
the same component forms 6.5 per cent of the turnover in the private sector.
The higher non-cost effective levels have affected the net profit margins (NPMs) of
the PSUs negatively over a period between 1990–91 and 2000–01. The NPMs of the PSUs
have consistently been negative when compared to an average of 6 per cent NPM in the
private sector. The decline in NPMs has affected the dividend outflow to the government.
The decrease in internal revenue generation of the PSUs has compelled the government
to increase its assistance to the PSUs in the form of equity infusions, subsidies, soft loans,
and the like. These different types of assistance have also increased the cost burden on the
government. The decrease in dividend flow from the PSUs pose serious systemic risks to
the economy. The blockage of huge cash reserves in the PSUs has decreased investments
in the priority sectors. Table 23.1 gives details of all the public sector and non-agricultural
establishments, showing employment details from 1981 to 2003.
Table 23.1
Employment in the
> Public Sector
Organised Sector End Central State Quasi-

March Govern- Govern- Govern- Private Grand
ment ments ment Total* Sector Total
Employment (mn)
1981 3.2 5.7 4.6 15.5 7.4 22.9
1991 3.4 7.1 6.2 19.1 7.7 26.7
1997 3.3 7.5 6.5 19.6 8.7 28.3
1998 3.3 7.5 6.5 19.4 8.8 28.2
1999 3.3 7.5 6.4 19.4 8.7 28.1
2000 3.3 7.5 6.3 19.3 8.7 28.0
2001 3.3 7.4 6.2 19.1 8.7 27.8
2002 3.2 7.4 6.0 18.8 8.4 27.2
2003 3.1 7.4 5.9 18.6 8.4 27.0
Share in
Employment (%)
1981 14.0 24.8 20.0 67.7 32.3 100.0
1991 12.8 26.6 23.3 71.3 28.7 100.0
1997 11.7 26.5 23.2 69.2 30.8 100.0
1998 11.5 26.5 22.9 68.9 31.1 100.0
1999 11.8 26.5 22.7 69.1 30.9 100.0
2000 11.7 26.7 22.6 69.1 30.9 100.0
2001 11.7 26.7 22.3 68.9 31.1 100.0
2002 11.8 27.1 22.1 69.0 31.0 100.0
2003 11.6 27.3 21.9 68.8 31.2 100.0
Annual Growth (%)
1981 0.5 3.6 5.4 2.7 2.3 2.6
1991 0.4 1.9 0.8 1.5 1.3 1.4
1997 −3.2 5.3 5.1 2.6 13.2 5.6
1998 −1.5 −0.4 −1.2 −0.7 0.7 −0.3
1999 1.9 – −1.2 – −0.6 −0.2
2000 −1.3 – −0.9 −0.5 −0.6 −0.5
2001 −0.3 −0.4 −2.2 −0.9 – −0.6
2002 −1.8 −0.7 −2.7 −1.9 −2.5 −2.1
2003 −2.2 −0.1 −2.0 −1.0 −0.1 −0.7
Note: D ata in this table cover all establishments in the public sector and all non-agricultural establish-
ments in the same, employing about 10 or more persons.
*
Including Local Bodies.
Source: Statistical Outline of India 2006–07, Tata Services Limited, Department of Economics and
Statistics.
Concept, Meaning, and Objectives of

Privatization
Concept
Just as the concept of a welfare state emerged to save the capitalist system from crises, similarly, Just as the concept of a welfare
the concept of privatization is being developed to save the welfare state from crises. In the last state emerged to save the capi-
decade, ‘privatization’ has become an international phenomenon. From Canada to India, the talist system from crises, simi-
larly, the concept of privatiza-
governments have voted for privatization as a means of increasing productivity effectively and
tion is being developed to save
for growth in the economy, while offering opportunities for citizens to invest. Each country the welfare state from crises.
may have its own reasons for adopting privatization, refuting its own social, economic, and
political circumstances.
Meaning
The very word ‘privatization’ seems to scare people. In Sri Lanka, they coined the word The very word ‘privatization’
‘pau-perisation’ and in China they call it ‘a strategic adjustment of the layout of the State seems to scare people. In Sri
sector’. In the United Kingdom, Nigel Lawson coined the term ‘people’s capitalism’ to imply Lanka, they coined the word
‘pau-perisation’ and in China
privatization by selling shares to the shareholder public. Margaret Thatcher modified the
they call it ‘a strategic adjust-
phrase to ‘popular capitalism’ as she thought the earlier formulation sounded communist, ment of the layout of the State
reminding her of a famous expression, ‘people is republic’. In India we call it ‘disinvestments’, sector’.
perhaps to convey the government’s desire to disengage from running a business.
Privatization is part of the process of rethinking the welfare state. Society is searching Privatization is part of the pro-
for new ways of delivering services because of our collective sense of efficiency. The entre- cess of rethinking the welfare
preneur, not the bureaucrat, is the ‘hero’ of a society. While we cannot be sure how it will all state.
turn out, privatization will be part of the emerging post-welfare state. Privatization wherever
applied, has achieved some measures of success to the local government.
Objectives
The government resorts to privatization with multiple objectives. The major objectives
sought by this exercise are as follows:
1. The reduction of political interference in the management of an enterprise, leading to
improved efficiency and productivity, that is, the functional managers get a free hand
in managing the organisation the way they want to.
2. The government also views privatization as a means of providing adequate competi- The major objectives sought
tion to the State-run enterprise. Privatization could take place in terms of granting by the privatization are reduc-
permission to the private sector to set up units in an otherwise government-controlled tion of political interference in
the management of an enter-
area. prise, leading to improved effi-
ciency and productivity, and as
3. Privatization in the developed as well as the developing countries, is undertaken for a means of providing adequate
the purpose of cash generation to fund the ever-increasing expenses. competition to the State-run
enterprise.
4. Certain developing nations can look upon privatization as a means of broad-basing
ownership of economic assets, thereby reducing the problem of concentration
of economic power.
The performance of the Central PSEs during the period from 1991–92 to 2004–05 has been
shown in Table 23.2.
Central PSEs
Performance of
Table 23.2
>
(` in crore)
Year No. of Turnover/ PBIT Net Profit Provisions for Dividend Contribution Gross Internal
Operating Operating Tax Payment to Central Resource
CPES Income Exchequer Generation
1991–92 237 133,906 13,675 2,356 1,647 687 19,951 12,943
1992–93 239 147,266 15,957 3,271 1,805 792 22,449 14,792
1993–94 240 158,049 18,556 4,545 2,110 1,028 22,988 16,676
1994–95 241 187,355 22,630 7,187 2,581 1,436 27,472 19,992
1995–96 239 226,919 27,587 9,574 4,047 2,205 30,878 24,198
1996–97 236 260,735 30,915 10,186 5,192 2,836 39,009 25,554
1997–98 236 276,002 37,206 13,582 5,634 3,609 42,289 31,192
1998–99 235 310,179 39,727 13,203 6,499 4,932 46,934 31,302
1999–2000 232 389,199 42,270 14,331 7,706 5,455 56,157 35,933
2000–01 234 458,237 48,767 15,653 9,314 8,260 61,037 37,811
2001–02 231 447,529 63,190 25,978 12,255 8,068 62,866 52,544
2002–03 227 535,165 73,374 32,399 17,432 13,768 81,867 54,273
2003–04 230 587,052 99,053 53,084 22,134 15,288 89,035 75,409
2004–05 227 700,862 109,518 65,429 21,661 20,714 110,599 83,854
Growth in
2004–05 Over
2003–04 (%) (–)1.30 19.39 10.57 32.36 (–)2.14 35.49 24.22 11.20
Over
1991–92 (%) (–)4.41 423.40 700.86 2,677.12 1,215.18 2,915.14 454.35 547.87
Source: Public Enterprise Survey 2004–05 and earlier issues.

Disinvestment Strategies
Before we go into the various issues relating to disinvestment, we must clear one semantic
problem. In India, the term ‘disinvestment’ is used more often than ‘privatization’. ‘Privatization’ ‘Privatization’ means a change
implies a change in the ownership resulting in a change in the management. Disinvestment in ownership resulting in
in that sense is a wider term extending from dilution of the stake of the government to a a change in management.
level where there is no change in control to dilution that results in the transfer of manage- ‘Disinvestment’ means dilution
of the stake of the government
ment. If, in fact, in a particular enterprise there is dilution of government ownership beyond to a level where there is no
51 per cent, this can result effectively in a ‘transfer of ownership’. The extent of dilution needs change in control that results
to be determined as part of the policy of disinvestment. Table 23.3 provides a summary of in the transfer of management.
disinvestment receipts from 1991 to July 2007. Box 23.1 details the policy of contraction of
the public sector.
Strategy
The issues relating to disinvestments raise around three questions: why, how, and how much?
To some extent, these issues were addressed by the Committee on Disinvestment, which sub-
mitted its report in 1993. As a background to answering these issues, we also need to look at
the evolution of the role of PSEs in our country as well as their performance.
The origins of PSEs are manifold. The objectives range from building an infrastructure
for the economic development to generating investable resources for the development by
earning suitable returns. Thus, the motivation extends from the theory of commanding
heights to the provision of consumption goods at subsidised rates. Eventually, PSEs are now
spread over widely from coal, steel, and oil at one end to hotel and bread-making at the other.
The time has come to critically assess the sectors in which PSEs must function. This is par-
ticularly important in the context that the resources available with the Centre and the states
are limited, and are needed for extending the social infrastructure in a bigger way. The Eighth
Plan identified some of the principles governing public sector investments as follows:
1. The PSEs should make investments only in those areas where investment is mainly
infrastructural in nature and where private sector participants are not likely to come
forth to an adequate extent within a reasonable time perspective.
2. The PSEs must withdraw from areas where no public purpose is served by its
The National Common Mini-
presence. mum Programme (NCMP)
while emphasizing the need
3. The principle of market economy should be accepted as the main operative principle
to strengthen and reform the
by all PSEs unless the commodities and services produced and distributed are PSEs had also commented:
specifically for protecting the poorest in the society. ‘The question of withdrawing
the public sector from non-core
The National Common Minimum Programme (NCMP) while emphasising the need to and non-strategic areas will be
strengthen and reform the PSEs had also commented: ‘The question of withdrawing the public carefully examined’.
Box 23.1 Industries Reserved for Public Sector

The policy of contraction of public sector was adopted 1. Atomic energy,
under the scheme of privatization. The number of 2. Mining of atomic minerals, and
industries exclusively reserved for public sector were
3. Railways.
reduced from 17, in 1956 to eight in 1991. The number
was reduced to six in 1993. Now only three industries
are exclusively reserved for the public sector, viz.,
1991–92 to Till Date
from Disinvestment:
Summary of Receipts
Table 23.3
>
AS ON 5.08.2014
Year Budgeted Receipts Receipts Receipts Receipts Receipts Total receipts Transactions (` crore)
receipt through sale through sale through from other from sale (` crore)
(` crore) of minority of majority Strategic related of residual
shareholding shareholding sale transactions shareholding
in CPSEs of one CPSE (` crore) (` crore) in disinvested
(` crore) to another CPSEs/
CPSE companies
(` crore) (` crore)
1991–92 2,500.00 3,037.74 – – – – 3,037.74 Minority shares sold in Dec,
1991 and Feb, 1992 by auction
method in bundles of ‘very good’,
‘good’ and ‘average’ companies
1992–93 2,500.00 1,912.51 – – – – 1,912.51 Shares sold separately for each
company by auction method.
1993–94 3,500.00 – – – – – – Equity of 6 companies sold by
auction method but proceeds
received in 94–95.
1994–95 4,000.00 4,843.10 – – – – 4,843.10 Shares sold by auction method.
1995–96 7,000.00 168.48 – – – – 168.48 Shares sold by auction method.
1996–97 5,000.00 379.67 – – – – 379.67 GDR-VSNL
1997–98 4,800.00 910.00 – – – – 910.00 GDR-MTNL
1998–99 5,000.00 * 5,371.11 – – – – 5,371.11 GDR-VSNL; Domestic offerings
of CONCOR and GAIL; Cross
purchase by 3 Oil sector
companies i.e. GAIL, ONGC and
IOC.
1999–00 10,000.00 ** 1,479.27 – 105.45 275.42 – 1,860.14 GDR-GAIL; Domestic offering
of VSNL; capital reduction and
dividend from BALCO; Strategic
sale of MFIL.
2000–01 10,000.00 – 1,317.23 554.03 – – 1,871.26 Sale of KRL, CPCL and BRPL to
CPSEs; Strategic sale of BALCO
and LJMC.
2001–02 12,000.00 – – 3,090.09 2,567.60 – 5,657.69 Strategic sale of CMC, HTL,
VSNL, IBP, PPL, hotel properties
of ITDC and HCI, slump sale
of Hotel Centaur Juhu Beach,
Mumbai and leasing of Ashok
Bangalore; Special dividend from
VSNL, STC and MMTC; sale of
shares to VSNL employees.
2002–03 12,000.00 – – 2,252.72 1,095.26 – 3,347.98 Strategic sale of HZL, IPCL,
hotel properties of ITDC, slump
sale of Centaur Hotel Mumbai
Airport, Mumbai; Premium for
renunciation of rights issue
in favour of SMC; Put Option
of MFIL; Sale of shares to
employees of HZL and CMC.
2003-04 14,500.00 12,741.62 – 342.06 – 2,463.73 15,547.41 Strategic sale of JCL; Call Option
of HZL; Offer for Sale of MUL,
IBP, IPCL, CMC, DCI, GAIL and
ONGC; Sale of shares of ICI Ltd.
2004–05 4,000.00 2,700.06 – – 64.81 – 2,764.87 Offer for Sale of NTPC and spill
over of ONGC; sale of shares to
IPCL employees.
2005–06 No target – – – 2.08 1,567.60 1,569.68 Sale of MUL shares to
fixed Indian public sector financial
institutions & banks and
employees
(Continued)
Table 23.3
>
AS ON 5.08.2014
Year Budgeted Receipts Receipts Receipts Receipts Receipts Total receipts Transactions (` crore)
receipt through sale through sale through from other from sale (` crore)
(` crore) of minority of majority Strategic related of residual
shareholding shareholding sale transactions shareholding
in CPSEs of one CPSE (` crore) (` crore) in disinvested
(` crore) to another CPSEs/
CPSE companies
(` crore) (` crore)
2006–07 No target – – – – – –
fixed
2007–08 No target 1,814.45 – – – 2,366.94 4,181.39 Sale of MUL (` 2366.94 cr)
fixed shares to public sector financial
institutions, public sector banks
and Indian mutual funds and
sale of PGCIL (` 994.82 cr) and
REC (` 819.63 cr) shares through
Offer for Sale.
2008–09 No target – – – – – –
fixed
2009–10 No target 23,552.93 – – – – 23,552.93 ` 2012.85 - NHPC, ` 2247.05
fixed OIL, ` 8480.098 NTPC, ` 882.52
REC, ` 9330.42 NMDC
2010–11 40,000.00 22,144.21 – – – – 22,144.21 ` 1062.74 SJVN, ` 959.65
EIL, ` 15199.44 COAL INDIA,
` 3721.17 PGCIL, ` 618.75
MOIL, ` 582.45 SCI
2011–12 40,000.00 13,894.05 – – – – 13,894.05 ` 1144.55 PFC, ` 12749.5 ONGC
2012–13 30,000.00 23,956.81 – – – – 23,956.81 ` 124.97 NBCC, ` 807.03 HCL,
` 5973.27 NMDC, ` 3141.51
OIL, ` 11457.54 NTPC,
` 310.15 RCF, ` 627.84 NALCO,
` 1514.50 SAIL
2013–14 40,000.00 15,819.46 – – – – 15,819.46 ` 571.71 MMTC, ` 259.56 HCL,
` 101.08 NFL, ` 30.17 ITDC,
` 4.54 STC, ` 358.21 NLC,
` 2131.28 NHPC, ` 1637.32
PGCIL, ` 497.32 EIL,` 1886.78
BHEL, ` 5341.49 IOCL, ` 3000
CPSE-ETF
2014–15 43,425.00 – – – 51.76 – 51.76 ` 3.60 Employee OFS of NFL,
(Till 5-08- ` 48.16 Employee OFS of NTPC
2014)
Grand 1,34,725.47 1,317.23 6,344.35 4,056.93 6,398.27 1,52,842.25
Total
* Out of ` 5371.11, ` 4184 crore constitute receipts from cross purchase of shares of ONGC, GAIL and IOC.
** Out of ` 1479.27, ` 459.27 crore constitute receipts from cross purchase of shares of ONGC, GAIL and IOC.
Source: Ministry of Disinvestment, Ministry of Finance, Government of India (http://www.divest.nic.in/SummarySale.asp)
sector from non-core and non-strategic areas will be carefully examined’. The performance
of public enterprises can be judged by several efficiency criteria. However, the financial
performance assumes importance as one of the objectives of creating PSEs was to generate
investable resources for development by earning adequate returns. The picture in this regard
is mixed.
In the fiscal 1995, out of a total of 241 public sector undertakings in the Central sector,
about 130 made net profits. The net profits amounted to ` 12,120 crore. The losses of 109
units amounted to ` 4,910 crore. It is also interesting to note that about 10 enterprises con-
tributed over two-thirds of the profits. Out of these 10, six were in the oil sector. The profits
of the PSEs would look less impressive if the oil sector is excluded. In fact, the contribution
of the profit-making PSEs to the finances of the Central government in the form of dividends
amounted only to ` 1,440 crore.
The reform of the public sector, The reform of the public sector, in general, and that of the loss-making units, in
in general, and that of the loss- particular, has assumed importance in the context of the financial strain under which all
making units, in particular, has
assumed importance in the
governments, both at the Centre and in the states, are now operating. The issue of how to
context of the financial strain handle loss-making enterprises needs to be faced squarely. One can move away from finan-
under which all governments, cial performance and judge the PSEs in terms of technical efficiency, allocative efficiency, and
both at the Centre and in the dynamic efficiency. Technical efficiency basically relates to the ratio of inputs to outputs.
states, are now operating.
Allocative efficiency relates to correction of market failure leading to better allocation of
resources that will be decided by the price mechanism. Dynamic efficiency relates to innova-
tions and technological development. Even in relation to these criteria, the results in relation
Current profit and/or current to public enterprises are mixed. Current profit and/or current loss need not necessarily be the
loss need not necessarily be appropriate criterion for dis-investment. Merely because a unit is profitable, it does not qualify
the appropriate criterion for
to continue to be publicly owned, unless it meets a well-defined felt need. Loss-making units
disinvestment. Merely because
a unit is profitable, it does not need not be excluded from disinvestment if there are buyers who can make them profitable.
qualify to continue to be public-
ly owned, unless it meets a well-
defined felt need. Loss-making
Background
units need not be excluded
The onset of privatization across the world began with Chile in the mid-1970s and the United
from disinvestment if there are
buyers who can make them Kingdom from 1979. Domestic fiscal crises and burdensome funding to meet the PSU
profitable. expansion requirement accelerated the need to privatise in these countries. In the United
Kingdom, privatization was carried out aggressively by Margaret Thatcher in the 1980s, with
the government letting loose most of its stake at one go. British Telecom, British Air, British
Power, British Petroleum, and British Rail were some of the major PSUs disinvested.
The United Kingdom’s example was followed by the other European nations including
France. During its divestment programme from 1986 to 1988, France privatised about 66
PSUs, with 42 in banking, 13 in insurance, 9 in the industry sectors, and 2 in telecommu-
nications. In Germany, Chancellor Kohl’s government divested stakes in VEBA (energy),
Volkswagen (auto), VIAG (metals and chemicals), and Salzgitter (steel and engineering)—
raising DM 10 bn—and pared its holding in the national carrier Lufthansa to 50 per cent.
In 1989, privatization became the norm in the Central and Eastern European nations
and in the former Soviet Union during their transitional phase of moving from planned to
market economies. In 1986, the Latin American countries started their privatization process
The sale proceeds of public mainly on account of a deepening fiscal crisis. The Asian financial crisis spurred Bangladesh,
undertakings are being utilized Pakistan, and Sri Lanka to privatise their manufacturing and retail operations in small
for meeting administrative ex-
penses or curtailing the budget- business, textiles, and agro industries from the mid-1970s.
ary deficit, instead of creating Privatization in India has become a controversial and a debatable issue. It is being criti-
health and educational facili- cised for ‘selling the family silver to the cronies of the rolling party’. The sale proceeds of
ties to general public and for public undertakings are being utilised for meeting administrative expenses or curtailing the
development of infrastructure
for trade and industry. budgetary deficit, instead of creating health and educational facilities to general public and
for development of infrastructure for trade and industry.
It is argued that much of what the government has collected over the years since
independence as the State’s assets have been now put up for sale. Further, the government is
not making any effort to privatise the loss-making PSUs. Instead, the government is privatis-
ing the profit-making public enterprises, which are beneficial for the welfare of the general
public and are adding pride to the nation. These healthy PSUs require no State support and
are efficiently managed. Privatization of loss-making units would definitely reduce financial
burden on the government. As no one will be buying the sick PSUs, all efforts are being
directed towards selling the healthy ones. Now the dilemma that is facing the government at
this juncture is, that while it will be able to sell all shares of the profit-making PSUs, it is going
to be left with the sick units only.
The Standing Committee on Public Enterprises (SCOPE) has, in 2004, argued that the
government’s disinvestment programme is totally unplanned and has, not benefitted the
PSUs. It is argued that the disinvestment exercise is merely a budgetary, gap-filling mecha-
nism in which neither the views nor the strengths of any corporation are taken into account
prior to the divesting of shares.
Desirability
Broadly speaking, there are two major reasons adduced for disinvestment. One is to provide
fiscal support and the other is to improve the efficiency of the enterprise. The fiscal sup-
port argument has to be given due weightage. The demands on the governments, both at the
Part of the sale proceeds should
Centre and in the states are increasing. There is a compelling need to expand the activities be used as a fiscal support for
of the State in areas such as education, health, and medicine. It is, therefore, legitimate that education, health, and social
a part of the additional resources needed for supporting these activities comes from the sale needs of the general public.
of shares built up earlier by the government out of its resources. It is, sometimes, argued that
the resources raised through disinvestments must be utilised for retiring past debts, thereby The resource raised through dis-
bringing down the interest burden of the government. So long as the government is a net investments must be utilized for
borrower of a fairly large magnitude, year after year, it does not make any material difference retiring past government debts,
whether the resources are utilised to retire the past debts or are simply utilised as part of the thereby bringing down the inter-
est burden of the government.
receipts. In the latter case, it only results in a lower borrowing requirement.
The second important argument in favour of disinvestment is the contribution that it can
make to improving the efficiency of the working of the enterprise. Leaving aside the extreme
case where the dilution results in the transfer of ownership, even in the case of disinvestment
where the dilution is of a lesser order and where the government control is still retained, the
induction of public ownership can have a salutary effect on the functioning of an enterprise.
It increases the accountability of those in charge of the enterprise. The shareholders would
require to be compensated and this will, in turn, compel the enterprise to run more effi-
ciently and earn more profits. This must be regarded as a part of the reform and restructuring
of public enterprises. Flexibility in ownership can, in effect, impart efficiency. In fact, the
induction of the public into the ownership structure can also create conditions in which there
There could be greater auton-
could be greater autonomy for the functioning of the PSE. Disinvestment can, therefore, be omy for the functioning of the
regarded as a tool for enhancing the economic efficiency. PSE.
The other important issue with respect to disinvestment relates to the extent of disinvest-
ment to be made in an enterprise. Obviously, the level of disinvestment in an enterprise in
any year should be derived from the target level of government ownership in that enterprise
over the medium term. The target levels of ownership could be 26 per cent to ensure a lim-
ited control over special resolutions that are brought in, in the general body meetings of the
enterprise: 51 per cent to have an effective control and 100 per cent for full ownership. The
target level of disinvestment should be derived from the desirable level of public ownership
in an activity or unit, consistent with the industrial policy.
The discussion paper quotes from a government document that the extent of dis
investment in strategic, core and non-core, and non-strategic sector could be ‘nil’, 49 per cent,
and 74 per cent or more, respectively. The NCMP has also indicated the possibility of with-
drawing PSUs from the non-core and non-strategic sectors. The approach paper of the Ninth
Plan also stated that ‘disinvestment will be considered up to 51 per cent and beyond in the
case of PSUs operating in non-strategic and non-core sectors’. Now the time has come to de-
fine very clearly which enterprise falls into what category. There is a general degree of consen-
sus that in the non-strategic and non-core sectors, disinvestment can be beyond 51 per cent.
For the rest of the sectors, the criterion of disinvestment can be the extent of improvement
and efficiency that can be brought about, as well as the need to take care of the financial re-
quirements of the government.
Pricing
An issue that arises with respect to disinvestment relates to the pricing to be adopted for
An issue that arises with respect
to disinvestment relates to the disinvestment. This, in turn, revolves around the appropriate valuation of the shares and the
pricing to be adopted for disin- modalities that are to be adopted for sale. In general, three methods for the valuation of shares
vestment. This, in turn, revolves are adopted: the net asset value (NAV) method, the profit-earning capacity value method, and
around the appropriate valua-
the discounted cash-flow method. While the NAV would indicate the value of the asset, it would
tion of the shares and the mo-
dalities that are to be adopted not be in a position to indicate the profitability or income to the investors. The profit-earning
for sale. capacity is generally based on the profit actually earned or anticipated. The discounted cash
flow is a far more comprehensive method of reflecting the expected income flows to the in-
vestors. Of these three methods, the discounted cash flow method has the greatest relevance
though it is the most difficult.
Valuation is a difficult exercise whether in the private or the public sector—in India or
elsewhere. This is all the more so when the different valuation methods give different results.
It is also to be noted that while the different valuation methods can provide a benchmark for
the price, the price at which a share can be sold is determined more by the investor percep-
The price at which a share can
be sold is determined more by tion than any other mechanical measure of intrinsic worth. There is, therefore, the need for
the investor perception than any a full disclosure to generate credibility and investor interest. A rise or fall in the share value
other mechanical measure of of an enterprise soon after disinvestment does not by itself indicate that shares were under-
intrinsic worth. There is, there-
fore, the need for a full disclo-
priced or overpriced at the time of disinvestment. On the modalities of disinvestment, there
sure to generate credibility and are two acceptable and transparent processes available which are as follows:
investor interest.
1. Offering shares of PSEs at a fixed price through a general prospectus. The offer is
made to the general public through the medium of recognised market intermediaries.
2. Sale of equity through auction of shares among a predetermined clientele, whose
number can be as large as necessary or practicable. The reserve price for the PSE
equity can be determined with the assistance of merchant bankers.
Both these methods have their own merits and demerits. In the first alternative of ‘offer
for sale’, difficulties may be encountered in estimating and determining the ‘fixed’ price,
if it is offered for the first time, and the shares have not been actually trading in the stock
exchange. On the other hand, this method has the advantage of spreading the ownership
widely among the general public and in a transparent manner. In the case of those PSEs for
which the first sale of equity is yet to be made, or those where the track record of trading in
shares is yet to be established, the tender system would be advantageous. Once a reasonable
market price is established in a normal trading atmosphere over a reasonable period of time
and a public enterprise completes the preparatory work, the fixed price method would be
appropriate.
Utilisation of Proceeds
The original investments in all PSUs were made by the government out of its receipts. These
are public funds and the proceeds of disinvestment should be utilised for the purpose of The proceeds of disinvestment
should be utilized for the pur-
expanding the activities of the PSUs and in other areas such as social sector activities, that is, pose of expanding the activities
education, health, eradication of poverty, creating employment, creating infrastructure for of the PSUs and in other areas
industrial development, and so on. Addressing the joint session of the Parliament, President such as social sector activi-
A.P.J. Abdul Kalam said, ‘My government believes that privatization should increase compe- ties, that is education, health,
eradication of poverty, creating
tition, not decrease it, We also believe that there must be a direct link between privatization employment, creating infra-
and social needs, like the use of revenues generated through privatization for designated structure for industrial develop-
social sector schemes’. Box 23.2 details the steps for disinvestment. ment, and so on.
It is surprising that the public sector, in spite of the enormous support and investment
from the government, has failed to perform. If a private sector does well because of the
high levels of professionalism it demands, why can the same not be ensured from the public
sector? If PSUs are given autonomy for day-to-day decision making and allowed to employ If PSUs are given autonomy for
competent managers, with management degrees from reputed management institutes, there day-to-day decision making and
is hardly any reason why they should fail. In fact, many of our PSUs are excellently man- allowed to employ competent
aged and they rake in good profits. Loss-making units were actually helpless in the hands of managers, with management
degrees from reputed manage-
those in power. They suffered for various reasons such as over-staffing, dumping inferior- ment institutes, there is hardly
quality raw materials, interference in pricing, instigated labour union strikes, unreasonable any reason why they should fail.
demands for high wages, and so on. On the whole, public sectors were rendered sick sys-
tematically, so that they can be sold at throwaway prices to individual buyers from the pri-
vate sector. This has been the story of disinvestment in India. Box 23.3 gives the essence of
‘Navratna’.
Box 23.2 Steps for Disinvestment

1. Disinvestment policy of the Government of India 12. Finalisation of SPA and SHA
2. Disinvestment Commission of the Government of 13. Vetting of the above documents (SPA and SHA) by
India the Law Ministry and the Central government
3. Proposal for disinvestment of a Central PSU 14. SPA and SHA are sent to prospective bidders for
4. Consideration of proposal by the Cabinet Committee their final bids (technical and financial)
on Disinvestment (CCD) 15. Bids are examined, analysed, and evaluated by the
5. Clearance of proposal Inter Ministerial Group (IMG)
6. Cleared proposal by CCD 16. IMG sends recommendation to CCD for final
approval of the bids, SPA, SHA, strategic partner,
7. Selection of an advisor
and other related issues
8. Invitation of Expression of Interest (EOI) from
17. Finalisation of the transaction
interested parties by the advisor through newspaper
advertisements 18. Once the deal is completed, all the related papers
and documents are sent to CAG for evaluation of
9. Receipts of EOI and shortlisting
the disinvestment deal
10. Preparation of information memorandum by the
19. The evaluated disinvestment deal is then placed
advisor
before the Parliament and finally, the same is
11. Preparation of draft of the Share Purchase released to the public.
Agreement (SPA) and Share Holder’s Agreement
(SHA)
Box 23.3 Navratna

In line with the policy of liberalization, the government continuous trend of profit earning during the earlier three
granted ‘Navratna’ status to PSEs having a comparative year but were not accorded the Navratna status, have
advantage and potential to become global players based been categorised under ‘Mini Ratna-I’ and ‘Mini Ratna-II’
on their size, performance, nature of activities, future based on the amount of profit earned.
prospects, and so on. The enterprises which have a
the Board for Reconstruction of

Public Sector Enterprises (BRPSE)
The Board for Reconstruction of Public Sector Enterprises (BRPSE), announced in the
Union Budget (2005–06) by the Finance Minister P. Chidambaram, has got the approval
of the government. The board will have seven members with a non-official member as the
Chairman. Besides, it would have three non-official members and three secretaries of the
government. The board’s recommendations would be advisory. It would advise the govern-
ment on the proposals referred to it and the ones that it takes up suo moto.
Key Responsibilities
Apart from revival, the board will also advise the government on the ways and means for
Apart from revival, the board
will also advise the govern- strengthening the PSEs, in general and making them more autonomous and professional.
ment on the ways and means It will consider restructuring of finances, organisations; and businesses; including diversifica-
for strengthening the PSEs, in tion, joint ventures, mergers, and acquisitions of Central public sector companies; and sug-
general and making them more
gest ways and means for funding such schemes. In respect of unviable companies, the board
autonomous and professional.
would also advise the government about the source of funds, including the sale of surplus
assets of the enterprise for the payment of all legitimate dues and compensation to workers
and other costs. The board will also monitor the incipient sickness in the Central PSUs.
One of the proposals the new body will take up is the ambitious ` 12,000 crore plan to
revive about 24 PSUs, largely under the Heavy Industry Ministry. The plan includes about
` 2,000 crore of fresh capital infusion into the companies, apart from a write-off of past dues
of about ` 10,000 crore. The proposal will travel to the Finance Ministry, after it is vetted
by the BRPSE. If approved by the North Block, the plan would be put up to the Cabinet
Committee on Economic Affairs:
• Government approves the Budget proposal for BRPSE.
• The board will have seven members with a non-official member as the Chairman.
It will have three non-official members and three secretaries of the government.
• The board will advise the government on strengthening the PSEs, in general, and
making them more autonomous and professional.
• Trade unions demand a place in the board.
The government is not keen on reviving all the sick PSUs. In fact, it has decided to close down
seven PSUs under the Ministry of Public Enterprises and Heavy Industries, and revive 17 of
them. Of the 17 companies the government likes to revive, three would be through the joint
venture route. For the joint venture, the government will have to offer a stake to a strategic
investor and the price at which the new partner will be inducted, is likely to be decided by the
group of ministers, which has been constituted for the following purposes:
• Government decides to close down seven PSUs and revive 17 others.

• Joint venture route proposed for revival of three units.
• Purchase preference scheme extended by a year.
• VRS revised to prompt more employees of loss-making units to avail of the scheme.
• A clean-up of balance sheets of companies underway.
• A special package for revival of HEC (Heavy Engineering Corporation).
Privatization has become a gray area in India of late. The sale of the efficiently managed The sale of the efficiently man-
PSUs and the retention of the sick units, which are nearly unmanageable, have together been aged PSUs and the retention of
reducing the assets of the government while exacerbating its burden. The whole process of the sick units, which are nearly
unmanageable, have together
privatization seems to be more beneficial for the individuals than for the public. been reducing the assets of the
It appears as though the then government’s policy was consciously taking a step towards government while exacerbating
privatising all profits and nationalising all losses. For example, Modern Food with assets its burden.
amounting to more than ` 2,000 crore has been sold for a little over ` 100 crore; Dalmiyas
have been allowed to buy companies worth ` 300 crore for ` 26 crore. Balco, a ` 5,000 crore
company has disinvested 51 per cent equity for just ` 551 crore. Other examples are ITDC,
GAIL, VSNL, and ONGC.
The government thinking that privatization would maximise the revenues and make
up for superior firm efficiency proved wrong. The Tatas acquired CMC in the first week
of October 2001 at a price of ` 197 per share. A year later, the price hovered around ` 500.
It cannot be that the Tatas effected a stunning improvement in the firm in such a short period.
Another glaring example is the sale of the Centaur Hotel in Mumbai. A private group, which
bought the hotel for ` 83 crore, sold it within four months to another private party for ` 115
crore, and that party put the said hotel for sale for ` 350 crore, within a year of its purchase.
The government is in a fiscal distress and is desperate to realise revenues by selling the
healthy PSUs, just to fill up the budgetary deficit gap. In the disinvestment process, the gov- In the disinvestment process,
ernment is not taking into consideration either the views or the strength of any corporation the government is not taking
prior to divesting shares. The government must rethink before divesting the shares of healthy into consideration either the
and profit-making PSUs and save the public’s sound assets from being sold to the rich for views or the strength of any
corporation prior to divesting
a song. shares. Government must re-
It is advisable that the government should adopt the policy of disinvestment in such a think before divesting shares of
way that the loss-making PSUs be sold, for which the government should provide incentives healthy and profit-making PSUs,
to the private parties opting to purchase them, so that the dead property will be canalised and save the public’s sound
assets from being sold to the
in the production process, and the loss to the government will be reduced. On the other rich for a song.
hand, the government should give autonomy to healthy profit-making and viable PSUs to be,
so that they are professionally managed and become competitive.
The New Disinvestment Policy and

Programme
Current Policy on Disinvestment
In May 2004, the government adopted the NCMP, which outlines the policy of the govern- In May 2004, the government
ment with respect to the public sector. The relevant extracts of NCMP are given as follows: adopted the NCMP, which out-
The UPA (United Progresive Alliance) government is committed to a strong and lines the policy of the govern-
effective public sector whose social objectives are met by its commercial functioning. But ment with respect to the public
sector.
for this, there is need for selectivity and a strategic focus. The UPA is pledged to devolve full
managerial and commercial autonomy to successful, profit-making companies operating

in a competitive environment. Generally profit-making companies will not be privatised.
All privatizations will be considered on a transparent and a consultative case-by-case
basis. The UPA will retain the existing ‘navratna’ companies in the public sector while these
companies raise resources from the capital market. While every effort will be made to mod-
ernise and restructure the sick public sector companies and revive sick industry, chroni-
cally loss-making companies will either be sold-off, or closed, after all the workers have got
their legitimate dues and compensation. The UPA will induct private industry to turn around
companies that have potential for revival.
The UPA government believes The UPA government believes that privatization should increase competition, and not
that privatization should decrease it. It will not support the emergence of any monopoly that only restricts com-
increase competition, and not petition. It also believes that there must be a direct link between privatization and social
decrease it. It will not support needs—like, for example, the use of privatization revenues for designated social sector
the emergence of any monopoly
that only restricts competition. schemes. Public sector companies and nationalised banks will be encouraged to enter
the capital market to raise resources and offer new investment avenues to retail investors.
Calling off the Ongoing Cases of Strategic Sale

In conformity with the policy enunciated in NCMP, it was decided in February 2005 to for-
mally call off the process of disinvestment through a strategic sale of profit-making CPSEs,
as enumerated in the following manner:
Name of the PSE Percentage of Equity Which was Earlier

Proposed to be Sold Through Strategic Sale
Manganese Ore India Limited 51%
Sponge Iron India Limited 100%
Shipping Corporation of India 54.12% (51% through strategic sale and
Limited 3.12% to employees)
National Aluminium Company 61.15% (10% domestic issue, 20% ADR issue,
Limited 29.15% strategic sale, and 2% to employees)
National Building Construction 74%
Corporation Limited
National Fertilizers Limited 53% (51% through strategic sale and
2% to employees)
Rashtriya Chemicals & Fertilizers 53% (51% through strategic sale and
Limited 2% to employees)
Hindustan Petroleum Corporation 39.01% (34.01% through strategic sale and
Engineers India Limited 61% (51% through strategic sale and
10% to employees)
Balmer Lawrie and Company Limited 61.8%
Engineering Projects India Limited 74%
Hindustan Paper Corporation Limited 74%
State Trading Corporation of India 75% (65% through strategic sale and
Sale of Small Portions of Government Equity

Through an IPO or FPO Without Changing the
Public Sector Character of CPSE
The government has also approved, in principle, the following:
a. listing of currently unlisted profitable CPSEs (other than Navratnas), each with a net worth
in excess of ` 200 crore, through an Initial Public Offering (IPO), either in conjunction
with a fresh equity issue by the CPSE concerned or independently by the government,
on a case-by-case basis, subject to the residual equity of the government remaining at least
51 per cent and the government retaining the management control of the CPSE;
b. the sale of minority shareholding of the government in listed, profitable CPSEs,
either in conjunction with a public issue of fresh equity by the CPSE concerned
or independently by the government, subject to the residual equity of the gov-
ernment remaining at least 51 per cent and the government retaining management
control of the CPSE; and
c. constitution of a ‘National Investment Fund’ (NIF).
On July 6, 2006, the government decided to keep all disinvestment decisions and pro-
On July 6, 2006, the govern-
posals on hold, pending the further review. The disinvestment decisions covered under ment decided to keep all
this decision were: disinvestment of 5 per cent of the government’s holding in Power Finance disinvestment decisions and
Corporation (PFC) Limited, riding piggyback on a fresh issue of PFC; offer for sale, proposals on hold, pending the
further review.
through book-building process, of 15 per cent equity in National Mineral Development
Corporation (NMDC) and 10 per cent equity each in Neyveli Lignite Corporation Limited
(NLC) and National Aluminium Company Ltd. (NALCO). Later, on November 23, 2006, the
government approved an IPO by PFC, consisting of a fresh issue of equity alone. The IPO of
PFC was completed in February 2007.
National Investment Fund (NIF)

In pursuance of the policy laid down in NCMP and the decision of the government to In pursuance of the policy laid
constitute NIF, the proposal for its operationalisation was approved on November 3, down in NCMP and the decision
2005. Accordingly, the Department of Disinvestment (DoD) has issued a resolution on of the government to constitute
November 23, 2005 (Annexure-13), constituting ‘NIF’ with the following objectives, struc- NIF, the proposal for its opera-
tionalisation was approved on
ture and administrative arrangements, investment strategy, and accounting procedure: November 3, 2005.
Objectives
i. The proceeds from disinvestment of CPSEs will be channelised into NIF, which is
to be maintained outside the Consolidated Fund of India (CFI).
ii. The corpus of NIF will be of a permanent nature.
iii. NIF will be professionally managed to provide sustainable returns to the govern-
ment, without depleting the corpus. Selected Public Sector Mutual Funds will be
entrusted with the management of the corpus of NIF.
iv. 75 per cent of the annual income of NIF will be used to finance the selected social
sector schemes, which promote education, health, and employment. The residual
25 per cent of the annual income of the Fund will be used to meet the capital
investment requirements of profitable and revivable CPSEs that yield adequate
returns, in order to enlarge their capital base to finance expansion/diversification.
Structure and Administrative Arrangements
NIF will be operated by the NIF will be operated by the selected Fund Managers under the discretionary mode of
selected Fund Managers under the Portfolio Management Scheme, which is governed by SEBI guidelines. The entire work
the discretionary mode of the of NIF will be supervised by the Chief Executive Officer (CEO) of NIF, a senior officer of
Portfolio Management Scheme,
which is governed by SEBI
the government. A part-time advisory board consisting of three eminent persons, with the
guidelines. requisite expertise to be appointed by the government, would advise CEO on various aspects
of the functioning of NIF.
Investment Strategy
i. The broad investment strategy is to provide sustainable returns without depleting the
corpus.
ii. The investment strategy for NIF will be formulated by the CEO, based on the advice of
the Advisory Board, so as to ensure that the government has a hands-off relation-
ship in terms of the actual investment that is to be done by the Fund Managers.
iii. Only broad guidelines are to be provided under the ‘discretionary mode’ to the
Fund Managers, within which individual investments would be made independ-
ently by the Fund Managers. More detailed guidelines specifying investment instru-
ments and limits for investment in such instruments will be separately specified in
the agreements to be entered into between the Fund Managers and the CEO of NIF,
on behalf of the government.
iv. Other operational details such as allocation of funds to the selected Fund Managers,
negotiations of management fee and charges to be paid to the Fund Managers, and
so on, will be also decided by the CEO based on the advice of the Advisory Board.
Appropriate mechanisms for regular review and monitoring of the functioning of
NIF, emerging market trends, and future prospects will be instituted.
Accounting Procedure
i. The receipts from disinvestment of CPSEs will be deposited in CFI under the
designated Head. Thereafter, these amounts would be appropriated from the CFI,
with a due approval by the DoD, and transferred to the selected Fund Managers
through the CEO of NIF.
ii. The income from NIF will be similarly deposited into CFI and would be appropri-
ated from it for specific purposes, as per the scheme of appropriation approved from
time to time by the Department of Expenditure.
Fund Managers of NIF

The following Public Sector Mutual Funds have been appointed initially as Fund Manag-
ers to manage the funds of NIF under the ‘discretionary mode’ of the Portfolio Management
Scheme, which is governed by the SEBI guidelines.
a. UTI Asset Management Company Limited,
b. SBI Funds Management (Pvt) Limited, and
c. Jeevan Bima Sahayog Asset Management Company Limited.
Disinvestment Programme for 2007–08

MUL
In December 2006, the government decided to sell its residual 10.27 per cent equity in
MUL, through the differential pricing method, to Indian public sector financial institu-
tions, public sector banks, and Indian mutual funds. The sale was completed in May 2007,
realising ` 2366.94 crore for the exchequer.
Critical Appraisal
The privatization policy of the government has been criticised particularly by sociologists, The privatization policy of the
economists, and communist politicians. However, the industrial policy of the then Chief government has been criticized
Minister of West Bengal, Jyoti Basu, announced in 1994, provided for an opening up of the particularly by sociologists,
economists, and communist
industrial sector for large private investments and foreign ventures. It is pertinent to note that politicians.
even a communist government felt the need for promoting the private sector and privatising
businesses. Hence, the criticism that privatization is against the principle of socialism or the
socialistic pattern of welfare state is of no substance.
Round the world, privatization moves have been criticised. Almost all the past privati-
zation in India has given rise to controversy. The first was the state of Modern Foods India
Limited (MFIL). The second was that of Bharat Aluminum Company Limited and the third
was Ibvally (Orissa). The MFIL case illustrates the problem of valuation—that the value of
a firm may not lie in its normal operating assets, but in something peripheral like the land,
which has not much value as a going concern but has a lot of value on liquidation. Besides,
the value of a firm for different buyers would be different as each buyer looks for a different
type of synergy in the candidate firm.
The Balco case illustrates the importance of paying attention to establishing legitimacy The Balco case illustrates the
first and choosing the target of privatization carefully. Initiating privatization in a big way importance of paying atten-
in an opposition party-rule State was perhaps a strategic mistake. Besides, whom the unit is tion to establishing legitimacy
sold to is as important as the price at which it is sold, for the plant must run well after it is first and choosing the target of
privatization carefully.
privatised. The LB-valley experience indicates that if the competition is run well with trans-
parent procedures, the outcome would be good with many bidders. Even more bidders from
the United States would have come but for the fact that escrows were not initially given but
agreed to later.
It is expected that such disinvestment would bring in the market force and competition
in the working of such enterprises, would introduce autonomy, and would also improve their
overall operating performance. This, however, raises questions such as how such disinvest-
ment would ensure autonomy to management. How far would privatization bring additional
savings in the country? Would it lead to additional savings by the private sector or would it be
a mere channelling of private savings by the erstwhile public sector? How are the funds that
are raised from disinvestment planned to be utilised? Would utilising these funds for meet-
ing operating expenses or revenue deficit not amount to meeting operating expenses out of
the sale proceeds of jewellery? Further privatization of chronically loss-making units, either
by way of sale of individual assets or by outright sale, no doubt would reduce the financial
burden on the government but would require political will.
Suggestions The key element for improving

performance is to let the public
The key element for improving performance is to let the public enterprise’s manage- enterprise’s management func-
ment function autonomously. There is a little indication of a change in the control by the tion autonomously.
g overnment over the public enterprises. The enterprise must be free to deal with surplus staff
and restructure their enterprises as they feel necessary. The future profitable operation of
public enterprises depends upon the following factors:
1. Managerial autonomy by removing the controls and guidelines given to the manage-
ment by the government,
2. Giving up of government control at least by making the board of directors the final
authority in the enterprise,
3. Restructuring of enterprises through mergers,
4. Reliance on market for signals on price–product mix, quality, and so on,
5. Cost reduction, improvement in productivity, optimising product mix, and maximum
capacity utilisation, and
6. Reducing overstaffing.
C ase
Water services fall in a low-level equilibrium, where the utilities provided limited and low-
quality services, due to insufficient resources. And inadequate service results in fewer resources
being collected. As a consequence, the entire population cannot be adequately covered. And
it is the poor who have to pay the price by incurring substantial costs to seek alternatives.
Paradoxically, any textbook on public economics will tell us that these very arguments make
government intervention imperative. From the early 1990s there has been a surge in privatiza-
tion-related projects/proposals in the water sector in both the developed and the developing
countries (to a greater extent), often at the behest of the World Bank.
The proponents say that the low-level equilibrium in the water sector can be punctured
only through private sector participation (PSP). Oddly enough, the World Bank has increas-
ingly made its loans conditional on the local governments, privatising their waterworks.
The arguments put forward in favour of privatization are only a myth. Experience across
the world suggests that instead of being a competitive market, water markets are generally
monopolistic.
The high barriers to entry and the low market contestability have resulted in few firms
competing globally. In such a situation, the only option with the State is to regulate the firm.
However, the effectiveness of such regulations is often questionable. There is evidence that
firms even refuse to adhere to the rules of the regulator. Reports indicate that one of the pri-
vate owners of the water project challenged the government to take back the franchise if the
regulator did not concede to the company’s demands for changing the terms of the original
agreement.
Since the sector has very few firms, terminating the concession is not a realistic option.
Sometimes, the contracts may be difficult to alter or cancel once awarded, even if the
circumstances change. Even in the developed countries, terminating water concession can
be very difficult. Large firms, public or private, generally have principal–agent problems that
cause inefficiencies. In addition, in the case of a regulated sector with information asymme-
try (because all the information is not in the public domain), the private operators may be
inefficient to even over the cost prices, as a fixed return is assured by the regulator.
The assertion that PSP is essential to finance a large investment that is needed in the
water sector is also entirely true. Contrary to expectations, despite privatization, the financial
support from host governments through subsidies or guarantees remains at significant levels.
A review of different privatization experiences across the world shows that privatization is
concentrated in poorer countries and the private water industry is dominated by six MNCs.
The efficiency of private-owned utility is also shrouded in mystery. A recent review of 12
empirical studies by Anwander and Ozuna in the Environment and Development Economics,
on the relative efficiency of public versus private utilities confirms that the effect of privatiza-
tion is ambiguous for the water sector. Only four studies have concluded that private owner-
ship is more efficient than public ownership. Numerous examples exist of poorly performing
privatised utilities. Several countries in Latin America have in fact reverted to municipal
management due to poor performance of the private operators.
Corruption is another accompanying feature of water privatization. Recently, a French
government’s move of privatization was accused of corrupt practices to secure enormous
profits. Moreover, any privatization which involves just one or very few participants will lack
transparency. Private firms may be able to recover the tariffs better as they have no obligation
to maintain supplies to the non-payer or to keep prices artificially low. To achieve this, they
may resort to practices such as supplying water only to enterprises where they can make huge
profits.
For example, the 1995 water privatization in Puerto Rico left the poor without water
while the US military bases and tourist resorts got adequate supplies. Indian law holds that
the groundwater is not a common/community resource but belongs to the landowner. Any
privatization will result in unchecked and excessive sinking of bore wells which will
1. lower the water table and
2. overload the water supplies with dissolved salt, fluorine, and arsenic.
In the long run, when the water table lowers and water becomes saline, it will have wide im-
plication for land-use patterns also. This is what is happening everywhere. In India, Bechtel
was involved in the Dabhol Power Project with Enron. It is now involved in the water priva-
tization of Coimbatore and Tirupur, as part of a consortium with Mahindra and Mahindra
and United International North West Water. As with other water privatization contracts, this
one has not been made public.
There exist several other ways to improve the efficiency of water supply, such as public
ownership of resources and operations, public ownership with operations contracted out to
private sector, and community and user participation. Before resorting to PSP, public–private
participation through service or management contracts should be tried out. The influence
and control over the pricing of water tariffs is vital to avoid exploitation of the monopoly
power by private firms.
From the investor’s point of view too, the public–private model works better than the
private sector as the primary task of investing in a country is mitigated to a great extent. The
utilities could be restructured to make them more efficient. One component of restructur-
ing is metering and charging a volumetric price reflecting the cost of service. It will not only
improve the usage of water but will also reduce the wastage of the same by the users.
Case Questions
1. Do you support privatization of water utilities?
2. Why are only private ownership and operations being actively pursued? Why must
not one first try the other ways and then resort to handing over the vital resources to
the MNCs?
SUMMARY
While the Congress-I initiated the process of economic the public sector is becoming performance oriented, there
reform with an emphasis on privatization and pushed it to is a need to strengthen professionalism, give more powers
some extent, the BJP and NDA (National Democratic Alli- to the Managing Directors of the PSUs in decision making,
ance) government, blatantly and in a muddle-headed fashion and reduce their dependence on ministerial control. Only af-
carried forward the banner of privatization, taking advantage ter giving more powers to the PSUs can they be made more
of the fact that the Congress is not in a position to oppose accountable. As there is no conclusive evidence that the pri-
it, being itself the architect of privatization. In the process, vate sector is more efficient than the public sector, whereas
the country had to pay enormous costs to meet the budget facts giving an edge to the public sector, it would be pru-
deficits by fleecing the healthy PSUs, and in the process, the dent to abandon the irrational policy of disinvestments of the
navratnas are also not spared. PSUs and search for other alternatives to further improve the
What the country ought to do is to immediately have a fresh PSUs’ performance.
look at the role of the highly profit-making PSUs. Now that
KEY WORDS
● Privatization ● Debt ● Stock
● Fiscal ● Profit-earning Capacity ● BRPSE
● Disinvestment ● Fiscal Crises ● Net Asset Value (NAV)
● Sick Unit ● Discount Flow Method ● Merchant Bankers
● Public Sector ● Capital Infusion
QUESTIONS
1. Explain the meaning of privatization. Make a critical 4. Explain the measures to be followed for the revival of
analysis of the issue of privatization. PSEs in India.
2. Explain the changes in the public opinion on PSEs and 5. Discuss the measures taken by the UPA government
the privatization move of PSEs in the recent years. for the revival of PSEs.
3. Explain the major changes in the policy directions of
the government towards PSEs in India.
REFERENCES
n Datt, R. and K. P. M. Sundharam (2005). Indian n Misra, S. K. and V. K. Puri (2000). Indian Economy.
Economy. Delhi: Sultan Chand. Mumbai: Himalaya Publishing House.
n Dhar, P. K. (2000). Indian Economy: Its Growing n Nib, S. (2004). Disinvestments in India. New Delhi:
Dimensions New Delhi: Kalyani Pub. Sage.
24
C hapter
Globalization
>>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>>
• Background 633 • Globalization and Its Impact on the Indian
• Views of Scholars on Globalization 634 Industry 642
• Studies on Globalization 634 • Positive Effects of Globalization 648
• Efforts of Anglo-Americans 635 • Negative Effects of Globalization 652
• Salient Aspects of Globalization 635 • Pro-globalization 653
• Role of Transnational Corporations (TNCs) 635 • Anti-globalization 654
• Popular and Successful Transnational • Globalization—An Assessment 656
Corporations (TNCs) 636 • A Critical Appraisal of Globalization 658
• Concept and Meaning 637 • Threats to Globalization 660
• Definition 638 • Case 662
• Features 638 • Summary 662
• Globalization is Inevitable 639 • Key Words 663
• Ten Rules of Global Reforms 640 • Questions 663
• India and Globalization 641 • References 663
• Government’s Measures Towards
Globalization 641
Globalization has changed us into a company that searches the world, not just to sell or to
source, but to find intellectual capital—the world’s best talents and greatest ideas.
—Jack Welch
Background
The widespread scholarly emphasis on the economic dimension of globalization derives part-
ly from its historical development as a subject of academic study. Some of the earliest writings
on the topic explore in much detail how the evolution of international markets and corpora-
tions led to an intensified form of global interdependence. These studies point to the growth The economic accounts of glo-
of international institutions such as the European Union (EU), the North American Free balization convey the notion
Trade Association (NAFTA), and other regional trading blocs. The economic accounts of that the essence of the phenom-
enon involves ‘the increasing
globalization convey the notion that the essence of the phenomenon involves ‘the increasing linkage of national economies
linkage of national economies through trade, financial flows, and foreign direct investment through trade, financial flows,
(FDI) by multinational firms.’ Thus, the expanding of economic activity is identified as both and foreign direct investment
the primary aspect of globalization as well as the engine of its rapid development. (FDI) by multinational firms.’
Views of Scholars on Globalization

Many scholars who share this economic perspective consider globalization a real phenom-
enon that signals an epochal transformation in the world affairs. Their strong affirmation of
globalization culminates in the suggestion that a quantum change in human affairs has taken
place, as a new flow of large quantities of trade, investment, and technologies has expanded
from a trickle to a flood across national borders. They propose that the study of globaliza-
tion should be moved to the centre of social–scientific research. According to their view, the
central task of this research agenda should be a close examination of the evolving structure
of global economic markets and their principal institutions.
Studies On Globalization
The studies of economic globalization are usually embedded in thick historical narratives
that trace the gradual emergence of the new post-war world economy to the 1944 Bretton
Woods Conference. Under the leadership of the United States and Great Britain, the major
economic powers of the West decided to reverse the protectionist policies of the inter-war
period (1918–39) by committing themselves to the expansion of international trade. The
In Bretton Woods Conference, major achievements of the Bretton Woods Conference include limited liberalization of trade
1944, the gold-based fixed rate and establishment of binding rules on international economic activities. In addition, the par-
system was set. ticipants of the Bretton Woods Conference agreed upon the creation of a stable currency
exchange system in which the value of each country’s currency was pegged to a fixed gold
value of the US dollar. Within these prescribed limits, individual nations were free to con-
trol the permeability of their borders, which allowed them to set their own economic agen-
das, including the implementation of extensive social welfare polices. Bretton Woods also
set the institutional foundations for the establishment of three new international economic
organisations.
The IMF and the International The International Monetary Fund (IMF) was created to administer the international
Bank for Reconstruction and monetary system. Likewise, the International Bank for Reconstruction and Development,
Development, or World Bank, or World Bank, was initially designed to provide loans for Europe’s post-war reconstruction.
were set up in Bretton Woods
Beginning in the 1950s, its purpose was expanded to fund various industrial projects in the
Conference in 1944.
developing countries around the world. In 1947, the General Agreement on Tariffs and Trade
(GATT) became the global trade organisation charged with fashioning and enforcing of mul-
In 1947, GATT became the glo- tilateral trade agreements. Founded in 1995, the World Trade Organisation (WTO) emerged
bal trade organisation charged as the successor organisation to GATT.
with fashioning and enforcing
of multilateral trade agree- During its operation for almost three decades, the Bretton Woods system contributed
ments. greatly to the establishment of what some observers have called the ‘golden age of controlled
capitalism.’ According to this interpretation, the existing mechanism of a state’s control over
the international capital movements made full employment and expansion of a welfare state
really possible. Rising wages and increased social services secured in the wealthy countries of
the global North gives a temporary class compromise.
Most scholars of economic glo- Most scholars of economic globalization trace the accelerating integrationist tendencies
balization trace the accelerat- of the global economy to the collapse of the Bretton Woods system in the early 1970s. In
ing integrationist tendencies response to profound changes in the world economy that undermined the economic com-
of the global economy to the
collapse of the Bretton Woods
petitiveness of the US-based industries, President Richard Nixon decided in 1971 to abandon
system in the early 1970s. the gold-based fixed-rate system. The combination of new political ideas and economic
developments, high inflation, low economic growth, high unemployment, public sector
deficits, and two major oil crises within a decade led to the spectacular election victories of
Globalization | 635
c onservative parties in the United States and the United Kingdom. These parties spearheaded
the neoliberal movement towards the expansion of international markets, a dynamic idea
supported by the deregulation of an enormous increase in global financial transactions.
Efforts of Anglo-Americans
During the 1980s and 1990s, the Anglo-American efforts to establish a single global market Shattering the post-war eco-
were further strengthened through comprehensive trade-liberalization agreements that in- nomic consensus of Keynesian
creased the flow of economic resources across national borders. The rising neoliberal para- principles, free-market theories
digm received a further limitation with the 1989–91 collapse of command-type economies pioneered by Friedrich Hayek
and Milton Friedman estab-
in the Eastern Europe. Shattering the post-war economic consensus of Keynesian princi- lished themselves as the new
ples, free-market theories pioneered by Friedrich Hayek and Milton Friedman established economic orthodoxy, advocat-
themselves as the new economic orthodoxy, advocating the reduction of the welfare state, ing the reduction of the welfare
downsizing of the government, and the deregulation of the economy. A strong emphasis state, downsizing of the govern-
ment, and the deregulation of
on ‘monetarist’ measures to combat inflation led to the abandonment of the Keynesian goal the economy.
of full employment in favour of establishing more ‘flexible’ labour markets. In addition, the
dramatic shift from a state-dominated to a market-dominated world was accompanied by
technological innovations that lowered the cost of transportation and communication. The
value of world trade increased from $57 bn in 1947 to an astonishing $6 tn in the 1990s.
Salient Aspects of Globalization

Perhaps, the two most important aspects of economic globalization relate to the changing Perhaps, the two most impor-
nature of the production process and the internationalization of financial transactions. Indeed, tant aspects of economic glo-
many analysts consider the emergence of a transnational financial system the most fundamen- balization relate to the chang-
ing nature of the production
tal feature of our time. As sociologist Manuel Castells points out, the process of financial glo-
process and the internationali-
balization accelerated dramatically in the late 1980s as capital and securities markets in Europe sation of financial transactions.
and the United States were deregulated. The liberalization of the financial trading allowed
for an increased mobility among the different segments of the financial industry, with fewer
restrictions, and a global view of investment opportunities. In addition, the advances in data
processing and information technology (IT) contributed to the explosive growth of tradable
financial value. However, a large part of the money involved in expanding the markets, had
little to do with supplying capital for a productive investment, putting together machines, raw
materials, and employees to produce saleable commodities and the like. Most of the growth
occurred in the purely money-dealing currency and securities markets that trade claims to
draw profits from future production. Aided by new communication technologies, global
entries and speculators earned spectacular incomes by taking advantage of the weak, finan-
cial and banking regulations in the emerging markets of the developing countries. By the late
1990s, an equivalent of nearly $2 tn was exchanged daily in the global currency markets alone.
Role of Transnational
Corporations (TNCs)
While the creation of international financial markets represents a crucial aspect of eco-
nomic globalization, another important economic development in the last three decades
also involves the changing nature of global production. Transnational corporations (TNCs)
Transnational corporations c onsolidated their global operations in an increasingly deregulated global labour market.
(TNCs) consolidated their global The availability of cheap labour, resources, and favourable production conditions in the
operations in an increasingly Third World enhanced both the mobility and the profitability of TNCs. Accounting for over
deregulated global labour mar-
ket. The availability of cheap la-
70 per cent of the world trade, these gigantic enterprises expanded their global reach as their
bour, resources, and favourable FDI rose by approximately 15 per cent annually during the 1990s. Their ability to disperse
production conditions in the manufacturing processes into many discrete phases, carried out in many different locations
Third World enhanced both the around the world, is often cited as one of the hallmarks of economic globalization. Indeed,
mobility and the profitability of
TNCs.
the formation of such ‘global commodity chains’ allows huge corporations such as Nike and
General Motors to produce, distribute, and market their products on a global scale. Nike,
for example, sub-contracts 100 per cent of its goods production to 75,000 workers in China,
South Korea, Malaysia, Taiwan, and Thailand.
Transnational production systems augment the power of global capitalism by enhanc-
ing the ability of TNCs to bypass the nationally based political influence of trade unions
and other workers’ organisations in collective wage-bargaining processes. While rejecting
the extreme accounts of economic globalization, the political economist Robert Gilpin none-
theless concedes that the growing power of TNCs has profoundly altered the structure and
functioning of the global economy.
These giant firms and their global strategies have become major determinants of trade
The consequence of globali-
zation is MNCs are becom- flows and of the location of industries and other economic activities around the world. Most
ing extremely important in of the investments are in capital and technology-intensive sectors. These firms have become
determining the economic, central in the expansion of technology flows to both industrialised and industrialising econo-
political, and social welfare of mies. As a consequence, multinational firms (MNCs) have become extremely important in
many nations.
determining the economic, political, and social welfare of many nations. Controlling much
of the world’s investment capital, technology, and access to global markets, such firms have
become major players not only in the international economic affairs, but in the political
affairs as well (refer to Figure 24.1).
• Many TNCs have a higher annual income than some countries.
• There are 119 McDonalds fast food outlets in the world, and over 62 million custom-
ers are served each day.
• At least 75 per cent of world flows come from TNCs.
• As much as 67 per cent of all exports are directly related to TNCs through relations
with Third world countries
• India processes 1 per cent of the food it grows; however, the United States processes
70 per cent of the food it grows.
Popular and Successful

Transnational Corporations (TNCs)
Nike is a major publicly traded sportswear and equipment supplier based in the United
States. The company is headquartered near Beaveron, Oregon, which is part of the Portland
metropolitan area. It is the world’s leading supplier of athletic shoes and apparel and a major
manufacturer of sports equipment, with revenue in excess of US$18.6 billion in the fiscal
year 2008.
Globalization | 637
Foreign direct investment: at least 75 per cent of world flows

come from TNCs
25% TNCs
Others 75%
International trade: 67 per cent of all exports are directly related to

TNCs through intrafirm operations or trade with third parties
Intrafirm
Non-TNC operations
trade 33% 34%
TNC trade 33%
with third
parties
Source: tncandglobalization.weebly.com
• Many successful TNCs have more annual income than some countries.
Some TNCs are bigger than some countries

measured by value added or GDP, 2000, billions of dollars
Chile 71
ExxonMobil 63
Pakistan 62
General Motors 56
Algeria 53
Peru 53
Czech Republic 51
New Zealand 51
United Arab Emirates 48
Bangladesh 47
Hungary 46
Ford Motor 44
DaimlerChrysler 42
Nigeria 41
0 10 20 30 40 50 60 70 80
Source: tncandglobalization.weebly.com
Concept and Meaning

The phenomenon of globalization seems to have occurred in the late 19th century. The share The integration of world econo-
of export in the gross domestic product (GDP) of 16 major industrialised countries rose my through international trade,
from 18.2 per cent in 1900 to 21.2 per cent in 1913. If we consider the period from 1950 to at the turn of the last century,
was about the same as it is
1999, the world exports rose from $61 bn in 1950 to $5,460 bn in 1999. In addition, the trade towards the end of this century.
in commercial services amounted to $1,340 bn in 1999. Over this period, the share of world
exports to world output grew from 6 per cent to 16 per cent; likewise, FDI flows increased to
a record of $855 bn in 1999.
While three-fourths of this ($636 bn) were attracted by the developed countries, some of
the developing countries, especially China, have been major beneficiaries in the recent years.
The high-performing Asian economies, so also some of the Latin American countries, have
consistently secured tremendous gains from a dynamic and vibrant world trade and invest-
ment. It is seen from the above data that the integration of world economy through interna-
tional trade, at the turn of the last century, was about the same as it is towards the end of this
century. This indicates the presence of international trade in both the periods.
Definition
Human societies across the globe have established progressively closer contacts over many
Globalization is nothing but the
growing economic interdepend-
centuries, but recently the pace has dramatically increased. Jet airplanes, cheap telephone
ence through increasing cross- service, email, computers, huge oceangoing vessels, instant capital flows, all these have made
border transaction in goods and the world more interdependent than ever. Multinational corporations manufacture products
services. in many countries and sell to consumers around the world. Money, technology and raw ma-
terials move ever more swiftly across national borders. Along with products and finances,
ideas and cultures circulate more freely. As a result, laws, economies, and social movements
are forming at the international level. Many politicians, academics, and journalists treat these
trends as both inevitable and (on the whole) welcome. However, for billions of the world’s
people, business-driven globalization means uprooting old ways of life and threatening live-
lihoods and cultures. The global social justice movement, itself a product of globalization,
proposes an alternative path, more responsive to public needs. Intense political disputes will
continue over globalization’s meaning and its future direction. The globalization process in-
cludes globalization of markets, globalization of production, globalization of technology, and
globalization of investment. Basically this chapter deals with features.
Features
Globalization encompasses the following features:
Globalization enables a busi-

1. Operating and planning to expand businesses throughout the world,
ness to operate and plan to ex- 2. Erasing the differences between domestic- and foreign market,
pand throughout the world.
3. Buying and selling goods and services from/to any country in the world,
4. Establishing manufacturing and distribution facilities in any part of the world, based
on feasibility and viability rather than national consideration,
5. Product planning and development are based on the market consideration of the
entire world,
6. Sourcing of factors of production and inputs like raw materials, machinery, finance,
technology, human resources, and managerial skills from the entire globe,
7. Global orientation in strategies, organisational structure, organisational culture, and
managerial expertise, and
Entire globe is becoming a
single market. 8. Setting the mind and attitude to view the entire globe as a single market.
Globalization | 639
Box 24.1 explains the management strategies that are to be globalized.
Box 24.1 Management Strategies to be Global

1. Economies of scale, cost reduction, and efficiency in 4. Latest technology absorption and modernisation.
the production process. 5. Cost reduction and quality controls leading to
2. Organisational restructuring involving men, efficiency.
materials, and management that are suitable for 6. Aggressive sales strategy, multimedia marketing,
global production. brand promotion, and trademarks and patent rights.
3. Calibrating to globalization through FDI capital flow 7. Financial strengthening through mergers, FJVS, and
and capital restructuring. acquisitions.
Globalization is Inevitable
According to the globalist perspective, globalization reflects the spread of irreversible mar-
According to the globalist per-
ket forces that are driven by technological innovation which make the global integration of spective, globalization reflects
national economies inevitable. In fact, globalism is almost always intertwined with the deep the spread of irreversible mar-
belief in the ability of the markets to use new technologies to solve social problems far better ket forces that are driven by
technological innovation which
than any alternative course. When, years ago, the British Prime Minister Margaret Thatcher make the global integration of
famously pronounced that ‘there is no alternative’ (TINA), she meant that there existed no national economies inevitable.
longer a theoretical and practical alternative to the expansionist logic of the market. In fact,
she accused those nonconformists, who still dared to pose alternatives, as foolishly relying
on anachronistic, socialist fantasies that betrayed their inability to cope with the empirical
reality. The governments, political parties, and social movements had no other choice but
to ‘adjust’ to the inevitability of globalization. Their remaining sole task was to facilitate the
integration of national economies in the new global market. The states and inter-state system
should, therefore, serve to ensure the smooth working of market logic. Indeed, the multiple
voices of globalism convey to the public their message of inevitability with a tremendous
consistency. Below are some examples.
In a speech on US foreign policy, President Clinton told his audience, ‘Today we must
embrace the inexorable logic of globalization—that everything from the strength of our econ-
omy to the safety of our cities, to the health of our people depends on events not only within
our borders, but half a world away’. On another occasion he emphasized that ‘globalization is
irreversible. Protectionism will only make things worse’. Clinton’s Under Secretary Eizenstate
echoed the assessment of his boss,
Globalization is an inevitable element of our lives. We cannot stop it any more than
we can stop the waves from crashing on the shore. The arguments in support of trade
liberalization and open markets are strong ones—they have been made by many of you
and we must not be afraid to engage those with whom we respectfully disagree.
Frederick W. Smith, the Chairman and CEO of FedEx Corporation, suggests that ‘globalization Globalization is very difficult to
is inevitable and inexorable and it is accelerating … Globalization is happening, it’s going to reverse because it is driven by
happen. It does not matter whether you like it or not, it’s happening, it’s going to happen’. both powerful human aspiration
Journalist Friedman comes to a similar conclusion, ‘Globalization is very difficult to reverse and powerful technologies.
because it is driven both by powerful human aspiration for higher standards of living and
by enormously powerful technologies which are integrating us more and more every day,
whether we like it or not’. However, Friedman simply argues by asserting that there is some-
thing inherent in technology that requires a neoliberal system. He never considers that, for
example, new digital communication technologies could just as easily be used to enhance
public-service media as it can be utilized in the commercial, profit-making enterprises. The
choice depends on the nature of the political will exerted in a particular social order.
Ten Rules of Global Reforms

In return for supplying the much-needed rules to the developing countries, the IMF and the
World Bank demand from their creditors the implementation of neoliberal policies that fur-
ther the material interests of the First World. Unleashed on the developing countries in the
1990s, these policies are often referred to as ‘Washington Consensus.’ It consists of a 10-point
Washington Consensus con-
sists of a 10-point programme, programme that was originally devised and codified by John Williamson, formerly an IMF
the purpose of which was to advisor in the 1970s.
perform the internal economic The programme was mostly directed at countries with large-remaining foreign debts
mechanism of debtor countries
from the 1970s and 1980s. Its purpose was to reform the internal economic mechanisms
in the developing world.
of debtor countries in the developing world so that they would be in a better position to
repay the debts they had incurred. In practice, the terms of the programme spelled out a new
form of colonialism. The 10 areas of the Washington Consensus, as defined by Williamson,
required Third World governments to enforce the following reforms:
1. A guarantee of fiscal discipline, and a curb on budget deficits.
2. A reduction of public expenditure, particularly in the military and public
administration.
3. Tax reform, aiming at the creation of a system with a broad base and with effective
enforcement.
4. Financial liberalization, with interest rates determined by the market.
5. Competitive exchange rates, to assist the export-led growth.
6. Trade liberalization, coupled with the abolition of import licensing and a reduction of
tariffs.
7. Promotion of FDI.
8. Privatization of state enterprises, leading to efficient management and improved
performance.
9. Deregulation of the economy.
10. Protection of property rights.
To call this programme ‘Washington Consensus’ is no coincidence. The United States is by
far the most dominant economic power in the world, and the largest TNCs are based in the
The United States is by far the United States. As the British journalist Will Hutton points out, one of the principal aims of the
most dominant economic pow- Economic Security Council set up by President Clinton in 1993 was to open up 10 countries
er in the world, and the largest to US trade and finance. Most of these ‘target countries’ are located in Asia. Again, this
TNCs are based in the United
States. is not to say that the United States is in complete control of the global financial markets
Globalization | 641
and, therefore, rules supremely over this gigantic process of globalization. However, it does
suggest that both the substance and the direction of economic globalization are, indeed, to a
significant degree shaped by the US foreign and domestic policy.
India and Globalization

In the broader Indian context, the earning of foreign exchange and having a comfortable
balance of payment (BoP) position were the fundamental reasons for globalization. How-
ever, the world has become borderless and a global village. Mass communication media like
satellite TV network, fax, Internet, and the telecommunications have internationalised the
Indian consumer’s preference. There is no alternative for Indian industry but to globalize its
operations to meet the ever-increasing aspirations of the Indian consumers. With the cur-
With the current liberalization
rent ‘liberalization’ programme of the Government of India (GOI), many foreign MNCs are programme of the GOI, many
entering Indian markets through new projects, acquisitions, and mergers. They are likely to foreign MNCs are entering
compete with the Indian domestic industry with their international mass scales. Unless the Indian market.
Indian industry is sufficiently globalized to counter such competitive threats in the home
market, the Indian domestic industry may find itself becoming unviable.
Indian industry has, hitherto, been enjoying protection in various forms from the gov-
ernment, to such an extent that many of them do not really know what a severe competition
can do to an industry. Many products manufactured in India are not cost-effective and do
not even measure up to the minimum quality levels. All these are the result of the compla-
cency accumulated over a long period of protection. Cost-competitive, high-quality prod-
ucts and services can be effectively offered to domestic consumers through the international
exposure gained from globalization. Globalization, besides adding higher earnings of foreign
exchange, provides the companies with an access to a large global market.
International exposure through globalization helps companies to acquire and update International exposure through
their technology, be cost-effective, and ward off future competitive threats in the domestic globalization helps companies
market. Innovative management styles witnessed in the global markets can bring in a fresh to acquire and update their
technology, be cost-effective,
air of creativity and professionalism to the Indian industry. Asia is emerging as an important
and ward off future competitive
growth region for the future. The market is here and the resources are available. The govern- threats in the domestic market.
ment diplomacy is conducive and compelling. The need for globalization has thus become
pre-eminent for the Indian industry.
Government’s Measures Towards

Globalization
The GOI has taken the following measures in order to globalize the Indian economy:
1. Removing constraints and obstacles to the entry of MNCs into India by diluting and
finally scrapping restrictive laws like Foreign Exchange and Regulation Act, 1973
(FERA). The Foreign Exchange Management Act (FEMA) has been passed by delet-
ing the clauses which restricted the entry of MNCs.
2. Permitting Indian companies to collaborate with foreign companies in the form of
foreign joint ventures (FJVs).
3. Establishing of FJVs by Indian companies in various foreign countries.
4. World Bank-advocated import liberalization. Consequently, the GOI reduced the

import tariffs to 15 per cent.
5. Replacing licences of imports with tariffs.
6. Eliminating various import duties and drastic reduction of other import duties.
By removing export duties, 7. Lifting the quantitative restrictions (QRs) on 715 goods with effect from 1 April, 2001,
lifting the QRs, and offering in order to enhance the efficiency, quantity, product design, delivery, thus reducing
incentives to MNCs, the govern- the prices.
ment can globalise the Indian
economy. 8. Removing export subsidies.
9. Replacing licensing of exports with duties.
10. Levying low, flat tax on the export income.
11. Reformulating the policy of export processing zones (EPZs) and export-oriented
units (EOUs).
12. Liberalising the inflow of FDI.
13. Offering incentives to MNCs and NRIs (nonresident Indians) to invest in India.
14. Allowing foreign institutional investors (FIIs) to invest in the Indian capital market.
15. Expanding the list of items for an automatic approval of foreign equity.
16. Allowing the Indian mutual funds to invest in foreign companies.
17. Allowing the Indian companies to procure capital from foreign countries through
‘Euro Issues’ and ‘Global Deposit Receipts (GDR).’
18. Free the way of investment in FJVs.
19. Devaluing the rupee by lifting exchange controls in a phased manner.
20. Allowing the rupee to determine its own exchange rate in the international market
without an official intervention.
21. Full convertibility of rupee in the current account.
22. Acting cautiously regarding convertibility of rupee in the capital account in view of
the Asian crisis.
23. Decanalising oil and agricultural trade.
24. Countering anti-dumping measures.
25. Resolving market access issues in the services.
26. Seeking membership in trade blocs.
Globalization and Its Impact on THE

Indian Industry
Economic Development
The process of economic liberalization began during Prime Minister Indira Gandhi’s regime
in the early 1980s. It continued in a halting manner during the tenure of her son Rajiv
Gandhi’s government in the late 1980s. The aim of the policies was to move away from a
Globalization | 643
state-controlled, planned economy with an emphasis on investment in heavy industries run The aim of the policies was
by the public sector, to the one which would be more market friendly and one which envis- to move away from a state-
aged a greater role for the private enterprises. The government’s strategy has been to integrate controlled, planned economy
the country’s economy with the rest of the world. withan emphasis on investment
in heavy industries run by the
When the economic-reform process began, the country was going through an acute public sector, to the one which
shortage of foreign exchange. The country’s hard-currency reserves had dwindled to an abys- would be more market friendly
mal level. Earlier, a part of India’s official gold stocks had been taken out of the country to and one which envisaged a
raise funds. The government approached the IMF for a structural adjustment loan, which greater role for the private
enterprises.
was granted under certain terms and conditions. These included a drastic reduction in the
fiscal deficit, a reduction in money supply, a cutting down of the import tariff, and a devalu-
ation of the Indian currency. The reduction in the deficit resulted in a squeeze on the capi-
tal investment, especially in the social infrastructure sectors such as health and education,
which was subsequently reversed, as it was not found politically feasible.
Non-economic Developments
Even as the government freed the country’s industrial sector from the licensing system, Even as the government freed
marking a radical departure from the past, the industrial production did not pick up quickly. the country’s industrial sec-
In fact, on account of the fiscal squeeze among the other things, the Indian industry had to tor from the licensing system,
marking a radical departure
go through a reversionary phase. Non-economic developments, in particular the demoli- from the past, the industrial pro-
tion of the Babri Mosque in December 1992, the bomb blasts in Bombay in March 1993, duction did not pick up quickly.
the outbreak of plague in August 1994, the political instability at the Centre during 1996, the
Pokhran nuclear test in 1998, and the Kargil war in 2000, all contributed to slowing down the
pace of economic growth. Major financial scandals involving brokers, bankers, bureaucrats,
and politicians were unearthed, and this led to a crash in the then-booming stock markets
and the financial sector.
Low Industrial Growth

The changing growth profile of the Indian economy is shown in Table 24.1. India’s index of India has achieved a long-term
industrial production (IIP) data for March 2013 shows the slowest annual industrial growth average compound rate of
in 20 years, and the second lowest since 1982 (from when IIP data is available). At a measly industrial growth of about
6.5 per cent in the post-liberli-
1 per cent growth over last year, our average IIP number over the year is at the lowest since
sation period.
1991–92. (Average IIP number is the IIP average for the whole financial year, which removes
intra-year seasonality.)
Sr. Item 1980–81 to

(At factor cost)
1992–93 to
< Table 24.1
Sectoral Real Growth
No. 1991–92 2000–01 Rate in GDP
I. Agriculture and allied 3.9 3.3
industry 6.3 6.5
II. Of which manufacturing 6.1 7.4
services 6.4 8.2
III. Of which trade, hotels, transport, and
communications 5.5 8.3
Financial, real estate, and business services 9.4 8.8
Community, social, and personal services 5.6 7.4
Total GDP 5.4 6.4
ource: Indian Industry in Post-Liberalization Era, published by Forum of Free Enterprise, Mumbai,
S
July–August 2001.
India’s Industrial Production Growth Lowest in 20 Years

16.0%
15.6%
14.0% 13.0%
12.9%
12.0% 11.7%
10.0% 9.1%
8.7% 8.7% 9.1%
8.6%
8.6% 8.2% 8.6% 8.2%
8.0%
6.7% 6.7%
6.7% 7.0%
7.3%
6.0% 6.0% 5.7%
6.1% 4.9%
5.3%
4.0%
3.2% 4.1% 2.9%
2.3% 2.5%
2.0% 2.8%
1.0%
0.6%
0.0%
1982-83
1983-84
1984-85
1985-86
1986-87
1987-88
1988-89
1989-90
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
Source: IIP from MOSPI and RBI.
High Tariffs and Taxes

The customs tariffs for a whole range of industrial products in India are very high and are
set to be brought down to the level of East Asian countries in the next three years (2005–08).
In the recent budget, the Finance Minister announced that he would reduce the number of
rates to the minimum with a peak rate of 15 per cent within the next three years. The Indian
industry is further burdened with heavy indirect taxes. There is a vast disparity between the
burdens of domestic indirect taxes applicable to the Indian industry and similar taxes appli-
cable to the foreign producers in their respective economies.
The Indian Government should
The Indian industry cannot effectively exploit the economies of scale unless indirect
consider the removal of QRs taxes are rationalised and customs tariffs progressively reduced. The government should also
and devaluation of Indian consider the other factors for Indian industry to progress such as (i) the removal of quantita-
rupee, to progress. tive restrictions (ii) the entry of China into the WTO, (iii) the devaluation of Indian rupee,
and (iv) the disparity between the tariffs and taxes.
Increased Industrial Unemployment

Unemployment due to mod- There are widespread closures of industries, downsizing of jobs due to modernisation and
ernisation, uncertainty in stock globalization, and an increase in the industrial unemployment. There is an urgent need of
markets, old and new economy strengthening the mechanism of the social safety net. The crux of the problem is about the
syndrome, industrial consolida- allocation of adequate financial resources for the National Renewal Fund (NRF) and us-
tion and restructuring and negli-
gible global export are the nega- ing them not only for retrenchment compensation by way of voluntary retirement bene-
tive impacts of globalization. fits but more importantly for retraining and redeployment of the growing army of labour
force, which are likely to be rendered jobless with the massive onslaught of competition and
globalization.
Uncertainty in Stock Markets

Stock markets are becoming the driving force in the new, market-driven industrial struc-
ture that is coming into existence. In the past, the allocation of resources to the industry
was predominantly determined by the forces of industrial licensing, import controls, pricing,
Globalization | 645
and distribution regulations. In the implementation of this regime, the perspective planning
programmers in the sequence of five-year plans of the Planning Commission essentially
offered the driving principles. But this is no longer valid now.
There is an uncertainty whether many of our basic and capital goods industries will be
looked upon favourably if they seek the support of capital markets for funding their new
programmes of expansion and diversification. This also raises an important issue that in
the event of capital markets not supporting the future resource needs for the creation of
new industrial capacities,which would then come forward to support the process of further
industrialisation, what would be the condition?
Old and New Economy Syndrome

There is a growing perception that the old economy is all ‘bad old guys and bad old days’
while the new economy is ushering in new hopes of prosperity. The reflection of this thought
process is evident in the growing market capitalisation of IT stocks in the total market capi-
talisation in the stock markets. Of course, the recent rapid slide in the IT sector stocks have
brought about a substantive correction in the extreme distortion that was created earlier.
Even in the global stock markets especially, at NASDAQ (National Association of Securities
Dealers Automated Quotations), there has been a precipitous fall in the new technology
stocks. The increasing globalization also means a transmission of investment sentiments The basic issue is how to utilise
across the stock markets of the world. The Indian markets cannot be immune to this trend the new economy dynamics to
but this fact raises the following questions—has the old economy failed us? or Are our wrong modernise and galvanise the
old economy rather than getting
policies that have failed most sectors of the old economy? The basic issue is how to utilise the lost in the irrelevant debate of
new economy dynamics to modernise and galvanise the old economy rather than getting lost past failures.
in the irrelevant debate of past failures.
Industrial Consolidation and Restructuring

The post-reform experience suggests that the Indian industry is not averse to the process of
restructuring. In the recent years, there have been significant efforts towards industrial con-
solidation and restructuring, including some tough decisions on downsizing, divestments,
and global norms of productivity, cost, and pricing. The classic examples are cement, petro-
chemicals, steel, and pharmaceutical industries. This restructuring process needs enormous
stimulus, and it must spread across many other sub-sections of the Indian industry too. The
crucial questions are—How far the reform process of imparting flexibility to labour markets How soon will the proposed re-
forms become operative and ef-
and the reform of bankruptcy laws, including the repeal of SICA (Sick Industries Compa- fective given the limitations of a
nies Act) and the dissolution of BIFR (Board for Industrial and Financial Reconstruction), coalition governance?
facilitate the restructuring of the Indian industry? and how soon will the proposed reforms
become operative and effective given the limitations of a coalition governance?
Negligible Global Export

Global markets offer opportunities for all but opportunities by itself do not guarantee the
desired results. For high-performing Asian economies as well as for China, the benefits of The benefits of globalization for
China is, their trade to GDP ra-
globalization are clearly reflected in the rising ratio of their trade (imports plus exports) to
tio is rising and is hovering be-
GDP, which in 2004 was hovering between 40 per cent and 45 per cent. But in the case of tween 40 per cent and 45 per
India, even granting the fact that our trade to GDP ratio has increased in the post-reform cent, whereas for India, it is only
period from about 13 per cent of GDP in the early 1990s to about 20 per cent of GDP at 20 per cent at present.
2004, we have a long way to go before we can catch up with the levels achieved by the Asian
Tigers.
In the most significant areas of globally manufactured products like gems and jewellery,
readymade garments, cotton yarn, fabrics, tea, and leather products, India does not have any
meaningful share of global markets. Even in the IT sector, it is the software segment where
India is doing extremely well while the hardware sector remains at a nascent stage only. In
substance, what has been achieved so far is impressive but not very inspiring. India has lost
its status as the 10th largest industrial power in the world, in the course of the last two dec-
ades or more. It has also to make a mark in the export markets of the manufacturing prod-
ucts. India’s overall share in the global exports is hovering around a modest 0.7 per cent in
2008. All this goes to suggest that in the coming years, the Indian industry will have to either
shape up or ship out.
Other Areas
The gross domestic savings (GDS) as a percentage of GDP declined to 22 per cent in 1998–99
when compared to 24.3 per cent in 1990–91. The investment rate is 25 per cent and it is
believed that the savings–investment gap will be made up by external funds. However, all
through the 1990s the exports have been growing slower than the imports, a continuation of
an old trend. In addition, the currency has been steadily devaluing, implying an increase in
the debt-service burden and costlier imports.
The currently comfortable state of external balance primarily reflects short-term capital
flows from the FIIs. FDI, despite wide-ranging incentives, is about $2 bn, whereas the cor-
responding figure for China is close to $20 bn. The former Prime Minister Chandra Shekhar
asserted in an interview that liberalization policies will not do any good to our country and
instead only strengthen the hands of the MNCs.
The former Union Finance Minister Madhu Dandavate, while delivering a lecture on
The former Union Finance Min-
ister Madhu Dandavate, while ‘GATT and Liberalization’, quoted, ‘Approximately seven lakh small-scale industries (SSI) in
delivering a lecture on ‘GATT the country have closed down while another six lacks SSIs and 7000 big industries have be-
and Liberalization’, quoted, come sick in the last 5 years during India’s march towards globalization.’ Dandavate said that
‘Approximately seven lakh the SSI sector in India was once so dynamic that it accounted for 40 per cent of the country’s
small-scale industries (SSI) in
the country have closed down productivity, providing employment to 19.7 million people, and earning about 45 per cent of
while another six lacks SSIs foreign exchange; the same sector is now on its deathbed.
and 7000 big industries have The agriculture sector, which has a major share in the GDP, stands to lose market due to
become sick in the last 5 years
a cheap agro produce from the developed countries. There is now a considerable evidence to
during India’s march towards
globalization.’ show that in the last 10 years, the regional inequalities have widened and the rich have be-
come richer. While the growing inequality creates a class of rich consumers, this bias is easily
saturated. Therefore, the rising inequality does not help in the expansion of mass markets.
The GOI should take a firm stand The globalization policy of the government must be in accordance with the circumstances in
and review the WTO restric- the country. The government should take a firm stand and review the WTO restrictions per-
tions pertaining to agriculture,
small-scale sector, investment, taining to agriculture, small-scale sector, investment, and trade-related intellectual property
and trade-related IPRs. rights (IPRs).
Areas of Concern in the Indian Economy

Globalization offers both challenges and opportunities for the Indian economy. The chal-
lenges are more serious because of the lack of competitive strength in the Indian industries.
India has experienced a decade of market-oriented reforms and many serious problems too
have surfaced in the mean time. They are as follows:
1. The technology gaps of several years are glaring. The difficulty in securing technology
transfers from the developed countries is more worrisome.
Globalization | 647
2. Infrastructure bottlenecks.
3. The hardcore reforms such as exit policy, privatization, and so on, are still politically In India, the hardcore reforms
difficult to implement. such as exit policy, privatization,
etc. are still politically difficult to
4. Indian products or services are not competitive in terms of price, quality, and delivery implement.
schedules.
5. The economy, in general, and industries, in particular, are victims of high cost.
6. The market access in the developed countries is very difficult as they are protected by
tariff and non-tariff barriers.
7. Most developed countries are unreceptive to India’s problems and are always de-
manding a larger market access in India.
8. India’s political economy is not very stable. The prevailing system of coalition govern-
ance is not conducive for any prompt and effective change and its implementation too.
9. India’s share of the world exports is a meagre 0.7 per cent and its share of trade India’s share of world exports
in the world services is even less. Hence, it does not command any bargaining is a meagre 0.7 per cent and
its share of trade in the world
strength in the WTO-level negotiations. Table 24.2 details on the India’s export
services is even less. Hence, it
performance. does not command any bargain-
ing strength in the WTO.
Most of these problems are of our own making and will have to be resolved with our own
internal efforts. At the WTO’s negotiating table, we can only raise issues that are applicable to
global trade and which do not comply with its given provisions and conditionalities. Box 24.2
vividly explains in points the issues that are to be raised.
India’s exports as percentage of Value in terms < Table 24.2

India’s Export
of trade Performance
World’s India’s India’s (1978–79
Years exports* imports GDP = 100)
1980–81 0.42 53.5 4.6 80.8
1990–91 0.58 75.4 5.8 109.3
1995–96 0.64 86.7 9.1 137.9
1997–98 0.62 84.4 8.7 145.8
1998–99 0.61 78.4 8.3 150.0
1999–2000 0.80 74.1 8.3 134.2
2000–01 0.70 88.2 9.9 128.1
2001–02 0.71 85.2 9.4 125.4
2002–03 0.80 85.8 10.6 113.6
2003–04 0.80 81.7 11.0 123.3
2004–05 0.89 73.8 11.8 106.9
2005–06 0.90 77.0 13.1 NA
*Calendar years, 1980–81 for 1980, etc.; NA: not applicable.
Source: Statistical Outline of India 2006–07, Department of Economics and Statistics, Tata Services
Limited.
Box 24.2 Issues in the Debate

• Is increasing globalization poses the risk of widening • Has India benefitted from globalization and foreign
the gulf between the developed and the developing aid?
nations? • Does a foreign aid hurt the internal potential of an
• The foreign aid provided by the World Bank and other economy to perform on its own, thereby making it
international financial institutions to the developing over-dependent on the external monetary help?
and the underdeveloped nations, over the past few • Is it the easy inflow of money in the form of aid that
decades, has actually enabled these countries to becomes the luring factor for the developing nations
develop themselves. to become the developed ones overnight?
• The Argentine economy is a burning example of the • Have the developed nations always benefitted in the
ineffectiveness of aid (in the form of IMF loans) name of globalization at the cost of the underdevel-
unless stringent macro-economic policies are oped ones?
simultaneously implemented.
The following figure shows percentage growth of India’s Exports and Imports for the period
from 2001–02 to 2010–11.
Figure 24.1
Percentage Growth of
> 45.00
Exports
Imports
39.53
India’s Exports and 40.00
35.77
Imports for the Period 35.17
35.00
from 2001–02 to 31.80
2010–11 30.00 28.19
27.58 27.94 27.27
Percentage Growth
25.28
25.00 23.45
22.06 21.60
21.21 20.83 20.44
20.00
14.98 14.71
15.00
10.00
7.26
6.21
5.00 2.68
0.57
0.00
−0.78
1
−5.00
–0
–0
–0
–0
–0
–0
–0
–0
–0
–1
–1
00
01
02
03
04
05
06
07
08
09
10
20
20
20
20
20
20
20
20
20
20
20
Year
Source: Annual Report Book
POSITIVE EFFECTS OF Globalization

Globalization has various aspects which affect the world in several different ways as follows:
Industrial
The emergence of worldwide production markets and broader access to a range of foreign
products for consumers and companies. Particularly, the movement of materials and goods
between and within transnational corporations, and access to goods by wealthier nations and
individuals at the expense of poorer nations and individuals who supply the labour.
Globalization | 649
Financial
The emergence of worldwide financial markets and better access to external financing for
corporate, national, and subnational borrowers. Simultaneous, though not necessarily purely
globalistic, is the emergence of under or un-regulated foreign exchange and speculative mar-
kets leading to inflated wealth of investors and artificial inflation of commodities, goods, and,
in some instances, entire nation’s as with the Asian economic boom-bust that was brought on
externally by ‘free’ trade.
Economic
The realisation of a global common market, that is based on the freedom of exchange of
goods and capital.
Political
Political globalization is the creation of a world government which regulates the relation-
ships among nations and guarantees the rights that are arising from the social and eco-
nomic globalization. Politically, the United States has enjoyed a position of power among
the world powers; in part, because of its strong and wealthy economy. With the influence
of globalization and with the help of the United States’ own economy, the People’s Republic
of China has experienced some tremendous growth within the past decade. If China
continues to grow at the rate projected by the trends, then it is very likely that in the next
20 years there will be a major reallocation of power among the world leaders. China will
have enough wealth, industry, and technology to rival the United States for the position of
a leading world power. The European Union, the Russian Federation, and India are among
the other already established world powers which may have the ability to influence future
world politics.
Increased Competition
One of the most visible effects is the improved quality of products and services due to global
competition. Customer service and the ‘customer is the king’ approach to production have
led to improved quality of products and services. As domestic companies have to fight out
foreign competition, they are compelled to raise their standards and customer satisfaction
levels in order to survive in the market. Besides, when a global brand enters a new country, it
comes in riding on some goodwill, which it has to live up to. This creates competition in the
market and a ‘survival of the fittest’ situation.
Employment
With globalization, companies have forayed into the developing countries and hence gener-
ated employment for them. However, it can turn out to be either good or bad, depending on
the point of view you wish to see it from. It has given an opportunity to invest in the emerg-
ing markets and tap the talent which is available there. In developing countries, there is often
a lack of capital which hinders the growth of domestic companies and hence, employment.
In such cases, due to global nature of the businesses, people of developing countries too can
obtain gainful employment opportunities. However, the developed countries have lost jobs
on account of this shift of jobs to the developing world and hence it is a pinch felt by people
in the First World.
Investment and Capital Flows

Many companies have directly invested in developing countries like Brazil and India by start-
ing production units, but what we also need to see is the amount of foreign direct investment
(FDI) that flows into the developing countries. Companies which perform well attract a lot
of foreign investment and thus push up the reserve of foreign exchange.
Foreign Trade
While discussing the effects of globalization, how can we forget about the impact of foreign
trade on an economy? Comparative advantage has always been a factor, even in during old
times. While trade originated in the times of early kingdoms, it has been institutionalised
due to globalization. Previously, people had to resort to unfair means and destruction of
kingdoms and countries to get what they wanted. Today, it is done in a more humane way,
with mutual understanding. People who operate in uncivilised ways have to face the WTO
and other world organisations that have been established with a view to control and regulate
trade activities of the countries.
Spread of Education
One of the most powerful effects of globalization is the spread of education. Today, you can
move in the search of the best educational facilities in the world, without any hindrance.
A person living in the United States can go to another continent for a new experience which
he or she may not find in his or her home country. If one is interested, one can even get a
specialisation in subjects not indigenous to his country and then spread that knowledge to
the home country. A good example of that is how the American managers went to Japan to
learn the best practices in the field of mass production and incorporated that knowledge in
their own production units.
Informational
An increase in the information flows between the geographically remote locations. Arguably,
this is a technological change with the advent of fibre-optic communications, satellites, and
increased availability of Internet telephony services possibly as an ancillary or unrelated to
the globalist ideology.
Cultural
The growth of cross-cultural contacts, the advent of new categories of consciousness and
identities, such as Globalism—which embodies cultural diffusion, the desire to consume and
enjoy foreign products and ideas, adopt new technology and practices, and participate in a
‘world culture’; the loss of languages (and corresponding loss of ideas); and also the transfor-
mation of culture.
Ecological
The advent of global environmental challenges, which cannot be solved without any sort of
international cooperation, such as climate change, cross-boundary water and air pollution,
over-fishing of the ocean, and the spread of invasive species. Many factories are built in the
developing countries where they can pollute freely. Globalism and free-trade interplay to
increase pollution and accelerate the same, in the name of an ever-expanding, capitalist-
growing economy in a non-expanding world. The detriment is again to the poorer nations
while the benefit is allocated to the wealthier nations.
Globalization | 651
Social
An increased circulation by people of all nations with fewer restrictions, provided that the
people of those nations are wealthy enough to afford an international travel, which the
majority of the world’s population is not. An illusory ‘benefit’ recognised by the elite and the
wealthy, and increasingly too, as fuel and transport costs rise.
Transportation
Fewer and even fewer European cars on European roads each year (the same can also be
said about the American cars on American roads) and the death of distance through the
incorporation of technology to decrease travel time. This would appear to be a technological
advancement recognised by those who work in information, rather than the labour-intensive
markets, accessible to the few rather than the many; and if it is indeed an effect of globalism
then it reflects the disproportionate inequitable allocation of resources rather than a benefit
to the humanity overall.
International Cultural Exchange
• The spreading of multiculturalism and better individual access to cultural diversity

(e.g., through the export of Hollywood and Bollywood movies). However, the im-
ported culture can easily supplant the local culture, causing a reduction in diver-
sity through hybridisation or even assimilation. The most prominent form of this
is Westernisation, but Sinicisation of cultures has taken place over most of Asia for
many centuries. Arguably, the hegemonic effects of globalism and homogenisation
of culture as the capitalist, globalized economy becomes the ‘only’ way that countries
may participate through the IMF and the World Bank, leads to a destruction rather
than an appreciation of differences in the culture.
• The greater international travel and tourism for the few who can afford for interna-
tional travel and tourism.
• The greater immigration, including illegal immigration, except for those countries
around the world including the United Kingdom, Canada, and the United States, who
have in 2008 accelerated the removal of illegal migrants and modified laws to increase
the ease of removing those who have entered the country illegally, while ensuring that
the immigration policies allow those, who are more favourable to the stimulation of
economy, to enter, primarily focusing on the capital, which the immigrants can move
into a country with them.
• The spread of local consumer products (e.g., food) to other countries (often adapted
to their culture) including genetically modified organisms (GMOs). A new and novel
feature of the globalized growth economy is the birth of the licensed seed that will be
viable for only one season and cannot be replanted in a subsequent season—ensuring
a captive market to a corporation. All nations may have their food supply controlled
by a company that is successful in implementing such GMOs, potentially through the
World Bank or the IMF loan conditions.
• Worldwide fads and pop culture, such as Pokémon, Sudoku, Numa Numa, Origami,
Idol series, YouTube, Orkut, Facebook, and MySpace, are accessible to those who have
Internet or television, leaving out a substantial segment of the Earth’s p
opulation.
• Worldwide sporting events such as FIFA World Cup and the Olympic Games.
• Formation or development of a set of universal values—homogenisation of culture.
Technical
• The development of a global telecommunications infrastructure and a greater trans-

border data flow, using such technologies such as Internet, communication satellites,
submarine fibre-optic cable, and wireless telephones.
• The increase in the number of standards applied globally, for example, copyright laws,
patents, and world trade agreements (WTAs).
Legal/Ethical
• The creation of the International Criminal Court, which the United States has refused
to sign onto, and international justice movements.
• The crime importation and the raising awareness of global crime-fighting efforts and
cooperation.
• Sexual awareness—It is often easy to focus only on the ‘economic aspects of
G
lobalization.’ This term also has strong social meanings behind it. As globalization
can also mean a cultural interaction between different countries, and may also have
social effects such as changes in the sexual inequality, this issue has brought about a
greater awareness of the different (often more brutal) types of gender discrimination
throughout the world. For example, women and girls in African countries have long
been subjected to female circumcision—such a harmful procedure has been exposed
to the world, and since then, the practice is decreasing in occurrence.
• An increasing concentration of wealth in fewer and even fewer hands. The media and
other multinational mergers are leading to fewer corporations that are controlling
vaster segments of society and production. The decreasing number in the middle class
group and the increasing number in the poverty group have been observed within the
globalized and the deregulated nations. Globalization was responsible for the largest
sovereign debt default in the world history, bankrupting the entire nation of Argen-
tina in 2002. Globalization did, however, benefit the business and finance sectors,
that the large corporations and multinational banks were able to move over $40 bn in
cash, out of Argentina literally in the dead of night, as there were no regulations in this
deregulated and globalized country to prevent them from doing so. The banks locking
the citizens out of their own accounts, the 60 per cent-and-above unemployment rate,
and the bankruptcy of an entire nation are arguments against globalization.
NEGATIVE EFFECTS OF GLOBalization

• In order to cut down costs, many firms in developed nations have outsourced their
manufacturing and white-collar jobs to Third-World countries like India and China,
where the cost of labour is low. The most prominent among these have been jobs in
the customer service field as many developing nations have a large English-speaking
population – ready to work at one-fifth of what someone in developed world may call
‘low pay.’ This has caused a lot of resentment among the people of developed coun-
tries, and companies have been accused of taking their jobs away. Another problem
is that many Americans are not satisfied with the level of customer service that they
are subjected to, and this has caused a lot of animosity among people and has added
to the dissent that people already have against outsourcing.
Globalization | 653
• There are various schools of thought which argue that globalization has led to an
increase in activities such as child labour and slavery. In countries with little or no
accountability, corporations employing children can work smoothly by bribing the
officials, which may result in an increase in illegal activities. Critics opine that globali-
zation has resulted in a fiercely competitive global market, and unethical practices in
business are a by-product of this.
• Globalization may have inadvertently helped terrorists and criminals. At the heart of
globalization is an idea that humans, materials, food, etc. be allowed to travel freely
across borders, but 9/11 was a ghastly reminder that people with evil intentions can
use it as an opportunity and cause damage.
• It is not only the developed nations that are complaining about its negative effects, but
also people in developing nations – where most of the industries have been set up,
have their own set of reasons against globalization. They often complain that their cit-
ies have been reduced to garbage dumps where all the industrial waste is accumulated
and pollution levels are sky-high.
• Fast food chains like McDonalds and KFC are spreading fast in the developing world.
People are consuming more junk food which has an adverse impact on their health. Apart
from the health concerns, there is something else that globalization has been criticised for,
and it is the accusation that it has opened floodgates for restaurants and eateries which are
insensitive to the religious beliefs of the host nation. For example, a lawsuit had to be filed
against McDonalds in India, after it was accused of serving beef in their burgers.
• While the rich are getting richer, the poor are struggling for a square meal. If the
current Occupy Wall Street protests are a reminder of how angry people are with the
current set-up, then those who govern us should take notice, and work towards al-
leviating poverty. Ideally, globalization should have resulted in creation of wealth and
prosperity, but corporate greed and corrupt government has ensured that money is
not distributed equally.
• When the first-known case of AIDS came up in America, only few would have traced
its origin to Sub-Saharan Africa. Globalization brought people from various coun-
tries together, and this is perhaps the reason that a virus from a jungle was trans-
ported to almost every country in the world.
• Environmental degradation is an issue which has been debated ferociously in vari-
ous international meetings, and it has to be accepted that globalization is one of the
most important factors that has aggravated the situation. The amount of raw materi-
als needed to run industries and factories is taking a toll on the natural reserves of
planet earth, and pollution has severely impacted the quality of air that we need so
very much for our survival.
Pro-globalization
Globalization advocates such as Jeffrey Sachs, point to the above average drop in the poverty
rates in countries, such as China, where globalization has taken a strong foothold, when com-
pared to the areas that were less affected by globalization, such as Sub-Saharan Africa, where
Generally, Free Trade, Capital-
the poverty rates have remained stagnant. ism, and Democracy are the
Generally, Free Trade, Capitalism, and Democracy are the systems that are widely be- systems that are widely be-
lieved to facilitate globalization. The supporters of free trade claim that it increases economic lieved to facilitate Globalization.
prosperity as well as opportunities, especially among the developing nations, enhances civil
liberties, and leads to a more efficient allocation of resources. The economic theories of com-
parative advantage suggest that free trade leads to a more efficient allocation of resources,
with all countries involved in the trade benefitting. In general, this leads to lower prices,
more employment, higher output, and a higher standard of living for those in the developing
countries.
Anti-globalization
‘Anti-globalization’ is a pejorative term that is used to describe the political stance of people
and groups who oppose the neoliberal version of ‘globalization.’
‘Anti-globalization’ may involve ‘Anti-globalization’ may involve the process or actions that are taken by a state in order
the process or actions that to demonstrate its sovereignty and practise democratic decision making. Anti-globalization
are taken by a state in order may occur in order to put brakes on the international transfer of people, goods, and ideology,
to demonstrate its sovereignty
and practise democratic deci- particularly those determined by the organisations such as the IMF or the WTO in imposing
sion making. the radical deregulation programme of free-market fundamentalism on local governments
and populations. Moreover, as the Canadian journalist Naomi Klein argues in her book No
Logo: Taking Aim at the Brand Bullies (also subtitled No Space, No Choice, No Jobs), that anti-
globalism can denote either a single social movement or an umbrella term that encompasses
a number of separate social movements such as nationalists and socialists.
In either case, the participants stand in opposition to the unregulated political power of
large, MNCs, as the corporations exercise power through leveraging trade agreements which
damage in some instances the democratic rights of citizens, the environment particularly air-
quality index and rain forests, as well as national governments’ sovereignty to determine the
labour rights—including the right to unionise for better pay and better working conditions,
or laws as they may, otherwise, infringe on the cultural practices and the traditions of the
developing countries. Most people who are labelled ‘anti-globalization’ consider the term to
be too vague and inaccurate. Podobnik states that ‘the vast majority of groups that participate
in these protests draw on international networks of support, and they generally call for forms
of globalization that enhance democratic representation, human rights, and egalitarianism’.
Critics argue that:
• Poorer countries are sometimes at disadvantage. While it is true that globalization en-
courages free trade among countries on an international level, there are also negative
consequences because some countries try to save their national markets. The main
export of poorer countries is usually agricultural goods. It is difficult for these coun-
tries to compete with stronger countries that subsidise their own farmers. Because the
farmers in the poorer countries cannot compete, they are forced to sell their crops at
a much lower price than what the market is paying.
• Exploitation of foreign impoverished workers. The deterioration of protections for
weaker-nations by stronger industrialised powers has resulted in the exploitation of
the people in those nations to become cheap labourers. Due to lack of protections,
companies from powerful industrialised nations are able to offer workers enough sal-
ary to entice them to endure extremely long hours and unsafe working conditions.
The abundance of cheap labour gives the countries in power an incentive to not rectify
the inequality between nations. If these nations developed into industrialised nations,
the army of cheap labour would slowly disappear alongside development. With the
world in this current state, it is impossible for the exploited workers to escape poverty.
It is true that the workers are free to leave their jobs, but in many poorer countries,
this would mean starvation for the worker, and if possible, even his/her family.
Globalization | 655
• The shift to service work. The low cost of offshore workers have enticed corporations
to move production to foreign countries. The laid-off unskilled workers are forced
into the service sector where wages and benefits are low, but turnover is high. This
has contributed to the widening economic gap between the skilled and the unskilled
workers. The loss of these jobs has also contributed greatly to the slow decline of the
middle class which is a major factor in the increasing economic inequality in the
United States. The families that were once a part of the middle class group are forced
into lower positions by massive layoffs and outsourcing to another country. This also
means that people in the lower class group have a much harder time climbing out of
poverty because of the absence of the middle class group as a stepping stone.
• Weak labour unions. The surplus in cheap labour, coupled with an ever-growing
number of companies in transition, has caused a weakening of labour unions in the
United States. The unions lose their effectiveness when their membership begins to
decline. As a result, the unions hold less power over corporations that are able to eas-
ily replace workers, often for lower wages, and have the option to not offer unionised
jobs anymore.
In December 2007, the World Bank economist Branko Milanovic called the much previous em- In December 2007, the World
pirical research on global poverty and inequality into question because, according to him, the Bank economist Branko
improved estimates of purchasing power parity (PPP) indicate that the developing countries Milanovic called the much pre-
vious empirical research on glo-
are worse off than how it was previously believed. Milanovic remarks that ‘literally hundreds bal poverty and inequality into
of scholarly papers on convergence or divergence of countries’ incomes have been published in question because, according to
the last decade based on what we know now were faulty numbers. With the new data, econo- him, the improved estimates of
mists will revise calculations and possibly reach new conclusions.’ Moreover, noting that purchasing power parity (PPP)
indicate that the developing
Implications for the estimates of global inequality and poverty are enormous. The new countries are worse off than
how it was previously believed.
numbers show global inequality to be significantly greater than even the most pessi-
mistic authors had thought. Until the last month, global inequality, or difference in real
incomes between all individuals of the world, was estimated at around 65 Gini points—
with 100 denoting complete inequality and 0 denoting total equality, with everybody’s
income the same—a level of inequality somewhat higher than that of South Africa. But
the new numbers show global inequality to be 70 Gini points—a level of inequality
never recorded anywhere.
The critics of globalization typically emphasise that globalization is a process that is mediated
according to corporate interests, and typically raise the possibility of alternative global insti-
tutions and policies, which they believe address the moral claims of poor and working classes
throughout the globe, as well as environmental concerns in a more equitable way. The move-
ment is very broad, including church groups, national liberation factions, peasant unionists,
intellectuals, artists, protectionists, anarchists, those in support of relocalization, and others.
Some are reformists (arguing for a more humane form of capitalism) while others are more
revolutionary (arguing for what they believe is a more humane system than capitalism), and
some others are reactionary (arguing that globalization destroys national industry and jobs).
One of the key points made by the critics of recent economic globalization is that income
One of the key points made by
inequality, both between and within nations, is increasing as a result of these processes. One the critics of recent economic
article from 2001 found that significantly, in seven out of eight metrics, the income inequality globalization is that income
had increased in the 20 years ending 2001. Also, ‘incomes in the lower deciles of the world inequality, both between and
within nations, is increasing as
income distribution have probably fallen absolutely since the 1980s.’ Furthermore, the World
a result of these processes.
Bank’s figures on absolute poverty were challenged. The article was sceptical of the World
Bank’s claim that the number of people living on less than $1 a day had held steady at 1.2 bn
from 1987 to 1998, because of the biased methodology.
Globalization—An Assessment
India, since political independence, has failed to transform its economy and society into a
fully modern industrial one, despite having been able to hold on to political democracy. This
is not to suggest that no economic or social changes have occurred. The insufficient transfor-
mation is evident on two counts: firstly, the extent of economic deprivation and poverty is too
large to be acceptable by any yardstick; secondly, and there are many instances of economies
around the world, especially in Asia, which have moved far ahead of India in terms of the
living standards in a very decisive fashion. The apparent reasons are not hard to find. It has
been a story of the lack of good governance in terms of the content of economic policies and
in institutional failures.
In the last two decades of the 20th century, there were strong internal and external com-
In the last two decades of the
20th century, there were strong pulsions of merging into a global economic system, which was itself marked by major politi-
internal and external compul- cal changes and economic uncertainties. In choosing to pursue the economic policies of the
sions of merging into a global Washington Consensus, India has been reducing the space of state intervention to enable the
economic system, which was
market to work more freely. However, there are three specific areas where the state should
itself marked by major political
changes and economic uncer- play a more (and not less) active role to ensure facilitation, coordination, and correction of
tainties. market failures. Specifically, these entail works and incentive structures, improved use of
resources (both in quantity and efficiency) in building fundamental capabilities in primary
education and basic health, and a more coordinated effort in generating investments in the
physical infrastructure.
A related aspect of governance in a market economy that is open to free flow of trade
A related aspect of governance
in a market economy that and some international capital movements is, a loss of autonomy in conducting domestic,
is open to free flow of trade fiscal and monetary policies. This loss is not in form, but market integration substantially
and some international reduces the power of standard economic policies to address issues of unemployment, infla-
capital movements is, a loss
tion, and growth. One likely outcome is that India begins to concentrate in competing with
of autonomy in conducting
domestic, fiscal, and monetary other nation states in attracting investments and trade. The domain of mass politics, so criti-
policies. cal to good governance in democratic societies, has begun to shrink. The political agenda is
changing quite rapidly from basic economic issues to regional, particularistic concerns of
community, ethnicity, and religion.
The lack of good governance affects the poorest 40 per cent (income distribution-wise)
of India’s population the worst. Here, the extent of acute deprivation and destitution des-
perately needs active governance in creating fundamental capabilities. The next 40 per cent
(relatively better off, but still very poor by international standards) is deprived from availing
and creating market opportunities because of the inadequacies of physical infrastructure and
inefficiencies of local institutions in harnessing dynamic energies into productive collective
efforts. The top 20 per cent constitute the power elite and the primary constituents of the dis-
tributional coalition. The elite’s material development has been significant, and it has benefit-
ted from planned interventions of the past and stands to benefit from a globalized economy
of the future.
There is a nascent form of global governance already discernible, based on the Washing-
ton consensus. There are a number of multilateral institutions that could serve the purpose
of further developing such a governance structure. At the same time, there are numerous
groups and organisations that are raising their voices over other important global concerns
such as fairness in international trade, poverty alleviation, and environmental protection.
They are contesting the rising hegemony of the Washington consensus. The structure and the
ethical basis of future governance in an integrated world are, therefore, hard to predict just
yet. Dominant global trends along with India’s own experiment with international integra-
tion are far removed from the desirable features of good governance. The two most impor-
tant features of any global governance structure are democracy and equity. Good governance
Globalization | 657
must also ensure sustained development opportunities for the poor and deprived people of
the world. It entails, among many other things, new economic policies and institutions, new
lifestyles, and preferences. Above all, it must be able to reconcile the individual advantage
nurtured by the market with a tolerant concern for all.
The overall post-liberalization growth of the Indian economy has not been inspiring. The overall post-liberalization
India lifted its growth rate during the 1990s but is still under performing. India will not be growth of the Indian economy
able to achieve the average annual growth of 9 per cent, that is targeted for this decade unless has not been inspiring. India
radical reforms are carried out. The liberalization process in the country has not been able lifted its growth rate during
the 1990s but is still under
to take off in the real sense because the instrument of change, that is, the bureaucracy has performing.
not been reformed. In the reform process, the role of bureaucracy should have been that of a
facilitator. The entire bureaucratic administrative set-up at the centre and the states needs to
be looked into and redesigned to be in consonance with the liberalization philosophy.
The reforms would ensure that some departments like finance, are specialised, and per-
sons of sound knowledge of their fields head health, science and technology, and so on. Most
jobs today require professionalism, specialisation, and formulation of policies in areas like
insurance, banking, foreign trade, and telecom that requires an in-depth understanding of
the subject. In the United States, specialists like lawyers, economists, financial experts, pro-
vide the necessary expertise and the latest inputs to the government so that it is able to for-
mulate the best possible policy.
The Indian industry, to be competitive in price, cost, and quality, must be provided a The Indian industry, to be
level-playing field in technology transfer, infrastructure interest on finance, labour reforms, competitive in price, cost, and
government regulations, customs tariffs on imports, central and state government taxes, and quality, must be provided a
level-playing field in technology
the like. The reforms would invariably involve restructuring of the administrative set-up, transfer, infrastructure interest
which would ensure an optimal utilisation of resources for the benefit of citizens. The admin- on finance, labour reforms, gov-
istration needs to play the role of a facilitator by providing infrastructure and ensuring that ernment regulations, customs
the basic minimum needs of the citizens expected from the government are fulfilled within tariffs on imports, central and
state government taxes, and
the available resources. the like.
The bureaucracy should be made to face competition. If it does not change, then sooner
or later the forces of change generated by the economic reforms would do so. A review of the
past policies followed during the first 40 years of planning reveals that there was no other
alternative to the present policy of economic reforms. The very purpose of the liberalization
To be globalised, the Indian in-
was to remove unnecessary controls and regulation, liberating the trade and industry from dustry has to be competitive in
unwanted restrictions, and to make various sectors of the Indian economy competitive on the price, quality, and technology.
global economic platform by making them produce quality goods in a cost-effective manner.
Liberalization does not mean simply inviting a good number of foreign companies or
MNCs, on whatever unreasonable terms, with whatever objectives in mind, and in what-
ever sector, indiscriminately. By implication, economic liberalization suggests that the entire
opening up of economy should ultimately be for building up strength of our own. Hence,
inviting foreign companies (MNCs) should only be means and not an end. Liberalization Liberlisation means removal of
means the removal of control and not of regulations. Liberalization does not imply any secret control and not of regulation.
deals behind the curtain. On the contrary, it does mean the elements of transparency and
accountability in the functioning and procedures relating to the economy.
Privatizations in India have given rise to a controversy. Privatization has been criticised
for ‘selling the family silver to cronies of the rolling party.’ The sale proceeds of public sector
undertakings (PSUs) are being utilised for meeting the operating expanses or curtailing the
budgetary deficit instead of creating health education facilities to general public, and devel-
opment of infrastructure for trade and industry. Further, the government is not taking any
effort to privatise the loss-making PSUs. Instead, the government is privatising the profit-
making public sector enterprises (PSEs) that are beneficial for the welfare of the general pub-
lic and are pride to our nation, for example, Balco. The privatization of loss-making units
would definitely reduce the financial burden on the government. The top 10 loss-making
PSEs are RINL, HFC, FCI, DTC, IA, HEC, IDPL, HSL, HPC, and HSCL. The government
should privatise the loss-making PSUs and let the profit-making PSE managements function
autonomously for improving their performance. In 1992–93, the top 10 profit leaders of PSEs
were IOC, NTPC, ONGC, MTNL, SAIL, BPCL, NSML, HPCL, MMTC, and BHEL.
The currently comfortable foreign exchange reserves (FER) primarily reflects a short-
term capital flow from the FIIs, which can vanish as easily as they appeared. These are not
money flow; their sudden departure for greene pastures has wrecked havoc on many Third-
Non-economic developments, World economies. Non-economic developments, political instability, and communal frenzy
political instability, and commu- contributed to slowing down the pace of economic growth. The government should tackle
nal frenzy contributed to slow- the situation firmly, for which it requires political will.
ing down the pace of economic
growth in India.
In substance what has been achieved so far is impressive but is not very encouraging.
India has lost its status as the 10th largest industrial power in the world, in the course of last
two decades or more. India’s share in the global export is just 0.7 per cent. India cannot attain
growth in exports while continuing with stringent control and licensing of imports in the
name of providing protection to the domestic industries and thereby, losing the competitive
character of these domestic industries.
Thus, under the present circumstances, there is no reverse to economic reforms, but
whatever policy reforms and restructuring programmes are to be adopted in the Indian econ-
omy, must have its adaptability in Indian soil and must also serve the interest of the general
masses. The government should take a firm stand and review the WTO restrictions pertain-
ing to agriculture, small-scale sector, investment, and trade-related IPRs.
A Critical Appraisal of Globalization

Initially, the pressure for the process of globalization and liberalization came from inter-
national institutions—the IMF and the World Bank. These institutions have had a growing
influence over the Indian economy since the mid-1970s. The personnel from these institu-
tions have occupied influential policy-making positions in the government since then. Their
influence over the thinking of our academics and of the media has been growing ever since.
They have funded a growing number of studies, all over the world and more specifically, in
India. They have offered consultancies and temporary assignments to many influential posi-
tions. These institutions have had a package of policies ready for implementation in India
since the late 1980s.
Inevitably, when an economic
Inevitably, when an economic crisis struck India in 1990, a package was available for im-
crisis struck India in 1990, a plementation in India and this was to globalize the economy. WTO, the rechristened version
need for globalization and liber- of GATT, appeared on the scene in 1995. Its provisions have moved India farther in the di-
alization was created. rection of globalization. Given the vacuum in thinking among the leadership, political frag-
mentation, and instability in the body politics, and the general underpreparation of various
sections of Indian elite to face the challenge, staying out of WTO was never a choice. The
multilateral coercion brought to bear upon a weak nation in joining the WTO was accepted
as inevitable. It has been preferred to the bilateral coercion that would have had to be faced
if the nation has to be kept out of the WTO. At the WTO, the fight among nations is to
get others’ markets opened with the least concession from oneself. A successful battle there
requires a well-defined national interest and a will to carry forward the national agenda.
Inevitably, across the political spectrum, there has been the sense of TINA to globaliza-
There has been the sense of
TINA to globalise and liberalise
tion and liberalization. The Indian ruling elite (at most 3 per cent of the population) has
the Indian Economy. seen globalization as the opportunity to join the international elite, and, therefore, they have
pushed for it. They are able to freely consume the same goods that the international elite
Globalization | 659
consumes and can freely move around in those circles enjoying vacations, sending children
abroad for education, and so on. Indian businesses initially felt that they would be able to
use liberalization to generate larger profits. They have, by and large, been disabused of these
misconceptions as they find that they cannot compete against the MNCs due to their control
over capital and technology. Loss of control of Indian capital over its own markets is symbol-
ised by the movements in the Indian stock market indices, which are now being determined
by the moods and whims of the foreign investors and the changes in NASDAQ.
Effectively, the advantage of liberalization has accrued to foreign capital, and the proc-
ess of globalization has been a one-way street for the nation as a whole. It has affected the
economic, political, and social aspects of our nation. For 97 per cent of the people of this na-
tion, it has meant a worsening of living conditions and growing social tensions. However, an
illusion of prosperity has been created by the availability of goods and the spawning of casino
mentality, created by the capital gains in the world of finance.
The new technologies being introduced in India under the process of globalization are
highly capital intensive. The WTO has strengthened its control over technologies of MNCs,
of creating property rights over them. The introduction of e-commerce has the potential of
eliminating a large number of jobs from the services sectors in both the developed and the
developing worlds. Those propagating globalization in India have not considered the impli-
cations of these trends for not only the poor but also the middle classes. The nation needs a
technology policy, which is sadly lacking.
Globalization and liberalization are processes of marketisation. Markets, in turn, are Globalization and liberlisation
based purely on the purchasing power of economic agents. It is not a democratic institution are processes of marketisation.
and in its pure form, it is not based on the considerations of human values. It does not dis-
tinguish between the rich and the poor, the old and the young, and men and women. These
considerations have been superimposed only by the society, in which we live. International
markets are considered to be the most efficient ones, but there is no inter-national society
with universal values to impose on these markets. Hence, international markets are not mod-
erated by human concerns and have tended to be highly iniquitous, marginalising the already
weak. With some exceptions, disparities have grown across nations, within nations, across
states, and within states.
Markets are based on the notions of ‘more is better’ and ‘consumer sovereignty.’ This
has promoted consumerism and individualism. Inevitably, the vision is based on short-run
considerations and non-communitarian values. There is no place for sacrifice in a market and
individual interest comes before that of the community. But the building of a nation requires
a sense of community and sacrifice. If this has to come up voluntarily, the society has to be
seen to be just by all those elements constituting it. If there is a feeling of injustice, people get
alienated and there is an inevitable rise in social tensions.
Globalization and liberalization have fostered in India a growing inequity and margin- Globalization and liberalization
alisation of the weak. This has created a sense of social injustice and led to growing social have fostered in India a growing
and political tensions. The aspirations of the dalits, the backward, and women among whom inequity and marginalisation of
poverty is entrenched have come up against the wall of new economic policies, which have the weak.
resulted in growing underemployment and the rising prices of basic goods.
The state, already weakened by corruption, has been further weakened by the new eco-
nomic policies. The policies determined in the interest of property groups have had a pro-
gressively narrower social base. At the WTO, the interests of the small and medium farmers,
the industrialists, and of the labourers are being sacrificed in favour of some concessions for
big business. The policies needed by the poor to mitigate underemployment and control in-
flation have run up against the barriers of international credit ratings. In this strategic retreat
of the state, the policies which were pro-poor have been increasingly sacrificed.
Many groups and Individuals Many groups and individuals have been fighting battles against liberalization and
have been fighting battles globalization at local levels. These have not picked up sufficient mass or momentum to be
against liberlisation at local able to pose a challenge to the new economic policies. The forces that are ranged against are
levels in India.
global and have enormous financial clout. The pace at which the economy is being opened up
has left the opponents of these policies feeling helpless. As the economy globalises, a reversal
of these policies is becoming more and more difficult. This has also generated a sense of
despondency.
At the international level also, India has given up its leadership of the third world. The
South Asian Association for Regional Cooperation (SAARC) never emerged as a regional
force and is now in disarray. G-15 and G-77 do not count much because India has stopped
making the effort to give a lead, perhaps under pressure from a global capital. At the WTO,
India has not given a lead to other nations since 1987. Africans have made some attempts for
unity but India has argued against such attempts. This weakens the capacity of India to fight
the challenge of the one-way globalization, which is being imposed on it by an international
capital.
The social and the cultural aspects of the challenge of globalization are no less serious
than the economic ones. Success is now being defined in Western terms. Indian artisans are
being increasingly subjected to the demands of the Western market. Many traditional jobs
face extinction due to the emergence of new substitute products. Indian women and the
media are increasingly showcasing fashions that are originating in the West. The family as an
institution is coming under an increasing stress. Even though globalization has not resolved
the problems of the people in the absence of alternatives, the TINA syndrome has prevailed
and no effective challenge has come up yet.
To pose a challenge to globalization, all the social groups that face the growing hardship
Even if globalization is the aim,
it can be done in a much bet- today and have been opposing the new economic policies have to get together to be effective.
ter way by keeping the national There is a need to revive the belief that the nation can do it and has the resources to do so.
interest in mind. However, the Even if globalization is the aim, it can be done in a much better way by keeping the national
alternative models of develop-
interest in mind. However, the alternative models of development are feasible, and Mahatma
ment are feasible, and Mahat-
ma Gandhi with his emphasis Gandhi with his emphasis on catering to the interest of the last man first showed the way
on catering to the interest of towards building a just society. Fortunately, India as a large country, is not in the same posi-
the last man first showed the tion as Myanmar or Albania, and can do things differently. India with its long history has
way towards building a just
society.
shown that it can, at times, also show the way to the rest of the world. For this, a vision and a
political will need to be developed.
Threats to Globalization
The real threat to globalization The real threat to globalization comes from within. A decade into it in its full form, cracks
comes from within. A decade have appeared in its edifice. The very soundness of many of its premises are being questioned
into it in its full form, cracks the world over. The grim tale of Enron’s rise and fall, the sudden miseries of Argentina due to
have appeared in its edifice. The
the forced economic reform and globalization, the continuing misuse of domestic MNCs for
very soundness of many of its
premises are being questioned espionage and sabotage in the host countries, and the arm-twisting on the free-trade rules
the world over. to squeeze the weaker countries, are all symptoms of a deep malaise. Apparently, those who
have set the rules are themselves violating them when the rules do not suit them.
Hardly three years ago, Argentina was being touted as a model of the new economic
regime, and was being heralded as a success story of macro-economic stability, like how India
is projected now. It had reduced inflation to almost a zero level. Its structural reform was
lauded and its finance minister too was applauded, as an economic wizard. However, when
the expected results failed to show up, there was more advice to enforce still higher doses of
reform—as India is now being told—until it all finally collapsed.
Globalization | 661
We are now being told to do exactly what had failed to click in that model country.
The only exception was the convertibility of rupee, which the foreign experts had dropped
after the collapse of the Asian Tigers. In Argentina, free facilities to foreign investment for
a decade did not improve its industrial growth in any measure. The FDI was confined to
primary production like mining, oil and gas, and of course, automobile.
The privatization programmes had little effect on the industrial production except The privatization programmes
helping the government to fill the budgetary gap. It also tried all other routine remedies— had little effect on industrial
liberalization of imports, full play for FIIs, opening up of services, deregulation of banking production except helping the
government till the budgetary
industry, elimination of budget deficits, reduction of bank rates and tax, a curb on govern- gap.
ment spending, and so on. Each of these worked as a temporary painkiller but failed to make
any improvement. Prophetically for us, as the expected miracle failed, the slash in expendi-
ture led to a slower investment.
These high-profile MNCs could the change government’s decisions in its favour, get
deregulations done for its profit, and appoint its own nominees at crucial government posts.
Even after its collapse, the Bush aides continue to openly arm-twist India for a favourable set-
tlement on Dhabhol project. So much for the direct US intervention to favour its MNCs and
the latter’s hold on our rulers. The Enron scandal has also put the business rating agencies in
spot. Hardly a few weeks before the collapse, they had given impressive ratings to the firm.
Another aspect that should throw doubts over the iconisation of MNCs and their executives
has been their continuing nexus with the politicians and the bureaucrats. How can national
governments trust the integrity of the MNCs when they are allowed participation in sensitive
projects? All these aspects poses serious challenges to the corporate-commanded globalization.
Considering the present trend of threat appearing out of globalization, the Indian indus-
trial firms, who initially welcomed the MNCs, have now started to develop second thoughts
on unrestricted entry of foreign capital. CII (Confederation of Indian Industry) and ASSO-
CHAM (Associated Chambers of Commerce and Industry) have also become worried about
the activities of MNCs in swallowing up the Indian firms on some pretext. Thus, a consensus
is now emerging that the free and wholesale globalization should be replaced by a selective
path of globalization, giving weightage to national interest.
Although globalization and liberalization have their own meaning, the goal is to attain a
higher growth rate, self-reliance, full employment, and a better level of living. They are sup-
posed to attain growth with equity and should try to improve the condition of the majority of
the population living in these developing countries. Unfortunately, globalization usually helps Unfortunately, globalization
a limited population living in these industrially advanced countries. They are also reaping the usually helps a limited popula-
advantage of an unequal bargaining power at the WTO, and are also forcing the developing tion living in these industrially
advanced countries. They are
countries to open up their markets for the entry of products and investment capital of industri- also reaping the advantage of
ally developed countries. In this connection, the Human Development Report (1996) observed, an unequal bargaining power
at the WTO, and are also forc-
While globalization has often helped growth in strong countries, it has bypassed the ing the developing countries to
weak. The poorest countries, with 20 per cent of world’s people, have seen their share of open up their markets for the
the world trade fall between 1960 and 1990 from 4 per cent to less than 1 per cent. And entry of products and invest-
ment capital of industrially de-
they receive a meagre 0.2 per cent of the world’s commercial lending. veloped countries.
Thus, if everything moves in the same direction then the fate of globalization will be under a
constant threat. The liberalization policies will not do any good to our country and instead,
only strengthen the hands of MNCs. The country lost its independence because of one East
India Company; but now hundreds of MNCs are freely operating in India taking advantage The liberalization policies will
not do any good to India and
of the liberalised policies. The globalization policies of the government must be in accord- instead, only strengthen the
ance with the circumstances in the country. The government should take a firm stand and hands of MNCs.
review the WTO restrictions that are pertaining to agriculture, small-scale sector, invest-
ment, and trade-related IPRs.
C ase
Softcore Consultancy Services is in the IT sector. It is currently facing a shortage of skilled
manpower and is fuelling a hike in the employee salaries, which has been boosting a 10 per
cent to 40 per cent growth during the last couple of years. While there is an abundance of
trainable human resources, a dearth in the skilled manpower is being felt across the industry,
and that has resulted in a hike in salaries.
Typically, salary jumps happen not only in the conventional manner of being promoted
but also because of professionals changing jobs more frequently. The increase in salaries var-
ies from job to job, and ranks highest in the IT sector where employees get a hike of over
40 per cent when they join a new establishment. There is no dearth in the entry-level human
resources as there is a large supply, but a severe shortage is felt in the middle-level positions.
According to Mr. Raj, the CEO of Softcore, many new captive and third-party off-shore
facilities that are being set up in the country have led to a competition for skilled human
resources that are already scarce. This is also leading to an ever-widening, demand–supply
gap and a rise in the average salary level for all positions, apart from pushing up the attrition
in the existing facilities, he said.
There is a new trend of employees moving to MNCs abroad for higher salaries and global
experience. The salary package and working environment factor are far better in countries
like the United States when compared to India. Then returning to India with a global expe-
rience paves the way for a higher pay and a better position. This is also one reason for the
shortage of skilled manpower and the hike in employee salaries in the IT sector.
Case Questions
1. What are the problems that the Softcore is facing? Suggest some remedies for the
same.
2. Do you support globalization?
s u mma r y
India tried to integrate into the world economy as soon as it foreign firms have either left India or critiqued India other-
became a sovereign state, but with its own terms and con- wise.
ditions. However, over these years, India has been slowly From the historical point of view, it is imperative that the
pressured by several external forces like the foreign govern- GOI, the foreign companies, and the governments of other
ments, foreign corporations, and international agencies to nations have to recognise and respect the need for globali-
integrate on their own terms. The roots of the present globalization of India and have to help the globalization process
zation process in India lie way back in the 1980s. India start- take off in a balanced and sustained manner. Hence, while
ed to liberate trade in 1977–78. This open policy increased undertaking policies on the liberalization of Indian economy,
the number of items in the Open General License (OGL). the GOI has to take care of the ‘globalization of India’ alone
Most importantly, we find that ‘globalization’ with reference as it has been presumed in the past 15 years.
to India has been more of globalization in India and less The policies of the GOI should be able to focus the FDI into
of globalization of India. In other words, globalization has the manufacturing sectors and high-technology areas through
been only a one-way process, that is foreign enterprises have which the Indian economy can effectively be a part of the
found a favourable way to do business in India since inde- globalization process worldwide. With a similar framework of
pendence. Foreign companies have invested in India only our study, further research may be conducted on the other
when the policies of the GOI have favoured either the market developing countries in Asia, to enhance our understanding
or the efficiency-seeking objectives of the foreign firms. The of the globalization process in the same context.
Globalization | 663
Key W o r d s
● Globalization ● Liberalization ● Tariffs
● Euro ● Public Expenditure ● Multinational Corporations (MNCs)
● Trade (foreign) ● Budget Deficits ● TINA Syndrome
● Non-economic Sector ● Foreign Institutional Investors (FIIs) ● Global Deposit Receipts (GDR)
● Stock Markets ● Capital Market ● Foreign Direct Investment (FDI)
● Economy ● Bank Rate
● Industrial Consolidation ● Quantitative Restrictions (QRs)
Q u est i o n s
1. What is globalization? Explain the features of 4. Discuss the threats to the Indian economy from
globalization. globalization.
2. Analyse the impact of globalization on the Indian in- 5. Analyse the steps taken by the Indian government to
dustry. globalise the economy.
3. Examine the benefits of globalization for the Indian 6. Suggest precautionary measures to protect the
economy. Indian economy from globalization.
Refe r e n ces
n Agarwal, N. P. and S. C. Jain (2003). Corporate Gover- n Michael, V. P. (2001). Globalization, Liberalization and
nance. Jaipur: Indus Valley Pub. Strategic Management. Mumbai: Himalaya Publishing
House.
n Arya, P. P., B. B. Tandon, and A. K. Vashisht (2003).
Corporate Governance. New Delhi: Deep and Deep Pub- n Munshi, S. and B. P. Abraham (2004). Good Governance,
lications. Democratic Societies and Globalization. New Delhi: Sage.
n Balasubramanian, N. (2005). ‘Corporate Governance in n Pandey, T. N. (2003). ‘Naresh Chandra Committee on
India: Traditional and Scriptural Perspective’, Chartered Auditor’s Role in Corporate Governance’, Chartered Sec-
Secretary, 2(3), 279. retary, 33, 464.
n Bedi, S. (2004). Business Environment. New Delhi: Excel n Prahalad, H. (2002). Computing for the Future. New Delhi:
Books. Tata McGraw-Hill.
n Chandra, R. (2002). Corporate Management. Delhi: n Rao, P. (2003). ‘Emerging Trends in Corporate Gover-
Kalpaz Pub. nance’, Chartered Secretary, 33, 1147.
n Desai, A. A. (2003). ‘Towards Meaningful Corporate n Reed, D. and S. Mukherjee (2004). Corporate Gover-
Governance’, Chartered Secretary, 33. nance, Economic Reforms, and Development: The Indian
Experience. New Delhi: Oxford University Press.
n Gupta, S. L. (2001). Contemporary Issues in Corporate
Restructuring. New Delhi: Anmol Pub. n Scholes, J. (2001). Exploring Corporate Strategies: Text
and Cases, 4th ed. New Delhi: Prentice-Hall.
n Jain, R. B. (2004). Corruption-free Sustainable Develop-
n http://tncandglobalization.weebly.com
ment: Challenges and Strategies for Good Governance.
New Delhi: Mittal Pub.
n Machraja, H. R. (2004). Corporate Governance. Mumbai:
Himalaya Publishing House.
25
C hapter
Foreign Investment
>>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>>
• Meaning 664 • R&D, Local Technological Capability, and
• Need for Foreign Investment 665 Diffusion 684
• Adverse Implications of Foreign • and the Knowledge-based Economy in
FDI
Investment 666 India: Software and Global R&D Hub 686
• Determinants of Foreign Investment 666 • Foreign Technology Transfers 689
• Government Policies 668 • Policy lessons 690
• Liberalization and Changing Sectoral • New Policies 692
Composition of FDI 672 • A Comparative Statistical outline of FDI 693
• Liberalization and Changing Sources of FDI in • Case 710
India 674 • Summary 711
• Impact of FDI Inflows: Some Issues 680 • Key Words 711
• Rising Importance of FDI in Indian • Questions 712
Economy 683
• References 712
Meaning
At the time of independence, India’s technological base and domestic savings were both weak
At the time of independence,
India’s technological base and
and stagnant. Therefore, India adopted an import substitution and encouraged foreign pri-
domestic savings were both vate capital and technology as elements of her strategy for industrial development, in order to
weak and stagnant. Therefore, fill up the technological and production gaps and accelerate the development process.
India adopted an import substi- Foreign investment is seen as a means to supplement domestic investment for achieving a
tution and encouraged foreign
private capital.
higher level of economic development. It benefits the domestic industry as well as the Indian
consumer by providing opportunities for technological upgradation, giving access to global
managerial skills and practices, optimal utilisation of human and natural resources, making
Indian industry internationally competitive, opening up export markets, providing backward
and forward linkages, and providing access to international quality goods and services.
An investment in a country by individuals of and organizations from other countries
FDI is defined as an ‘investment is an important aspect of international finance. This flow of international finance may take
that is made to acquire a last-
ing interest in an enterprise the form of portfolio investment, that is, acquisition of securities or direct investment crea-
operating in an economy other tion of productive facilities. Foreign direct investment (FDI) is the outcome of the mutual
than that of investor.’ interest of multinational firms and host countries. According to the IMF, FDI is defined as
an ‘investment that is made to acquire a lasting interest in an enterprise operating in an
economy other than that of investor.’ The investors’ purpose is to have an effective voice in
the management of an enterprise. The essence of FDI is the transmission to the host country
a package of capital, managerial skills, and technical knowledge.
Foreign Investment | 665
NEED FOR FOREIGN INVESTMENT

Generally, a foreign investment is motivated by a private gain but it has many benefits for
less developed countries (LDC) if proper caution and care are exercised while inviting a for-
eign investment. A foreign investment should be supportive of the progress of the economy,
development of industry, and prosperity of people. It should not be destructive in any form.
The following arguments are advanced in favour of foreign investment:
Raising the Level of Investment. Foreign investment can fill the gap between desired
investment and locally mobilised savings. Local capital markets are often not well developed.
Thus, they cannot meet the capital requirement for large investment projects. Besides, the FDI can fill the gap between the
local non-availability of access to the hard currency that is needed to purchase investment desired investment and locally
goods can be difficult. Foreign investment solves both these problems at once as it is a direct mobilised savings. It supplies a
package of needed resources. It
source of external capital. helps a number of UDCs to pos-
Upgradation of Technology. Foreign investment can supply a package of needed sess huge mineral resources.
resources such as management experience, entrepreneurial abilities, and organisational and
technological skills. Foreign investment brings with it the technological knowledge while
transferring machinery and equipment to developing countries. Similarly, as the foreign-
owned enterprises come into competition with the local firms, the latter category of enter-
prises are forced to improve their technology and standards of product quality. Further, the
foreign-owned enterprises pressurise and assist the local support industries to improve the
quality of their products and ensure a greater reliability of delivery, both of which make it
necessary for their support industries to upgrade their technology.
Exploitation of Natural Resources. A number of underdeveloped countries (UDCs)
possess huge mineral resources, which await an exploitation. These countries themselves
do not possess the required technical skill and expertise to accomplish this task. Therefore,
they have to depend upon a foreign capital to undertake the exploitation of their mineral
wealth.
Development of Basic Economic Infrastructure. Underdeveloped or developing
countries require a huge capital investment for the development of basic economic structure
as their domestic capital is often too inadequate. In such a situation, a foreign investment
plays a pivotal role in the development of basic infrastructure such as transport and commu-
nication system, generation and distribution of electricity, development of irrigation facili-
ties, and so on.
Improvement in Export Competitiveness. A foreign investment can help the host
country to improve its export performance. It has a positive impact on the host country’s
export competitiveness by raising the level of efficiency and the standard of product quality.
Further, a foreign investment provides the host country a better access to foreign markets.
Enhanced export possibility contributes to the growth of the host economies by relaxing the
demand side constraints on growth. This is especially important for those countries which
have a small domestic market and must increase exports vigorously to maintain their tempo
of economic growth.
Improvement in the Balance-of-Payment (BoP) Position. In case of an adverse (BoP)
situation in the host country, an investment presents a short-run solution to the p roblem.
Benefit to Consumers. Consumers in the developing countries stand to gain from
a foreign investment through new products and improved quality of goods at competitive
prices.
Revenue to Government. The profit generation by a foreign investment in the host
country contributes to the corporate tax revenue in the latter.
ADVERSE IMPLICATIONS OF FOREIGN

INVESTMENT
A foreign investment is not an A foreign investment is not an unmixed blessing. The governments in the developing coun-
unmixed blessing. The govern- tries have to be careful while deciding on the magnitude, pattern, and conditions of a private
ments in the developing coun- foreign investment. The possible adverse effects of a foreign investment are as follows:
tries have to be careful while
deciding on the magnitude, pat- 1. The historically exploitative character of a foreign investment, as a partner of
tern, and conditions of a private colonialism, naturally arouses deep-rooted nationalist sentiments and suspicions.
foreign investment.
2. There is a widespread belief that is based on sufficient empirical evidence that a
foreign capital is essentially interested in loco technology and highly profitable
consumer goods and not in technologically difficult, long-gestation industries, which
are of high priority from the point of view of the host nation.
3. The clue to a direct investment lies not in the physical movement of capital from a
developed country to an LDC, but in the capital formation in the latter through the
local operation of a multinational corporation (MNC) that is based in the former.
4. A foreign capital has historically been accused of an attitude of discrimination against
the employment of local nationals in the high-salaried jobs and against local trans-
port, insurance, or credit organisations.
5. The development caused by a foreign investment tends to have an enclave character.
That is, to say, it only creates small pockets of affluence, that are isolated from the
mainstream of the host country’s state of social and economic development.
6. Foreign enterprises, by virtue of their financial strength and general competitive effi-
ciency, inevitably obstruct the growth of indigenous, industrial entrepreneurship.
7. The cost of foreign capital for the host country tends to be very high. That such costly
capital imposes a very severe strain on the host country’s foreign exchange can easily be
understood by comparing the quantum of capital inflow, excluding investment profits
with the quantum of foreign exchange outgo, on account of capital and profit remittances.
8. When foreign investments compete with the home investments, the profits in the
domestic industries fall, there by leading to a fall in the domestic savings.
9. The contribution of a foreign firm to public revenue through corporate taxes is com-
paratively less because of liberal tax concessions, investment allowances, designed
public subsidies, and tariff protection that are provided by the host government.
10. The foreign firms may influence political decisions in the developing countries. In
view of their large size and power, national sovereignty and control over economic
policies may be jeopardised. In extreme cases, the foreign firms may bribe the public
officials to secure undue favours.
DETERMINANTS OF FOREIGN INVESTMENT

The relative importance of foreign investment determinants varies not only between countries
but also between different types of foreign investments. Further, the relative importance of for-
eign investment determinants may change over a period of time in a country. The factors influ-
encing the determination of foreign investment in the host country are explained as follows:
Political Stability. In many countries the political situation is very unstable. In many countries the political
Governments change frequently and so also do the government policies and decisions. situation is very unstable. The
Foreign institutional investors (FIIs) are generally reluctant to invest in countries where relevant rules and regulations of
the host country that are govern-
political situations are unstable. For example, due to the unstable political situation in India, ing the foreign investment de-
not much foreign investment has been attracted in India as compared to China. cided the quantum of the latter.
Legal and Regulatory Framework. The relevant rules and regulations of the host
country that are governing the foreign investment decide the quantum of the latter. These
rules and regulations pertain to protection of property rights, ability to repatriate profits, and
free market for currency exchange. The rules, regulations, and administrative procedures of
the host country regarding foreign investment must be transparent.
Size of Market. Large developing countries provide substantial markets where the
consumer demands for certain goods far exceed the available supplies. This demand poten-
tial is a big draw for many foreign-owned enterprises. It explains the massive foreign invest-
ment into China since the early 1980s.
Prices and Exchange Rates. Price level and exchange rates of the host country deter-
mine the foreign investment in the country. The instability in prices and exchange rates affect
the inflow of foreign investment.
Access to Basic Inputs. The availability of and access to basic inputs such as oil and gas,
minerals, forestry products, skilled and unskilled labour force, and so on, determines the extent
of foreign investment in the country. Box 25.1 vividly gives the six mantras for FDI.
Box 25.1 Six Mantras for FDI

1. Legislative and policy reforms • Focus immediately on the infrastructure of
• Remove the unnecessary restrictions on equity airports, telecommunications, ports, and roads
participation by companies, in the selected areas to make the country more
attractive to FIIs.
• Standardise the guidelines for environmental issues,
5. Concentrated zones for FDI activity
• Strengthen the intellectual property rules, espe-
cially in the sectors where India has a compara- • Expand the export processing zones (EPZs) to pro-
tive advantage with its educated and skilled vide a modern infrastructure in the export-oriented
workforce, and projects,
• Reduce the variance of FDI laws that are based on • Use EPZs to provide special procedures for these
sector. projects and increase trade openers, and
2. Government processes and machinery • Expand the use of technology parks and other
agglomeration of industries for which India is
• Increase the areas for automatic approval,
particularly attractive.
• Reduce the role of the Foreign Investment Devel-
6. Engagement of FIIs
opment Board (FIDB), and
• Create a council of senior union and state
• Streamline the number of agencies that are
government officials and representatives of large
involved when approvals are necessary.
foreign-invested companies,
3. Centre–state dynamics
• Use the council to deepen the insights into
• Delegate more authority in the selected areas of issues that impede FDI,
the states to negotiate FDI projects.
• Use the council to develop high-impact actions,
4. Infrastructure
• Use the council to learn from these actions and
• Increase political commitment, regulatory trans- adjust quickly, and
parency, and dispute-resolution mechanisms to
• Use the council to build mutual respect and trust.
foreign participation in infrastructure, and
GOVERNMENT POLICIES
India’s economic development since independence is unique in several ways. The founding
fathers adopted a mixed-economy approach for development. Economic planning and public
sector undertakings (PSUs) were assigned pivotal roles and a socio-economic approach to
growth was set within a framework of parliamentary democracy. The government polices
regarding foreign investment can be discussed under the following heads:
1. Pre-liberalization policies,
2. Liberalization polices, and
3. New policies.
Pre-liberalization Policies
The First Plan period had

First Plan Period
noticed that the attitude At the time of independence, the attitude towards foreign capital was one of fear and suspi-
towards foreign capital was one
of fear and suspicion. cion. This was natural on account of the previous exploitative role played by it in ‘draining
away’ the resources from this country. The suspicion and hostility found expression in the
industrial policy of 1948 which, though recognising the role of a private foreign investment in
the country, emphasised that its regulation was necessary in the national interest. This attitude
expressed in the 1948’s industrial policy resolution, had the foreign capitalists dissatisfied.
This was subsequently simplified by the then Prime Minister Nehru in his statement to the
Parliament on 6 April 1949, which for a very long time remained as the only major policy state-
ment. He declared that the stress on the need to regulate, in the national interest, the scope and
manner of the foreign capital that arose from the past association of foreign capital and control
with domination of the economy of the country. However, circumstances having changed, the
object of regulation should, therefore, be the utilisation of foreign capital in a manner most
advantageous to the country.
Indian capital needs to be supplemented by foreign capital not only because the national
savings alone would not be enough for the rapid development of the country on the desired
Indian capital needs to be sup-
plemented by foreign capital scale, but also because in many cases, scientific, technical, and industrial knowledge and capi-
not only because the national tal equipment can best be secured along with the foreign capital. Nehru further added that
savings alone would not be the Government of India would expect all undertakings, Indian or foreign, to conform to the
enough for the rapid develop-
ment of the country on the
general requirements of their industrial policy. In return, he assured them of the following:
desired scale, but also because 1. That there would be no discrimination between Indian and foreign interests. As
in many cases, scientific, tech-
nical, and industrial knowledge regards the existing foreign interest, the government did not intend to place any
and capital equipment can best restrictions or impose any conditions which were not applicable to a similar Indian
be secured along with the for- enterprise.
eign capital.
2. Foreign interest would be permitted to earn profit, subject only to regulations common
to all.
3. If and when foreign enterprises were compulsorily acquired, compensation would be
paid on a fair and equitable basis.
The Government of India had no desire to injure in any way either British or other non-
Indian interest in India and would gladly welcome their contribution in a constructive and
cooperative role in the development of India’s economy. He assured foreign enterprises that
there would be no restriction on the remittance of profit or withdrawal of foreign capital
investment, subject to normal foreign exchange considerations. If any foreign concern was to
be compulsorily acquired, the government would provide a reasonable compensation.
Second Plan Period. Despite the above assurances, the foreign capital in the requisite During the Second Plan period
quantity did not flow into India during the First Plan period. During the Second Plan period, the emphasis was on increasing
the emphasis was on increasing the foreign exchange resources of the country, and increased the foreign exchange resources
of the country.
foreign investment was encouraged in order to finance the import of the required plant and
equipment. There was a clear shift of emphasis around 1957, though there was no formal
pronouncement to this effect. This was due to two immediate factors.
The Acute Foreign Exchange Situation from 1956 to 1957 Onwards. The need for
external finance and know-how becomes all important and even imports were allowed on the
condition of securing a foreign partnership. The Birla Mission was sent abroad in 1957 with
the specific object of encouraging foreign industrialists to invest in India. Both the Indian
public and private sectors, till then were totally opposed to foreign capital, and the govern-
ment became strong votaries of the doctrine of foreign capital, that was being essentially
complementary to Indian capital. For several years, foreign investment and know-how were
almost indiscriminately allowed even in the non-essential areas.
Selective Foreign Investment Policy Period (1960–68). By the mid-1960s the manu- Foreign equity participation was
facturing base of the economy had considerably broadened, and there was a greater availabil- normally limited to 40 per cent
ity of domestic resources and technical know-how. ‘Official policy’, therefore, came to relate save in exceptional cases
involving substantial export,
the role of foreign capital to its capacity to bridge important technological gaps in the coun- import substitution, or sophis-
try, particularly with reference to import substitution and increased export. A high degree of ticated technology, which could
selectivity came to be exercised in allowing the private foreign investment and collaboration not be secured by any other
proposals. Such investment came to be allowed only when it was considered to be essential means.
and of high priority from the point of view of techno-economic considerations and where the
technology was of an advanced kind, not indigenously available. Since this policy came to be
crystallised around 1968, an outright purchase of technology or a limited-direction royalty
agreement was generally favoured. Foreign equity participation was normally limited to 40 per
cent save in exceptional cases involving substantial export, import substitution, or sophisti-
cated technology, which could not be secured by any other means.
Foreign Investment Policy (1968–90). The year 1968 was a landmark in the evolution
of the foreign investment policy of the Government of India. For the first time after Nehru’s
statement, clear guidelines were issued on the policy of Government of India with regard to
foreign investment and collaboration. There were also big procedural changes.
The Foreign Investment Board (FIB) was set up in December 1968 as a single agency
within the government to deal with all matters relating to foreign investment and collabo-
ration. Since 1973, under the new industrial licensing procedure, when an applicant sub-
mits composite application for both industrial licence and approval of foreign investment or
technical collaborations, such composite cases are decided by the Projects Approval Board
(PAB). With the establishment of the FIB, the government also laid down clear guidelines for
a foreign investment in respect of the areas in which they would be allowed; in what forms It is important to note that
and the conditions to which they would be subject regarding royalty, lump sum payment, between 1973 and 1983,
and so on. as a result of FERA (Foreign
Exchange Regulation Act) the
A general decision was taken to limit foreign equity participation to less than 40 per number of foreign majority
cent, except in cases where the required technology was highly sophisticated or the projects companies came down sharply.
were export oriented. From 1980 onwards, the climate for foreign collaborations improved In two significant cases—IBM
distinctly because of speedy approval and disposal of collaboration proposals. About and Coca Cola—which were
required to bring down non-
590 proposals were approved in the year 1982 which increased to 1,204 in the year 1985. resident holdings to 74 per cent
It is important to note that between 1973 and 1983, as a result of FERA (Foreign Exchange and 40 per cent, respectively,
Regulation Act) the number of foreign majority companies came down sharply. In two but declined to comply with
these requirements, the govern-
significant cases—IBM and Coca Cola—which were required to bring down non-resident
ment directed the two compa-
holdings to 74 per cent and 40 per cent, respectively, but declined to comply with these nies to close their business in
requirements, the government directed the two companies to close their business in India. India.
Significantly, after the liberalization from 1991 onwards, Coca Cola returned to India. So
did IBM through joint ventures (JVs). Most foreign companies took steps to comply with the
FERA guidelines through disinvestments or through a fresh issue of capital. Only a few chose
to wind up their business.
Liberalization Policies
After pursuing a restrictive policy towards FDI over four decades with a varying degree of
selectivity, India changed tracks in 1990s and embarked on a broader process of reforms that
was designed to increase its integration with the global economy. Among the reform meas-
ures that were implemented included a departure from the restrictive policy towards FDI,
a much more liberal trade policy, besides reforms of capital market and exchange controls.
The New Industrial Policy (NIP) that was announced on July 24, 1991, marked a major
departure in respect to FDI policy, with the abolition of industrial licensing system except
where it is required for strategic or environmental grounds, creation of a system of automatic
clearance of FDI proposals fulfilling the conditions laid down, such as the ownership levels of
50 per cent, 51 per cent, 74 per cent, and 100 per cent foreign equity; opening of new sectors
such as mining, banking, insurance, telecommunications, and construction; and manage-
ment of ports, harbours, roads and highways, airlines, and defence equipment to foreign-
owned companies, subject to sectoral caps. Foreign ownership up to 100 per cent is permitted
in the most manufacturing sectors—in some sectors even on an automatic basis—except
Liberalization is essentially a for defence equipment where it is limited to 26 per cent and for items that are reserved for
process, whereby liberal values, production by small-scale industries where it is limited to 24 per cent. Box 25.2 gives a pic-
concepts, and percepts take an
operational form. ture of new conditions for 100 per cent FDI. The dividend that is balancing and the related
export obligation conditions of FIIs, which applied to 22 consumer goods industries, were
withdrawn in 2000.
Liberalization Trends and Patterns in FDI Inflows

The economic reforms, in general, and liberalization of FDI policy, in particular, have affected
During the 1990s, the FDI the magnitude and the pattern of FDI inflows that were received by India. During the 1990s,
showed a marked increase they showed a marked increase until 1997, when they peaked at US$3.6 bn. However, after
until 1997 when they peaked at stagnating for a few years at around US$2.5 bn, they again rose to a level of about $3.4 bn and
US$3.6 bn. After stagnating for
a few years, it again rose to a
to $4.3 bn in 2003 (as shown in Table 25.1). The magnitude of FDI inflows received by India
level of about $3.4 bn in 2003. would appear too small, especially if compared with the inflows received by other countries
in the region such as China (around $50 bn in the recent years).
Box 25.2 100% FDI in Construction Sector

The Government of India announced new FDI norms in • Minimum $10 mn capital investment for wholly owned
the construction and real-estate development sector subsidiaries;
on February 24, 2005. The new conditions for allowing • Original investment cannot be repatriated before
100 per cent FDI in the real-estate sectors stipulates that three years; and
• Minimum area that is to be developed under each • Sale of underdeveloped land barred to prevent
project has been reduced to 25 acres from 100 acres; speculation in real estate.
• Earlier requirement of minimum 20,000 dwelling units
for serviced housing plots has been changed to a
minimum built-up area of 50,000 sq. m;
(US$ mn) < Table 25.1

India’s FDI Inflows,
Year FDI Inflows 1990–2012
1990 236.7
1991 75.0
1992 252.0
1993 532.0
1994 974.0
1995 2151.0
1996 2525.0
1997 3619.0
1998 2633.0
1999 2168.0
2000 3588.0
2001 5477.6
2002 5629.7
2003 4321.1
2004 5777.8
2005 7621.8
2006 20,327.8
2007 25,349.9
2008 47,138.7
2009 35,657.3
2010 21,125.4
2011 36,190.4
2012 25,542.8
Source: http://unctad.org/en/pages/DIAE/World%20Investment%20Report/Annex-Tables.aspx
In an analysis of the role of liberalization in explaining the rising inflows of FDI till 1997,
Kumar found that only a part of the increase of FDI inflows could be attributed to liberaliza-
tion; a part of the rise was explained in terms of a sharp expansion in the global scale of FDI The magnitude of FDI inflows
received by India would appear
outflows during the 1990s. Secondly, the decline in inflows since 1997 despite a continued too small, especially if com-
liberalization suggested that the policy liberalization is not an adequate explanation of FDI pared with the inflows received
inflows. Macro-economic fundamentals of the host economies that emerge as the most pow- by other countries in the region
erful explanatory variables in the inter-country analysis of FDI inflows also explain the year- such as China (around $50 bn
in the recent years).
to-year (y-t-y) fluctuations in FDI, though with a lag. This becomes clear from Table 25.2,
which plots the FDI inflows during the 1990s against the fluctuations in the annual rates of
the growth of the industrial output. One finds a good correspondence between the industrial
growth rate in a year and the FDI inflows in the following year. The industrial growth seems
to provide a signal to the FIIs about the prospects of the economy. Therefore, it appears that
the policy liberalization may be a necessary but not a sufficient condition for FDI inflows.
Table 25.2
Industrial Growth (left
> Year FDI Inflows (US$ mn) Industrial Growth Rate (%)
scale) and FDI Inflows 1991 155 −1.0

(right scale) in India, 1992 233 4.3
1991–2003
1993 574 5.6
1994 973 10.3
1995 2,144 12.3
1996 2,591 7.7
1997 3,613 3.8
1998 2,614 3.8
1999 2,154 4.9
2000 2,315 7.0
2001 3,400 3.5
2002 3,450 6.2
2003 4,269 6.7
Source: UNCTAD and the Government of India data.
The implication of the above discussion is that the recovery of industrial growth rate
in 2003–04 was likely to increase FDI inflows in the subsequent year. Some indications of
this trend are already available from India which is emerging as the third, most attractive
FDI destination after China and United States (compared to sixth in 2003), in terms of the
FDI confidence index that was developed at Kearney on the basis of a survey of 1,000 global
corporations.
Liberalization and Changing Sectoral

Composition of FDI
During the 1990s, the FDI The sectoral composition of FDI in India underwent a significant change in the 1990s.
showed a marked increase Table 25.3 presents a sectoral distribution of FDI stock in India at three points of time—1980,
until 1997 when they peaked at 1990, and 1997 (i.e., the latest available year for the stock data). Three characteristics of FDI
US$3.6 bn. After stagnating for
a few years, it again rose to a
stock in India can be noted. Firstly, the share of mining and petroleum along with the plan-
level of about $3.4 bn in 2003. tation sector in FDI stock fell markedly from 9 per cent in 1980 to only 2 per cent in 1997.
Secondly, as the bulk of FDI inflows in the pre-liberalization era were directed to the manufac-
turing sector, it accounted for the bulk of FDI stock with nearly 87 per cent share in 1980 that
declined marginally to 85 per cent in 1990. However, with the liberalization of the FDI policy
regime in the 1990s, the FDI inflows have been received by services and infrastructural sectors.
This brought the share of manufacturing down to 48 per cent by 1997. During the 1990s, the
services clearly emerged as a major sector receiving FDI. The power generation among other
infrastructure sectors (included in ‘others’) also attracted a substantial FDI during the 1990s,
bringing the share of ‘others’ up to nearly 35 per cent from the marginal in 1980 and in 1990.
Among the manufacturing sub-sectors, the FDI stock in 1997 was also more evenly
distributed between food and beverages, transport equipment, metals and metal products,
1997 End-March 1980 End-March 1990 End-March 1997 < Table 25.3
Industrial Distribution
Industry Group
Value % Value % Value % of India’s Inward FDI
Stock, 1980–97
Plantations 385 4.13 2,560 9.46 4,310 1.18
Mining 78 0.84 80 0.30 410 0.11
Petroleum 368 3.94 30 0.11 3,330 0.91
Manufacturing 8,116 86.97 22,980 84.95 175,230 48.00
1. Food and beverages 391 4.19 1,620 5.99 24,310 6.66
2. Textiles products 320 3.43 920 3.40 10,390 2.85
3. Transport equipment 515 5.52 2,820 10.43 24,570 6.73
4. Machinery and
machine tools 710 7.61 3,540 13.09 19,310 5.29
5. Metals and metal
products 1,187 12.72 1,410 5.21 7,600 2.08
6. Electrical goods and
machinery 975 1.45 2,950 10.91 29,400 8.31
7. Chemicals and
allied products 3,018 32.34 7,690 28.43 32,530 8.91
8. Others 1,000 10.72 2,030 7.50 27,120 7.43
Services 320 3.43 890 3.29 54,650 14.97
Others 65 0.70 510 1.89 127,170 34.83
Total 9,332 100.00 27,050 100.00 365,100 100.00
Source: RBI Bulletin (April 1985, August 1993, October, 2000).
electricals and electronics, chemicals and allied products, and miscellaneous manufacturing,
unlike a very heavy concentration in relatively, technology-intensive sectors, viz., machinery,
chemicals, electricals, and transport equipment up to 1990. The infrastructural sectors which
commanded nearly half of the total approved investments in the 1990s had not been open to
FDI inflows before and hence, could be attributed to policy liberalization.
It may be useful to look at the distribution of an inward FDI within the services sector,
given its increasing importance in the FDI inflows during the 1990s. A look at the sub-sector
break-up of cumulative approvals of FDI during the 1991–2000 period suggests that about
61 per cent of the approved services sector of FDI has gone to the telecommunications sector.
The financial and banking sector stood as the second most important services sector to FDI
nearly claiming about 14 per cent of the total amount approved. Other important branches
were hotel and tourism, and air and sea transport.
The attractiveness of India as a preferred investment destination could be ascertained
from the large increase in FDI inflows to India, which rose from around US$ 6 billion in
2001–02 to almost US$ 38 billion in 2008–09. As part of the capital account liberalization,
FDI was gradually allowed in almost all sectors, except a few on grounds of strategic impor-
tance, subject to compliance of sector-specific rules and regulations. The large and stable
FDI flows also increasingly financed the current account deficit over the period. During the
recent global crisis, when there was a significant deceleration in global FDI flows during
2009–10, the decline in FDI flows to India was relatively moderate reflecting robust equity
Table 25.4
Equity FDI Inflows to
> (Per cent)
Sectors 2006–07 2007–08 2008–09 2009–10 2010–11

India
Sectoral Shares (Per cent)
Manufactures 17.6 19.2 21.0 22.9 32.1
Services 56.9 41.2 45.1 32.8 30.1
Construction, real estate, 15.5 22.4 18.6 26.6 17.6
and mining
Others 9.9 17.2 15.2 17.7 20.1
Total 100.0 100.0 100.0 100.0 100.0
Equity Inflows (US$ billion)
Manufactures 1.6 3.7 4.8 5.1 4.8
Services 5.3 8.0 10.2 7.4 4.5
Construction, real estate, 1.4 4.3 4.2 6.0 2.6
and mining
Others 0.9 3.3 3.4 4.0 3.0
Total equity FDI 9.3 19.4 22.7 22.5 14.9
Source: http://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=2513
flows on the back of strong rebound in domestic growth ahead of global recovery and steady
reinvested earnings (with a share of almost 25 per cent) reflecting better profitability of
foreign companies in India.
However, when there had been some recovery in global FDI flows, especially driven by
flows to Asian EMEs, during 2010–11, gross FDI equity inflows to India witnessed significant
moderation. Gross equity FDI flows to India moderated to US$ 20.3 billion during 2010–11
from US$ 27.1 billion in the preceding year. From a sectorial perspective, FDI in India mainly
flowed into services sector (with an average share of 41 per cent in the past five years) followed
by manufacturing (around 23 per cent) and mainly routed through Mauritius (with an aver-
age share of 43 per cent in the past five years) followed by Singapore (around 11 per cent).
However, the share of services declined over the years from almost 57 per cent in 2006–07 to
about 30 per cent in 2010–11, while the shares of manufacturing, and ‘others’ largely compris-
ing ‘electricity and other power generation’ increased over the same period (refer to Table 25.4).
Sectorial information on the recent trends in FDI flows to India show that the moderation in
gross equity FDI flows during 2010–11 has been mainly driven by sectors such as ‘construction,
real estate, and mining’ and services such as ‘business and financial services.’ Manufacturing,
which has been the largest recipient of FDI in India, has also witnessed some moderation.
Service sector is the highest FDI attracting inflows with 21 per cent of the total inflows,
followed by computer software and hardware, telecommunication and housing and real estate
with 9 per cent, 8 per cent, 7 per cent and 7 per cent inflows, respectively (refer to Table 25.5).
Liberalization and Changing Sources

of FDI in India
European countries were the
European countries were the major sources of FDI inflows into India until 1990. However,
major sources of FDI inflows into
India until 1990. However, their their relative importance steadily declined in the post-liberalization period, with the share
relative importance steadily of major European source countries (which include the UK, Germany, France, Switzerland,
declined.
< Table
Amount in Rs crores (US$ in million)
25.5
Ranks Sector 2011–12 2012–13 2013–14 Cumulative Percentage
Sectors Attracting
(April to (April to (for April, Inflows to Total
Highest FDI Equity
March) March) 2013) (April ‘00– Inflows (in
Inflows
April ‘13) Terms of
US$)
1. Services 24,656 26,306 1291 173,567
19%
Sector ** (5216) (4833) (238) (37,472)
2. Construction 15,236 7248 173 101,222
Development: 11%
Townships, (3141) (1332) (32) (22,112)
Housing, Built-Up
Infrastructure
3. Telecommunications 9012 1654 33 58,765 7%
(Radio Paging, (1997) (304) (6) (12,862)
Cellular Mobile,
Basic Telephone
Services)
4. Computer 3804 2656 56 52,830 6%
Software and (796) (486) (10) (11,701)
Hardware
5. Drugs and 14,605 6011 5365 54,245 6%
Pharmaceuticals (3232) (1123) (987) (11,305)
6. Chemicals (Other 18,422 1596 276 40,772 5%
than Fertilisers) (4041) (292) (51) (8932)
7. Automobile 4347 8384 118 39,287 4%
Industry (923) (1537) (22) (8316)
8. Power 7678 2923 63 36,200 4%
(1652) (536) (12) (7846)
9. Metallurgical 8348 7878 97 34,911 4%
Industries (1786) (1466) (18) (7525)
10 Hotel and 4754 17,777 179 33,439 3%
Tourism (993) (3259) (33) (6664)
Source: DIPP Database.
Note: (i) ** Services sector includes financial, banking, insurance, non-financial/business, outsourcing,
R&D, courier, Tech. Testing and analysis.
(ii) Cumulative sector-wise FDI equity inflows (from April 2000 to April 2013) are at Annex. B.
(iii) FDI sectorial data has been revalidated/reconciled in line with the RBI, which reflects minor
changes in the FDI.
Figures (increase/decrease) as compared to the earlier published sectorial data.
Sweden, Italy, and Netherlands) coming down from 69 per cent and 66 per cent of FDI stock,
in 1980 and 1990, to just 31 per cent by 1997. The decline in the relative importance of Euro-
pean countries as sources of FDI to India has been made more prominent by diversification
of the sources of FDI by the country over the 1990s.
The United States had emerged as the most important source of FDI over this period
with a share of nearly 19 per cent of stock in 1992. In 1997 the share of the United States
Later in the post-liberlisation at 13.75 per cent was, however, deceptive as a large proportion of the United States’ FDI
period, the United States has was believed to be routed through Mauritius, making the island-nation appear as the largest
emerged as the most important source of investments in India with ` 65.46 bn or nearly 18 per cent of the total FDI stock
source of FDI.
in the economy in 1997. The emergence of Mauritius as the largest source of FDI can be
explained by the Double Taxation Avoidance Agreement (DTAA), which was signed between
Mauritius and India during the 1990s that enables FIIs to minimise their tax liability, given
the tax haven status of Mauritius. Hence, FIIs from other countries, principally the United
States, route their investments through Mauritius to take advantage of the tax treaty.
According to the fact sheet Mauritius shows the highest FDI investment in equity
inflows with 38 per cent of the total inflow followed by Singapore, UK, Japan, and USA with
11 per cent, 9 per cent, 7 per cent, and 6 per cent, respectively (refer to Table 25.6 and 25.7).
Liberalization and Mode of Entry:

Greenfield vs M&As
An important feature of FDI inflows into India during 1990s is the emergence of mergers and
acquisitions (M&As) as an important channel. During the period 1997–99, for instance, nearly
39 per cent of FDI inflows into India have taken the form of M&As by foreign companies of
the existing Indian enterprises, whereas in the pre-reform period FDI entry was invariably
in the nature of Greenfield investments (refer to Table 25.8). This trend may have implica-
tions for the impact of FDI, given the limited potential of acquisitions when compared to the
Greenfield entry to add to the stock of productive capital, generate a favourable knowledge
spillovers, and competitive effects.
In India, the value of cross-border M&A sales touched $5.5 billion in 2007, posting
17.72 per cent growth over 2006. The number of Greenfield investments in India increased
Amount Rupees in crores (US$ in million)
Table 25.6
Share of Top Investing
> Ranks Country 2011–12 2012–13 2013–14 Cumulative Percentage to
(April to (April to (for April, Inflows (April Total Inflows (in
Countries FDI Equity March) March) 2013) ‘00 – April ’13) Terms of US$)
Inflows (Financial Years)
46,710 51,654 1929 343,053
1. Mauritius 38
(9942) (9497) (355) (74,021)
24,712 12,594 7031 97,214
2. Singapore 11
(5257) (2308) (1293) (20,753)
36,428 5797 51 80,509
3. UK 9
(7874) (1080) (9) (17,558)
14,089 12,243 222 70,316
4. Japan 7
(2972) (2237) (41) (14,591)
5347 3033 810 51,733
5. USA 6
(1115) (557) (149) (11,270)
6698 10,054 939 43,317
6. Netherlands 5
(1409) (1856) (173) (9138)
7722 2658 134 32,462
7. Cyprus 4
(1587) (490) (25) (6914)
7452 4684 138 25,651
8. Germany 3
(1622) (860) (25) (5506)
(Continued)
Ranks Country 2011–12 2012–13 2013–14 Cumulative Percentage to < Table 25.6
(Continued)
(April to (April to (for April, Inflows (April Total Inflows (in
March) March) 2013) ‘00 – April ’13) Terms of US$)
3110 3487 224 17,088
9. France 2
(663) (646) (41) (3614)
1728 987 56 11,363
10. U.A.E. 1
(353) (180) (10) (2,433)
Total Fdi Inflows 165,146 121,907 12,623 909,535
from all Countries* –
(35,121) (22,423) (2321) (195,724)
Source: DIPP database.
*
Includes inflows under NRI Schemes of RBI.
Note: (i) Cumulative countrywise FDI equity inflows (from April 2000 to April 2013) are at Annex. A.
(ii) Percentage worked out in US$ terms and FDI inflows received through FIPB/SIA+ RBI’s auto-
matic route + acquisition of existing shares only.
40
< Table 25.7
Country-wise FDI inflows
35
Mauritius (37.55) in India from April, 2000
Singapore (10.05) to June, 2012
30 United Kingdom (9.34)
25 Japan (7.25)
United States (6.13)
20
Netherlands (4.38)
15 Cyprus (3.78)
10 Germany (2.79)
France (1.71)
5
UAE (1.32)
0
Amount of FGI Inflows (Percentage)
Source: http://equityupdates.com/2012/10/quick-facts-about-fdi-in-india/
Year FDI Inflows ($ min) M&A Funds ($ min) Share of M&A < Table 25.8
Share of M&As in FDI
1997 3,200 1,300 40.6 Inflows in India
1998 2,900 1,000 34.5
1999
(January to March) 1,400 500 35.7
Total 7,100 2,800 39.4
Source: Kumar (2000).
Table 25.9
Number of Greenfield
> Year Number of Greenfield FDI projects Number of Cross-border M&A deals
and M&A Deals 2003 453 83

(2003–2007) 2004 699 80
2005 594 121
2006 1026 161
2007 682 167
Source: http://dipp.nic.in/englis/publications/reports/fdi_ncaer.pdf
from 247 projects in 2000 to 980 projects in 2006, but declined to 682 projects in 2007 (refer to
Table 25.9). During the period from 2002 to 2006, 15 of the 300 Greenfield projects that were
reported exceeded $1 billion in their worth. These investment projects were concentrated
in heavy industries, property, tourism and leisure, and electronics. The growth in number
of M&A deals in India has been less impressive than the number of Greenfield investments
(refer to Table 25.10). According to information in UNCTAD’s World Investment Report
(2008), the value of cross-border M&A sales by India increased from $4740 million in 2006 to
$5580 million in 2007 and purchases from $6586 million in 2006 to $30,414 million in 2007.
The number of sales deals increased from 161 to 167 and purchases from 162 to 194. This
implies that the average sales deal size increased from $29.4 million in 2006 to $33.4 million
in 2007.
FDI Inflows into India in a Comparative

East Asian Perspective
Although the FDI inflows into Although the FDI inflows into Indian economy increased considerably during the 1990s fol-
Indian economy increased lowing the reforms, India’s share would appear too small, especially if it is compared with
considerably during the 1990s
following the reforms, India’s that of the other countries in the region such as China. In 2001, India’s reported inflows of
share would appear too small, about $3.4 bn represented a mere 1.7 per cent of the total inflows attracted by the developing
especially if it is compared with countries. In contrast, China received an estimated $46.8 bn of inflows in the same year, rep-
that of the other countries in
resenting nearly 23 per cent of the total developing country FDI inflows. There are also other
the region such as China.
differences in the sectoral patterns and the acquisition modes among other characteristics.
In what follows we take a brief look at the key differences and some possible explanations.
Magnitudes of FDI Inflows

The comparison of about US$3.4 bn in the annual inflows of FDI by India with US$45 bn
of FDI inflows by China is often made. It has been pointed out, however, that the figures of
Table 25.10
M&A Deals in India
> Year Number of Deals $ million
2004 80 1760
2005 121 3754
2006 161 4740
2007 167 5580
2008 *
66 2254
Source: UNCTAD (various years). World Investment Report.
Note: *Number of cross-border M&As refers to the first half of 2008.
FDI inflows in India and China are not comparable because of several differences. Firstly, the
Indian figures of inflows do not follow IMF’s BOP Manual that is followed internationally.
The principal difference is that the Indian figures count only the fresh inflows of equity and
do not take into consideration the reinvested earnings by foreign affiliates in the country nor
the inter-corporate debt flows that are generally included while computing the FDI figures
as per the IMF guidelines. Therefore, the Indian figures tend to under-report the inflows.
Secondly, the FDI inflows into China are believed to be overestimating the real FDI inflows The FDI Inflows into India in a
in view of the round-tripping of the Chinese capital to take advantage of a more favourable comparative East Asian per-
tax treatment of FDI. Therefore, the figures of India and China are not strictly comparable, spective. The FDI inflows into
China in 2000 as a preparation
and they tend to overplay the difference between the intensity of inflows between the two of GDP is 3.6 per cent when
countries. Finally, the size of the Chinese economy is much larger than the Indian economy compared to 0.5 per cent in the
and hence, the figures should be normalised. case of India.
Table 25.11 puts the FDI inflows into India and China in a comparative perspective. The
reported figure of FDI inflows into China in 2000, as a proportion of GDP is 3.6 per cent when
compared to 0.5 per cent in the case of India. However, when the Indian figures are revised
by taking into account the reinvested earnings and inter-corporate debt, and Chinese figures
are moderated on account of possible round-tripping of FDI inflows (using the estimates
provided by the IFC), the gap in the FDI/GDP ratios narrows in the range of 1.7–2.0 for India
and China, respectively.
The Indian government had taken steps to revise the definition of FDI flows into the The Indian government has
country. A Committee that was set up by the RBI, in its report submitted in October 2002, taken steps to revise the defi-
recommended that the Indian definition be brought on par with the global practice. In June nition of FDI flows into the
country. A committee that was
2003, the Government of India announced that adoption of international norms led to near
set up by the RBI, in its report
doubling of FDI inflow figures from US$2,342 mn to $4,029 mn in 2000–01 and from $3,906 submitted in October 2002, rec-
mn in 2001–02 to $6,131 mn in 2002–03. Even after taking into account the measurement ommended that the Indian defi-
problems, the FDI inflows in India are low compared to other economies in the region. The nition be brought on par with
the global practice.
studies of determinants of FDI inflows conducted in the tiles framework of an extended
model of location of foreign production have found that a country’s attractiveness to FDI
is affected by structural factors such as market size (income levels and population); extent
of urbanisation; quality of infrastructure; geographical and cultural proximity with major
sources of capital; and policy factors, viz., tax rates, investment incentives, and performance
requirements. In terms of these, while India’s large population base is an advantage, its low-
income levels, low levels of urbanisation, and relatively poor quality of infrastructure are the
disadvantages. Furthermore, the relative geographical and cultural proximity of India’s East
Asian counterparts, with major sources of capital such as Japan and Korea (also the United
States), for instance, may have put her at a disadvantage when compared to them. Further-
more, unlike China and some other countries, India has not employed fiscal incentives like
Heads
India China < Table 25.11
FDI Inflows in China and
Reported FDI* Adjusted FDI# Reported FDI* Adjusted FDI# India: A Comparative
FDI net inflows (BoP, 2.3 8.0 39.0 20.0 Perspective, 2000
current US$ bn)
FDI net inflows 0.5 1.7 3.6 2.0
(percent of GDP)
Source: Srivastava (2003) based on World Bank, World Development Indicators, 2002 and IFC, World
Business Environment Survey: Economic Prospects for Developing Countries, March 2002.
Notes: * Figures published by an official source.
#
Based on IFC’s World Business Environment Survey, 2002.
tax concessions to attract FDI. India is also behind China by at least 12 years in terms of
launching reforms. Finally, the ability of China in attracting the FDI inflows to quite a large
extent owes to the large special economic zones (SEZs), which provide the foreign enterprises
better and specialised infrastructure and flexibility from the domestic regulations, such as
labour laws.
The FDI inflows received by India accounted for 3 per cent of gross fixed capital for-
mation (GFCF) in 2005, 6.6 per cent in 2006 and 5.8 per cent in 2007. The corresponding
figures for China are 7.7, 6.4 and 5.9 per cent, respectively. Thus, the share of FDI in GFCF
for India in 2007 was almost the same as that of China. The share of inward FDI stock of
India was 0.5 per cent of GDP in 1990, 3.7 per cent in 2000 and 6.7 per cent in 2007. The cor-
responding figures are much higher for China, viz., 5.1, 16.2 and 10.1 per cent, respectively.
The sales of India’s mergers and acquisitions (M&A) reached $5,580 million in 2007 and
stood at $2,254 million in January–June 2008. Similarly, India’s purchases of M&As reached
$30,414 million 2007 and stood at $8556 million in January–June 2008.
Quality of FDI Inflows into India and China: Sectoral Composition

and Other Differences
India’s post-reform period experiences SLI (Silent Lacunar Infarction) Tests that a
substantial proportion of FDI has gone into services, infrastructure, and relatively low,
technology-intensive, consumer goods manufacturing industries when compared to a high
concentration in technology-intensive manufacturing industries in the pre-reform period. In
China and other South-east Asian countries, the bulk of FDI is concentrated in the manufac-
turing. In the pre-reform period, FDI was consciously channelled into technology-intensive
China and other South-east
Asian Countries have directed manufacturing, through a selective policy. In the post-reform period, however, opening up
FDI to manufacturing with of new industries such as services and infrastructure to FDI has led to a lot of FDI going
export obligations and other into them, thus bringing down the tiles share of manufacturing. Within manufacturing too,
incentives such as pioneer in-
now that there is no policy to direct the FDI to certain branches, the consumer goods indus-
dustry programmes.
tries that did not have so much exposure to FDI have risen in importance. On the other
hand, while following in general a liberal policy towards FDI, China and other South-east
Asian countries have directed the FDI to manufacturing, with export obligations and other
incentives such as pioneer industry programmes. Hence, FDI also accounts for a relatively
high share of manufactured exports in these countries, as observed later. It suggests that
while according it a liberal treatment, a broad direction needs to be given to improve the
quality of FDI and make it to contribute more to industrialisation and building export capa-
bility. Specific promotion of export-oriented FDI may also be fruitful.
Impact of FDI Inflows: Some Issues

Given their intangible assets, MNC affiliates can contribute to their host country’s develop-
ment with generation of output, employment, balanced regional development, technologi-
cal capability, and export expansion, among other things. The lack of data on the economic
activity of enterprises that are operating in India which are classified by the nationality of
ownership has constrained a fuller appreciation of the role that was played by FDI in the
country’s economic development. In what follows, the findings of existing studies and some
observations based on the comparisons of the samples of enterprises are made to the gather
some idea of the impact of FDI.
Place of FDI in India: Shares in Sales, Capital

Formation, and GDP
An idea of the relative importance of FDI in India can be had from the share of output or sales of
foreign affiliates in output or sales of the industrial sector. A few attempts have been made in that
direction. Kumar estimated that the foreign-controlled firms accounted for nearly 25 per cent
of the output of larger private corporate sector and 31 per cent in the manufacturing sector in
1980–81. Arthreye and Kapil, in an attempt to update Kumar’s estimates, following the same
methodology, found that foreign firms in 1990–91 accounted for about 26 per cent of sales
in the manufacturing, down from 31 per cent in 1980–81. The declining trend of the share of
foreign controlled enterprises over the 1980–90 period has to do with the restrictive attitude
followed by the government, with respect to FDl during the period. Similar estimates for the
post-liberalization period are not available.
To examine the trends in the share of foreign enterprises during the 1990s in the Indian
manufacturing sector, we have computed the share of foreign firms in the total value added
and the total sales in a sample of large private sector companies that are quoted on Indian
stock exchanges and included in the RIS (Research and Information System) database
compiled by extracting the information of relevant companies from the Prowess (online)
Database of the Centre for Monitoring Indian Economy (CMIE). The shares that are com-
puted on the basis of the sample such as this, are useful only to observe trends overtime,
as information is not available on the representative nature of the sample. The shares of
foreign enterprises in both value added and sales reveal an increasing trend in the 1990s,
particularly in the late 1990s.
Therefore, the liberalization policy seems to have led to a rise in the place of foreign The liberalization policy seems
enterprises in the Indian industry. Table 25.12 provides the data for shares of foreign firms in to have led to a rise in the place
the Indian manufacturing units during the 1990s. The growing importance of FDI inflows in of foreign enterprises in the
Indian industry.
the Indian economy can also be judged from the rising ratios of FDI inflows as a proportion
No. of Sample Firms Share (%) of < Table 25.12

Shares of Foreign
Year Total Foreign Domestic Total Value Total Sales Firms in the Indian
Firms Firms Added Manufacturing During
1990s
1990 1,378 126 1,252 9.50 11.26
1991 1,754 149 1,605 9.77 11.77
1992 1,991 458 1,833 9.61 11.69
1993 2,381 171 2,210 9.77 11.88
1994 2,987 178 2,809 9.91 11.67
1995 3,500 190 3,310 9.25 11.03
1996 3,649 195 3,454 9.65 11.67
1997 3,695 208 3,487 10.77 12.64
1998 3,695 216 3,479 11.20 12.85
1999 3,716 225 3,491 12.12 13.66
2000 3,726 224 3,502 12.76 14.05
2001 2,959 193 2,766 12.63 13.77
Source: RIS database.

of gross fixed capital formation (GFCF) from 0.3 per cent to 4 per cent, in 1990 and of the
inward FDI stock as a percentage of GDP rising from 0.5 per cent to 5.4 per cent over the
same period.
FDI, Growth, and Domestic Investment

FDI inflows could contribute to the growth rate of the host economy by augmenting the capi-
tal stock as well as with infusion of new technology. However, the high growth rates may also
lead to more FDI inflows by enhancing the investment climate in the country. Therefore, the
FDI-growth relationship is subject to a causality bias (given the possibility of a two-way rela-
tionship). What is the nature of the relationship in India? A recent study has examined the
direction of causation between FDI and growth empirically, from a sample of 107 countries
for the 1980–99 period. In the case of India, the study finds a Granger neutral relationship as
the direction of causation was not pronounced.
Furthermore, it has been shown that sometimes the FDI projects may actually crowd out
or substitute the domestic investments from the product or the capital markets, with the mar-
ket power of their well known brand names and other resources and may, thus, be immis-
erising. Therefore, it is important to examine the impact of FDI on the domestic investment
to evaluate the impact of FDI on the growth and welfare in the host economy. Our study to
examine the effect of FDI on the domestic investment in a dynamic setting, however, did not
find a statistically significant effect of FDI on the domestic investment in the case of India.
It appears, therefore, that the FDI inflows that are received by India have been of a mixed
type, combining some inflows that are crowding in the domestic investments while others
are crowding them out, with no predominant pattern emerging.
Empirical studies on the nature Empirical studies on the nature of relationship between the FDI and the domestic invest-
of relationship between FDI and ments suggest that the effect of FDI oil domestic investment depends on the host government
the domestic investments sug- policies. The governments have extensively employed selective policies and imposed various
gest that the effect of FDI oil performance requirements, such as local content requirements (LCRs) to deepen the commit-
domestic investment depends
on the host government policies. ment of MNCs with the host economy. The Indian government has imposed the condition of
phased manufacturing programmes (or LCR) in the auto industry to promote vertical inter-firm
linkages and encourage the development of the auto component industry (and crowding-in of
domestic investments). A case study of the auto industry where such policy was followed shows
that these policies (in combination with the other performance requirements, viz., foreign
exchange neutrality), have succeeded in building all internationally competitive, vertically inte-
grated auto sector in the country. The Indian experience in this industry, therefore, is in tune
with the experiences of Thailand, Brazil, and Mexico, as documented by Moran (1998).
Exports and BoPs

A number of developing countries have used FDI to exploit the resources of MNCs such as
globally recognized brand names, best practices technology, or by getting integrated with
their global production networks, among others, for expanding their manufactured exports.
The early studies analysing the export performance of Indian enterprises in the
pre-liberalization phase reported no statistically significant difference between the export
performance of foreign and local firms. Sharma—in a study, using a simultaneous equation
model, was examining the factors and explaining the export growth in India over 1970–98
period—found FDI to have no significant effect on the export performance, though its coef-
ficient had a positive sign.
Obviously, in a highly protected setting, both local and foreign firms found it more prof-
itable to concentrate on the domestic market. For the post-reform period, Agarwal found a
weak support for the hypothesis that foreign firms have performed better than the local firms
in India in the Indicators 1990 1995 2000 2003 post-reform period 1996–2000, though the
estimates were not robust across various technology groupings and the foreign ownership
dummy turned out to be significant at 10 per cent level, only in the case of medium-high
technology industries.
Rising Importance of FDI in Indian

Economy
Controlling for several firm-specific factors, fiscal incentives, and industry characteristics,
Kumar and Pradhan, in a recent study analysing the export orientation of over 4,000 Indian
enterprises in the manufacturing for the 1988–2001 period, found that the Indian affiliates
of MNCs appear to be performing better than their local counterparts in terms of export-
orientation overall, though with some variation across industries. In the light of the findings
Reforms have prompted the
of the earlier studies that were relating to pre-liberalization period of no significant difference
foreign MNCs to begin explor-
in the export orientation of foreign and local enterprises, it would appear that reforms have ing the potential of India as an
prompted the foreign MNCs to begin exploring the potential of India as an export-platform export-platform production in a
production in a modest manner. modest manner.
The studies that are analysing the determinants of the patterns of export orientation of
MNC affiliates across 74 countries in seven branches of the industry over three points of time,
have shown trade liberalization to be an important factor in explaining the export orientation
of the foreign affiliates. Furthermore, in the host countries with large domestic markets, the
export obligations have been found to be effective for promoting export orientation of foreign
affiliates to the Third World countries. From that perspective, the liberalization of trade regime
during the 1990s in India may have facilitated the export orientation of foreign affiliates, as
borne out from the above.
The export obligations have also been employed fruitfully by many countries to prompt
MNC affiliates to exploit the host country’s potential for export-platform production. For
instance, in China, which has succeeded in expanding manufactured exports with the help
of MNC affiliates, the regulations stipulate that the wholly owned foreign enterprises must
undertake to export more than 50 per cent of their output. As a result of these policies, the
proportion of foreign enterprises in the manufactured exports has steadily increased over
the 1990s to 44 per cent. The MNC affiliates account for over 80 per cent of China’s high-
technology exports. India has not imposed the export obligations on MNC affiliates except
for those entering the products that are reserved for the SMEs. However, indirect export
obligations in the form of dividend balancing have been imposed for enterprises the are Under these policies, a foreign
producing primarily consumer goods (since phased out in 2000). Under these policies, a enterprise is obliged to earn the
foreign exchange that it wishes
foreign enterprise is obliged to earn the foreign exchange that it wishes to remit abroad as a to remit abroad as a dividend,
dividend, so that there is no adverse impact on the host country’s BoPs. Sometimes, a condi- so that there is no adverse im-
tion of foreign exchange neutrality has been imposed where the enterprise is required to earn pact on the host country’s BoPs.
foreign exchange enough to even cover the outgo on account of imports. Therefore, these
regulations have acted as indirect export obligations, prompting the foreign enterprises to
export, to earn the foreign exchange that is required by them. The evidence that is available
suggests that such regulations have prompted the foreign enterprises in undertaking exports.
In the case of the auto industry, in order to comply with their export commitments and to
comply with foreign exchange neutrality condition, foreign auto majors have undertaken the
exporting of auto components from India, which have not only opened new opportunities
for Indian component manufacturers but also in that process, found profitable opportunities
for businesses too. Hence, the exports of auto components from India are now growing at
a rapid rate exceeding the obligations several times over. These regulations have acted to
remove the information asymmetry that has been existing in the minds of the auto majors
about the poor quality of the Indian components. In that respect, India’s experience is very
similar to that of Thailand that has emerged as the major auto hub of South-east Asia.
It has been shown that even indirect export obligations such as foreign exchange neutral-
ity and dividend balancing could be effective in prompting the MNCs to exploit opportuni-
ties for an export-oriented manufacture. In order to comply with the performance require-
ments that were imposed at the time of entry, Pepsi developed a model of contract farming
in Punjab with a new technology that was brought in for growing horticulture products of
requisite quality and specifications in the country. This way, the indirect export obligations
have helped the country to benefit not only from export earnings but also from transfer and
diffusion of new technology among farmers.
R&D, Local Technological Capability,

and Diffusion
For the overall sample of manufacturing, foreign firms appear to be spending more on R&D
(Research and Development) activity in India than on the local firms, though the gap between
their R&D intensities tended to narrow down, and finally vanishing by 2001. Table 25.13
clearly explains in detail the R&D intensities. A study analysing the R&D activity of the
Indian manufacturing enterprises in the context of liberalization found that after controlling
The study also observed differ- for extraneous factors, the MNC affiliates reveal a lower R&D intensity when compared to
ences in the nature of motiva-
local firms, presumably on account of their captive access to the laboratories of their parents
tion of R&D activity of foreign
local firms. and associated companies. The study also observed differences in the nature of motivation
R&D Intensity (%) < Table 25.13

R&D Intensity of
Year Total Foreign Firms Domestic Indian Manufacturing
Firms Enterprises Based on
Ownership, 1990–2001
1990 0.053 0.114 0.046
1991 0.082 0.086 0.082
1992 0.148 0.213 0.139
1993 0.201 0.365 0.178
1994 0.217 0.378 0.196
1995 0.272 0.377 0.259
1996 0.312 0.376 0.303
1997 0.413 0.447 0.409
1998 0.341 0.559 0.309
1999 0.352 0.477 0.332
2000 0.311 0.386 0.298
2001 0.343 0.320 0.346

of R&D activity of foreign and local firms. The local firms seem to be directing their R&D
activity towards absorption of imported knowledge and to provide a backup to their outward
expansion. The MNC affiliates, on the other hand, either focus on customisation of their par-
ent company’s technology for the local market or focus on using the local technology.
With respect to contribution of FDI to local technological capability and technology dif-
fusion, the studies find a mixed evidence. Fikkert study covering 305 Indian private sector
firms showed that the firms with foreign equity participation have an insignificant direct effect The study showed that the firms
on R&D, but they tend to depend significantly more on foreign technology purchases, which with foreign equity participa-
in turn tend to reduce R&D. In view of these findings, Fikkert concludes that ‘India’s closed tion have an insignificant direct
effect on R&D.
technology policies with respect to foreign direct investment and technology licensing had the
desired effect of promoting indigenous R&D, the usual measure of technological self reliance.’
On the knowledge spillovers from foreign to domestic enterprises, the evidence suggests
that they are positive when the technology gap between the foreign and local enterprises is
not wide. When the technology gap is wide, the entry of foreign enterprises may affect the
productivity of domestic enterprises adversely, that is, there could be negative spillovers.
Some governments, for example, Malaysia, have imposed technology-transfer require-
ments on foreign enterprises. However, such performance requirements do not appear to
have been very successful in achieving their objectives. Instead, the other performance
requirements such as LCRs or domestic-equity requirements (DERs) may be more effec-
tive in the transfer of technology. As observed above, the LCRs and export performance
requirements (EPRs) have prompted the foreign enterprises to transfer and diffuse some
knowledge to the domestic enterprises, in order to comply with their obligations. Similarly,
the DERs may facilitate the quick absorption of file knowledge that was brought in by the
foreign enterprises, which is an important prerequisite of the local technological capability,
as is evident from the case studies of the Indian two-wheelers industry, where Indian JVs
with foreign firms were able to absorb knowledge that was brought in by the foreign partner,
and eventually become self-reliant not only to continue production but even to develop their
own world-class models for the domestic market and exports, on their own.
Some have expressed the view that DERs may adversely affect the extent or the quality
of technology transfer. However, it has been shown that MNCs may not transfer key tech-
nologies even to their wholly owned subsidiaries abroad fearing the risk of dissipation the
or diffusion through mobility of employees. Furthermore, even if the content and quality of
technology transfer is superior in the case of a sole venture than in the case of a JV, from the
host country’s point of view, the latter may have more desirable externalities in terms of local
learning and diffusion of the knowledge that is transferred.
A recent trend in FDI is that of globalisation of R&D activity, including other knowledge
based activities such as development of custom software and business process outsourcing
(BPO). Once the potential of India, as a competitive location for software development, was Once the potential of India, as
established by the mid-1990s, the MNCs began to enter India for setting up their dedicated a competitive location for soft-
software development centres. Firm size, profitability, and efficiency foreign affiliates have ware development, was estab-
been generally larger than their local counterparts. This is to do with their strategy to employ lished by the mid-1990s, the
MNCs began to enter India for
a non-price rivalry, such as product differentiation that has substantial economies of scale. setting up their dedicated soft-
As Table 25.14 shows, even with our sample based on the Prowess database, the average size ware development centres.
of foreign firms is larger than that of the domestic firms. The early studies of profitability in
the Indian industry suggested that the foreign affiliates had higher profit margins on sales
than their local counterparts in most of the branches of the Indian manufacturing. A further
The early studies of profitability
analysis of the determinants of the profit margins of both foreign and local firms suggested
in the Indian industry suggested
that the higher profitability of foreign firms was more due to their preference to focus on that the foreign affiliates had
the less-price-elastic upper ends of the market with product differentiation and leaving the higher profit margins on sales
more-price-competitive lower ends of the market for local firms. than their local counterparts.
Table 25.14
Average Firm Size in
> Average Sales (Rs crore) Profit to Sales Ratio (%)
Indian Manufacturing Year All Firms Foreign Domestic All Firms Foreign Domestic
1990–2001 Firms Firms Firms Firms
1990 97.3 119.8 95.1 3.8 6.2 3.5
1991 90.3 125.1 87.0 3.7 7.0 3.3
1992 95.9 141.3 92.0 3.6 6.5 3.2
1993 92.8 153.4 88.1 3.4 6.0 3.1
1994 88.2 172.7 82.8 5.1 7.4 4.8
1995 94.3 191.6 88.7 6.7 9.0 6.4
1996 113.3 247.3 105.7 6.3 8.0 6.0
1997 119.8 269.0 110.9 4.6 7.8 4.1
1998 130.0 285.8 120.3 3.2 8.0 2.5
1999 134.9 304.3 124.0 1.6 7.6 0.7
2000 149.3 348.9 136.5 1.6 8.0 0.6
2001 187.5 395.6 172.9 1.4 7.9 0.3
The study did not find any evidence for their higher profitability to be, due to their better
efficiency of resource utilisation. The trend of the sample of larger firms that is used for this
study even in the post-liberalization period is summarised in Table 25.14. The table also sug-
gests that foreign affiliates have not only enjoyed consistently the higher profit margins but
that their profit margins have been more stable when compared to that of the local firms.
FDI and the Knowledge-based Economy

in India: Software and Global R&D Hub
The rise of the IT software and services industry (or software industry) over the 1990s repre-
sents one of the most spectacular achievements for the Indian economy. The industry, which
is highly export-oriented, has grown at an incredible rate of 50 per cent per annum over
The Indian software industry the past few years and has established India as an exporter of knowledge-intensive services
has grown at a phenomenal in the world; and has brought in a number of other spillover benefits such as of creating
compound annual rate of over employment and a new pool of entrepreneurship. The Indian software industry has grown
50 per cent over the 1990s,
at a phenomenal compound annual rate of over 50 per cent over the 1990s, from a modest
and has set a target of $50 bn
of exports by 2008. export revenue of US$100 mn in 1989–90, to evolve into over $12 bn export earnings by
2003–04, and has set itself a target of $50 bn of exports by 2008.
The success of Indian exports in the software industry is primarily driven by local enter-
prises, resources, and talent. The role played by MNCs in software development in India
is quite limited. Although all the major software companies have established development
bases in India, their overall share in India’s exports of software is rather small at 19 per cent.
MNCs do not figure among the top seven software companies in India, that are ranked either
on the basis of overall sales or the exports. Among the top 20 software companies too, no
more than six are MNC affiliates or JVs. About 79 of the 572 member companies of Nasscom
are reported as foreign subsidiaries. Some of these are actually subsidiaries of companies that
are promoted by the non-resident Indians in the United States while some others were Indian
companies to begin with but have been subsequently taken over by foreign companies. The
foreign subsidiaries include software development centres of software MNCs and also sub-
sidiaries of other MNCs that develop software for their parent’s applications, for example,
subsidiaries of financial services companies such as Citicorp, Deutsche Bank, or telecom-
munication MNCs such as Hughes and Motorola, among others. In addition, the MNCs
have set up 16 JVs with local enterprises, such as British Aerospace with Hindustan Aeronau-
tics. In all, 95 companies have been controlling foreign participation. The bulk of the entries
took place since 1994 by which time India’s potential as a base for software development was
already established and not the other way round.
What is the distribution of gains from the activity of MNC subsidiaries in the software
industry between home and host countries? Apparently, some of the MNC subsidiaries in
the software development are doing pioneering a work for their parents. For example, the
Oracle Software Development Centre that is located in Bangalore has been responsible for
designing the ‘network computer’ that is introduced by Oracle entirely. SAP of Germany has
management (DRM [Digital Rights Managements]) solutions for a high-tech industry devel-
oped entirely at SAP Labs, India, a Bangalore-based subsidiary of SAP. Many other design
centres of MNCs in India are doing a highly valuable development work for them. However,
the Indian subsidiaries of these MNCs do not share the revenue streams that are generated
by their developments worldwide. MNCs tend to invoice the exports of their subsidiaries to
them at cost plus 10 per cent to 15 per cent. Therefore, the distribution of gains is grossly in
favour of the home country of MNCs and against the host country, that is, India in this case.
Most of the export-oriented software companies operate as ‘export enclaves’, with little Most of the export-oriented
linkages with the domestic economy, if at all. The MNC subsidiaries in the software develop- software companies operate as
ment, in particular, derive almost all of their income from their export to their parents. Hence, ‘export enclaves’, with little link-
ages with the domestic econo-
hardly any vertical linkages are developed as the domestic operation generates very few knowl- my, if at all.
edge spillovers for the domestic economy. The bulk of the work done is also of a highly custom-
ized nature, having little application elsewhere. Given the high salaries and perks of a foreign
travel, the movement of personnel from these companies to the domestic firms also does not
take place. The employees of export-oriented firms are generally lured by foreign companies.
However, there is a considerable movement of personnel from the domestic, market-oriented
firms to export-oriented firms or foreign subsidiaries. A survey of the software industry sug- A survey of the software indus-
gested that about 45.6 per cent of the professionals were recruited by software firms from other try suggested that about 45.6
companies. The domestic market also supports the exports of products that are first tried per cent of the professionals
were recruited by software
locally and are improved on the basis of feedback data that are generated before being exported. firms from other companies.
In terms of technological complexity and sophistication, some projects in the domestic market
are more advanced and challenging than the export projects.
FDI and Global R&D Activity in India

Although the R&D activity of the domestic, market-oriented MNC affiliates is not high when
compared to their local counterparts as observed above, MNCs are increasingly looking to
India because of its relatively well-developed, scientific and technological infrastructure and
resources for setting up global and regional R&D centres that provide solutions to specific
R&D problems for their global operations, besides research collaborations with Indian
enterprises having complementary capabilities. This trend has been encouraged by the devel-
opment of international communication and information technologies (ICT) that allow
efficient communication between research groups that are based in different places across the
continents through dedicated networks. This enables MNCs to fragment the R&D projects
into smaller sub-projects, some of which could be sub-contracted to units that are located in
the developing countries having particular skills in that particular branch of knowledge. The
internationalisation of R&D that is conducted in this manner involves little risk of dissipa-
tion or diffusion of technology to competitors because of high specificity of the sub-project.
A quantitative analysis of the factors that are explaining the location pattern of the over-
seas R&D by US and Japanese MNCs suggested that the countries that are characterised by
a large scale technological activity and abundant, cheap, but qualified R&D power are most
likely to play host to MNCs’ overseas R&D activity. The Indian government has invested
cumulatively in building centres of excellence in different branches of science and technol-
ogy. These centres coupled with the relative abundance of the country in qualified but cheap
R&D manpower has begun attracting MNCs to it for setting up global or home-based, aug-
menting R&D centres. In the period of 2000–05, nearly 100 MNCs have set up R&D centres
in India. These include GE’s $80 mn technology centre at Bangalore, which is the largest
outside the United States and employs about 1,600 people. The list of MNCs that have set up
global R&D centres in India includes Akzo Nobel, AVL, Bell Labs, Colgate Palmolive, Cum-
mins, DuPont, Daimler–Chrysler, Eli Lilly, GM (General Motors), HP (Hewlitt–Packard),
Honeywell, Intel, McDonald’s, Monsanto, Pfizer, Texas Instruments, and Unilever.
According to some reports, the Indian R&D centres of the US MNCs have begun to
generate a substantial intellectual property for their parents and have filed more than 1,000
patent applications with the US Patent and Trademark Office, mostly during 2002 and 2003.
The Indian centres of multinational technology companies expect to double the number of
their employees from 40,000 in 2003. The Indian R&D centres of MNCs have begun to play
an important role in the knowledge generation for their parents. For instance, about 30 per
cent of all software for Motorola’s latest phones is written in India.
A look at the illustrative cases of the global R&D centres, R&D JVs, and contracts that are
set up by MNCs in India suggest that most of the R&D centres have been motivated primarily
by the abundance of highly talented R&D personnel in India at a much lower cost than that
prevailing in the Western world. An Indian engineer, for an instance, costs $2,300 per year
The existence of a few inter-
nationally renowned public- when compared to one with a similar profile in the United States for $60,000 per annum.
funded centres of excellence, Secondly, the existence of a few internationally renowned public-funded centres of excel-
such as the IISc, NCL, ITCT, lence, such as the Indian Institute of Science (IISc), National Chemical Laboratory (NCL),
etc., have helped India to at- and Indian Institute of Chemical Technology (IICT) have helped India to attract R&D invest-
tract R&D investment from
MNCs. ments from MNCs. Actually, the Indian research centres of Astra AB and Daimler–Benz
were specifically attracted to Bangalore by the prospects of a collaboration with the IISc.
Astra has actually endowed a Chair at IISc to cement its relationship with it and the Benz
Bangalore has also been cho-
sen by a number of ICT MNCs
Research Centre has contracted a project in avionics to IISc. Encouraged by its research
as their base for software contracts with IICT and NCL, DuPont has set up a separate Indian Technology Office at
development, and is widely its headquarters to systematically target India for its technology research activity. Another
referred to as ‘India’s Silicon feature of these investments is that these are all concentrated in a few Indian cities such as
Valley.’
Bangalore and Hyderabad because of the high concentration of innovative activities in these
areas. Bangalore has also been chosen by a number of ICT MNCs as their base for software
Over the past five years
(2000–05) nearly 100 MNCs development, and is widely referred to as ‘India’s Silicon Valley.’
have set up R&D centres in To sum up, the foregoing discussion on the FDI’s role in the software industry and
India. R&D activity suggests that India’s success owes largely to the cumulative investments that
were made by the government, over the past five decades in building what is now termed
The Indian government recog- as ‘National Innovation Systems.’ These include resources in the development of a system of
nised the potential of the coun-
try in computer software, way higher education in engineering and technical disciplines, creation of an institutional infra-
back in the early 1970s, and structure for S&T policy making and implementation, and building centres of excellence
started building the necessary and numerous other institutions for technology development, among many other initiatives.
infrastructure for its fruition, The Indian government recognised the potential of the country in computer software, way
in particular, for the training of
manpower. back in the early 1970s, and started building the necessary infrastructure for its fruition,
in particular, for the training of manpower. The government also facilitated a technological
capability building with investments in the public-funded R&D institutions and support-
ing their projects, by creating computing facilities, and developing an infrastructure for data
transfer and networking. The patterns of clustering of the software development activity and,
in particular, the case study of Bangalore provides a further evidence to the contention that
the public-funded technological infrastructure has crowded in the investments from the pri-
vate sector in the skill-intensive activities such as software development. It would appear
from the above fact that the investments made by the governments in the national innovation
systems have substantial positive externalities.
Foreign Technology Transfers

Along with the increase in FDI inflows, there has also been an increase in Foreign Technology
Transfer approvals into India (refer to Table 25.15 and 25.16). This could be attributed to India’s
increasing quest for advanced technology to modernise its industrial sectors .The majority of
the foreign technology transfers have been from the United States, followed by Germany and
other European countries. FDI trends in India show that the FDI environment has under-
gone a major change since the inception of economic reforms in 1991. The positive changes
can be attributed to the government, which has been instrumental in encouraging FDI in the
country. The government now acts as a ‘facilitator’ of private investment by creating an enabling
environment, it is a ‘provider’ of gaps in critical infrastructure to encourage investment, it acts
as a ‘partner’ to the private sector in ‘public-private’ partnerships, and it acts as an ‘investor’ in
social sectors such as health and education to serve the needs of society.
Number of Deals $ million < Table 25.15

Number of Cumulative
1991 to 1999 6541 Foreign Technology
2000 to 2006 418 Collaboration Approvals
2000 336
2006 1555
1991 to February 2009 8049
Source: SIA Newsletters.
Rank Sector No. of Technical Collabo- Percentage < Table 25.16

Sector-wise Technology
rations Approved (August with Total Tech-
1991–1991 Feb. 2009) nical Approvals Transfer Approvals
1. Electrical Equipment (including 1,258 15.62
computer software and electronics)
2. Chemicals (other than fertilisers) 902 11.20
3. Industrial Machinery 872 10.83
4. Transportation Industry 755 9.38
5. Misc. Engineering Industry 444 5.51
6. Other sectors 3,818 47.43
7. Total of all sectors 8,049 100.00
Source: DIPP Fact Sheet, April 2009.
Policy Lessons
This section overviewed the evolution of the Indian government’s attitude towards FDI,
examined the trends and patterns that are followed in FDI inflows during the 1990s, and
The changing policy framework considered its impact on the few parameters of development in a comparative East Asian per-
has affected the trends and spective. The changing policy framework has affected the trends and patterns of FDI inflows
patterns of FDI inflows that are
received by the country.
that are received by the country. Although the magnitude of FDI inflows has increased, in the
absence of a policy direction, the bulk of them have gone into services and soft-technology
consumer goods industries, bringing the share of manufacturing and technology-intensive
among them down in a sharp contrast to the East Asian countries. Although the importance
of FDI as a source of capital and output generation has risen, its impact on direct investment
and growth is mixed as some FDI inflows possibly crowd in the domestic investments while
some others crowd them out. The policies like local content regulation wherever pursued
(as phased manufacturing programmes in the auto industry) have yielded desirable results.
India’s experience with respect to fostering export-oriented industrialisation with the
help of FDI has also been much poorer than that of the East Asian economies. However, a
recent analysis suggests that MNCs are beginning to take a serious look at India’s potential
as a base for an export-oriented manufacture. As in the case of the East Asian countries, the
performance requirements such as export obligations wherever imposed (as indirect export
obligations dividend balancing on consumer goods industries) have helped in promoting the
MNCs to consider using India as a sourcing base, thus helping to solve information asym-
metry or the perception gap on the country’s potential. In terms of technology and R&D, the
manufacturing affiliates of MNCs in India seem to be spending a relatively smaller propor-
tion of their turnover on R&D activity, after controlling for extraneous influences. It also
appears that the R&D activity of MNC affiliates is geared for customisation of their technol-
ogy for local markets or to work on assignments by their parent companies in contrast to
the focus of the R&D activity of the local enterprises, on technology absorption and external
competitiveness. A case study evidence suggests that JV requirements and vertical inter-firm
linkages may facilitate a diffusion of knowledge brought in by MNCs.
India is also attracting an increasing attention from MNCs as a base for their knowledge-
based activities such as software development and global R&D activity. A case study of the
MNCs, showing an involvement in the knowledge-based activities suggests that India’s suc-
cess owes largely to the cumulative investments made by the government over the past five
decades in building what is now termed as ‘National Innovation Systems’, including resources
in the development of a system of higher education in engineering and technical disciplines,
creation of an institutional infrastructure for S&T policy making and implementation, build-
ing centres of excellence and numerous other institutions for technology development,
among other initiatives.
The MNC affiliates in India gen- The MNC affiliates in India generally enjoy a much better and stable profit margins when
erally enjoy a much better and
stable profit margins when com-
compared to the local enterprises, largely due to their ability to exploit the economies of
pared to the local enterprises, scale, with large scales of operations, and their strategy to focus on less price-sensitive upper
largely due to their ability to segments of markets than because of a greater efficiency per se. In general, the above analysis
exploit the economies of scale, brings out the role of the government policy in attracting and benefitting from FDI inflows
with large scales of operations,
and their strategy to focus on
for development. In the light of this discussion, we may now draw a few policy lessons for
less price-sensitive upper seg- India and other similarly placed developing countries. First of all, the liberalization of FDI
ments of markets than because policy may be necessary but not sufficient for expanding the FDI inflows. The overall macro-
of a greater efficiency per se. economic performance continues to exercise a major influence on the magnitude of FDI
inflows by acting as a signalling device for FIIs, about the growth prospects for the potential
host economy.
Hence, by paying attention to the macroeconomic performance indicators such as the

growth rates of industry through public investments in socio-economic infrastructure and
other supportive policies, and creating a stable and enabling environment would crowd in the
FDI inflows. The studies have shown that the policies that facilitate domestic investments also
pull in FDI inflows. While investment incentives may not be that efficient, an active promo-
tion of FDI by developing certain viable projects and getting key MNCs interested in them
could be useful in attracting investments in desirable directions. The government policies play
an important role in determining the quality or developmental impact of FDI and in facilitat-
ing the exploitation of its potential benefits by the host country’s development. The approval
policy that was followed till 1990 channelled the FDI into areas where capabilities are needed to
be built. The various performance requirements such as phased-manufacturing programmes,
EPRs, and domestic ownership requirements have also been employed by the government to
achieve developmental policy objectives. Even with a liberalised policy, some policy direction
to FDI is desirable as has been demonstrated by the case of East Asian countries.
One way to maximise the contribution of FDI to the host development is to improve The best way to maximise the
the chances of FDI’s crowding in the domestic investments and minimise the possibilities contribution of FDI to the host
of its crowding out the domestic investments. In this context, the experiences of South-east development is to improve
chances of FDI’s crowding in
Asian countries such as Malaysia, Korea, China, and Thailand in channelling the FDI into domestic investments.
the export oriented manufacturing through selective policies and EPRs that were imposed
at the time of entry deserve a careful consideration. The export-oriented FDI minimises the
possibilities of crowding-out of domestic investments and generates favourable spillovers for
domestic investments, by creating a demand for intermediate goods. Another policy that can
help in maximizing the contribution of FDI inflows is to push them to newer areas where
local capabilities do not exist as that minimises the chances of conflict with domestic invest-
ments. Some governments such as Malaysia have employed pioneer industry programmes
to attract FDI in industries that have the potential to generate more favourable externali-
ties for the domestic investment. Similarly, because an MNC entry through acquisition of
domestic enterprises is likely to generate less-favourable externalities for the domestic invest-
ment than the Greenfield investments, some governments discourage acquisitions by foreign
enterprises.
Another sphere where governmental intervention may be required to maximise the
gains from globalization is in diffusion of knowledge that is brought in by the foreign enter-
prises. An important channel of diffusion of knowledge that is brought in by MNCs in the
host economy is vertical inter-firm linkages with the domestic enterprises. Many govern-
ments—in the developed as well as the developing countries alike—have imposed LCRs
on MNCs to intensify the generation of local linkages and transfer of technology. The host
governments could also consider employing proactive measures that encourage foreign and
local firms to deepen their local content as a number of countries, for example, Singapore, The investments made by gov-
Taiwan, Korea, and Ireland, have done so successfully. The knowledge diffusion could also ernments in building up the
be accomplished by creating sub-national or sub-regional clusters of inter-related activities local capabilities for higher edu-
cation and training in technical
which facilitate the spillovers of knowledge through informal and social contacts among the
disciplines, centres of excel-
employees besides traditional buyer–seller links. UNCTAD also highlights the policy meas- lence, and in other aspects of
ures that are employed by different governments in promoting the linkages. The investments national innovation systems
made by governments in building up the local capabilities for higher education and training have substantial favourable
externalities, as is demonstrat-
in technical disciplines, centres of excellence, and in other aspects of national innovation ed by the case study of FDI in
systems have substantial favourable externalities, as is demonstrated by the case study of FDI India’s knowledge-based indus-
in India’s knowledge-based industries. tries.
Finally, in the light of the above, it is clear that it is of a critical importance for the host gov-
ernments to preserve a policy flexibility to pursue a selective policy or impose performance
requirements on an FDI, if necessary. Some of the performance requirements have already
been outlawed by the WTO’s Trade Related Investment Measures (TRIMs) Agreement.
Attempts have been made by the developed countries to expand the scope of international
trade rules beyond what is covered under TRIMs and General Agreement on Trade and
Services (GATS), and further limit the policy flexibility that is available to the developing
countries by creating the WTO’s multilateral framework on investment. However, due to
developing countries’ resistance to start WTO negotiations at the Cancun Ministerial Con-
ference of WTO, negotiations on the subject have been dropped from the agenda of the
Doha Round as per the July package agreed at the General Council Meeting that was held in
Geneva at the end of July 2004.
NEW POLICIES
In order to liberalise foreign investment in India and to attract more number of foreign
investors the government attempts to maintain a practice to continuously review the foreign
investment policy. The acceptance of the recommendations to increase the foreign invest-
ment limits in the respective sectors will not only attract foreign investment in India but will
also provide growth opportunities to Indian companies who can collaborate with foreign
companies to start business in various new sectors. The withdrawal of requirement of gov-
ernment approval for investment in different sectors will also act as an incentive to initiate
various business prospects and will expedite the launch of new projects.
Foreign direct investment (FDI) in India is subject to certain rules and regulations and
is also subject to predefined limits (‘limits’) in various sectors which range from 20 per cent
to 100 per cent. There are also some sectors in which FDI is prohibited. The FDI limits are
reviewed by the government from time to time and as and when the need is felt and FDI is
allowed in new sectors where the limits of investment in the existing sectors are modified
accordingly. In order to revise the FDI limits to attract more foreign investment in India, the
union government constituted a committee named, Arvind Mayaram Committee headed
by the Economic Affairs Secretary. On Tuesday, 16th July 2013, the government approved
the recommendations given by the Arvind Mayaram Committee to increase FDI limits in
12 sectors out of the proposed 20 sectors, including crucial ones such as defence and telecom.
Some of the important changes made in the existing FDI limits are provided hereunder.
• FDI limit in telecom sector is increased from 74 per cent to 100 per cent, out of which
up to 49 per cent will be allowed under automatic route and the remaining through
Foreign Investment Promotion Board (FIPB) approval. A similar dispensation would
be allowed for asset reconstruction companies and tea plantations.
• FDI in 4 sectors, i.e., gas refineries, commodity exchanges, power trading, and stock
exchanges have been allowed via the automatic route. In case of PSU oil refineries,
commodity exchanges, power exchanges, stock exchanges, and clearing corporations,
FDI will be allowed up to 49 per cent under automatic route as against current rout-
ing of the investment through FIPB.
• FDI in single brand retail is to be allowed up to 49 per cent under the automatic route
and beyond that shall be through FIPB.
• In credit information firms, 74 per cent FDI under the automatic route will be
allowed.
• In respect of courier services, FDI of up to 100 per cent will be allowed under the
automatic route. Earlier, similar amount of investment was allowed through FIPB
route.
• FDI cap in defence sector remained unchanged at 26 per cent; however, higher limits
of foreign investment in state-of-the-art manufacturing would be considered by the
Cabinet Committee on Security (CCS). Technically, the decision leaves it open for
CCS to even allow 100 per cent foreign investment in what the defence ministry will
define as ‘state-of-the-art’ segments with safeguards built in to ensure that the tech-
nology and equipment are not shared with other countries.
• In the contentious insurance sector, it was decided to raise the sectorial FDI cap from
26 per cent to 49 per cent under the automatic route under which companies investing
do not require prior government approval. A bill to raise FDI cap in this sector is pending
in the Rajya Sabha.
Some of the sectors in which FDI limits were expected to be increased but did not
were civil aviation, airport, media, multi-brand retail and brownfield (existing firms)
pharmaceuticals.
A COMPARATIVE STATISTICAL
OUTLINE OF FDI
Tables 25.17–25.22 and Figure 25.1 depict a comparative analysis of FDI. The government The government has permit-
ted, except for a small negative
has permitted the FDI up to 100 per cent under the automatic route for different areas. list, an access to the automatic
route for FDI.
Sector/
Before the proposal After the proposal < Table 25.17
Key Changes Proposed
Activity Percentage of FDI/ Percentage Under the FDI Limits
Entry route Entry route
Equity of FDI/Equity
Defence 26 Government No change Higher limits

sector route of foreign
investment
in ‘state-
of-the-art’
manufacturing
would be
considered by
the CCS
Insurance 26 Automatic 49 Automatic

sector route route
Telecom 74 Automatic up 100 Automatic up

services to 49% and to 49% and
government government
route route beyond
beyond 49% 49% and up
and up to to 100%
74%
(Continued)
Table 25.17
(Continued)
> Sector/
Before the proposal After the proposal
Activity Percentage of FDI/ Percentage

Entry route Entry route
Equity of FDI/Equity
Tea plantation 100 Government 100 Automatic up
route to 49% and
government
route beyond
49% and up
to 100%
Asset 74% of paid-up Government 100 Automatic up

reconstruction capital of ARC route to 49% and
company (FDI + FII) government
route beyond
49% and up
to 100%
Petroleum and 49 Government 49 Automatic

natural gas route route
Commodity 49% (FDI and FII) + Government 49 Automatic

exchanges [Investment by route (for route
registered FII under FDI)
portfolio investment
scheme (PIS) will be
limited to 23% and
investment under
FDI scheme limited
to 26%]
Power 49% (FDI and FII) FDI Government 49 Automatic

exchanges limit of 26% and an route (for route
FII limit of 23% of FDI)
the paid-up capital
Stock 49% (FDI and FII) FDI Government 49 Automatic

exchanges/ limit of 26% and an route (for route
Clearing FII limit of 23% of FDI)
corporations the paid-up capital
Credit 49% (FDI and FII) Government 74 Automatic

information route route
companies
Courier 100 Government 100 Automatic

services route route
Single brand 100 Government 100 Automatic up

product retail route to 49% and
trading government
route beyond
49% and up
to 100%
Source: http://www.mondaq.com
2008–09 2009–10 2010–11 2011–12 2008–09 2009–10 2010–11 2011–12
(US $ million) (Per cent to Total)
Maharashtra 12,431 8,249 6,097 9,553 45.5 31.9 31.4 26.2
Delhi 1,868 9,695 2,677 7,983 6.8 37.5 13.8 21.9
Karnataka 2,026 1,029 1,332 1,533 7.4 4.0 6.9 4.2
Gujarat 2,826 807 724 1,001 10.3 3.1 3.7 2.7
Tamil Nadu 1,724 774 1,352 1,422 6.3 3.0 7.0 3.9
Andhra Pradesh 1,238 1,203 1,262 848 4.5 4.7 6.5 2.3
West Bengal 489 115 95 394 1.8 0.4 0.5 1.1
Chandigarh 0 224 416 130 0.0 0.9 2.1 0.4
Goa 29 169 302 38 0.1 0.7 1.6 0.1
Madhya Pradesh 44 54 451 123 0.2 0.2 2.3 0.3
Kerala 82 128 37 471 1.3 0.5 0.2 1.3
Rajasthan 343 31 51 33 0.3 0.1 0.3 0.1
Uttar Pradesh 0 48 112 140 0.0 0.2 0.6 0.4
Orissa 9 149 15 28 0.0 0.6 0.1 0.1
States
< Table 25.18
FDI Inflows to Indian
(Continued)
Table 25.18
>
2008–09 2009–10 2010–11 2011–12 2008–09 2009–10 2010–11 2011–12

(US $ million) (Per cent to Total)
Assam 42 11 8 1 0.2 0.0 0.0 0.0
Bihar 0 0 5 24 0.0 0.0 0.0 0.1
Region not indicated 4,181 3,148 4,491 12,782 15.3 12.2 23.1 35.0
Total 27,332 25,834 19,427 36,504 100.0 100.0 100.0 100.0
Top 6 States 22,113 21,757 13,444 22,340 80.9 84.2 69.2 61.2
Top 2 States 14,299 17,944 8,774 17,536 52.3 69.5 45.2 48.0
Source: Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry, G
overnment of India.
http://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=2597
Note:
1. FDI equity inflows include ‘equity capital component’ only.
2. Maharashtra includes Maharashtra, Dadra & Nagar Haveli and Daman & Diu.
3. Delhi includes New Delhi and part of UP and Haryana.
4. Tamil Nadu includes Tamil Nadu and Pondicherry.
5. West Bengal includes West Bengal, Sikkim, and Andaman & Nicobar Islands.
6. Chandigarh includes Chandigarh, Punjab, Haryana, and Himachal Pradesh.
7. Madhya Pradesh includes Madhya Pradesh and Chhattisgarh.
8. Kerala includes Kerala and Lakshadweep.
9. Uttar Pradesh includes Uttar Pradesh and Uttaranchal.
10. Assam includes Assam, Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, and Tripura.
Share of FDI equity inflow by region*

Percentage of FDI inflow allocated to regions
< Figure 25.1
Share of FDI Equity
Maharashtra Inflow
New Delhi
Karnataka
Tamil Nadu
Gujarat
Andhra Pradesh
West Bengal
Punjab, Haryana
Kerala
Madhya Pradesh
Goa
Rajasthan April 2000 - March 2008

April 2000 - March 2010
Uttar Pradesh
April 2010 - May 2012
Orissa
Guwahati
Bihar
0 10 20 30 40 50
Source: India Ministry of Commerce and Industry.
*Refers to the regional offices of Reserve Bank of India of which only the predominant state is reported
in the chart, except for the regional office of Guwahati.
A. Total FDI Inflows (From April, 2000 To April, 2013):
1. CUMULATIVE AMOUNT OF FDI INFLOWS US$ 293,641 < Table 25.19

Fact Sheet on Foreign
(Equity inflows + ‘Re-invested earnings’ + million
‘Other capital’)* Direct Investment (FDI)
(From April 2000 to
2. CUMULATIVE AMOUNT OF FDI EQUITY INFLOWS ` 909,002 US$ 195,603
April 2013)—I
(excluding amount remitted through RBI’s + NRI crore million
schemes)
B. FDI Inflows During Financial Year 2013–14 (For April, 2013):
1. TOTAL FDI INFLOWS INTO INDIA US$ 3,563

(Equity inflows + ‘Re-invested earnings’ + million
‘Other capital’) (as per RBI’s Monthly bulletin
dated: 10.06.2013).
2. FDI EQUITY INFLOWS ` 12,623 crore US$ 2,321
million
C. FDI Equity Inflows (Month-Wise) During The Financial Year 2013–14:
Amount of FDI Equity Inflows

Financial Year 2013–14 (April-March)
(In Rs Crore) (In US$ mn)
1 April, 2013 12,623 2,321
2013–14 (for April, 2013) #
12,623 2,321
2012–13 (for April, 2012)# 9,620 1,857
Percentage growth over last year (+) 31 % (+) 25 %
D. FDI Equity Inflows (Monthwise) During The Calendar Year 2013
Amount of FDI Equity Inflows

Calendar Year 2013 (Jan.–Dec.)
(In Rs Crore) (In US$ mn)
1 January, 2013 11,719 2,157
2 February, 2013 9,654 1,795
3 March, 2013 8,297 1,525
4 April, 2013 12,623 2,321
Year 2013 (up to April, 2013)# 42,293 7,798
Year 2012 (up to April, 2012) #
38,974 7,700
Percentage growth over last year (+) 09 % (+) 01 %
Note: Country- and sector-specific analysis is available from the year 2000 onwards, as company wise
details are provided by RBI from April 2000 onwards only.
*
Data on ‘Re-invested earnings’ and ‘Other capital’, are the estimates on an average basis, based upon
data for the previous two years, published by RBI in monthly bulletin dated 10.12.2012.
Figures are provisional, subject to reconciliation with RBI, Mumbai.
#
Inflows for the month of March 2012 are as reported by RBI, consequent to the adjustment made in
^
the figures of March ‘11’, August ‘11’, and October ‘11’.
E. Statement On RBI’s Regional Offices (With State Covered) Received FDI Equity Inflows1 (From April, 2000 To
April, 2013):
Amount Rupees in crores (US$ in million)
S. No. RBI’s Regional State covered 2011–12 2012–13 2012–13 Cumulative Percentage to
office2 (April to (April to (for April inflows (April total inflows (in
March) March) 2013) ‘00 – April ‘13) terms of US$)
1. Mumbai Maharashtra, Dadra 44,664 47,359 958 294,452 32
and Nagar Haveli, (9553) (8716) (176) (63,513)
Daman and Diu
2. New Delhi Delhi, Part of up and 37,403 17,490 1417 169,998 19

Haryana (7983) (3222) (261) (36,554)
3. Chennai Tamil Nadu, 6711 15,252 346 53,156 6
Pondicherry (1422) (2807) (64) (11,144)
(Continued)
S. No. RBI’s Regional State covered 2011–12 2012–13 2012–13 Cumulative Percentage to
office2 (April to (April to (for April inflows (April total inflows (in
March) March) 2013) ‘00 – April ‘13) terms of US$)
4. Bangalore Karnataka 7235 5553 1577 51,022 6
(1533) (1023) (290) (11,074)
5. Ahmedabad Gujarat 4730 2676 206 39,306 4
(1001) (493) (38) (8688)
6. Hyderabad Andhra 4039 6290 405 37,296 4
Pradesh (848) (1159) (75) (8042)
7. Kolkata West Bengal, Sikkim, 1817 2319 135 10,639 1
Andaman and (394) (424) (25) (2331)
Nicobar Islands
8. Chandigarh Chandigarh, Punjab, 624 255 0 5564 1
Haryana, Himachal (130) (47) (0) (1201)
Pradesh
9. Bhopal Madhya Pradesh, 569 1208 6 4793 0.5

Chattisgarh (123) (220) (1) (998)
10. Kochi Kerala, 2274 390 2 4323 0.5
Lakshadweep (471) (72) (0) (911)
11. Panaji Goa 181 47 20 3574 0.4
(38) (9) (4) (775)
12. Jaipur Rajasthan 161 714 1 3326 0.4
(33) (132) (0) (685)
13. Bhubaneshwar Orissa 125 285 60 1677 0.2
(28) (52) (11) (352)
14. Kanpur Uttar Pradesh, 635 167 2 1617 0.2
Uttranchal (140) (31) (0) (348)
15. Guwahati Assam, Arunachal 5 27 0 348 0
Pradesh, Manipur, (1) (5) (0) (78)
Meghalaya,
Mizoram, Nagaland,
Tripura
16. Patna Bihar, 123 41 1 191 0
Jharkhand (24) (8) (0) (38)
17. Region not Indicated3 53,851 21,833 7486 227,720 25.0
(11,399) (4004) (1377) (48,871)
Sub Total 165,146 121,907 12,623 909,002 100.00
(35,121) (22,424) (2321) (195,603)
18. Rbi’s Nri Schemes (from 2000 to 2002) 0 0 0 533 –
(121)
Grand Total 165,146 121,907 12,623 909,535 –
(35,121) (22,423) (2321) (195,724)
Source: (A,B,C,D,E): DIPP.

1
Includes ‘equity capital components’ only.
2
The region wise FDI inflows are classified as per RBI’s regional office received FDI inflows, furnished by RBI, Mumbai.
3
Represents FDI inflows through acquisition of existing shares by transfer from residents to nonresidents. For this, RBI regional wise
information is not provided by the Reserve Bank of India.
April 2013)—II
(From April 2000 to
Direct Investment (FDI)
Fact Sheet on Foreign
Table 25.20
>
II Financial Year-Wise FDI Inflows Data:

A. As Per International Best Practice: (Data on FDI have been revised since 2000–01 with expended coverage to approach
(International best practices) (amount in US$ million)
FOREIGN DIRECT INVESTMENT (FDI) Investment

Equity FDI flows into india by FII’s for-
S. Financial year eign insti-
FIPB Route/ Equity capital of Total FDI Percentage
Re-invested Other tutional
No. (April to March) RBI’s Automatic unincorpora flows growth over
earnings+ capital+ investors
route/Acquisi- ted bodies # previous year (in
Fund (net)
tion route US$ terms)
FINANCIAL YEARS 2000–01 to 2013–14 (up to April 2013)
1. 2000–01 2339 61 1350 279 4029 – 1847
2. 2001–02 3904 191 1645 390 6130 (+) 52% 1505
3. 2002–03 2574 190 1833 438 5035 (–) 18% 377
4. 2003–04 2197 32 1460 633 4322 (–) 14% 10,918
5. 2004–05 3250 528 1904 369 6051 (+) 40% 8686
6. 2005–06 5540 435 2760 226 8961 (+) 48% 9926
7. 2006–07 15,585 896 5828 517 22,826 (+) 146% 3225
8. 2007–08 24,573 2291 7679 300 34,843 (+) 53% 20,328
9. 2008–09 31,364 702 9030 777 41,873 (+) 20% (–) 15,017
10. 2009–10 (P) (+) 25,606 1540 8668 1931 37,745 (–) 10% 29,048
11. 2010–11 (P) (+) 21,376 874 11,939 658 34,847 (–) 08% 29,422
12. 2011–12 (P) 34,833 1022 8206 2495 46,556 (+) 34% 16,812
13. 2012–13 (P) 21,825 1059 11,025 2951 36,860 (–) 21% 27,583
14 2013–14 (P) 2321 81 723 438 3563 – –
(for April 2013)
Cumulative Total 197,287 9902 74,050 12,402 293,641 – 144,654
(from April 2000 to
April 2013)
Source:
(i) RBI’s Bulletin June 2013 dt. 10.06.2013 (Table No. 34 – FOREIGN INVESTMENT INFLOWS).
(ii) Inflows under the acquisition of shares in March 2011, August 2011 and October 2011, include net FDI on account of transfer of partici-
pating interest from Reliance Industries Ltd. to BP Exploration (Alpha).
(iii) RBI had included swap of shares of US$ 3.1 billion under equity components during December 2006.
(iv) Monthly data on components of FDI as per expended coverage are not available. These data, therefore, are not comparable with FDI
data for previous years.
(v) Figures updated by RBI up to April 2013.
# Figures for equity capital of unincorporated bodies for 2010–11 are estimates.
(P) All figures are provisional.
+ Data in respect of ‘Re-invested earnings’ and ‘Other capital’ for the years 2009–10, 2010–11 and 2012–13 are estimated as aver-
age of previous two years.
< Table
(Continued)
25.20
(Continued)
Table 25.20
>
B. Dipp’s – Financial Yearwise FDI Equity Inflows (As Per Dipp’s FDI Database–Equity Capital Components Only)
S. No. Financial year (April to March) Amount of FDI inflows Percentage growth
over previous year
Financial Years 2000–01 to 2013–14 (up to April 2013) In Rs crores In US$ million (in terms of US$)
1. 2000–01 10,733 2463 –
2. 2001–02 18,654 4065 (+) 65%
3. 2002–03 12,871 2705 (–) 33%
4. 2003–04 10,064 2188 (–) 19%
5. 2004–05 14,653 3219 (+) 47%
6. 2005–06 24,584 5540 (+) 72%
7. 2006–07 56,390 12,492 (+)125%
8. 2007–08 98,642 24,575 (+) 97%
*
9. 2008–09 142,829 31,396 (+) 28%
10. 2009–10 # 123,120 25,834 (–) 18%
#
11. 2010–11 97,320 21,383 (–) 17%
^
12. 2011–12 # 165,146 35,121 (+) 64%
13. 2012–13 # 121,907 22,423 (–) 36%
14. 2013–14 (for April 2013) 12,623 2,321
Cumulative Total (from April 2000 to April 2013) 909,536 195,725 –
Note:
(i) including amount remitted through RBI’s NRI schemes (2000–2002).
(ii) FEDAI (Foreign Exchange Dealers Association of India) conversion rate from rupees to US dollar applied, on the basis of monthly average rate provided by
RBI (DEPR), Mumbai.
#
Figures for the years 2009–10, 2010–11, 2011–12 and 2012–13 (from April 2012 to August 2012) are provisional subject to reconciliation with RBI.
^
Inflows for the month of March 2012 are as reported by RBI, consequent to the adjustment made in the figures of March 11, August 11 and October
11.
*
An additional amount of US$ 4035 million pertaining to the year 2008–09, since reported by RBI, has been included in FDI database from February
2012.
Amount of foreign direct Percentage with < Table 25.21

Statement on
S. No. Country investment inflows total FDI Inflows (+)
Countrywise FDI Inflows
(in Rs crores) (in US$ millions)
(From April 2000 to
1. Mauritius 343,053.48 74,020.79 37.84 April 2013)
2. Singapore 97,213.73 20,753.47 10.61
3. United Kingdom 80,509.13 17,557.84 8.98
4. Japan 70,316.37 14,591.11 7.46
5. USA 51,732.97 11,270.12 5.76
6. Netherlands 43,317.44 9137.78 4.67
7. Cyprus 32,461.85 6913.92 3.53
8. Germany 25,650.65 5505.76 2.81
9. France 17,088.48 3614.16 1.85
10. UAE 11,362.94 2432.76 1.24
11. Switzerland 11,171.84 2386.80 1.22
12. Spain 7020.13 1474.13 0.75
13. South Korea 5862.02 1239.06 0.63
14. Italy 5301.49 1177.40 0.60
15. Hong Kong 4822.41 1038.43 0.53
16. Sweden 4634.36 987.80 0.51
17. Caymen Islands 3790.23 884.13 0.45
18. British Virginia 3604.56 795.86 0.41
19. Indonesia 2825.66 610.34 0.31
20. Poland 2988.38 568.99 0.29
21. Malaysia 2747.25 552.60 0.28
22. Australia 2482.32 535.86 0.27
23. The Bermudas 2252.20 502.07 0.26
24. Belgium 2277.24 491.87 0.25
25. Luxembourg 2229.84 479.02 0.24
26. Russia 2237.03 468.26 0.24
27. Canada 1957.00 426.10 0.22
28. Oman 1622.54 352.03 0.18
29. Denmark 1662.50 345.69 0.18
30. China 1432.94 279.14 0.14
31. Finland 1304.00 274.27 0.14
32. South Africa 1114.27 221.85 0.11
33. Austria 907.21 189.88 0.10
34. Ireland 696.30 155.82 0.08
35. Chile 654.72 141.07 0.07
36. Morocco 649.65 136.99 0.07
37. Norway 607.11 126.19 0.06
38. Thailand 527.01 113.55 0.06
39. British Isles 462.05 100.34 0.05
(Continued)
Table 25.21
(Continued)
> Amount of foreign direct Percentage with
40. West Indies 348.17 78.28 0.04
41. Taiwan 306.60 65.70 0.03
42. Mexico 347.26 65.23 0.03
43. Turkey 279.54 59.66 0.03
44. Israel 247.94 55.70 0.03
45. St. Vincent 254.02 49.67 0.03
46. Saudi Arabia 193.92 40.93 0.02
47. Panama 185.36 40.61 0.02
48. Korea (North) 187.15 36.94 0.02
49. Saint Kitts & 147.88 33.53 0.02
Nevis
50. New Zealand 146.36 32.70 0.02
51. Philippines 168.58 31.24 0.02
52. Bahamas 141.68 30.74 0.02
53. Sri Lanka 138.45 29.45 0.02
54. Jordan 155.03 28.57 0.01
55. Portugal 119.72 25.00 0.01
56. Iceland 93.72 21.14 0.01
57. Kenya 98.45 21.07 0.01
58. Virgin Islands 102.25 21.05 0.01
(USA)
59. Brazil 100.43 20.97 0.01
60. Kuwait 94.80 19.76 0.01
61. Gibraltar 83.67 19.51 0.01
62. Seychelles 92.05 19.17 0.01
63. Czech Republic 75.76 17.53 0.01
64. Kazakhstan 81.11 17.42 0.01
65. Bahrain 130.52 29.21 0.01
66. Liberia 64.54 14.56 0.01
67. Malta 58.39 12.78 0.01
68. Channel 57.20 12.71 0.01
Islands
69. Belarus 49.93 12.17 0.01
70. Nigeria 49.48 10.44 0.01
71. Hungary 47.86 10.30 0.01
72. Argentina 46.23 10.15 0.01
73. Myanmar 35.75 8.96 0.00
74. Isle of Man 38.09 8.49 0.00
75. Slovenia 39.07 8.24 0.00
76. Liechtenstein 35.25 7.42 0.00
(Continued)
Amount of foreign direct Percentage with < Table 25.21

(Continued)
77. Belize 25.14 5.52 0.00
78. Maldives 24.72 5.49 0.00
79. Slovakia 22.62 5.22 0.00
80. Rep. of Fiji 22.30 5.07 0.00
Islands
81. Romania 23.16 4.60 0.00
82. Ghana 21.13 4.46 0.00
83. Tunisia 19.84 4.31 0.00
84. Guersney 23.27 4.20 0.00
85. Greece 18.78 3.72 0.00
86. Uruguay 16.06 3.63 0.00
87. Scotland 13.51 2.99 0.00
88. Qatar 14.23 2.84 0.00
89. Egypt 14.54 2.76 0.00
90. West Africa 12.31 2.47 0.00
91. Trinidad & 12.73 2.34 0.00
Tobago
92. Nepal 9.12 1.94 0.00
93. Yemen 7.74 1.87 0.00
94. Monaco 7.49 1.52 0.00
95. Tanzania 6.31 1.41 0.00
96. Colombia 5.36 1.17 0.00
97. Ukraine 5.06 1.12 0.00
98. Uganda 5.06 1.10 0.00
99. Cuba 4.73 1.04 0.00
100. Guyana 4.60 1.00 0.00
101. Vanuatu 4.41 0.94 0.00
102. Bermuda 3.45 0.64 0.00
103. Togolese 3.08 0.60 0.00
Republic
104. Congo (DR) 2.41 0.54 0.00
105. Croatia 2.29 0.52 0.00
106. Aruba 1.96 0.43 0.00
107. Lebanon 1.87 0.39 0.00
108. Bulgaria 1.69 0.36 0.00
109. Estonia 1.31 0.30 0.00
110. Anguilla 1.46 0.29 0.00
111. Yugoslavia 1.13 0.24 0.00
112. Vietnam 1.14 0.24 0.00
113. Jamaica 1.00 0.22 0.00
(Continued)
Table 25.21
(Continued)
> Amount of foreign direct Percentage with
114. Iraq 0.85 0.19 0.00
115. Zambia 0.67 0.15 0.00
116. Iran 0.47 0.10 0.00
117. Libya 0.28 0.07 0.00
118. Latvia 0.27 0.06 0.00
119. Mongolia 0.27 0.06 0.00
120. Sudan 0.24 0.05 0.00
121. Peru 0.20 0.04 0.00
122. Bangladesh 0.16 0.03 0.00
123. Afghanistan 0.12 0.03 0.00
124. Botswana 0.13 0.02 0.00
125. St. Lucia 0.06 0.01 0.00
126. Georgia 0.02 0.00 0.00
127. East Africa 0.02 0.00 0.00
128. Bolivia 0.01 0.00 0.00
129. Costa Rica 0.01 0.00 0.00
130. Kyrgyzstan 0.01 0.00 0.00
131. Cameroon 0.01 0.00 0.00
132. Djibouti 0.00 0.00 0.00
133. Venezuela 0.00 0.00 0.00
134. Barbados 0.00 0.00 0.00
135. Muscat 0.00 0.00 0.00
136. FII’s 0.25 0.06 0.00
137. NRI ***
20,383.66 4684.25 2.39
138. Country details 30,854.20 6960.47 3.62
awaited
Sub Total 909,002.43 195,603.34 100.00
139. RBI’S NRI 533.06 121.33 –
Schemes
(2000–2002)
Grand Total 909,535.49 195,724.67 –
*
Complete/separate data on NRI investment is not maintained by RBI. However, the above FDI inflows
data on NRI investment, includes investment by NRIs, who have disclosed their status as NRIs, at the
time of making their investment.
+
Percentage of inflows worked out in terms of US$ and the above amount of inflows received through
FIPB/SIA route, RBI’s automatic route and acquisition of existing shares only.
Amount of FDI inflows Percentage with

< Table 25.22
Statement on Sector-
S. No. Sector
(in US$ millions) total FDI inflows
(+)
(in Rs crores) wise FDI Inflows
1. SERVICES SECTOR 173,566.76 37,472.10 19.16 (From April 2000 to
(Fin. banking, April 2013)
insurance, nonfin/
business, outsourcing,
R & D, courier, Tech.
testing and analysis,
other)
2. CONSTRUCTION 101,221.92 22,111.98 11.30
DEVELOPMENT
Townships, housing,
built-up infrastructure
and construction-
development projects
3. Telecommunications 58,765.22 12,862.13 6.58
4. Computer Software And 52,830.29 11,701.44 5.98
Hardware
5. Drugs And 54,245.00 11,304.91 5.78
Pharmaceuticals
6. Chemicals (Other Than 40,771.85 8931.64 4.57
Fertilizers)
7. Automobile Industry 39,287.47 8316.47 4.25
8. Power 36,200.05 7845.84 4.01
9. Metallurgical Industries 34,911.03 7524.89 3.85
10. Hotel And Tourism 33,439.24 6664.20 3.41
11. Petroleum And Natural 24,808.41 5381.48 2.75
Gas
12. Trading 18,794.48 3983.01 2.04
13. Information And 16,083.60 3392.33 1.73
Broadcasting
(Including Print Media)
14. Electrical Equipments 14,733.96 3194.72 1.63
15. Cement And Gypsum 11,939.04 2655.85 1.36
Products
16. Non-Conventional 13,092.51 2626.42 1.34
Energy
17. Miscellaneous 10,582.94 2329.82 1.19
Mechanical And
Engineering Industries
18. Industrial Machinery 11,108.42 2318.86 1.19
19. Construction 10,190.32 2173.03 1.11
(Infrastructure)
Activities
20. Consultancy Services 9725.55 2101.17 1.07
21. Hospital And Diagnostic 8967.10 1878.55 0.96
Centres
(Continued)
Table 25.22
(Continued)
> S. No. Sector
Amount of FDI inflows Percentage with
(+)
(in Rs crores)
22. Food Processing 9000.33 1869.72 0.96
Industries
23. Ports 6717.38 1635.08 0.84
24. Agriculture Services 7800.72 1609.24 0.82
25. Textiles (Including 5797.58 1245.89 0.64
Dyed, Printed)
26. Electronics 5466.79 1198.23 0.61
27. Sea Transport 5497.62 1195.44 0.61
28. Rubber Goods 5857.04 1139.05 0.58
29. Fermentation 5095.32 1134.64 0.58
Industries
30. Mining 4369.72 998.58 0.51
31. Paper And Pulp 4058.54 865.98 0.44
(Including Paper
Products)
32. Prime Mover (Other 4176.24 856.85 0.44
Than Electrical
Generators)
33. Education 3618.22 736.81 0.38
34. Soaps, Cosmetics And 3115.54 632.39 0.32
Toilet Preparations
35. Machine Tools 2967.43 623.06 0.32
36. Medical And Surgical 2969.69 614.72 0.31
Appliances
37. Ceramics 2453.09 555.49 0.28
38. Air Transport 2022.00 449.26 0.23
(Including Air Freight)
39. Diamond, Gold 1810.98 390.81 0.20
Ornaments
40. Glass 1942.21 389.07 0.20
41. Vegetable Oils And 1893.74 384.95 0.20
Vanaspati
42. Fertilisers 1536.08 318.23 0.16
43. Agricultural Machinery 1423.94 296.55 0.15
44. Printing Of Books 1257.52 272.32 0.14
(Including Litho
Printing Industry)
45. Railway-Related 1246.35 270.33 0.14
Components
(Continued)
S. No. Sector
Amount of FDI inflows Percentage with < Table 25.22
(Continued)
(+)
(in Rs crores)
46. Commercial, Office 1183.26 255.10 0.13
And Household
Equipments
47. Earth-Moving Machinery 769.05 174.95 0.09
48. Leather, Leather Goods 527.88 107.43 0.05
And Pickers
49. Tea And Coffee 462.78 102.45 0.05
(Processing And
Warehousing Coffee
And Rubber)
50. Scientific Instruments 534.25 101.50 0.05
51. Retail Trading 460.10 95.46 0.05
(Single Brand)
52. Timber Products 398.53 79.15 0.04
53. Photographic Raw Film 269.26 66.54 0.03
And Paper
54. Industrial Instruments 307.45 66.53 0.03
55. Boilers And Steam 305.75 61.83 0.03
Generating Plants
56. Sugar 242.32 51.82 0.03
57. Coal Production 119.19 27.73 0.01
58. Dye-Stuffs 87.32 19.50 0.01
59. Glue And Gelatin 70.56 14.55 0.01
60. Mathematical, 39.80 7.98 0.00
Surveying And Drawing
Instruments
61. Defence Industries 24.36 4.94 0.00
62. Coir 10.37 2.17 0.00
63. Miscellaneous 35,831.03 7910.21 4.07
Industries
Sub Total 909,002.49 195,603.37 100.00
64. RBI’S NRI Schemes 533.06 121.33 –
(2000–2002)
Grand Total 909,535.55 195,724.7 –
FDI inflows data re-classified, as per segregation of data from April 2000 onwards.
+
Percentage of inflows worked out in terms of US$ and the above amount of inflows received through
FIPB/SIA route RBI’s automatic route and acquisition of existing shares only.
FDI sectorial data has been revalidated/reconciled in line with the RBI, which reflects minor changes in
the FDI figures (increase/decrease) as compared to the earlier published sectorial data.
C ase
The policy of foreign ownership of banks continues to dominate the headlines in Andhra
Pradesh. Last week, the Finance Minister announced that the government would allow a
creeping increase at the rate of 10 per cent every year in the foreign ownership of banks in
India. Over a period of time and combined with equivalent voting rights, this would enable
FIIs to acquire a complete control of the Indian private sector banks. Foreign banks, have, of
course, been in the forefront in bringing the consumer finance products such as credit cards
and auto loans to the market. But the pioneer in credit cards was an Indian bank—Andhra
Bank—and a public sector one at that. Among the new generation of private sector banks,
barring an exception or two (UTI [Unit Trust of India] Bank comes to mind), the emphasis
is more on the non-fund-based businesses, like investments, which clearly, an FII would
target the old-generation private sector banks, which are usually very community-centric,
but have been playing an extremely strong role in supporting the small- and medium-scale
enterprises (SMSEs). In the manufacturing and trade, some promoters an big shareholders
would undoubtedly sell out at the right price. In the process, the new owners would acquire
a valuable franchise of the well-established SMEs, with a track record and high net-worth
customer base that comes along with it. Does it matter very much? The loss would clearly be
the nation’s. For the public sector and old-generation private sector banks, despite their many
faults and drawbacks, have proved to be the sinews of economic growth. But for them, would
Tirupur, for example, become the world’s largest hosiery manufacturing and export centre?
Can any foreign bank claim to have financed a single, currently successful unit in that town,
from the beginning? Today’s stock market favourite, Infosys, was first funded by the now,
much-derided, state level financial institutions. This is not to find fault with the foreign banks
in India. After all, their Indian representatives have been given a mandate and they are bound
to follow that. The larger issues of development are beyond their ken. It is only Indian banks
that could be expected to have the feel and empathy that are necessary to help the struggling
entrepreneurs. Merchant banking for disinvestment, IPOs (initial public offerings), pension
fund management, and financial services for the rich ought to be a part of any banking land-
scape, but they are at the far end of the value chain. Wealth has actually been created from a
globally efficient production of goods and services. Policy priorities lie in how to finance the
sectors of the economy which foster growth—agriculture, infrastructure, manufacturing, IT,
and so on—and evolve and support institutions that can achieve it.
Case Question
Do you support this policy of foreign ownership of banks?
SUMMARY
For about a decade since independence, the country had development; the East India Company syndrome seemed to
had an open attitude towards FDI. However, the Second haunt the policymakers.
Plan made a significant departure, emphasising self-reliant Further, in 1973, the FERA came into force. It limited the
economic development and a restrictive approach vis-à-vis equity of foreign companies in the Indian companies to 40
FDI, to protect the domestic base of created assets. The per cent. And in the late 1970s, some foreign companies
underlying philosophy was that the Transnational Corpora- were asked to leave the country itself. However, there was a
tions (TNCs), which bring in FDI, cannot be relied upon to the policy reversal in the 1980s. The industrial and trade policy
extent of allowing them to play a major role in the country’s
liberalization was accompanied by an increasingly receptive A steering group was constituted in the Planning Commission
attitude to FDI and foreign-licensing collaborations. to study the FDI regulatory regime and suggest policy meas-
To modernise the industry, a greater role to multinational ures for increasing the FDI flows. The crux of the group’s
enterprises was sought to be given. The exceptions from the recommendations was to liberalise further. A TNC’s decision
general ceiling of 40 per cent on foreign equity were allowed to locate in a country is based on the tax structure, special
on the merits of individual investment proposals. Riding the programmes and schemes, competition regime, entry and
wave of reforms, the full-scale liberalization measures were establishment requirements, investment protection, technol-
initiated in the 1990s to integrate the Indian economy with ogy transfer, natural resources and skill levels, incentives,
the global one. and institutional mechanism. However, determining the FDI
flow is a complex process. For example, while India may
The RBI was allowed to give an automatic approval for the seem more attractive than China on most of these counts,
priority industries. The FIIs were also given assurances of it attracts less than one-tenth of the FDI into the latter.
free remittances of profits and dividends, a fair compen-
sation in the event of acquisition, and a level-playing field. There are several other broad issues to be considered.
These changes in the FDI policy were complemented by bilat- To what extent is technology, which has gained entry, con-
eral investment treaties (BITs) and double taxation treaties sistent with India’s employment objectives? Has local
(DTTs), many of which were signed by India recently. When technological development received a set-back on account
the economic reforms programme was launched, it was well of foreign technology? What are the long-term effects of
recognised that the lack of infrastructure, such as roads and foreign collaborations on R&D? What is the precise degree
power, was a serious impediment to development. of import substitution brought about in capital and con-
sumer goods sectors, and what is its quantitative impact
However, there was confidence that FDI would flow in and on foreign exchange? Finally, what is the net contribution of
address the problem. As a natural corollary, the State, which foreign companies towards the host country’s export efforts?
was more or less the only investor in these sectors, stopped Indian representatives have been given a mandate and they
the further investment. The foreign investments did flow in are bound to follow that. The larger issues of development
but not to the extent expected. In 2001, FDI as a percentage are beyond their ken. It is only Indian banks that could be
of GDP was 4.7, among the lowest in the world. expected to have the feel and empathy that are necessary to
Moreover, whatever FDI came in, more or less bypassed the help the struggling entrepreneurs.
preferred sectors—roads and power. After about a decade, Merchant banking for disinvestment, IPOs (initial public
it was realised that the State could not withdraw from these offerings), pension fund management, and financial services
crucial sectors. For example, in the ambitious highway devel- for the rich ought to be a part of any banking landscape,
opment project, 95 per cent of the funding comes from the but they are at the far end of the value chain. Wealth has
State. However, a crucial decade was lost, delaying thereby, actually been created from a globally efficient production of
the development process. However, the think tanks soon goods and services. Policy priorities lie in how to finance the
thought that the FDI did not flow in because of bad roads and sectors of the economy which foster growth—agriculture,
the poor power situation. But was not FDI basically invited to infrastructure, manufacturing, IT, and so on—and evolve and
improve that road and power sector? support institutions that can achieve it.
Key W o r d s
● Infrastructure ● FDI Inflow ● Technology diffusion
● Exchange Rate ● Foreign Capital ● Backward Linkages
● Domestic Investment ● Gross Domestic Product (GDP) ● Forward Linkages
● R&D ● Foreign Direct Investment (FDI) ● Foreign Affiliate
● Technology Transfer ● Greenfields Investment ● FDI’s Automatic Route
● Multinational Enterprises (MNEs) ● Balance of Payment (BoP)
● R&D Hub ● Liberalization
Q u est i o n s
1. Explain the policy of the Government of India towards 6. What are the limitations of foreign investment in a
foreign investment. developing country?
2. Examine the case for and against foreign investment 7. Describe the FERA guidelines for regulating foreign
in India. investment in India.
3. How far is the control on foreign investment in India 8. Describe the components of foreign investment in
justified? India.
4. Is foreign investment in India necessary? Explain. 9. Outline the growth of foreign investment in India.
5. Discuss the merits and demerits of foreign invest- 10. ‘To keep pace with industrial development, foreign
ment in India. investment must not be rigidly handled.’ Explain in
the context of a developing country like India.
Refe r e n ces
n Bala, I. (2003). Foreign Resources and Economic Devel- n Paul, H. (2003). The Economic way of Thinking, 10th ed.
opment. New Delhi: Deep and Deep Pub. New Delhi: Pearson Education.
n Batra, G. S. (2004). Globalisation of Financial Markets. n Rao, P. S. (2003). International Business: Text and
Deep and Deep Pub. Cases. Mumbai: Himalaya Pub.
n Chidambaram and Alagappan (2003). Business Environ- n Srinivasan, T. N. (2002). Trade, Finance and Investment
ment. Delhi: Vikas Pub. in South Asia. New Delhi: Social Science.
n Chopra, C. (2003). Foreign Investment in India: Liber- n Sury, N. (2004). Foreign Direct Investment: Global and
alization and WTO—The Emerging Scenario. New Delhi: Indian Aspects. Delhi: New Century Pub.
Deep and Deep Pub. n ‘FDI in India and its growth linkages’ retrieved from
n Khan, A. Q. (2002). Strategy for Foreign Investment Man- http://dipp.nic.in/english/publications/reports/
agement in 21 Century. Allahabad: Kitab Mahal Pub. fdi_ncaer.pdf
n Kumar, N. (2002). Globalization and the Quality of Foreign n http://equityupdates.com
Direct Investment. New Delhi: Oxford University Press. n http://www.rbi.org.in
26
C hapter
Multinational
Corporations
>>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>>
• Origin 713 • A Critique of Mncs 725
• Meaning 714 • Multinational Companies and Production
• Definition 714 Linkages 726
• Objectives 715 • Mncs Deal a Blow to Domestic Companies 727
• Modes of Entry into Foreign Markets 715 • Mncs and Global Imbalance 728
• Global Sourcing 720 • Acquisition of Mncs by Indians 729
• Reasons for the Growth of Mncs 721 • Case 1 731
• Favourable Impact of Mncs 722 • Case 2 733
• Harmful Effects of the Operations of Mncs • Summary 734
on Indian Economy 723 • Key Words 734
• Domination of Mncs Over Indian Economy 724 • Questions 734
• Liberalization and Mncs 724 • References 735
ORIGIN
Multinational business operation is not a new concept. It emerged from mercantilist
philosophy. The British East India Company, Hudson’s Bay Corporation, and Royal Africa
Company are examples of multinational companies (MNCs) of the mercantilist era. The
post–World War II period has, however, witnessed a changing hand in colonialism, and there
emerged a new thrust for industrial and technological development, as well as the rise of the
United States as the largest industrial power. The growth of techno-economic power in coun-
tries like the United States, the United Kingdom, France, and Germany, simultaneously gave
birth to large business houses which extended their operations from the parent countries to
various host countries, subsequently skyrocketing their turnover. In the post-independence India,
In the post-independence India, many MNCs have gained ground. Although they many MNCs have gained
have brought in the latest technology to make their operations successful, they preferred ground. Although they have
to keep the secrets of their technology with themselves. The Coca-Cola experience is an brought in the latest technology
to make their operations suc-
example. The company preferred to wind up its operations instead of divulging its tech- cessful, they preferred to keep
nical secrets. The companies that operate through their subsidiaries prefer to guard the the secrets of their technology
technical know-how as their monopoly even if they have a minority shareholding. MNCs with themselves.
from the United States have the largest share of foreign direct investment (FDI) in India
followed by those from the United Kingdom, Germany, Japan, Switzerland, France, and
Canada.
Over 50 per cent of the subsidiaries operating in India with 100 per cent ownership
usring 1960–64 declined their ownership to 36 per cent during 1964–70. Over 50 per cent
of the companies had 75 per cent foreign ownership during the same period—1964–70.
According to a ‘running a stop’ report, the share of FDI in the developing countries marked
a decline from 31 per cent in 1971 to 27 per cent in 1980.
After the passing of the MRTP Act and FERA Act out of 883 foreign companies operating
in India, 817 companies diluted to either 40 per cent or 51 per cent, and about 40 compa-
nies came under the special category of high-technology industries or export-oriented in-
dustries. The liberalization policy of the Government of India in 1991 raised the limit of
foreign-equity participation from 40 per cent to 51 per cent. The government subsequently
planned to permit even up to 150 per cent participation in export-oriented and techno-
logically sophisticated industries. Foreign-equity participation and foreign-collaboration
agreements emerged as the participation methods of foreign firms in India. Another im-
portant method of operation was through subsidiaries that were operating in India with a
100 per cent foreign ownership.
MEANING
MNCs are considered as giant Multinational corporations (MNCs) are normally considered as giant firms, which are
firms, which are engaged in engaged in productive activities of a corporate nature, with headquarters located in one
productive activities of a corpo- definite country and having a variety of business operations in different countries in a broad-
rate nature, with headquarters based manner. MNCs are also called transnational corporations (TNCs), which simply
located in one definite country
and having business operations indicate that their business operations extend beyond the boundaries or borders of the
in different countries. country in which they were originally established.
DEFINITION
Any business corporation which has holdings, management, production, and marketing
Business operations of MNCs
extended over several countries, owns huge resources and extensive potentiality, and
extend beyond the boundar-
ies or borders of the country in encourages a collective transfer of resources among various countries, with a view to
which they were originally estab- increasing profitability under a centralized ownership, is called ‘multinational corporation.’
lished. There is no universally accepted definition for the term ‘multinational corporation.’ However,
the following definitions by Jacques Maisonrouge, President, IMB World Trade Corporation,
describes an MNC as a company that meets five criteria as follows:
1. It operates in many countries at different levels of economic development.
2. Its local subsidiaries are managed by the nationals.
3. It maintains the complete industrial organization including the research and develop-
ment (R&D) facilities in several countries.
4. It has a multinational central management.
5. It has a multinational stock ownership.
Author James C. Baker defines MNC as a company:
1. which has a direct investment based in several countries;
2. which generally derives 20 per cent to 50 per cent or more of its net profits from for-
eign operations; and
3. whose management makes policy decisions based on the alternatives available any-
where in the world.
Multinational Corporations | 715
Hence, MNCs are

1. Business enterprises with huge resources and potentiality;
2. Commercial organizations having management, production, marketing, and hold-
ings extended over several countries;
3. Institutions of vitality for international operations;
4. Undertakings that encourage a collective transfer of resources among various coun-
tries, at least from the host countries to the home country and vice versa; and
5. Business concerns of centralized ownership and control.
According to the International Labour Organisation (ILO), ‘The essential nature of the
multinational enterprises lies in the fact that its managerial headquarters are located in one
country, while the enterprise carries out operations in a number of other countries as well.’
OBJECTIVES
Generally speaking, MNCs consider international investments to accomplish the following
objectives:
1. To expand the business beyond the boundaries of the home country, where they were
originally established.
2. Minimise the cost of production, especially the labour cost.
3. Capture the lucrative foreign market against international competitors.
4. Avail the competitive advantage internationally.
The objective of an MNC is to
5. Achieve greater efficiency by producing in local markets and then exporting the capture a lucrative foreign mar-
products. ket against international com-
petitors.
6. Make the diversification intentionally effective so that a steady growth of business
could be achieved.
7. To safeguard the company’s interest in order to get behind the tariff walls.
8. Make the best use of technological advantages by setting up production facilities
abroad.
9. Establish an international corporate image.
10. Counter the regulatory measures in the parent country.
MODES OF ENTRY INTO FOREIGN MARKETS

• Exporting
• Licensing
• Franchising
• Countertrade
• Foreign direct investment
• Joint ventures and strategic alliances
Exporting: This term export derives from the conceptual meaning as to ship the goods and
services out of the port of a country. The seller of such goods and services is referred to as an
‘exporter’ who is based in the country of export, whereas the overseas-based buyer is referred to
as an ‘importer.’ In international trade, ‘exports’ refers to selling goods and services produced in
the home country to other markets. Export of commercial quantities of goods normally requires
involvement of the customs authorities in both the country of export and the country of import
Export is looking new customers in the next town, the next state or on the other coast, it differs
only if national borders are crossed and international accounts and currencies are involved.
Why companies go for export?
• When they have increased economy of scales
• Domestic consumption is below B.E.P
• For diversification
• To take advantage of different growth rate in different markets.
• To shift from declining market to emerging market of business/product life cycle
Licensing: It refers to a written agreement entered into by the contractual owner of a property or
activity giving permission to another to use that property or engage in an activity in relation to
that property. The property involved in a licensing can be real, personal or intellectual. Almost
always, there will be some consideration exchanged between the licensor and the licensee.
Licensing agreements can be an intangible but valuable asset in industries such as tech-
nology, biotechnology, and publishing. These agreements are a large part of intellectual prop-
erty law, particularly in terms of enforcement of copyrights, trademarks, patents, etc. to a
manufacturer in a foreign currency or country.
• Licensing is an arrangement whereby a firm (the licensor) grants a foreign firm
(the licensee) the right to use intangible property such as a patent, logo, formula,
process, etc.
• The licensee pays a royalty or per cent of the profits to the licensor.
• Licensing allows a business to go global relatively rapidly and simply. Rather than
trying to export a product directly, incurring shipping costs and delays, among other
barriers.
• A company can license their methods of doing business to a foreign organization.
Characteristics of Market that Leads Towards Licensing

• The market has low volume potential, cannot be served by exports, but could generate
extra revenues from royalties and fees.
• It is impossible to export either because of trade restrictions or the inability of
i mporter to get the foreign exchange to cover the cost of finished import.
• Competition in the market has made production too expensive.
This may be because of high domestic production cost, the location of facilities far away
from port, or the transportation cost involved in getting the product to a distant market.
• The risk may be too high for an equity investment, or it may be too high relative to the
resources at the companies disposal.
Characteristics of Company that Leads Towards Licensing

• The company need immediate cash flow and a foreign manufacturer can begin
production much faster than the company could, if it make a direct investment.
• The company that does not have the resources to manufacture for the market or in-
vest in it, but it want to recover some of its R&D costs or to generate a stream or
incremental income.
• The company wants to protect its technology or patents from being copied in certain
countries, so it officially license somebody to use it.
• The company may have a good product and attractive market, but the modification
required in the product are too many or too expensive for it to incorporate.
• The market is attractive and the risk is manageable, but it cannot afford to go in di-
rectly because of lack of capital, management skills or experience.
Basic Issues in International Licensing

• Boundaries of the agreement
• Determination of royalty
• Determining rights, privilege, and constraints
• Volume of sales
• Dispute settlement mechanism
• Agreement duration
Advantages of Licensing
• Licensing mode carries relative low investment on the part of licensor.
• Licensing mode carries low financial risk to the licensor.
• Licensor can investigate the foreign market without much efforts on his/her part.
• Licensing escapes from the risk of production failure.
Franchising: A type of license that a party (franchisee) acquires to allow them to have access
to a business’s (the franchisor) proprietary knowledge, processes, and trademarks in order to
allow the party to sell a product or provide a service under the business’s name. In exchange
for gaining the franchise, the franchisee usually pays the franchisor initial start-up and annual
licensing fees. As with licensing, franchising allows a business to go global relatively rapidly
and simply, however, franchising generally requires a greater commitment, financially and
otherwise, than licensing by both parties.
Franchises are a very popular method for people to start a business, especially for those
who wish to operate in a highly competitive industry like the fast-food industry. One of the
biggest advantages of purchasing a franchise is that, it gives access to an established com-
pany’s brand name, hence do not need to spend further resources to get name and product
out to customers. The most obvious example is the ubiquitous McDonald’s franchise. Some
other examples are hotel chains such as Hilton. Franchising may also allow some adaptation
to local tastes and customs.
Advantages of Franchising
• Franchisor can enter global market with low investment and low risk.
• Franchisor can get the information regarding the market, culture, customs, and
environment of the host country.
• Franchisor learns more international environment activities and practices from the
experiment of the franchisee which he/she could not experience from the home
country market.
• Franchisee can early start a business with low risk as he/she selects an established and
proven product and operating system.
• Franchisee gets the R&D activities at low cost.
• Franchisee escapes from the risk of product failure.
Countertrade: International trade in which goods are exchanged for other goods, rather
than for hard currency. A monetary valuation can however be used in counter trade for
accounting purposes. Countertrade is a form of international trade in which certain export
and import transactions are directly linked with each other and in which import of goods are
paid for by export of goods, instead of money.
Countertrade can be classified into three broad categories
• Barter
• Counter purchase
• Offset
Barter forms the oldest countertrade arrangement, and essentially involves the direct
exchange of goods and services having an equivalent value, but with no cash settlement. In a
counter purchase, the overseas seller agrees to buy goods or services sourced from the buyer’s
country up to a defined amount. In an offset arrangement, the seller assists in marketing
products manufactured by the buying country or allows part of the assembly of the exported
product to be carried out by manufacturers in the buying country; however, this practice is
often found in the aerospace and defense industries.
Countertrade has its pros and cons. A major benefit of countertrade is that it facilitates
conservation of foreign currency, which is a prime consideration for cash-strapped nations.
Other benefits include equilibrium of balance of payment, higher sales, better capacity utili-
zation, and ease of entry into challenging markets.
A major drawback of countertrade is that the value proposition may be uncertain, espe-
cially in cases where the goods being exchanged have significant price volatility. Other disad-
vantages of countertrade include complex negotiations, potentially higher costs and logistical
issues.
Foreign Direct Investment: An investment made by a company or entity based in one coun-
try, into a company or entity based in another country. Foreign direct investments differ sub-
stantially from indirect investments such as portfolio flows, wherein overseas institutions in-
vest in equities listed on a nation’s stock exchange. Entities making direct investments typically
have a significant degree of influence and control over the company into which the investment
is made. Open economies with skilled workforces and good growth prospects tend to attract
larger amounts of foreign direct investment than closed, highly regulated economies.
The investing company may make its overseas investment in a number of ways—either
by setting up a subsidiary or associate company in the foreign country, by acquiring shares of
an overseas company, or through a merger or joint venture.
Green Field Investment: A form of foreign direct investment where a parent company starts
a new venture in a foreign country by constructing new operational facilities from the ground
up. In addition to building new facilities, most parent companies also create new long-term
jobs in the foreign country by hiring new employees. Cost and risks of green field investment
are greater than with franchising or licensing.
Developing countries often offer prospective companies tax-breaks, subsidies, and other
types of incentives to set up green field investments. Governments often see that losing cor-
porate tax revenue is a small price to pay if jobs are created, knowledge and technology is
gained to boost the country’s human capital.
Critics on FDI
• Due to their size, MNCs may influence the host country’s economic and political
systems
• Control of a country’s important resources may pass into the hands of foreign corpo-
rations and, perhaps, then governments
Joint Venture: A joint venture is an organization created by two or more companies or a com-
pany and a foreign government in which each party contributes assets, owns the entity to some
degree, and shares risk. It is a business agreement in which the parties agree to develop, for a
finite time, a new entity and new assets by contributing equity. They exercise control over the
enterprise and consequently share revenues, expenses and assets. Joint venture represents a great
way to pool capital and expertise and reduce the exposure of risk to all involved. A joint venture
allows a company to partner with a firm from another country thus learning about business
practices, cultural differences, etc. This is particularly popular among manufacturing concerns.
Unlike a merger or acquisition, a joint venture does not have to be permanent, and it
offers companies the benefits of maintaining their independence and identities as individual
companies while offsetting one or more weaknesses with another company’s strengths.
Why two companies enter into a joint venture?
• To pursue larger opportunities than they could alone
• Establish presence in a foreign country
• Gain a competitive advantage in a particular market
• To lower costs
• Gain access to another company’s technology
• Increase revenues and customer base
• Expand product distribution
Strategic Alliances: A strategic alliance is an agreement between potential or actual competi-
tors to achieve common objectives. Unlike a joint venture they do not actually form a new
entity but work cooperatively while maintaining their independence. It allows participants to
share costs and risks and to take advantages of each other strengths. A strategic alliance could
help a company develop a more effective process, expand into a new market or develop an
advantage over a competitor, among other possibilities. Because strategic alliances are built
on trust, this type of arrangement should be undertaken with care.
For example, an oil and natural gas company might form a strategic alliance with a research
laboratory to develop more commercially viable recovery processes. A clothing retailer might
form a strategic alliance with a single clothing manufacturer to ensure consistent quality and
sizing. A major website could form a strategic alliance with an analytics company to improve
its marketing efforts.
GLOBAL SOURCING
A practice used by different companies to reduce costs by transferring portions of work to
outside suppliers rather than completing it internally.
Outsourcing is an effective cost-saving strategy when used properly. It is sometimes
more affordable to purchase a good from companies with comparative advantages than it is
to produce the good internally. An example of a manufacturing company outsourcing would
be Dell buying some of its computer components from another manufacturer in order to
save on production costs. Alternatively, businesses may decide to outsource book-keeping
duties to independent accounting firms, as it may be cheaper than retaining an in-house
accountant.
Firms pursue global sourcing strategies in order to:
• Reduce costs
• Improve quality
• Increase exposure to worldwide technology
• Improve the delivery-of-supplies (logistics) process
• Strengthen the reliability of supply by supplementing domestic supplies with foreign
suppliers
The Global Component Network for Ford’s European Manufacturing of the Escort
Austria United Kingdom Belgium Canada Norway

Tires, radiator Carburetor, rocker arm, clutch, Tires, tubes, Glass, radio Exhaust
and heater ignition, exhaust, oil pump, seat pads, flanges,
hoses distributor, cylinder bolt, cylinder brakes, trim tires
The
head, flywheel ring gear, heater,
Netherlands
speedometer, battery, rear wheel
Tires, paints,
spindle, intake manifold, fuel
hardware
tank, switches, lamps, front disc, Denmark
Italy steering wheel, steering column, Fan belt
Cylinder head, glass, weatherstrips, locks
Germany
carburetor, glass,
Locks, pistons, exhaust, ignition,
lamps, defroster
switches, front disc, distributor,
grills
weather strips, rocker arm,
speedometer, fuel tank, cylinder
bolt, cylinder head gasket, front
wheel knuckles, rear wheel
Japan spindle, transmission cases,
Starter, alternator, clutch cases, clutch, steering
cone and roller column, battery, glass
bearings, wind-
screen washer Assembly in Halewood, U.K., or
pump Saarlouis, Germany France
Alternator, cylinder head, master
cylinder, brakes, underbody
coating, weatherstrips, clutch
Sweden Spain United States release bearings, steering shaft
Switzerland and joints, seat pads and frames,
Hose clamps, Wiring harness, EGR valves, wheel
Underbody transmission cases, clutch cases,
cylinder bolt, radiator and heater nuts, hydraulic
coating, tires, suspension bushes,
exhaust down hoses, fork clutch tappet, glass
speedometer, ventilation units, heater hose
pipes, pressings, release, air filter,
gears clamps, sealers, hardware
hardware battery, mirrors
• Gain access to materials that are only available abroad

• Establish a presence in a foreign market
• Satisfy offset (countertrade) requirements
• React to competitors’ sourcing practices
Types of Outsourcing
Outsourcing
Non-captive Non-captive
Captive onshore Captive offshore
onshore offshore
outsourcing outsourcing
outsourcing outsourcing
Cost and standardization setoff

Cost
Captive
Onshore Captive
Offshore Non-captive
Onshore Non-captive
Offshore
Standardization
REASONS FOR THE GROWTH OF MNCs

MNCs exercise a huge control on the business of world economy. With huge capital resource,
latest technology, and worldwide reputation, these MNCs are diversifying the marketing of their
products in various counties, where they can sell easily whatever products they manufacture.
Given the desire of the people of an underdeveloped country for the products of MNCs instead of
their indigenous products, MNCs have been able to expand the market of their products in these
developing countries. The important reasons behind the growth of MNCs include the following:
1. Expansion of the market territory beyond the boundary of the country due to their
international image.
2. Marketing superiorities arising out of its up-to-date market information system,
market reputation, effective advertisements and sales-promotion techniques, and
warehousing facilities.
3. Financial superiorities over national firms.
4. Technological superiority over the national companies of the underdeveloped
countries.
5. Effective product innovations due to its superior R&D facilities.
Reasons for MNC’s to explore
Efficiency
Market Seeking Resource Seeking Seeking
Market Size & Per Cost of resources

Raw Material
Capita Income and assets
Market Growth Low cost Unskilled

labours
Other input costs,
e.g. transport,
Access to Regional communication &
Skilled Labours other intermediate
and Global Market
products
Technology,
Country-Specific Innovation, and other
Consumers created assets
Membership of regional
integration agreement
Physical conductive to the
Structure of Market
Infrastructure establishment of regional
corporate networks.
FAVOURABLE IMPACT OF MNCs

MNCs have had some favourable impact on the Indian economy. Initially, Indian industries
concentrated on the consumer goods sector only. MNCs have helped the Indian industry
sector to diversify its production spectrum which includes steel, light and heavy engineering,
petroleum refinery, man-made fibre manufacture, automobiles, chemicals, pharmaceuticals,
and several other types of industrial products. There are a number of arguments in favour of
MNCs as follows:
1. They help to increase the investment level and thereby, the income and employment
in the host country.
2. They become vehicles for transfering technology especially to developing countries.
3. They enable the host countries to increase their exports and decrease their import
requirements.
4. They work to equalise the cost of factors of production around the world.
5. They provide an efficient means of integrating national economies.
6. They make commendable contribution to R&D due to their enormous resources.
7. They also stimulate domestic enterprises. To support their own operations, they
encourage and assist domestic suppliers.
8. They help to increase competition and break domestic monopolies.
9. They help to improve the standard of living in their host countries.
10. They provide impetus in diversification.
11. They substantially contribute towards professionalisation of management in the host

countries.
12. They contribute substantially to improve the balance of payment (BoP) position in
the host countries.
13. They contribute towards the national exchequer by way of duties and taxes.
14. They play a vital role in developing the ancillaries in host counties.
15. They are profit-making enterprises which pay high dividends, motivating resource
mobilization among the investors in host countries.
Analyzing the Level of Internationalization of Firms with its Business

Environment
Degree of internationalization
of the business environment
Early starter Late starter
Degree of
internationalization
of the firm
Lonely International
international among other
HARMFUL EFFECTS OF THE OPERATIONS

OF MNCs ON INDIAN ECONOMY
The operations of MNCs have had some harmful effects on the Indian economy. The harmful
effects are as follows:
1. The main objective of MNCs is profit maximization and not the development needs
of poor countries; in particular, the employment needs and relative factor scarcities
MNCs inflict heavy damage
in these countries.
on the host countries through
2. Through their power and flexibility MNCs inflict heavy damage on the host countries suppression of domestic entre-
preneurship, extension of oli
through suppression of domestic entrepreneurship, extension of oligopolistic gopolistic practices, passing on
practices, passing on unsuitable technology and unsuitable products, worsening an unsuitable technology, and
income distribution, and so on. exploitation of manpower.
3. They can have an unfavourable effect on the BoP position of the country through an
outflow of large sums of money in the form of dividends, profits, royalties, interests,
technical fees, and so on, leading to an increasing volume of remittance.
4. They cause distraction of competition and acquire monopoly powers in the long run.
5. The tremendous power of the global corporations may pose a threat to the sover-
eignty of the nations in which they do their business.
6. They retard the growth of employment in the home country.

7. They interfere directly and indirectly in the internal political affairs and affairs of
other sort too, of the host country.
8. They cause harm by faulty technology transfer to capital-intensive nature, affecting
the employment in a labour-supply economy.
9. They cause a fast depletion of some of the non-renewable natural resources in the
host country.
10. Transfer pricing enables MNCs to avoid taxes by manipulating prices on the intra-
company transactions.
DOMINATION OF MNCs OVER INDIAN

ECONOMY
At present, MNCs have a stronghold over the Indian economy. Even during 1970s, about
At present MNCs have a strong-
hold over the Indian economy. 52.7 per cent of the total assets of the giant sector were controlled by the MNCs. As per the
Even during 1970s, about estimates of the Industrial Licensing Policy Inquiry Committee, in 1966, there were about
52.7 per cent of the total 112 MNCs operating in India with assets worth ` 10 crore or more. Of these, about 48 were
assets of the giant sector were either foreign branches or Indian subsidiaries of foreign companies. Besides, there were 14
controlled by the MNCs.
other companies, having heavy loans and equity capital, which were almost controlled by
foreign companies.
Thus, these 62 companies had nearly ` 1,370 crore worth of assets, which jointly consti-
tuted about 54 per cent of the total assets of the giant sector operating in India. D.S. Swamy
was of the opinion that a good number of other companies were also under foreign domina-
tion and some of these companies depended heavily on international financial institutions
for financial assistance. Thus during the mid-1960s, the Western foreign capital mostly domi-
nated the big business of the country, and thereby controlled the apex of India’s industrial
pyramid. Another important feature of MNCs in India is that they have been raising a major
part of investment resources within the boundaries of the Indian economy. Sudip Choud-
hury made a study of the sources of finance of MNCs during the period 1956–75, by taking
a sample of the 50 largest foreign subsidiaries. The study revealed that of the total financial
resources of these companies, only 5.4 per cent were contributed by foreign sources (equity
capital and loans); the remaining 94.6 per cent were contributed by the domestic sources.
Another study made by John Martinussen revealed that the amount of capital issues contrib-
uted by foreign participation declined from 61.5 per cent, with all consent of public limited
companies, in 1976 to only 29.5 per cent in 1980. Moreover, about 20 TNC-affiliated compa-
nies also reduced their foreign funding.
In reality, the MNCs mostly col- During the period 1972–83, some of these companies did not obtain any foreign funds.
lect their capital from within the
country and repatriate a big Thus, in reality, the MNCs mostly collect their capital from within the country and repatriate
chunk of their profits to their a big chunk of their profits to their parent countries.
parent countries.
LIBERALIzATION AND MNCs

In India, liberalization measures The liberalization movement was started in 1973. The process was gradually carried forward
initiated in 1991 opened up the to the liberalization measures initiated in 1991 to attract massive foreign investments. This
entry of MNCs. opened up the entry of MNCs into India in a big way. In this context, it is relevant to examine
the position of MNCs in the Indian economy in a liberalized environment. The Industrial
Policy Resolution of 1991 provided clear-cut measures for encouraging foreign companies
and MNCs. Among the various measures, areas like foreign investments, technology transfer
and import of foreign technology, liberalization of MRTP and FERA restrictions, and so on,
are worth mentioning. Measures to minimize the bureaucratic control were also a part of the
1991 policy, which encouraged the MNCs that were operating in India.
Foreign investment from foreign corporate firms, individuals, and non-resident Indians
were provided considerable incentives in the 1991 policy. Up to 51 per cent of direct foreign
equity was allowed in high-priority areas that were requiring heavy investments and advanced
technology, whereas even 100 per cent foreign equity was permitted in high-priority indus-
tries, the tourism industry, hotels, shipping, and hospitals with repatriation benefits according
to the Government Notification of 28 October 1991. In the export-oriented industries and
the sick units’ revival project, 100 per cent equity was already permissible. These measures
provided adequate scope for MNCs to increase their investment opportunities.
MNCs are capable of introducing the most modern technology. The technology import
policy proposed in the Industrial Policy of 1991 was a blessing in disguise for MNCs. They
particularly appreciated the automatic approvals of technology-import agreements in the
high-priority areas. The amendment of pre-entry restrictions on the establishment of new In India, the provision restrict-
ing the acquisition or transfer of
undertakings and the expansion of the already existing ones announced in the Central shares of MRTP undertakings in
Government Ordinance of 27 September 1991, facilitated the entry of new MNCs, on the both MRTP Act and the Compa-
one hand and the expansion of the existing ones, on the other. While the provision restrict- nies Act was deleted.
ing the acquisition or transfer of shares of MRTP undertakings in both MRTP Act and the
Companies Act were deleted, new provisions as in Section 108-A to Section 108-1 were
included, facilitating the transfer of shares in MRTP companies and dominant undertakings.
This was a step towards encouraging MNCs to make greater investments in India. Relaxation
of provisions regarding mergers, amalgamations, and takeovers by MRTP companies proved
successful for the expansion of MNCs in India. MNCs are now permitted to invest even in
India’s small-scale sector.
In connection with the liberalization policy, a number of additional measures were India had taken different mea-
adopted by the Government of India, which facilitated the effective role of MNCs in the sures to encourage MNCs, i.e.,
removal of import restrictions,
Indian economy. The measures included relief to foreign investors, devaluation of the Indian LERMS, memorandum to IMF,
rupee, removal of import restrictions, Liberalized Exchange Rate Management Systems FERA and MRTP relaxation,
(LERMS), memorandum to IMF (International Monetary Fund), encouraging foreign tie- GATT agreements, etc.
ups, FERA and MRTP relaxation, privatization of public sector banking and financial sector
reforms, GATT agreements, and so on. All these measures provided additional incentives to
MNCs to operate in India in a big way.
In fact, foreign investment has been approved as an important component of investment
in India by all governments at the centre. The 1991 policy strongly stressed the need for
encouraging and facilitating the foreign investment, paving the way for a big push in MNC
activities. The process of liberalization is expected to go further, opening the doors for a
greater MNC participation in India in the forthcoming years.
A CRITIQUE OF MNCs
Despite their positive contribution, MNCs have been criticized on various grounds. Following
factors will prove this:
Transfer Pricing and Sourcing: MNCs allocate costs and prices for products and
services between various branches and subsidiaries of the same company operating in
different countries. ‘Sourcing’ is essentially the same concept as applied to materials rather
The problem generally faced than costs. ‘Sourcing’ is defined as the successive transfer of materials, components, finished
by the host countries due to products, or services from some points in the network where they can be most economically
MNCs are transfer pricing and produced to some points where they can be most profitably sold. Host countries consider
sourcing, foreign control over
key sectors of the economy,
this strategy applicable to transfer income from country to country. Some countries, with less
technological monopoly, com- controls and more opportunities for MNCs will gain and other countries, vice verson, would
petition and market leadership, lose in the process. This technique can be used by MNCs to evade tax and to subvert or con-
and repatriation of funds. trol a n ation’s export capability and competitiveness, besides being able to hold down wages,
control or dominate market, introduce and improve oligopoly, and influence BoP position.
MNCs are powerful by virtue Foreign Control over Key Sectors of the Economy: MNCs are powerful by virtue of
of their control over a substan- their control over a substantial amount of resources, latest technical know-how, major mar-
tial amount of resources, lat-
est technical know-how, major ket share, high corporate image, and the like. Obviously, they have the ownership of consid-
market share, high corporate erable economic and social resources, and a substantial control of the corporate sector. There
image, and the like. Obviously, is, therefore, concern among the national governments that MNCs would strongly influence
they have the ownership of con-
the economic and political policies of the host countries. Foreign investments are, there-
siderable economic and social
resources, and a substantial fore, entertained by host governments with caution. This is the reason why certain regulatory
control of the corporate sector. measures are usually adopted by the governments.
Technological Monopoly: MNCs import the latest technology, which may be conducive
to the latest development. However, they would have the monopoly over it; and resultantly,
By virtue of their technological
advancement, high resource- the products would remain as monopoly products, just like Coca-Cola. The MNCs do
fulness, and operational capa- not appreciate giving their technology to the host countries fearing a threat to their very
bilities, opportunities and open- monopolistic status. This would be detrimental to the technological development in the host
ings are available for them in countries, keeping them on the periphery of economic progress.
the realm of global business.
Competition and Market Leadership: A large number of MNCs are market leaders.
Moreover, due to their control over extensive resources, they are in a better position to pro-
vide a strong competition for the indigenous industry. They enjoy a comparative advantage
in a competitive situation.
Repatriation of Funds: MNCs and foreign companies repatriate funds from the host
countries to the countries of their headquarters or to other countries of their preference,
affecting the BoP position of the host countries. Hence, such financial flows are widely criti-
cised. A foreign company which makes an investment and takes risk should obviously be
allowed to repatriate some part of its earnings in the host countries, which is a normal aspect
of any foreign investment. Taking into account the contribution made by these companies,
such repatriation should not be grudged.
MNCs have also been criticized as being mere profit-oriented companies and least
MNCs have also been criticized interested in the developmental needs of the host countries. They tend to evade or under-
as being mere profit-oriented mine the economic autonomy of the host countries by virtue of their strong position, while
companies and least interes- they control the market either by attaining the position of ‘market leader’ or by maintaining
ted in the developmental needs
of the host countries.
a monopoly position. Despite all such criticisms, the positive contribution made by MNCs in
the host countries is widely recognized and appreciated.
MULTINATIONAL COMPANIES AND

PRODUCTION LINKAGES
The contribution of FDI to sustainable economic development of the host countries
depends to a large extend on the production linkage between foreign affiliates and domestic
firms. Such linkages can take the form of backward, forward, and Horizontal linkage. Back-
ward linkage exist when foreign affiliate acquire goods or services from domestic firms.
Forward linkage exist when foreign affiliate sell goods and services to domestic firms.
Horizontal linkage involves interactions with domestic firms engaged in competing activities.
In Indian context MNCs like Sony, Nokia, etc. are operating in forward linkage and
dumping their products which are manufactured in their home country or at their subsidiary
at third country. This is beneficial to them due to interfirm transfer and to exporting country,
but on the contrary it has an adverse effect on Indian economy making BOP more susceptible.
We should welcome MNC’s who are ready for backward linkage, as it has to purchase
from local suppliers which will increase productivity and market.
Opportunity cost of Tax subsidies/Tax Holidays: To attract MNCs, FDI or to stimulate
growth in selected industries government provid tax abatements, tax subsidies, tax holidays,
or tax reduction programmes. Governments usually create tax holidays as incentives for
business investment but at what cost? By doing so, we are losing a chunk of national wealth.
Externalities: MNCs use non renewable resources available with the domestic country
putting the environment and country in jeopardy.
MNCs DEAL A BLOW TO DOMESTIC

COMPANIES
While Indian firms have been striking bulge bracket deals overseas, MNCs are slowly but
surely picking some gems in the domestic market. Over the last few years, some of the
sectoral leaders have been snapped up by MNCs, who have taken a short cut to hit the bulls’
eye in one of the fastest growing emerging markets in the world. While Ranbaxy’s sell-off to
Japanese drug maker Daiichi Sankyo is the latest to join the list, the other companies in the
sectors like cement, electrical products, and apparel have also witnessed sell-offs.
The first big sale happened way back in 1993 when Ramesh Chauhan sold off a slew of
soft-drink brands to Coca-Cola India. This was followed by a series of small-time sell-offs
by Indian business groups to MNCs, who were looking to get a foothold in India after the
economy’s opening up (refer to Table 26.1). While there were numerous sell-offs thereafter,
the market leaders were not part of them in most cases, and MNCs continued to snap up the
Year Target Acquirer Indian promoter Realisation < Table 26.1

The Great Indian Sale
1993 Brands—Thums Up, Coca-Cola Ramesh Chauhan 400 Prominent Sell-offs by
Maaza & Limca. Indian Promoters
2000 Cement Business Lafarge Raymond 785
(Singhanias)
2005 DSP Merrill Lynch Merrill Lynch Hemendra Kothari 2,200
2005–07 ACC and Gujarat Holcim Sekhsarias/ 3,600
Ambuja** Neotias*
2006 Aircel Maxis C. Sivasankaran 3,600
2006 Matrix Lab Mylan N. Prasad* 570
2007 Anchor Matsushita Shah Family 2,000
2007 JM Morgan Stanley Morgan Stanley NImesh Kampahi 2,000
Sec
2007 Barista Lavassa C. Sivasankaran 560
Source: The Economic Times, Pune, June 12, 2008.

Notes: *-- minority stake; ** -- multiple transactions
top players in smaller niche areas. Over the last three years, a number of blue chips and other
category leaders have been bought over by MNCs or private equity (PE) funds.
For instance, Swiss cementmaker Holcim struck a double deal by acquiring the top two
cement makers in the country—ACC and Gujarat Ambuja. Holcim started by acquiring the
stake of founder Sekhsaria and Neotia families in Gujarat Ambuja and indirectly got a sig-
nificant minority stake in ACC. It later upped its stake through a public offer. The sell-off was
prompted by two basic issues: right valuation and issues related to family succession.
Today, Holcim controls India’s largest cement manufacturer ACC with close to a
43 per cent stake in the company, besides holding 46 per cent stake in Ambuja Cement (for-
merly Gujarat Ambuja). It is not just strategic acquirers who have managed to acquire the
sector leaders. In August 2007 PE fund Blackstone acquired the country’s largest apparel-
maker and exporter, Gokaldas Exports. The PE player bought the promoters’ 50.1 per cent
stake in Gokaldas for $165 mn and bought another 20 per cent through an open offer in what
was considered to be an overvalued transaction.
‘It was in the interest of the company to partner Blackstone, whose financial strength and
stakes in different companies across the world would help Gokaldas expand and also ensure
an assured large order flow to the company’, says Gokaldas Exports’ Managing Director
(MD) Rajendra Hinduja, whose family still holds 20 per cent in the company and manages
the company on a daily basis.
‘In textiles, the return on the capital employed and management effort undertaken by
the company is much less when compared to other industries. So it made sense for the pro-
moters to offload stake in Gokaldas and deploy the money in business where the returns are
much higher’, says an industry source, on why promoters, who had run the company for over
25 years, decided to decide the control to Blackstone.
In another buyout in the year
In another buyout in the year 2007–08, the Japanese firm Matsushita Electric Industrial
2007–08, the Japanese firm
Matsushita Electric Industrial bought about 80 per cent of the privately held electric equipment maker Anchor Electricals.
bought about 80 per cent of The Mumbai-based Shah family that the retains 20 per cent stake pocketed $480 mn for giv-
the privately held electric equip- ing up its majority stake in the firm, which was close to a one-third share in the domestic,
mentmaker Anchor Electricals.
electrical products market.
MNCs AND GLOBAL IMBALANCE

According to recent released analysis by McKinsey Global Institute, India hosts about 158
large global companies having a revenue of $ 1 billion or more, making the country the 11
most favoured destination for setting up of a multinational corporation headquarters with a
combined revenue of $ 898 billion. The United States topped the chart with 2,123 large firms
having their headquarters in the country with a combined revenue of $ 15,221 billion, fol-
lowed by Japan (1,028 firms, $ 7,347 billion), China (577, $ 5,449 billion), Germany (462,$
3,788 billion), and United Kingdom (358, $ 2,818 billion), constituting the top five.
The top 10 most favoured destinations for setting up an headquarters of a global MNC
include: France which hosts 236 firms’s headoffice, Australia hosting 203 firms, Canada host-
ing 194 firms, Italy hosting 179 firms, and Russia with 165 firms. India was ranked 11th
in the list followed by South Africa, Switzerland, Taiwan, and Brazil. Currently, the United
States, Canada, and Western Europe account for 11 per cent of the world’s population but are
home to over 50 per cent of large company headquarters. In comparison, South Asia is home
to 23 per cent of the world’s population but only 2 per cent of the world’s large companies’
headquarters. Companies from emerging regions are growing faster than their counterparts
from the developed world not only on their home turf but also in overseas markets.
ACQUISITION OF MNCs BY INDIANS

Indian economy is growing significantly over the years and the industry sector plays an
important role in this growth. Whether in the home country or in any host nation, Indian
companies are excelling with their own business and also by acquiring other companies.
Indian companies have acquired many significant companies across the globe and have
expanded their business successfully. Here are some acquisitions by Indian companies.
1. Tata Group Acquired Corus, October 2006
Deal size: $12.98 billion, Country: United Kingdom
Tata Steel is India’s second largest steel company with a capacity of producing 3.8
million tonnes of crude steel. It has most of its plant in Jamshedpur, Jharkhand. It is
considered as one of the best companies in producing steel.
In October 2006, Tata Steels acquired Corus with an outstanding price of $12.98 billion.
2. Bharti Airtel acquired Zain Africa, February 2010
Deal size: $10.7 billion, Country: Kenya
At present, Bharti Airtel is the largest mobile network in India. It is also expanding its
reaches throughout the globe.
In February 2010, Bharti Airtlel added 180 million new customers in its list by
acquiring an African Mobile Network provider called Zain Africa. This acquisition
took place against an amount of $10.7 billion.
3. Hindalco Industires acquired Novelis, February 2007
Deal size: $5.73 billion, Country: Canada
Hindalco Industries is one of the main branches of the Aditya Birla group. It is head-
quartered in Mumbai and is one of the largest producers of aluminium in the world.
On the other hand, Novelis is a Canadian company which has been the best in its kind
during 2007.
Few years back, Hindalco acquired Novelis with an outstanding amount of
$5.73 billion.
4. ONGC acquired Kashagan Oilfields, November 2012
Deal size: $5 billion, Country: Kazakhstan
This acquisition took place in November 2012. After this acquisition, India has
become one of the major energy providers among other oil producing nations. After
acquiring these oilfields, ONGC’s shares rose by 8 per cent in the stock market.
ONGC fulfills a major portion of India’s crude oil requirement. It also fulfills
48 per cent gas requirement of India.
5. ONGC acquired Imperial Energy, August 2008
Imperial Energy Corporation was founded in 2004. It has its headquarter in Leeds,
United Kingdom. It operates mainly from Siberia.
By August 2008, Imperial Energy was acquired by ONGC. The deal was finalized for
$2.62 billion.
The exploration rate of Imperial Energy is very high and this might have been the
reason, ONGC was highly interested in acquiring Imperial Energy.
6. Tata Motors acquired Jaguar Cars and Land Rover, March 2008
Tata Motors is one of the common names on the Indian roads. It is the eighth largest
car manufacturer in the world. In terms of manufacturing trucks and buses, it comes
in the fourth and second ranks, respectively.
By March 2008, Tata Motor offered a deal of $2.3 billion and acquired British brands,
Land Rover and Jaguar.
7. Tanti Group of Companies and Arcapita Bank BSCc acquired Honiton Energy,
April 2010
Deal size: $2 billion, Country: China
Arcapita Bank BSCc is headquartered in Bahrain. It is one of the leading investment
firms in the world. In April 2010, this investment firm went into partnership with
Tanti Group of Companies. This partnership was of $2 billion and the reason behind
this partnership was to develop windmills to produce 1,650 MW power in China.
Tanti Group is an Indian conglomerate company. The Chairman and Managing
Director of Suzlon Energy is the owner of this company.
8. Adani Enterprises acquired Port Terminals, May 2011
Deal size: $1.97 billion, Country: Australia
Adani group is an Indian conglomerate company founded in 1988 by Gautam Adani.
It has its headquarter in Ahmedabad. Adani Group has a tight grip on various fields.
Resources, logistics, energy, agribusiness, etc. are the main operational fields of this
group. During May 2011, this group announced a deal of $1.97 billion. This deal was
to acquire Port Terminal in Australia.
9. Essar Global acquired Algoma Steel, April 2007
Deal size: $1.79 billion, Country: Canada
Algoma Steel was founded by Francis Hector Clergue in 1901. It is one of the very few
steel companies that have seen World War I and II.
Essar Global acquired Algoma Steel in 2007. During that period, Essar Global had
48 per cent of Algoma’s shares. The final deal was set at $1.97 billion.
10. Reliance Industries acquires Oil and Gas Assets (Marcellus Shale), April 2007
Deal size: $1.7 billion, Country: United States
Mukesh Ambani is the richest man in India and hence his company is the richest
company in India. Reliance industries are expanding its business, not only in India
but also all over the world.
The Marcellus shale is located in the northern Appalachia, Pennsylvania. It is the major
source of gas producing rocks. The thickness of these rocks is more than 900 feet.
Reliance Industries acquired this gas source in April 2007, offering a deal of $1.7
billion.
11. Indian Hotels Co acquired Orient-Express Hotels, October 2012
Deal size: $1.67 billion, Country: Bermuda
Indian Hotels Company is the chain of luxury hotels, run by the Tata group. Most of
the hotels in this chain are run under the ‘Taj’ tag. This hotel chain has set a new stan-
dard for the hotel business. In terms of luxury and comfort, it is one of the prominent
names in India.
This time, Indian Hotels’ wish is to provide luxury and comfort in the British way.
They have already offers a deal of $1.67 billion to the Orient-Express Hotels.
However, the deal has not yet been closed.
12. Essar Global acquired Minnesota Steel, April 2007
Deal size: $1.65 billion, Country: United States
Essar Global invested $1.65 billion to acquire Minnesota Steel in April, 2007. Prior to
acquiring Minnesota Steel, Essar Group had acquired Algoma Steel.
Minnesota Steel has an estimated production capability of 1.4 billion tonnes. Dur-
ing the time of acquiring Minnesota Steel, Essar Global’s experts said that they are
expecting to produce 1.5 million tonnes of steel by the end of 2009.
Case 1
Ranbaxy Sellout
Ranbaxy, one of the success stories in India, started out as a distributor of medicine and
turned into an MNC by getting over 80 per cent of its business from outside the country. The
company Ranbaxy first came to become headlines when it launched the product ‘Calmpose’
in 1969 which was India’s answer to Roche’s ‘Valium.’ Thus, it started the journey as an Indian
pharmaceutical company into generic drugs. When the international market was headed by
biggies like Pfizer, Novartis, and GlaxoSmithKline, Ranbaxy’s entry into that arena led to
many buyers turning to less-expensive production houses in India.
Initially, Ranjit Singh and Gurbux Singh, who were distributors for A. Shionogi, a
Japanese pharmaceutical company manufacturing vitamins and anti-TB drugs, started this
company in the early 1960s. The name ‘Ranbaxy’ is a fusion of these original promoters.
Then, Bhai Mohan Singh took over Ranbaxy. He was the recipient of the Padma Vibhusan
Award in 2005. He passed away on 28 March 2006. Bhai Mohan Singh had collaborated with
the Italian pharma company Lapetit Spa (Milan) and subsequently, bought out its business.
Ranbaxy Laboratories Ltd went public in 1973 and the sleeping-pill Calmpose catapulted the
company into the big league.
Later, Parvinder Singh, the eldest son of Bhai Mohan Singh, became the MD in 1982. His
brothers Manjit Singh and Analjit Singh also joined in but later on moved out to other busi-
nesses. In 1989, Bhai Mohan Singh decided a three-way split of his assets. Parvinder Singh
was given control over Ranbaxy, Manjit Singh was made in charge of Montari Industries, and
Anajit Singh was handed over Max India. However, some differences arose between Bhai
and his sons. Bhai Mohan Singh and Parvinder had a row over expansion and strategy plan-
ning for Ranbaxy. This led to an ousting of Bhai Mohan Singh from the Company in 1999,
thus souring the relationship between the father and son. Parvinder Singh died of cancer on
3 July 1999. He was the recipient of the ‘Businessman of the year’ in 1998.
Both father and son had a sharp sense for sniffing out a business that had the poten-
tial to give their company another thrust, and they took full advantage of the opportunities
presented. Neither spared any eff orts to get the company where they wanted it, and used
well their political connections, whenever the need arose. In the beginning of the year 2006,
Malvinder Mohan Singh, son of Parvinder Singh, took control of the company by becom-
ing the MD and CEO, while his younger brother Shivinder Mohan Singh was inducted to
the company’s board. In an unexpected and stunning move, one of the country’s largest and
fast-growing pharmaceutical company, Ranbaxy has sold its majority stake of more than
50 per cent to the Japanese drug firm Daiichi Sankyo. On Tuesday 11 June 2006, Daiichi
Sankyo announced the acquisition of the stake for over ` 15,000 crore.
There has been speculations that after the acquisition of Ranbaxy, many other compa-
nies may follow suit. This deal makes Japanese firm Daiichi the 15th biggest drugmaker in
the world. Malvinder Singh will continue as CEO and MD and the company will retain its
name. The Singh family would net in about ` 10,000 crore by selling their stake. Malvinder
Singh would also assume the position of Chairman of the Board upon the deal’s closure that
is expected by March 2009. The Japanese firm would acquire the entire 34.82 per cent stake
from its current promoters Malvinder Singh and his family. Also, Daiichi would make an
open offer for an additional 20 per cent stake in Ranbaxy at a price of ` 737 per share, which
represents a premium of over 50 per cent on the average price over the last three months.
Besides the promoters’ 34.8 per cent stake, Daiichi would also get about 9 per cent
through issuing of preferential allotment of shares and some warrants, which could be later
converted into another 4.5 per cent holding. These, along with a minimum 8 per cent that the
new promoters wish to acquire through the open offer, would take Daiichi’s holding to above
50 per cent. Post acquisition, Ranbaxy would become a debt-free firm with a cash surplus
of around ` 2,800 crore (` 28 bn). The two firms said that they plan to keep Ranbaxy a listed
entity in India. To some industry observers, promoters of other Indian pharma companies
should take a cue from Ranbaxy’s move. Ranjit Kapadia, Head of Research (Pharma) and
Prabhudas Liladhar, said:
The valuation is about 20 times of Ranbaxy’s EBIDTA and about 4 times its total sales.
Its a great deal. Other Indian promoters should realise that at the right place and at
the right time, they should divest their stake instead of clinging on for emotional
attachment.
Even as Indian companies have been on an active acquisition mode globally, there had
also been off-and-on rumours of global companies planning to acquire Indian majors, such
as Cipla, Aurobindo, and Shasun Chemicals. Recently, the Burman family exited the pharma
business by selling its entire 65 per cent stake to the German company Fesenius Kabi. The
market was assuming that this deal will unlock the real value of Indian generic pharmaceuti-
cal companies and will trigger more such deals. The drugs worth more than $90 bn are going
off-patent in the near future. At the same time, many leading MNCs are yet to have a portfo-
lio of the generic drugs.
Indian drugmakers were prevented from bringing out generic versions of patented drugs
aft er the country introduced the product-patent regime in 2005. The drug-discovery process
involves an investment of billions of dollar and hence, it is impossible for most domestic
drugmakers to pursue the original drug-discovery process. Margins are thin in the global
generic business mainly due to intense competition. Aurobindo Pharma, Cipla, and Orchid
Chemicals and Pharmaceuticals usually, among others, figure on the list of companies that
are takeover targets for multinational pharmaceutical companies.
The predication was that the small players will be compelled to exit the business and
only those with a strong business model can remain in the generic business in future. The
Mylan–Matrix deal, Dabur’s acquisition earlier, and now the Ranbaxy deal showed that the
global pharmaceutical companies are looking at India in a big way, recognizing the country
as an important pharma destination. Whether those companies prefer to set up units from
scratch, through acquisitions or strategic alliances, will vary from one company to another.
Big pharma companies are shutting down facilities and moving manufacturing to countries
where the costs are low. Another reason for them to close down the manufacturing facilities
and move to low-cost countries are strict effluent-treatment norms.
If the promoters of India’s largest drug company felt it better to exit business after many
years of attempts to make it one of the largest in the world, then there must be serious issues
with India’s drug policy. Should the government and other authorities seriously think about
it? The pharmaceutical sector has always maintained that the pharma companies should be
allowed to invest their profits in R&D rather than squeezing them with more price controls
for more drugs.
India’s ability to manufacture drugs at almost one-eighth of global cost and availabil-
ity of quality-English-speaking scientific personnel with chemistry skills are some of the
important factors that attract big pharmaceutical companies to India. As against this, the
rising manufacturing costs and dwindling pipeline have forced global pharma companies to
off-shore manufacturing to locations such as India. It is unfortunate and shocking to believe
that Ranbaxy was going to become part of a Japanese pharmaceutical company. Its promoters
may have thought of exiting this business with the handsome premium they are getting, than
going through the rigours of complex, pharmaceutical manufacturing processes. ‘This deal
will, at least for sometime, end the euphoria on Indian pharma going global and conquering
the world’, said a leading industry expert.
Case Questions
1. Analyse the reasons behind the Ranbaxy sellout.
2. Suggest the changes in the Drug Policy of India.
3. Do you support the above deal of the Ranbaxy.
Case 2
The latest proposal of the Government of India in 2005 is to charge tax on foreign BPO
companies, which have their core work in India. But question here is, why tax only for who
are doing their core work here? The logic may be to slow down the growth of MNC in India.
But the government is missing the big picture, that is, the BPO services have tax holiday
till 2009. The tax holiday itself was a price paid by the Indian government to accelerate the
BPO sector in India; now this sector is doing business, which is almost of $3.6 bn in just
five years in India. The BPO industries may give long-term benefits to India. It is unjust to
change the rules in midway, as the government had decided to give tax holiday till 2009;
this tax holiday itself could have been an incentive for many MNCs to base their operations
in India.
In one stroke, a business decision involving millions of dollars is being made to look
stupid, because of this proposal. If, as an example, Intel is considered, having development
centres in India to which outsourcing is done by Intel US, Intel India is given a cost plus
remuneration of say, $25 per hour. The chip developed by India is sold by Intel US to its cus-
tomer abroad at a profit of $100. A revenue officer may attempt to tax a significant portion of
the $100, while computing in Indian’s rightful share of tax. The profit of $100 per chip comes
not from just a chip-design work in India, but also from a great manufacturing development
of the market, and consumer marketing, none of which is done in India. To isolate design as
the sole determinant of profit is to mistake a part for the whole. Its idea, whose time has not
come, foreign companies say that it cannot be taxed if its translations with BPO are at ‘arm’s
length and a question of ‘core’, and none of the core activities does not arise.
Case Questions
1. What is the logic of having government behind this?
2. Does the government stop the growth of BPOs and MNCs in India?
3. Do you support the above proposal? Explain.
SUMMARY
MNCs are major, powerful industrial undertakings, which Frequent political changes in the host countries influence
control huge resources not only in their parent countries but the investment decisions of foreign companies. The policies
also in the host countries. They have emerged as success- followed by one political party in power may be substantially
ful business giants with their total foreign sales exceeding altered when another political party comes to power. This
the GNP of many countries around the globe except that of is the reason why foreign investors seem tremendously
the United States and former USSR. Roughly speaking, two- concerned about the political stability in the host countries.
thirds of the total FDI is concentrated in the developed mar- After the introduction of the liberalization policy of 1991,
ket economies, while the remaining one-third in the LDCs. foreign companies are free to operate in India without any
The host government’s policies and approaches to foreign fear. Even 100 per cent equity companies were encouraged
investment’s monetary and fiscal policies, manpower avail- for business in various areas. In a globalized market, these
ability in economic terms, employment stability, industrial MNCs play a vital role, and they are almost as free as Indian
climate, BoP position, scope for adequate profit margin, companies to effectively operate in the Indian business
repatriation rules, and so on, are vital issues which parent canvas.
companies consider before taking investment decisions.
KEY WORDS
● Multinational Corporations (MNCs) ● Monopoly ● Offshoring
● Liberalization ● LCD ● Non-renewable Natural Resources
● LERMS ● Technology Transfer ● Transfer Pricing
● GNP ● Nation Exchequer ● Tax Evasion
● Technological Monopoly ● Transnational Corporations (TNCs) ● Sourcing
● Repatriation of Funds ● Host Countries ● Balance of Payment (BoP)
● Parent Corporations ● Outsourcing ● Externalities
QUESTIONS
1. Explain the impact of foreign aid on the economic 5. How outsourcing and contract manufacturing helps
development in India. Analyse the problems of MNCs to reduce cost?
foreign aid in India in this connection. 6. What measures can be taken to restrict dumping by
2. Explain the origin, growth, and domination of MNCs in MNCs?
India. 7. What are the motives of MNCs behind entering into
3. Explain the participation of MNCs through foreign another country?
collaboration in India. Explain its favourable and 8. Explain outsourcing and types of outsourcing.
harmful effects.
4. Explain the system of control introduced in India over
MNCs and FERA.
REFERENCES
n Adhikari, M. (2001). Global Business Management: In n Francis Chirunilam 4th Edition: International Business
an International Economic Environment. New Delhi: Environment: Himalaya Publication.
Macmillan. n Rao, P. S. (2002). International Business: Text and
n Bhalla, V. R. and R. Shiva (2004). International Busi- Cases. Mumbai: Himalaya Publishing House.
ness: Environment and Management. Delhi: Amol Pub. n Sinha, J. B. P. (2004). Multinationals in India: Managing
n Bhandari, B. (2005). The Ranbaxy Story: The Rise of an the Interface of Cultures. New Delhi: Sage.
Indian Multinational. New Delhi: Penguin. n Vadhani, V. A. (2004). Global Business. Mumbai:
n Cherunilam, F. (2005). International Trade and Export Himalaya Publishing House.
Management. Mumbai: Himalaya Publishing House. n ‘Ranbaxy Sell Off: Other Farma Firms May Follow Suit,’
n Jaykumar, B. ‘Ranbaxy Deal May Spur Hostile Bits in The Economic Times, January 12, 2008.
India’, June 12, 2008, www.rediff.com/money/2008. n Economic and Social Council
n Misra, S. K. and V. K. Puri (2000). Indian Economy. n RBI Hand Book on Indian Statistics 2012–13.
27
C hapter
India’s Import–Export
Policies
>>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>>
• Historical Perspective 736 • Export Promotion Measures 760
• Governing Authority 737 • Special Economic Zones 761
• India: Pre- and Post-liberalization 740 • Agri-export Zones 763
• Liberalization Policy of Exim 742 • Highlights of Foreign Trade Policy,
• Annexure I 746 2009–2014 764
• Annexure II 747 • Case 769
• Annexure III 747 • Summary 770
• Exim Performance 748 • Key Words 771
• Exim Policies 750 • Questions 771
• India’s Exim Performance 757 • References 771
• Regional Trade Agreements 760
Historical Perspective
Historically, export and import Historically, export and import (exim) controls were first introduced in India in 1939 as a
(exim) controls were first wartime measure under the Defence of India Act and Rules, 1939. This was primarily with
introduced in India in 1939 as
a wartime measure under the
a view to regulate the available foreign exchange and limited shipping facilities for the war
Defence of India Act and Rules, and for limited civil purposes. After the war the control was continued by an ordinance, and
1939. thereafter by the Imports and Exports (Control) Act, 1947. This Act was initially meant to be
in force for only three years, but has been extended ever since.
After independence the import control did not undergo any structural change, but its
objective became quite different. The changed objectives were no longer the regulations of
wartime or post-war economy, but to help and guide a planned economic development.
Apart from this general legislation, there are some special legislations having a bearing on
various aspects of the import or the export of specific commodities, for example, the Foreign
Exchange Regulation Act (FERA), 1947; Custom Act, 1962; Coffee Act, 1942; Tea Act, 1953;
and Coir Industries Act, 1953.
The Import and Export (Control) Act is a short enactment consisting of eight sections.
The key section is Section 3. This section of the Act empowers the central government to
make provisions by an order that was published in the Government Gazette ‘for prohibiting,
restricting or otherwise controlling the import into, and export of goods out of India.’ This
gives the government the absolute power not only over the export and import of any com-
modity but also over the ordinary trade in any imported commodity. Again, under Section 3,
the central government has promulgated the Import (Control) Order, 1955 and the Export
(Control) Order, 1962.
India’s Import–Export Policies | 737
The Import Control Order has given rise to the system of import licensing. The goods
indicated in this order cannot be imported without a licence from the appropriate licensing
authority unless the government has granted an exemption to any commodity from licens-
ing. Until recently, the list of goods mentioned in the order was very long and nothing worth-
while was left out of it.
The Import Control Order prescribed some general factors for guiding the issue of
licence, for example, the nonavailability of foreign exchange, the interest of the state, and
so on. Detailed guidelines were, however, given through annual announcements made by
the central government (Ministry of Commerce) in the Import Trade Control Policy Book,
popularly known until recently as the ‘Red Book’, which was published on or shortly after
1 April every year. Currently, it is in force for a longer period. There was another accompany-
ing publication titled Import Trade Control Handbook of Rules and Procedures. In the wake
In the wake of sea changes in
of sea changes in the trade policy in the recent years, there was then a much smaller Export the trade policy in the recent
and Import (Exim) Policy, 2002–07, which sought to usher in an environment that was free years, there was then a much
of restrictions and controls. smaller Export and Import
The legal frame of export control, as in the case of import control, is provided by the (Exim) Policy, 2002–07, which
sought to usher in an environ-
Import and Export (Control) Act, 1947. Under Section 3 of this Act, the central government ment that was free of restric-
promulgated the Exports (Control) Order, 1962. The executive authority in respect of export tions and controls.
control is vested in the Chief Controller of Imports and Exports. He is also charged with
the responsibility of taking all follow-up actions in respect of all categories of export obliga-
tion cases, that is, cases where industrial licence, capital goods, imports licence, and foreign
investment collaborations have been allowed, subject to an obligation to export a specified
percentage of the products.
The export obligation is enforced through a legal agreement between the Chief Control-
ler and the undertaking supported either by bank guarantees for an amount equivalent in
value to the value of the goods to be exported, or in lieu of a bank guarantee with an alterna-
tive penalty and charges. The Chief Controller of Imports and Exports also initiates action in
case of violation of the terms of the agreements.
Governing Authority
The Department of Commerce is the competent authority for regulating, development, and
promotion of India’s international trade and commerce through formulation of appropri-
ate international trade and commercial policy and implementation of the various provisions
thereof. The basic role of the department is to facilitate the creation of an enabling environ-
ment and infrastructure for accelerated growth of international trade. The department for-
mulates, implements, and monitors the foreign trade policy (FTP) which provides the basic
framework of policy and strategy to be followed for promoting exports and trade. The trade
policy is periodically reviewed to incorporate changes necessary to take care of emerging
economic scenarios both in the domestic and international economy. Besides, the depart-
ment is also entrusted with responsibilities relating to multilateral and bilateral commercial
relations, special economic zones, state trading, export promotion and trade facilitation, and
development and regulation of certain export oriented industries and commodities.
The department is headed by a Secretary who is assisted by an Additional Secretary and
Financial Advisor, three Additional Secretaries, 13 Joint Secretaries and Joint Secretary level
officers and a number of other senior officers. Keeping in view the large increase in work-
load in matters related to the World Trade Organization (WTO), Regional Trade Agreements
(RTAs), Free Trade Agreements (FTAs), Special Economic Zones (SEZs), Joint Study Groups
(JSGs), etc. two posts each of Joint Secretaries and Directors were created in the department
during 2008–09.
Subjects under Administrative Control

I. International Trade
• International trade and commercial policy including tariff and non-tariff barriers.
• I nternational agencies connected with trade policy (e.g., UNCTAD, ESCAP, ECA,
ECLA, EEC, EFTA, GATT/WTO, ITC and CFC).
• I nternational commodity agreements other than agreements relating to wheat,
sugar, jute, and cotton.
• I nternational Customs Tariff Bureau including residuary work relating to the Tariff
Commission.
II. Foreign Trade (goods and services)
• All matters relating to foreign trade.
• Import and Export Trade Policy and Control excluding matters relating to
 Import of feature films;
 Export of Indian films – both feature length and shorts; and
 Import and distribution of cine-film (unexposed) and other goods required by
the film industry.
III. State Trading
• P
olicies of state trading and performance of organisations established for the pur-
pose and including
• Th
e State Trading Corporation of India Limited and its subsidiary, STCL Ltd.
(formerly, Spices Trading Corporation Ltd.) [excluding Handicrafts and Hand-
looms Export Corporation and Central Cottage Industries Corporation; the Tea
Trading Corporation of India Limited, which are no longer subsidiaries of STC];
 Projects & Equipment Corporation of India Limited (PEC);
 India Trade Promotion Organization and its subsidiaries; and
 Minerals and Metals Trading Corporation and its subsidiaries.
 Production, distribution (for domestic consumption and exports) and devel-
opment of plantation crops, tea, coffee, rubber, spices, tobacco and cashew.
 Processing and distribution for domestic consumption and exports of instant
tea and instant coffee:
(a) Tea Board
(b) Coffee Board
(c) Rubber Board
(d) Spices Board
(e) Tobacco Board
IV. Management of Certain Services

• C
adre management of Indian Trade Service and all matters pertaining to training,
career planning and manpower planning for the service.
• C
adre management of Indian Supply Service and all matters pertaining to training,
career planning, and manpower planning for the service.
• C
adre management of Indian Inspection Service and all matters pertaining to
training, career planning, and manpower planning for the service.
V. Special Economic Zones
• A
ll matters relating to development, operation and maintenance of special economic
zones and units in special economic zones, including export and import policy, fis-
cal regime, investment policy, other economic policy, and regulatory framework.
Note: All fiscal concessions and policy issues having financial implications are
decided with the concurrence of the Ministry of Finance or failing such concur-
rence with the approval of the Cabinet.
VI. Export Products and Industries and Trade Facilitation
• Gems and jewellery.
• M
atters relating to Export Promotion Board, Board of Trade and International
Trade Advisory Committee.
• M
atters relating to concerned Export Promotion Councils/Export Promotion
Organisations.
• Indian Institute of Foreign Trade and Indian Institute of Packaging.
• Indian Diamond Institute and Footwear Design and Development Institute.
• Coordination for export infrastructure.
• D
evelopment and expansion of export production in relation to all commodities,
products, manufacturers and semi-manufacturers including
 Agricultural produce within the meaning of the Agricultural Produce (Grading
and Marking) Act, 1937 (1 of 1937);
 Marine products;
 Industrial products (engineering goods, chemicals, plastics, leather
products, etc.);
 Fuels, minerals and mineral products; and specific export oriented products
including plantation crops, etc. but excluding jute products and handicrafts.
• A
ll organisations and institutions connected with the provision of services relating
to the export effort including
 Export Credit and Export Insurance including Export Credit Guarantee
Corporation Limited;
 Export Inspection Council Standards including quality control;
 Directorate General of Commercial Intelligence and Statistics; and
 Free Trade Zones.
• Projects and programmes for stimulating and assisting the export efforts.
VII. Attached and Subordinate Offices

• Directorate General of Foreign Trade.
• Directorate General of Supplies and Disposals.
• Directorate General of Anti-Dumping and Allied Duties and related matters.
• Directorate General of Commercial Intelligence and Statistics.
India: Pre- and Post-liberaliZation

Pre-liberalization: Indian economic policy after independence was influenced by the colo-
nial experience (which was seen by Indian leaders as exploitative in nature) and by those
leaders’ exposure to Fabian socialism. Policy tended towards protectionism, with a strong
emphasis on import substitution, industrialisation under state monitoring, state interven-
tion at the microlevel in all businesses especially in labour and financial markets, a large
public sector, business regulation, and central planning. Five-Year Plans of India resembled
central planning in the Soviet Union. Steel, mining, machine tools, water, telecommunica-
tions, insurance and electrical plants, among other industries, were effectively nationalised
in the mid-1950s. Elaborate licences, regulations and the accompanying red tape, commonly
referred to as Licence Raj, were required to set up business in India between 1947 and 1990.
The Indian currency, the rupee, was inconvertible and high tariffs and import licenc-
ing prevented foreign goods reaching the market. India also operated a system of central
planning for the economy, in which firms required licences to invest and develop. The laby-
rinthine bureaucracy often led to absurd restrictions—up to 80 agencies had to be satisfied
before a firm could be granted a licence to produce and the state would decide what was
produced, how much, at what price and what sources of capital were used. The government
also prevented firms from laying off workers or closing factories. The central pillar of the
policy was import substitution, the belief that India needed to rely on internal markets for
development, not international trade—a belief generated by a mixture of socialism and the
experience of colonial exploitation.
Trade Scenario
• The low annual growth rate of the economy of India before 1980, which stag-
nated around 3.5 per cent from 1950s to 1980s, while per capita income averaged
1.3 per cent. At the same time, Pakistan grew by 5 per cent, Indonesia by 9 per cent,
Thailand by 9 per cent, South Korea by 10 per cent, and Taiwan by 12 per cent.
• Only four or five licences would be given for steel, electrical power, and communica-
tions. Licence owners built up huge powerful empires.
• State-owned enterprises made large losses.
• Infrastructure investment was poor because of the public sector monopoly.
• Licence Raj established the ‘irresponsible, self-perpetuating bureaucracy that still
exists throughout much of the country’ and corruption flourished under this system.
Need of Liberalization: A Balance of Payments crisis in 1991 pushed the country to near
bankruptcy. In return for an IMF bailout, gold was transferred to London as collateral, the
rupee devalued and economic reforms were forced upon India. That low point was the cat-
alyst required to transform the economy through badly needed reforms to unshackle the
economy. Controls started to be dismantled, tariffs, duties, and taxes progressively lowered,
state monopolies broken, the economy was opened to trade and investment, private sector
enterprise and competition were encouraged and globalization was slowly embraced.
Post-liberalization: The Indian economy was liberalised in 1991. This opened the gates for
foreign investment into Indian industries and portfolio investments into Indian stock mar-
kets. The major effect of liberalization is in the opening of the economy, making it more
competitive, getting the government out of the huge morass of regulation, empowering the
states to take more responsibility for economic management and thereby creating a kind of
competition among the states for foreign investors. The GDP growth rate, which had col-
lapsed to 0.8 per cent in 1991–92 rebounded to a near normal 5.3 per cent in 1992–93 and
then accelerated to 6.2 per cent in 1993–94. Subsequently, the GDP grew at an average rate of
7.5 per cent in the 3 years, i.e., 1994–95 to 1996–97.
The fruits of liberalization reached their peak in 2007, when India recorded its highest
GDP growth rate of 9 per cent. With this, India became the second fastest growing major
economy in the world, next only to China. The growth rate has slowed significantly in the
first half of 2012. An organisation for Economic Co-operation and Development (OECD)
report states that the average growth rate 7.5 per cent will double the average income in a
decade, and more reforms would speed up the pace.
The policy now allows 100 per cent foreign ownership in cellular services, single brand
retail, courier services and asset reconstruction. Further, the policy also allows 49 per cent
ownership in petrol and natural gas, insurance, power exchanges, civil aviation, stock
exchanges, depository and tea plantation.
Procedures for obtaining permissions were greatly simplified by listing industries that
are eligible for automatic approval up to specified levels of foreign equity.
Impact of Liberalization on Indian Economy

• Increase in Employment.
• Arrival of New Technology or Development of Technology.
• Development of Infrastructure.
• Identity at World Level.
• Increase Our Currency Value (INR).
• GDP Growth.
• Increase Consumption and Adaptation of New Lifestyle.
• Increment of Competition.
• Increment in Foreign Investor.
Advantages of Liberalization
• Development of economy without capital investment.
• Increase the foreign investment.
• Increase the foreign exchange reserve.
• Increase in consumption and control over price.
• Reduction in dependence on external commercial borrowings.
Challenges for Further Reforms

• Slow growth of the agricultural sector, where half of the Indians earn most of their
income
• Highly restrictive and complex labour laws
• High inflation
• High poverty
• Corruption and graft
• Lack of political consensus and will
Liberalization Policy of Exim

The new government took office at a time when the balance of payment (BoP) position fac-
ing the country had become critical and foreign exchange reserves (FER) had depleted to
dangerously low levels. The export momentum built up during the period from 1986–87 to
1989–90, when India’s exports grew at an average annual rate of 17 per cent in terms of US
dollars, was lost in 1990–91 when the export growth decelerated to only 9 per cent in terms
of US dollars. The exports in April–May 1991 actually showed a decline of 5.8 per cent in
terms of US dollars when compared with April–May 1990. The imports had to be severely
contained in the course of 1990–91 because of the shortage of foreign exchange. This affected
the availability of many essential items and also led to a distinct slowdown in the industrial
growth.
Restoration of viability in our external payments situation was an urgent task requiring
action on several fronts, including macro-economic stabilisation and reforming of trade pol-
icy. The trade policy reform has to aim for a quick revival of the momentum of exports. It is
only through the growth of exports that we can expect to overcome persistent BoP problems,
restore international confidence, and achieve true self-reliance with an expanding economy.
The government announced an To this end, the government announced an initial package of trade policy reforms on
initial package of trade policy 4 July, 1991. Several changes were introduced in trade policy that aimed at strengthening
reforms on 4 July, 1991. Sev-
eral changes were introduced the export incentives, eliminating a substantial volume of import licensing, and applying an
in trade policy that aimed at optimal import compression in view of the BoP situation.
strengthening the export incen-
tives, eliminating a substantial Export Processing Zones (EPZs) and 100 Per cent Export-oriented Units (EOUs): EPZ
volume of import licensing, Scheme and 100 per cent EOU Scheme were introduced to provide duty-free enclaves, which
and applying an optimal import would enable entrepreneurs to concentrate on production exclusively for exports. How-
compression in view of the BoP
situation.
ever, with increasing liberalization in the Domestic Tariff Area (DTA), the duty advantages
enjoyed by EPZs/EOUs have become less important, while the procedures of customs bond-
ing are very onerous. The schemes have not, therefore, taken off as expected and they have
Under the NIP the working
of these schemes has been also not attracted any foreign investment that was aimed at tapping export markets to the
reviewed and some changes extent that was expected. The working of these schemes has been reviewed and the following
have been made. changes have been made:
i. All EOUs/EPZ units will be eligible for exim scrips at the basic rate of 30 per cent
applied to net foreign exchange earning.
ii. The duty applicable on DTA sales from EOUs/EPZ units is being reduced to 50 per
cent of the normal customs duty, subject to the duty payable not being less than the
excise duty on the same product. The extent of DTA sales will be in accordance with
their entitlement. The DTA sales will be permitted in the ratio of 25:75 in relation to
export sales in case of units whose use of indigenous raw material is more than 30 per
cent of production. In all other cases the ratio of permissible DTA sales to export sales
will be 15:85. The procedures for clearing goods from the EOUs/EPZ units for DTA
sales are also being streamlined.
iii. In order to encourage exporters to set up EOUs or EPZ units, the net foreign exchange
earned by EOUs or EPZ units can be clubbed with the earnings of their parent/associ-
ated companies in the DTA for the purpose of according export house, trading house,
or star trading house status for the latter.
iv. The International Price Reimbursement Scheme (IPRS) for supply of steel to export-
ers will also be extended to EOUs and EPZ units. The Development Commissioners
(DCs) are being empowered to issue payment authorities in lieu of Joint Chamber of
Commerce and Industry (JCCI) and Export Subsidy (ES).
Automatic Approval Scheme: Under the New Industrial Policy (NIP), most industries do
not require an industrial licence except for a defined list. The clearances for imports of capital
goods have also been made automatic where capital goods imports are covered by foreign
equity or where they are 25 per cent of the value of plant and investment, subject to a limit
of ` 2 crore. With a view in bringing about a comparable streamlining in the procedure for
EOU/EPZ approvals, a system of automatic approvals is being established for all proposals
which fall within certain parameters. Capital goods imports will be allowed under the auto- Under Automatic Approval
matic approval procedure if they are fully covered by a foreign equity or if they do not exceed Scheme, capital goods imports
50 per cent of the value of plant and equipment, subject to a ceiling of ` 3 crore. All proposals will be allowed if they are fully
covered by a foreign equity.
within the automatic approval parameters will be cleared within two weeks. All other pro-
posals will be submitted to the Board of Approvals (BoA) for consideration and decisions,
including issue of licences, and will be taken within 45 days.
Centralised Clearance: A large number of issues relating to the operation of EOUs/EPZ
units, require a centralised clearance in the Ministries of Commerce and Industry. Powers are
being delegated to the DCs so that these approvals can be given on a decentralised basis. The
specific approval of the DC would not be required in cases of broad banding by EPZ units,
where value addition is being maintained. The unit concerned would need only to provide a
relevant information to the DC.
Concessions to EOUs/EPZs: The following specific concessions to EOUs/EPZ units have
also been extended:
i. Allowing entry of imported raw material on ‘provisional assessment’ basis to expedite
customs clearance,
ii. Permitting units under the EPZ and EOU Schemes to supply/transfer finished goods
among themselves,
iii. Replacement of multiple bonds by a single bond for obtaining an import clearance,
iv. Increasing the list of items under the ‘Special Imprest Licence Scheme’ on a selective
basis,
v. Expediting supplies from the DTA without any payment of excise duty by issuing
pre-authenticated CT-3 form booklets to EOUs, which would obviate the necessity of
approaching the Central Excise offices each time when such exemption is sought, and
vi. Clarifying that containers that are stuffed in EPZs and EOUs are not to be re-inspected
at other points as long as seals are intact.
Private Participation in Warehouses: The government has also decided to allow private
parties to establish bonded warehouses within EPZ for stocking and sale of duty-free raw
materials, components, consumables, and spares to EPZ units and EOUs. This will cut down
the delay in obtaining supplies of duty-free materials, which are in constant and regular
demand by exporters.
The procedure for import of Simplified Procedure for Import of Capital Goods: The procedure for import of capital
capital goods has been simpli- goods has been simplified following the statement on industrial policy. New units and units
fied following the statement on
industrial policy.
that are undergoing a substantial expansion will automatically be granted licences for import
of capital goods other than those in Appendix 1 Part A (Restricted List) of the Exim Policy,
without any clearance from the indigenous availability angle, provided the import of capital
goods is fully covered by a foreign equity or the import requirement is up to 25 per cent of
the value of plant and machinery, subject to a maximum of ` 2 crore.
Access to Non-OGL (Open General Licence) Capital Goods: Access to non-OGL capital
goods other than those in Appendix 1 Part A has also been expanded for all exporters and
export houses by the fact that the exim scrips entitlement has been increased and exporters are
allowed to use exim scrips that are earned on their own exports for import of such capital goods.
Harmonising Trade and Customs Classification: The classification system used in the Exim
Policy and the system that is used by the customs, are not identical, and this has often created
difficulties in determining the tariffs that are applicable to different items. The two codes are
being harmonised. This will reduce the scope for a discretionary decision making at lower
levels and introduce a greater transparency in the import policy including the tariff structure.
Over the years, a number of Canalisation of Exports and Imports: Over the years, a number of items of exports and
items have been canalised for imports have been canalised for export or import through specified public sector agencies.
export or import through speci-
The government has reviewed the list of items thus canalised and has decided that a number
fied public agencies.
of items may be decanalised. In the case of exports, 16 items are being decanalised immedi-
ately. In the case of imports 6 items are being decanalised and placed on OGL while 14 items
are being decanalised and listed in Appendix 3 where they will be available for import against
exim scrips. The list of items is given in Annexure II. There is a strong case for decanalising
the imports of more items of raw materials and placing them on the OGL. However, in view
of the present BoP position, a decision on these items is being deferred. The government’s
policy is to progressively reduce the extent of canalisation.
Objectives of Public Sector Trading Organisations: The public sector trading organisations
like the STC (State Trading Corporation) and MMTC (Minerals and Metals Trading Corpo-
ration) have traditionally depended heavily on the canalised trade. They will be now reori-
ented to achieve the objectives of emerging as international trading houses that are capable
of operating in a competitive global environment of serving as effective instruments of public
policy and of providing adequate support services to the small-scale/cottage sectors.
Export Houses and Trading Houses: The government will continue to support the develop-
ment of export houses and trading houses as instruments for promoting exports. To this end,
the following initiatives are being taken:
i. Export houses, trading houses, and star trading houses received additional licences at
varying rates based on their net foreign exchange earning in the previous year. For the
year 1991–92, it was decided to widen the range of items that can be imported against
additional licences. The range will now be the same as that of the exim scrips.
ii. With effect from April 1, 1992, additional licences will stand abolished and export
houses, trading houses, and star trading houses will receive additional exim scrips at
the rate of 5 per cent of the FOB (free on board) value of exports.
iii. The government has announced that permission will be given for setting up of trad-
ing houses with 51 per cent foreign equity for the purpose of promoting exports. Such
trading houses would be eligible for all benefits that are available to domestic export
and trading houses, in accordance with the Exim Policy.
Foreign Currency Accounts for Exporters: The government has decided to allow the estab-
The government has decided to
lished exporters to open foreign currency accounts in approved banks and allow exporters allow the established exporters
to raise external credits, pay for export-related imports from such accounts, and to move to open foreign currency ac-
credit export proceeds to such accounts. This will facilitate the payments by exporters for their counts in approved banks and
essential imports. The Reserve Bank of India (RBI) will notify details of this scheme separately. allow exporters to raise external
credits, pay for export-related
Board of Trade (BoT): The Board of Trade (BoT) has been reconstituted and will be acti- imports from such accounts,
vated once again. The board will be an apex forum to facilitate a close and frequent inter- and to move credit export pro-
ceeds to such accounts.
action between industries and trade, on the one hand, and government, on the other. The
government will attach a great importance to the advice and recommendations of the BoT.
Re-orientation of the Office of CCI&E: The Office of the Chief Controller of Imports and
Exports (CCI&E) is being redesignated as the Directorate General of International Trade.
The principal function of the directorate will, henceforth, be promotion of exports and facili-
tation of imports to promote export trade. The government is of the view that the Imports
The government is of the view
and Exports (Control) Act, 1947 and the orders thereunder would require a review. Such a that the Imports and Exports
review will be made as soon as possible. Besides, the Manual of Office Procedure and the func- (Control) Act, 1947 and the orders
tions performed by various port offices will be comprehensively reviewed and a new charter thereunder would require a
review. Such a review will be
of duties and functions will be drawn up to reflect the new role of the Directorate.
made as soon as possible.
State’s Role in Exports Promotion: Exports can only take place if we generate adequate
volumes of surpluses in exportable commodities. The government recognises that State gov-
ernments have a major role to play in achieving this objective. The State governments have
been requested to exempt exports from all fiscal levies in order to ensure that our export-
ers are able to compete effectively in the world markets. The government has taken steps to
strengthen the States’ Cell in the Ministry of Commerce so that an interface with the State
governments becomes more effective. At the same time, the government has requested, and
will continue to persuade, the State governments to set up a separate Export Promotion Cell
or a Directorate of Export Promotion in each State Secretariat.
Reduction in Import Licensing: The recently implemented policy changes imply a substantial The implemented policy chang-
es imply a substantial reduc-
reduction in the extent of licensing and in the number and types of licences. Supplementary tion in the extent of licensing
licences for the import of items in Appendices 3 (except for SSI [small-scale industries] and and in the number and types of
manufacturers of life-saving drugs and equipment), 4, and 9 of the Exim Policy, 1990–93, have licences.
been abolished. The additional licences which were issued as an incentive to export houses
and trading houses stand abolished with effect from 1 April, 1992, and the incentive will take
the form of an additional exim scrips entitlement. To achieve an optimal import containment
in the context of the present BoP situation, several steps have been taken. One of these is the
shift of many items which are now on OGL to the limited permissible list.
With these changes, the policy for import of raw materials, components, and other inputs
that are needed for production has been simplified. Most raw materials and other inputs
(except for those on the Restricted List) can be freely imported either against exim scrips or
on OGL. Some raw materials continue to be canalised, but in most of these cases the require-
ments beyond those provided by the canalising agencies can be met through exim scrips. It is
the policy of the government to move to a situation where imports of essential raw materials
and components that are needed for industrial production are regulated through appropriate
tariffs. However, in view of the BoP position which necessitates a continued import contain-
ment, this cannot be done immediately. Many items must, therefore, remain on the limited
permissible list, with imports permitted only against the exim scrips.
Elimination of Licensing and QRs: The medium-term objective of the government is to

progressively eliminate licensing and quantitative restrictions (QRs) on the capital goods and
raw materials/components so that all these items can be placed on OGL, save for a small,
carefully defined negative list. This shift is proposed to be achieved over a period of three to
The government is trying hard
five years. The government will appoint a high-level committee to work out the modalities of
to work out the modalities of achieving this transition, keeping in mind the BoP position and the need to rationalise and
achieving this transition. reduce tariffs progressively to provide the Indian industry with an appropriate environment
to develop international competitiveness.
Annexure I
Products Eligible for Additional Exim Scrips
Entitled to 10 Percentage Points
I. Fish and fish products:
Individually quick frozen fish (excluding frog legs) and canned marine products
Box 27.1 Duty Entitlement Passbook Scheme (DEPB)
II. Agricultural items:
• Cashew kernels roasted/salted in consumer packs of 1 kg or less
• F
resh fruits, vegetables, cut flowers, plants and plant materials, and spices going
by air
• A
ll types of canned bottle and aseptically packed fruits, vegetable products, and
spices
• Pulverised/treated guar gum
• I nstant tea, quick brewing black tea, tea bags, packed tea, tea caddies, and tea
chestlets
• Instant coffee in all forms
III. Drugs and drug intermediaries (as appearing at S. No. B. II[1] of Appendix 17 of
IMPEX Policy)
IV. All electronic products
V. High-technology engineering products (to be notified separately)
Box 27.1 Duty Entitlement Passbook Scheme (DEPB)

In order to increase the export–GDP (gross domestic of value limits on a large number of export products
product) ratio, a number of initiatives have been taken in covered under the Duty Entitlement Passbook Scheme
the recent years. These include a reduction in exploring (DEPB), and special financial assistance packages for
credit rates, both pre- and postshipment, higher-duty selected export products having high-value addition and
drawback rates on a range of export items, abolition high-level of international competitiveness.
Annexure II
List of Import Items to be Decanalised
I. List of items to be decanalised and put under OGL
i. Silk worm
ii. Sodium borate
iii. Old ships
iv. Fluorspar
v. Platinum
vi. Palladium
II. List of import items to be decanalised and put under REP
i. Jute pulp
ii. Manila hemp
iii. Raw sisal fibre
iv. Raw jute
v. Alkyl benzene
vi. Floppy diskettes
vii. Lauric acid
viii. Oleic acid
ix. Stearic acid
x. Palmitic acid
xi. Palm fatty acid
xii. Palm acid oil
xiii. Other fatty acids, pure or mixed, including acid oils
xiv. Soap stocks
Annexure III
List of Export Items to be Decanalised
i. Castor oil
ii. Polyethylene (LD)
iii. Coal and coke
iv. Colour picture tubes and sub-assemblies of colour TVs containing colour TV picture
tubes
v. Ethyl alcohol or rectified spirit of any proof degree whether denatured or not
vi. Exposed cinematographic films and videotape cinema films
vii. Khandsari molasses
viii. Molasses
ix. Mill scale scrap
x. Bimetal ore (black iron ore) with manganese content from 3 per cent up to10 per cent
of Goa origin
xi. Railway passenger coaches and locomotives
xii. Raw jute, mesta, and jute cuttings
xiii. Sugar
xiv. Iron ore of Redi origin
xv. Iron ore of Goa origin when exported to China or Europe in addition to Japan, South
Korea, and Taiwan
xvi. Low-grade bauxite of West Coast origin
Exim performance
Import Structure
The structure of our imports has undergone a great change in the recent years. The desire
for rapid industrialisation necessitated large imports of machinery, capital goods, transport
equipment, and project goods. Although the earlier manufactured commodities predomi-
nated the Indian imports, over a period of few decades, petroleum, oil, and lubricants (POL)
and capital goods have dominated the imports.
In the recent years, with the In the recent years, with the progress of import substitution and higher production in the
progress of import substitution country, there has been a significant reduction in the imports of cereals and cereal products,
and higher production in the
fertilisers, and metals besides many other goods. In the commodity composition of our
country, there has been a sig-
nificant reduction in the imports imports, a few commodities are important and have accounted for 60 per cent to 80 per cent
of cereals and cereal products, of our total imports during the late 1990s. These commodities are POL, capital goods, pearls
fertilisers, and metals besides and precious stones, fertilisers, iron and steel, chemicals, and edible oils.
many other goods.
An interesting feature of imports during a span of almost 50 years since economic plan-
ning that started in 1951 is that there has been a compulsion in the petroleum import. While
its share was negligible in 1950–51 and was only 1 per cent of the total imports in 1960–61, it
increased to 8 per cent in 1970–71 and to 20 per cent in 1975–76. It reached an exceptionally
high peak of 41.95 per cent in 1980–81, but in 2004–05 it was only 20.4 per cent. The import
of petroleum has increased substantially due to a heavy demand in our country. Also, the
price factor caused by politics for profits of oil-producing countries and the Gulf crisis in the
early 1990s are equally responsible factors.
Imports during November 2013 were valued at ` 211907.66 crore representing a negative
growth of 4.37 per cent in Rupee terms over the level of imports valued at ` 221590.06 crore
in November 2012. Cumulative value of imports for the period April–November 2013–14
was ` 1810680.39 crore as against ` 1748678.68 crore registering negative growth of 5.39
per cent in Dollar terms and growth of 3.55 per cent in Rupee terms over the same period
last year.
Oil imports during November 2013 were valued at US$ 12964.8 million which was 1.1
per cent lower than oil imports valued at US$13107.0 million in the corresponding period
last year. Oil imports during April–November 2013–14 were valued at US$ 111058.5 mil-
lion which was 2.8 per cent higher than the oil imports of US$ 108076.3 million in the cor-
responding period last year. Non-oil imports during November 2013 were estimated at US$
20868.4 million which was 23.69 per cent lower than non-oil imports of US$ 27347.0 million
in November 2012. Non-oil imports during April–November 2013–14 were valued at US$
192833.4 million which was 9.5 per cent lower than the level of such imports valued at US$
213115.4 million in April–November 2012–13.
Export Performance
India’s share in the world trade has declined over a period of 50 years. In 1951, when the First
Five-Year Plan was introduced, the share of India’s exports in the world trade was 2.19 per
cent. It fell to 1.21 per cent in the exports in 1960–61. The same trend continued in the next
decade of planning, as the share in exports in 1970 was 0.66 per cent. In 1980, India’s share
in the world exports fell to 0.42 per cent but rose slightly in mid-1980s, as the share of India’s
exports rose to 0.63 per cent in 1985.
However, in 1991, the share of exports fell to 0.53 per cent. In 1994, it improved to 0.61
per cent and in 1998, the share remained stagnant at 0.6 per cent. At present, the share of
India’s exports in the world is 0.61 per cent. In the 1990s, the decline in India’s share in the
world trade was arrested and reversed; the target now is to raise India’s share to more than
1 per cent. With the success of industrialisation and a general improvement in the structure
of the economy, new commodities have also become important. At present, India’s exports by
major commodity groups are as follows:
1. Manufactures that include engineering goods, chemicals and allied products, cotton Manufacturers that include
yarn, fabrics, jute manufactures, leather and its manufactures, readymade garments, engineering goods, chemicals,
and gems and jewellery, together accounted for more than 80 per cent of India’s and allied products, etc., together
accounted for more than 80
exports to the world in 1998–99. per cent of India’s exports to
the world in 1998–99.
2. Agriculture and allied products category including cashew kernels, coffee, marine
products, raw cotton, rice, meat, spices, sugar, tea, and tobacco.
Manufactures which constitute more than 80 per cent of our total exports, at once reflect
the tremendous strides we have taken in putting up the modern production facilities. If a
country’s industrial power has to be measured today, to a large extent, it can be done through
its export basket. We continue to sell tea, coffee, jute, cotton, leather, spices, and other tra-
ditional items even today, but they reach the world with much value added in the form of
processed and packaged items. The change that has taken place in our export basket is almost
revolutionary, with products of our vast technological and industrial base predominating.
Engineering goods, high-quality cotton and synthetic yarn, fabrics, drugs and phar-
maceuticals, chemicals, automobiles, trucks, TVs and audio systems, plastic and linoleum
products, processed food, computer software, railway coaches, telecommunication equip-
ment, and similar high-technology items today make up much of our exports, reflecting the
technological and industrial development that has taken place in India over the last five dec-
ades. After almost 53 years of independence, one can say India has come of age as far as its
export products are concerned.
The composition of exports reveals a gradual shift during the 1990s. The share of ores
and minerals has declined progressively from 4.6 per cent in 1991–92 to 3.1 per cent in
1997–98, and this trend has continued during 1998–99, with the share declining further to
2.4 per cent. There was a marginal improvement of 0.5 per cent in 2000–01, with the share
rising to 2.9 per cent and again with a marginal fall to 2.8 per cent in 2001–02. Overall, since
liberalization, there has been a fall in the share to the tune of 1.8 per cent.
It is a common phenomenon in the analysis of Indian exports to distinguish between
traditional and non-traditional exports. The share of the three traditional commodities, viz.,
textiles, jute manufactures, and tea has been declining. The sectors that have been able to
maintain a steady growth or at least a ‘healthy stagnation’ have been gems and jewellery,
leather products, and readymade garments.
Exports during November 2013 were valued at US$ 24613.29 million (` 154160.39 crore)
which was 5.86 per cent higher in Dollar terms (21.04 per cent higher in Rupee terms) than
the level of US$ 23250.94 million (` 127358.88 crore) during November 2012. Cumulative
value of exports for the period April–November 2013–14 was US$ 203989.66 million
(` 1223387.07 crore) as against US$ 191957.75 million (` 1045629.09 crore) registering a
growth of 6.27 per cent in Dollar terms and growth of 17 per cent in Rupee terms over the
same period last year.
Exim Policies
Five-year Exim Policy
On 31 March, 1992, a Five-year Till 31 March, 1985, India’s Import Policy was announced on an yearly basis. Sometimes, this
Exim Policy was announced. policy was even announced on a six-month basis. From April 1985 to March 1988, there was
Prior to this, it was announced a three-year Import Policy. Subsequently also three-year policies were announced, but each
on and yearly basis up to 1985
and later for three years from
time the policy was cut short by a year. However, for the first time in the trade history of the
1985 to 1992. country, a Five-year Exim Policy was announced by the Government of India on 31 March,
1992. The announcement of the new Exim Policy coincided with the launching of India’s
Eighth Five-Year Plan. And on 31 March, 1997, another Exim Policy for the period 1997–02
was announced. The 1997–2002 Exim Policy is co-terminus with the Ninth Five-Year Plan.
Objectives of the Exim Policy

The objectives of the 1997–2002 Exim Policy are given below:
1. Accelerating the country’s transition to a globally oriented vibrant economy with a
view to derive maximum benefits from the expanding global market opportunities.
2. Stimulating a sustained economic growth by providing access to essential raw
materials, intermediates, components, consumables, and capital goods that are
required for augmenting the production.
3. Enhancing the technological strength and efficiency of Indian agriculture, industry,
and services, thereby improving their competitive strength while generating new
employment opportunities.
4. Encouraging the attainment of internationally accepted standards of quality.
5. Providing consumers with good quality products and services at reasonable prices.
The policy sought to consolidate
the gains of the previous policy
and further carried forward the
process of liberalization, by Exim Policy, 1997–2002
deregulating and simplifying
the procedures and removing The Exim Policy, 1997–2002 (coinciding with the period of the Ninth Five-Year Plan) sought
the QRs. to consolidate the gains of the previous policy and further carried forward the process of
liberalization by deregulating and simplifying the procedures and removing the QRs in a
phased manner. It set an ambitious target of attaining an export level of US$90 bn to US$100
bn by the year 2002 and achieving a 1 per cent share in the world trade.
Salient Features
The following were the salient features of the policy:
1. The exim shall be free, except to the extent that they are regulated by the provisions of
this policy.
2. The central government may, in the public interest, regulate the import or export of
goods by means of a Negative List of Imports or a Negative List of Exports, as the case
may be.
3. The negative lists may consist of good—the import or export of which is prohibited,
restricted through licensing, or canalised.
4. The prohibited items in the negative list of imports shall not be imported and the
prohibited items in the negative list of exports shall not be exported.
5. Any goods, the export or import of which is restricted through licensing, may be
exported or imported only in accordance with a licence that is being issued in this
behalf.
6. Any goods, the import or export of which is canalised, may be imported or exported
by the canalising agency specified in the negative list.
7. No export or import shall be made by any person without an Importer–Exporter
Code (IEC) number, unless it is specifically exempted.
Modified Exim Policy, April 1998

The new government at the Centre, which assumed office in March 1998, announced its The policy modification led the
Exim Policy for the year 1998–99 on 13 April, 1998. As a part of the annual Exim Policy government to free a large num-
modification, the government freed a large number of consumer goods from import restric- ber of consumer goods from im-
port restrictions and all major
tions and liberalised all the major export promotion schemes. This new dose of liberalization export promotion schemes.
of the trade regime by the new government was necessitated by the commitments made by
India at the World Trade Organisation (WTO). The timing of the import policy liberalization
coincided with the scheduled review of India’s trade policy by WTO on 16 and 17 April, 1998.
Apart from the general global pressure on India to remove the restrictions on imports, the
United States had filed a complaint with the WTO against India’s import regime.
The following were the main provisions of the modified Exim Policy:
1. About 340 more items were shifted from the restricted list to OGL. Thus, out of the
total number of 10,202 items that are covered under the Exim Policy, only 2,200
remained on the restricted list.
2. The revised policy set the export growth target of 20 per cent for the year 1998–99
which, in other words, required a total export of the order of $41.4 bn during 1998–99.
3. The zero-duty Export Promotion Capital Goods (EPCG) Scheme was extended to
all the software exporters by lowering the threshold limit of importable capital goods
from ` 20 crore to ` 10 lakh. The lowering of the threshold limit was expected to
help the software companies to proliferate throughout the length and breadth of the
country. In other words, they could import any capital goods without paying any
import duty and in return, can sign an export obligation of five times the value of the
capital goods, based on the net foreign exchange earnings, for a period of six years.
In the case of garments, agriculture, food processing, gems and jewellery, electronics,
leather, and sports goods and toys, the minimum limit was lowered to ` 1 crore.
4. In a bid to prevent cheap imports being dumped at unreasonable prices, the govern-
ment set up an anti-dumping cell called Directorate General (DG) of Anti-Dumping
and Allied Duties. The DG would be responsible for investigation into the alleged cases
of dumping as well as subsidised cases. The DG would also recommend anti-dumping
duties where it is found that the dumped imports are causing harm to the domestic
industry. Where harm is caused to the domestic industry by subsidising exports by the
exporting country, the DG would have the jurisdiction to investigate all such cases and
recommend possible imposition of countervailing duties (CVDs). The DG would also
advise industry groups and consumers on how to go about collecting information and
procedures that are involved in making out a case for anti-dumping duties.
5. Other provisions included (a) delegation of powers to regional licensing offices,
(b) doing away with the minimum value addition of 33 per cent under advance
licensing scheme, (c) simplified procedures for clubbing of advance licence schemes,
and (d) private-bonded warehouses to be set up to import, stock, and sell even the
negative list items.
Exim Policy, 1999–2000

The new policy removed physi-
In its effort to further dismantle the import control regime and hasten the integration of
cal controls on imports. the Indian economy with the world economy, the government announced a revised Exim
Policy on 31 March, 1999, which came into force on 1 April, 1999. The new policy freed
the import of about 894 items of consumer goods, agricultural products, and textiles from
licensing requirements. In other words, a number of consumer items could now be imported
licence-free, subject only to the payment of import duty. The physical controls on imports
were removed and the only control over imports was fiscal in nature, that is, adjusting the
import duty to regulate the imports. These adjustments were to be made within the upper
limits prescribed by the WTO.
Moreover, another 414 items were removed from the restricted list, allowing these to be
imported against special import licences. India’s international commitments required the
removal of licensing curbs on imports by the year 2003.

The Union Commerce and Industry Minister announced the new Exim Policy of the Gov-
ernment of India for the year 2000–01 on 31 March, 2000. The policy, envisaging a 20 per
cent export growth in dollar terms in 2000–01, brought about a major rationalisation in the
export promotion schemes and hence, launched a series of sector-specific initiatives.
Export Promotion
In a major initiative to boost the exports, the government announced the following measures:
Special Economic Zones (SEZs): On the pattern of the Chinese model, the government
announced the setting up of two SEZs, at Positra in Gujarat and Nangunery in Tamil Nadu.
Industrial units that are located in SEZs will be exempted from a plethora of rules and regula-
tions that are governing exports and imports. The entire production will have to be exported
from these zones. Sales from DTA can be done only on full payment of customs duty. Several
EPZs will shortly be converted into SEZs. The EPZs located in Kandla, Vizag, and Kochi
will be converted into SEZs immediately. It was further announced that 100 per cent foreign
direct investment (FDI) would be allowed in all products in SEZs.
SEZs would be treated as if they are outside the customs territory of the country. The units SEZs would be treated as if they
would be able to import capital goods and raw materials duty free. The movement of goods to are outside the customs terri-
tory of the country. The units
and from SEZs would be unrestricted. A fiscal incentive package (including tax holiday) for
would be able to import capital
export units to be located in SEZs would be announced by the government in a due course. goods and raw materials duty
SEZs have played a crucial role in boosting China’s exports and presently, the country free.
derives 40 per cent of its exports from such zones. However, Chinese SEZs are based on a
contract labour system (hire-and-fire policy). The Commerce Minister, while announcing
the Exim Policy, categorically ruled out any changes in the labour laws. Moreover, there is
no system of reservation of items for SSIs in China. It is unclear if the Government of India
would allow the production of reserved items for small industries in the SEZs. Still further,
there are various infrastructure bottlenecks like power shortage, lack of transport facilities,
and, of course, procedural delays. Hence, the success of SEZs in India is a moot question.
Sector-specific Packages: The Exim Policy, 2000–01 announced sector-specific packages for
The Exim Policy announced
seven core areas to boost exports. These areas are—gems and jewellery, pharmaceuticals, sector-specific packages
agrochemicals, biotechnology, silk, leather, and garments. For gems and jewellery exporters, for seven core areas. The
the government announced a Diamond-Dollar Account Scheme (DDAS). Under the scheme, policy announced further
financial incentitives to the
the export proceeds can be retained in a dollar account, and the exporters can use the funds
states, based on their export
in this account for the import of rough diamonds. performance.
For agrochemicals, biotechnology, and pharmacy units (considered as knowledge-
intensive), the government allowed duty-free import of laboratory equipment, chemicals,
and reagents up to 1 per cent of the FOB value of exports. Similarly, the government increased
the duty-free import of trimmings, embellishments, and other items from 2 per cent to 3 per
cent of the total export value.
Involvement of State Governments in Export Promotion: Since the states forego taxes
(mainly sales tax) on exports, they have a very little incentive to promote exports. The Exim
Policy, 2000–01 announced financial incentives to states based on their export performance.
An incentive scheme with an initial outlay of ` 250 crore to secure the state’s involvement in
the national export drive was unveiled. The states can use the funds for export promotion
activities such as infrastructure development. The Commerce and Industry Minister said that
he would request the states to treat all the units that are exporting more than 50 per cent of
their turnover as public utility services. This would enable them to keep their international
commitment on delivery schedules. Furthermore, the Minister observed that the recent
spectacular growth of software exports was, apart from India’s knowledge in high-tech, due
to the hands-off policy of the government towards this sector. A similar approach to hard-
ware electronics is also called for.
Import Liberalization: The Exim Policy, 2000–01 lifted QRs on 714 commonly used items The Exim Policy, 2000–01 lifted
(agricultural products and consumer durables), which can now be freely imported. Thus, the QRs on 714 commonly used
commodities like meat, milk powder, coffee, tea, fish, pickles, cigars and cigarettes, televi- items (agricultural products and
consumer durables), which can
sions, radios, tape recorders, footwear, and umbrellas can be imported freely from 1 April, now be freely imported.
2000. However, most of these items will attract a peak rate of basic import duty of about 35
per cent, which together with surcharge and special customs duty will add up to a total of 44
per cent on import duties. Furthermore, that 44 per cent will be enhanced by a CVD that is
equivalent to the domestic excise duty on the product that is being imported.
The lifting of licensing and quota restrictions on 714 import items was in line with India’s
WTO obligations. The government promised to abolish licensing and quota curbs on the
remaining 715 items (such as liquor, cars, and so on.) in April 2001. Many critics of the new
policy feared that the removal of licensing and quota restrictions would lead to a surge in
imports of these items, hurting the domestic industry. However, it is noteworthy that import
Many critics of the new policy restrictions are being phased out since 1996 but no extraordinary growth has occurred
feared that the removal of li- in the import of freed items. The Commerce Minister has maintained that anti-dumping
censing and quota restrictions and anti-subsidy tariffs and other safeguards would be used if there was a sudden surge in
would lead to a surge in imports
of these items, hurting the do- imports, causing a serious injury to the domestic industry.
mestic industry.
The Union Commerce and Industry Minister unveiled the Exim Policy for the year 2001–02
on March 31, 2001.
Removal of Quantity Restrictions

The process of removal of The process of removal of import restrictions, which began in 1991, was completed in a phased
import restrictions was complet- manner by the Exim Policy, 2001–02 with the removal of restrictions on the remaining 715 items.
ed in a phased manner by the
Exim Policy, 2001–02.
This was in tune with the commitments made to the WTO. Out of these 715 items, 342 were tex-
tile products, 147 were agricultural products, and 226 were other manufactured products.
However, the import of agricultural products like wheat, rice, maize, copra, and coconut
oil was placed in the category of State Trading. The nominated State Trading Enterprise will
conduct the import of these commodities solely as per commercial considerations. Similarly,
the import of petroleum products including petrol, diesel, and ATF (aviation turbine fuel),
was also placed in the category of State Trading. In all, 27 out of 715 items taken off the QRs
list were put under the State Trading category.
The Minister was confident that the Indian market would not be swamped by imported
brands of commonly used articles. To prevent dumping, the government will take a recourse
to anti-dumping duties and other non-tariff barriers. Arrangements have been made to track,
collate, and analyse the data on 300 sensitive items which mainly comprise farm goods and
items that are produced by the SSI sector.
Agri-export Zones
With a view to boost agricultural exports and provide remunerative returns to the farming
community, the Exim Policy proposed the setting up of agri-export zones (AEZs). Three such
zones are proposed to be set up in Himachal Pradesh, Jammu & Kashmir (to promote export
of apples), and Maharashtra. The government will make efforts to provide an improved access
to the produce/products of the agriculture and allied sectors in the international market. The
State governments have been asked to identify the product-specific AEZs, for the develop-
ment of export of specific products from a geographically c ontiguous area.

The Exim Policy, 2002–07 was unveiled on 31 March, 2002. The policy entails several institutional,
infrastructural, and fiscal measures that are intended to promote exports, which are conducive
to the economic development of the country. The following are the salient features of the policy:
The policy entails several insti- Special Economic Zones (SEZs)

tutional, infrastructural, and fis-
cal measures that are intended Offshore Banking Units (OBUs) shall be permitted in SEZs. The units in SEZ would be permit-
to promote exports, which are ted to undertake a hedging of the commodity price risks, provided such transactions are under-
conducive to the economic de-
velopment of the country.
taken by the units on a stand-alone basis. This will impart security to the returns of the unit.
It has also been decided to permit External Commercial Borrowing (ECB) for a tenure of
less than three years in SEZs. The detailed guidelines will be worked out by the RBI. This will
provide opportunities for accessing the working capital loan for these units at internationally
competitive rates.
Employment Oriented
Export restrictions like registration and packaging requirements are being removed on but-
ter, wheat and wheat products, coarse grains, groundnut oil, and cashew, which are sent to
Russia. QR and packaging restriction on wheat and its products, butter, pulses, grain and
flour of barley, maize, bajra, ragi, and jowar, were removed on 5 March, 2002.
The restrictions on the export of all cultivated (other than wild) varieties of seed, except
jute and onion, have been removed. To promote the export of agro- and agro-based products,
20 AEZs have been notified. In order to promote the diversification of agriculture, transport
subsidy shall be available for the export of fruits, vegetables, floriculture, poultry, and dairy
products. The details would be worked out in three months.
Three per cent special DEPB rate for primary and processed foods that are exported in
retail packaging of 1 kg or less. An amount of ` 5 crore under Market Access Initiative (MAI)
has been earmarked for promoting the cottage sector exports coming under the KVIC (Khadi
and Village Industries Commission). The units in the handicrafts sector can also access funds
from MAI scheme for the development of a website for a virtual exhibition of their products.
Under the EPCG scheme, these units will not be required to maintain an average level of
exports while calculating the export obligation. These units shall be entitled to the benefit of
export-house status on achieving lower than the average export performance of ` 5 crore as against
` 15 crore for others. The units in the handicraft sector shall be entitled to duty-free imports of an
enlarged list of items as embellishments up to 3 per cent of FOB value of their exports.
Exim Policy 2008–12

In the era of global competitiveness, there is an imperative need for Indian exporters to
upgrade their technology and reduce their costs. Accordingly, an important element of the
Exim Policy is to help exporters for technological upgradation. Technological upgradation of
exports is sought to be achieved by promoting imports of capital goods. For this, the follow-
ing initiatives have been initiated in the new policy.
Special Focus
With a view to continuously increasing our percentage share of global trade and expand-
ing employment opportunities, certain special focus initiatives have been identified/con-
tinued for market diversification, technological upgradation, support to status holders,
agriculture, handlooms, handicraft, gems and jewellery, leather, marine, electronics and IT
hardware manufacturing industries, green products, exports of products from North-East,
sports goods, and toys sectors. Government of India shall make concerted efforts to promote
exports in these sectors by specific sectorial strategies that shall be notified from time to time.
Market Diversification
Weaker demand in developed economies, triggered by falling asset prices and increased eco-
nomic uncertainty has pulled down the growth of India’s exports to developed countries.
There are no clear signals as to when the markets in developed countries would revive. To
insulate Indian exports from the decline in demand from developed countries, in this policy
focus is on diversification of Indian exports to other markets, especially those located in
Latin America, Africa, parts of Asia and Ocenia. To achieve diversification of Indian exports,
the following initiatives have been taken under this policy.
(a) 26 new countries have been included within the ambit of focus market scheme.
(b) The incentives provided under the focus market scheme have been increased from
2.5 per cent to 3 per cent.
(c) There has been a significant increase in the outlay under ‘market linked focus product
scheme’ by inclusion of more markets and products. This ensures support for exports
to all countries in Africa.
Technological Upgradation
To usher in the next phase of export growth, India needs to move up in the value chain of
export goods. This objective is sought to be achieved by encouraging technological upgrada-
tion of our export sector. A number of initiatives have been taken in this policy to focus on
technological upgradation; such initiatives include:
(a) EPCG scheme at zero duty has been introduced for certain engineering products,
electronic products, basic chemicals and pharmaceuticals, apparel and textiles,
plastics, handicrafts, chemicals and allied products and leather and leather products.
(b) The existing 3 per cent EPCG scheme has been considerably simplified to ease its
usage by the exporters.
(c) To encourage value added manufacture export, a minimum of 15 per cent value addi-
tion on imported inputs under advance authorisation scheme has been stipulated.
(d) A number of products including automobiles and other engineering products have
been included for incentives under focus product, and market linked focus product
schemes.
(e) Steps to encourage project exports shall be taken.
Agriculture and Village Industry

(a) Vishesh Krishi and Gram Udyog Yojana.
(b) Capital goods imported under EPCG will be permitted to be installed anywhere in AEZ.
(c) Import of restricted items, such as panels, is allowed under various export promotion
schemes.
(d) Import of inputs such as pesticides is permitted under advance authorisation for agro
exports.
(e) New towns of export excellence with a threshold limit of ` 150 crore shall be notified.
(f) Certain specified flowers, fruits, and vegetables are entitled to a special duty credit
scrip, in addition to the normal benefit under VKGUY.
Handlooms
(a) Specific funds are earmarked under MAI/MDA scheme for promoting handloom
exports.
(b) Duty free import entitlement of specified trimmings and embellishments is 5 per cent
of FOB value of exports during the previous financial year.
(c) Duty free import entitlement of hand knotted carpet samples is 1 per cent of FOB
value of exports during the previous financial year.
(d) Duty free import of old pieces of hand knotted carpets on consignment basis for
re-export after repair is permitted.
(e) New towns of export excellence with a threshold limit of ` 150 crore shall be notified.
(f) Machinery and equipment for effluent treatment plants is exempt from customs duty.
India’s Exim Performance

Foreign trade has played a crucial role in India’s economy, growing at almost three times the
growth of GDP during the last four years. India’s exports cover a wide range of items including
engineering goods, ores and minerals, chemicals and related products, gems and jewellery,
and of late, petroleum products. Imports have increased substantially, bulk of which com-
prise items like petroleum and crude products; fertilisers; precious and semi-precious stones
for export production; and capital goods, raw materials, consumables, and intermediates for
industrial production and technological upgradation.
Impact of Euro Zone Crisis on India’s Trade

The opening up of the Indian economy has greatly increased the role of trade. In the Eleventh Foreign trade has played a cru-
Plan, the total share of merchandise exports and imports as a proportion of GDP rose from cial role in India’s economy,
growing at almost three times
36.4 per cent to 45.6 per cent. the growth of GDP during the
However, along with the increased trade integration, the merchandise trade deficit too last four years.
has risen from 7.8 per cent of GDP in 2007–08 to 10.6 per cent in 2011–12. This high trade
deficit was offset by a growing net balance on service trade and a high level of remittances.
Following the global financial crisis in 2007–08, India’s exports registered a 3.5 per
cent decline in 2009–10. The sovereign debt crisis in the Euro Zone periphery in 2011–12
impacted negatively economic growth in and exports from India. Between 2010–11 and
2011–12, India’s growth rate declined from 8.4 per cent in 2010–11 to 6.5 per cent in 2011–12
and to 5 per cent during 2012–13. During the same period growth rate of exports declined
from 40.5 per cent in 2010–11 to 20.9 per cent in 2011–12. The tight monetary policy has
increased the cost of lending affecting domestic investment.
In sharp contrast to a rapid expansion witnessed both in India’s exports and imports
(21.3 per cent and 32.3 per cent, respectively) in 2011–12, in 2012–13, exports have fallen
month over month, even in absolute terms, since May 2012. A negative growth in exports
was recorded up to 5.5 per cent in the first 9 months of this year, on a cumulative basis.
However, since January 2013, exports have again started increasing on a monthly basis.
Trend of India’s Foreign Trade

India’s Exports and Imports
489,181
(Values in US $ Millions)
500,000
369,769
450,000
303,696
304,624
400,000
288,373
251,654
251,136
350,000
300,000
185,295
178,751
163,132
250,000
200,000
150,000
100,000
50,000
0
2007-08 2008-09 2009-10 2010-11 2011-12
Export Import
India’s Foreign Trade Scenario – Rupees
(Rupees Billion)
Year Exports Imports Trade Balance
Oil Non–Oil Total Oil Non–Oil Total Oil Non–Oil Total
2012–13 330790.01 –314446.82 16343.19 8918.71 17772.91 26691.62 321871.30 –332219.73 –10348.43
2011–12 267914.83 –253255.24 14659.59 7430.75 16023.88 23454.63 260484.08 –269279.12 –8795.04
2010–11 188778.97 –177349.75 11429.22 4822.82 12011.85 16834.67 183956.15 –189361.60 –5405.45
2009–10 132899.02 –124443.69 8455.34 4116.49 9520.86 13637.36 128782.53 –133964.55 –5182.02
2008–09 123397.91 –114990.36 8407.55 4199.68 9544.68 13744.36 119198.23 –124535.04 –5336.80
2007–08 1141.92 5416.72 6558.64 3206.55 6916.57 10123.12 –2064.63 –1499.85 –3564.48
2006–07 845.20 4872.59 5717.79 2585.72 5819.35 8405.06 –1740.52 –946.75 –2687.27
2005–06 515.33 4048.85 4564.18 1946.40 4657.69 6604.09 –1431.07 –608.84 –2039.91
2004–05 314.04 3439.35 3753.40 1340.94 3669.71 5010.65 –1026.90 –230.35 –1257.25
2003–04 163.97 2769.69 2933.67 945.20 2645.88 3591.08 –781.23 123.82 –657.41
2002–03 124.69 2426.68 2551.37 853.67 2118.39 2972.06 –728.98 308.29 –420.69
2001–02 101.07 1989.11 2090.18 667.70 1784.30 2452.00 –566.63 204.82 –361.82
2000–01 85.42 1950.29 2035.71 714.97 1593.76 2308.73 –629.55 356.53 –273.02
1999–00 1.69 1593.93 1595.61 546.49 1605.88 2152.37 –544.80 –11.95 –556.75
1998–99 3.76 1393.77 1397.53 269.19 1514.13 1783.32 –265.43 –120.36 –385.79
1997–98 13.11 1287.90 1301.01 303.41 1238.35 1541.76 –290.30 49.55 –240.76
1996–97 17.10 1171.07 1188.17 356.29 1032.91 1389.20 –339.18 138.16 –201.03
1995–96 15.18 1048.36 1063.53 251.74 975.05 1226.78 –236.56 73.31 –163.25
1994–95 13.09 813.65 826.74 186.13 713.58 899.71 –173.04 100.07 –72.97
1993–94 12.48 685.04 697.51 180.46 550.55 731.01 –167.98 134.49 –33.50
1992–93 13.79 523.09 536.88 171.42 462.33 633.75 –157.63 60.76 –96.86
1991–92 10.22 430.20 440.42 131.27 347.24 478.51 –121.05 82.95 –38.09
1990–91 9.38 316.20 325.58 108.16 323.77 431.93 –98.78 –7.57 –106.35
1989–90 6.97 269.62 276.58 62.73 290.56 353.28 –55.76 –20.94 –76.70
1988–89 5.05 197.27 202.32 43.58 238.78 282.35 –38.53 –41.51 –80.04
1987–88 6.49 150.25 156.74 40.43 182.01 222.44 –33.94 –31.76 –65.70
1986–87 4.11 120.41 124.52 28.11 172.85 200.96 –23.99 –52.45 –76.44
1985–86 6.45 102.50 108.95 49.89 146.68 196.58 –43.45 –44.18 –87.63
1984–85 18.18 99.26 117.44 54.09 117.25 171.34 –35.91 –18.00 –53.91
1983–84 15.88 81.83 97.71 48.32 110.00 158.32 –32.44 –28.17 –60.61
1982–83 12.35 75.68 88.03 56.22 86.71 142.93 –43.87 –11.03 –54.89
1981–82 2.21 75.85 78.06 51.89 84.18 136.08 –49.68 –8.33 –58.02
1980–81 0.25 66.86 67.11 52.64 72.86 125.49 –52.39 –6.00 –58.38
1979–80 0.19 64.00 64.18 32.67 58.76 91.43 –32.48 5.24 –27.24
1978–79 0.14 57.12 57.26 16.77 51.34 68.11 –16.63 5.78 –10.85
1977–78 0.16 53.92 54.08 15.51 44.69 60.20 –15.35 9.23 –6.12
1976–77 0.19 51.24 51.43 14.13 36.60 50.74 –13.95 14.64 0.69
1975–76 0.19 40.17 40.36 12.26 40.39 52.65 –12.07 –0.22 –12.29
1974–75 0.14 33.15 33.29 11.57 33.62 45.19 –11.43 –0.47 –11.90
1973–74 0.12 25.11 25.23 5.60 23.95 29.55 –5.48 1.16 –4.32
1972–73 0.29 19.43 19.72 2.04 16.63 18.67 –1.75 2.79 1.04
1971–72 0.11 15.98 16.08 1.94 16.30 18.25 –1.84 –0.33 –2.16
1970–71 0.09 15.27 15.35 1.36 14.98 16.34 –1.27 0.28 –0.99
Source: Directorate General of Commercial Intelligence and Statistics.

Note: Data for 2011–12 are revised and for 2012–13 are provisional.
Also Refer Notes on Tables.
REGIONAL TRADE AGREEMENTS

World Trade Organization: The World Trade Organization (WTO) is the only global inter-
national organisation dealing with the rules of trade between nations. At its heart are the
WTO agreements, negotiated and signed by the bulk of the world’s trading nations and rati-
fied in their parliaments. The goal is to help producers of goods and services, exporters and
importers conduct their business.
The WTO is run by its member governments. All major decisions are made by the mem-
bership as a whole, either by ministers (who usually meet at least once every two years) or by
their ambassadors or delegates (who meet regularly in Geneva).
The WTO agreements are lengthy and complex because they are legal texts covering a
wide range of activities. However, a number of simple, fundamental principles run throughout
all of these documents. These principles are the foundation of the multilateral trading system.
The South Asian Free Trade Area (SAFTA): Is an agreement reached on 6 January 2004
at the 12th SAARC summit in Islamabad, Pakistan. It created a free trade area of 1.6 billion
people in Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. The seven
foreign ministers of the region signed a framework agreement on SAFTA to reduce customs
duties of all traded goods to zero by the year 2016.
The purpose of SAFTA is to encourage and elevate common contract among the coun-
tries such as medium- and long-term contracts. Contracts involving trade operated by states,
supply and import assurance in respect of specific products, etc. It involves agreement on
tariff concession like national duties concession and non-tariff concession.
The objective of the agreement is to promote good competition in the free trade area and
to provide equitable benefits to all the countries involved in the contracts. It aimed to benefit
the people of the country by bringing transparency and integrity among the nations. Further,
SAFTA was also formed in order to increase the level of trade and economic cooperation
among the SAARC nations by reducing the tariff and barriers and also to provide special
preference to the least developed countries (LDCs) among the SAARC nations.
Brazil, Russia, India, and China (BRICS): The idea coined in 2003 by Goldman Sachs,
which speculates that by 2050 these four economies will be the most dominant. South Africa
was added to the list on 13 April, 2011 creating ‘BRICS.’ The BRICS Forum is an independ-
ent international organisation encouraging commercial, political and cultural cooperation
between the BRICS nations, and was formed in 2011.
The Group of 20 Finance Ministers and Central Bank Governors (G-20): Is a group
of finance ministers and central bank governors from 20 major economies: 19 countries plus
the European Union, which is represented by the President of the European Council and by
the European Central Bank. The G-20 heads of government or heads of state have also peri-
odically conferred at summits since their initial meeting in 2008. Collectively, the G-20 econ-
omies account for approximately 86 per cent of the gross world product (GWP), 80 per cent
of world trade (including EU intra-trade) and two-thirds of the world population.
The members of the G20 are Argentina, Australia, Brazil, Canada, China, France,
Germany, India, Indonesia, Italy, Japan, Republic of Korea, Mexico, Russia, Saudi Arabia,
South Africa, Turkey, United Kingdom, United States, and European Union.
Export Promotion Measures

Export promotion being a constant endeavour of the government, export performance is
constantly monitored, and export strategy and export policies are formulated. In the Foreign
Trade Policy (FTP) for the years 2004–09 announced on 31 August, 2004, the government
spelt out a bold vision to double India’s percentage share of global merchandise trade within
five years and to focus on the generation of additional employment. Stability of trade policy
regime has yielded positive results and in the next three years since the inception of the
FTP, India’s merchandise exports had recorded an appreciable growth. According to the lat- According to the latest informa-
est information published in the World Trade Statistics by the World Trade Organization tion published in the World Trade
(WTO), India’s share in the total world trade (which includes trade in both merchandise and Statistics by the World Trade
Organization (WTO), India’s share
services sector) has gone up from 1.1 per cent in 2004—that is, the initial year of the FTP, in the total world trade (which
2004–09 to 1.5 per cent in 2006. includes trade in both merchan-
Based on the current rates of growth of merchandise and services trade, it is expected dise and services sector) has
that India’s share in the world trade covering merchandise plus service sector trade may well gone up from 1.1 per cent in
2004—that is, the initial year
double from the level of 2004 to reach 2 per cent mark in 2009. In line with the government’s of the FTP, 2004–09 to 1.5 per
objective of having an all-inclusive growth, the Annual Supplement to FTP announced in cent in 2006.
April, 2007 also focused on promoting employment-intensive export growth through ini-
tiatives like Focus Products, Focus Market Schemes, the Vishesh Krishi Upaj Yojana as well
as sector-specific initiative giving thrust on handloom, handicrafts, cottage and tiny indus-
tries, gems and jewellery, and so on. Under the general export promotion schemes, the DEPB
Scheme had been extended for another year up to 3 March, 2008. These measures were aimed
to augment and sustain the current rate of export growth in line with India’s comparative
advantage and the emerging situation in the international market. The export target for
2007–08 had been fixed at US$160 bn.
Special Economic Zones

India was one of the first in Asia to recognise the effectiveness of the EPZ model in promot-
ing exports, with Asia’s first EPZ set up in Kandla in 1965. Seven more zones were set up
thereafter. However, the zones were not able to emerge as effective instruments for export
promotion on account of the multiplicity of controls and clearances, the absence of world-
class infrastructure, and an unstable fiscal regime. While correcting the shortcomings of the
EPZ model, some new features were incorporated in the SEZ Policy, which was announced
in April 2000. This policy intended to make SEZs an engine for economic growth, supported
by quality infrastructure and complemented by an attractive fiscal package, both at the Cen-
tre and at the State level, with minimum possible regulations. The salient features of the SEZ
Scheme are:
• A designated duty-free enclave to be treated as foreign territory only for trade opera-
tions and duties and tariffs.
• No licence required for import.
• Manufacturing or service activities allowed.
• SEZ units to be positive net foreign-exchange earner within three years.
In order to impart stability to
• Domestic sales subject to full customs duty and import policy in force. SEZ regime and to achieve gen-
eration of greater economic ac-
• Full freedom for sub-contracting. tivity and employment through
the establishment of SEZs, a
• No routine examination by customs authorities on exported/imported cargo. SEZ Act has been enacted. The
SEZ Act, 2005, supported by
In order to impart stability to SEZ regime and to achieve generation of greater economic SEZ Rules, has come into effect
activity and employment through the establishment of SEZs, a SEZ Act has been enacted. on 10 February, 2006.
The SEZ Act, 2005, supported by SEZ Rules, has come into effect on February 10, 2006.
Incentives and facilities offered to units in SEZs under the Act for promotion of invest-
ment, including foreign investment, include—duty-free import/domestic procurement of
goods for development; operation and maintenance of SEZ units; 100 per cent Income Tax
exemption on export income for SEZ units under Section 10AA of the Income Tax Act
for the first five years, 50 per cent for the next five years thereafter, and 50 per cent of the
ploughed-back export profit for the succeeding five year exemption from Central Sales Tax;
and exemption from Service Tax and Single-window Clearance Mechanism for establish-
ment of units.
All the eight EPZs located at Kandla and Surat (Gujarat), Santa Cruz (Maharashtra),
Cochin (Kerala), Chennai (Tamil Nadu), Visakhapatnam (Andhra Pradesh), Falta (West
Bengal), and Noida (Uttar Pradesh) have been converted into SEZs. Under SEZ Act, formal
approvals have been given so far for setting up of 366 SEZs in the private/joint sector or by
the State governments and their agencies, which include the 142 approvals for which
Notifications have already been issued.
The benefit derived from SEZs is evident from the investment, employment, exports, and
The benefits derived from the infrastructure developments that are additionally generated. An investment of the order of
multiplier effect of the invest- ` 100,000 crore including an FDI of US$5 bn to US$6 bn is expected by the end of December
ments and additional economic
2007. About 100,000 direct jobs are expected to be created by December 2007. The benefits
activity in the SEZs and the
employment generated thus, will derived from the multiplier effect of the investments and additional economic activity in
far outweigh the tax exemptions the SEZs and the employment generated thus, will far outweigh the tax exemptions and the
and the losses on account of losses on account of land acquisition. Stability in fiscal concession is absolutely essential to
land acquisition.
ensure the credibility of government intensions.
Some of the highlights of the SEZ Scheme are as follows:
a. Exports from the functioning SEZs during the last three years are the following:
Year Value Growth Rate (%)

(Rs Crore) (Over Previous Year)
2003–04 13,854 39
2004–05 18,314 32
2005–06 22,840 24.7
2006–07 34,787 52. 3
Projected exports
from all SEZs for
2007–08 ` 67,088 crore
Source: INDIA 2008, a book published by the Publications Division, Ministry of Information and
Broadcasting, Government of India.
b. Investment and employment in the SEZs set up prior to the SEZ Act, 2005:
At present, 1,216 units are in operation in the SEZs. In the SEZs that were established
prior to the Act coming into force, there were 1,098 units providing a direct employ-
ment to over 1.93 lakh persons; about 40 per cent of whom are women. Private
investment by entrepreneurs in these SEZs established prior to the SEZ Act was in
the order of over ` 5,844 crore.
c. Investment and employment in the SEZs notified under the SEZ Act 2005:
Current investment and employment—
• Investment: ` 46,075 crore
• Employment: 40,153 persons
Expected investment and employment (by December 2009):
• Employment: 2,109,589 additional jobs
d. Expected investment and employment if 366 formal approvals become
operational:
• Employment: 4 million additional jobs
Impact of the SEZ Scheme

The overwhelming response to the SEZ Scheme is evident from the flow of investment and
creation of additional employment in the country. The SEZ Scheme has generated a tremen-
dous response among the investors, both in India and abroad, which is evident from the list
of developers who have set up SEZs:
• Nokia, Tamil Nadu
• Quark City, Chandigarh
• Flextronics, Tamil Nadu
• Mahindra World City, Tamil Nadu
• Motorola, DELL, and Foxconn
• Apache (Adidas Group), Andhra Pradesh
• Divvy’s Laboratories, Andhra Pradesh
• Rajiv Gandhi Technology Park, Chandigarh
• ETL Infrastructure, Chennai
• Hyderabad Gems Ltd., Hyderabad
Agri-export Zones
The setting up of the Agri-export zones (AEZs) is intended to provide remunerative returns
to the growers by enhancing the marketability of the produce of these zones in the interna-
tional as well as domestic markets. These zones are identified by the state governments for an
end-to-end development to promote the export of identified products from a geographically
contiguous area. The idea is to dovetail all the incentive schemes, both central and state, and
evolve a comprehensive package of services for an intensive delivery to farmers, processors,
The AEZ scheme has been
and exporters. So far, ‘in principle’ approvals have been accorded for 45 AEZs in 19 different introduced to transform rural
states. The AEZ scheme has been introduced to transform rural regions into regional rural regions into regional rural
motors of the export economy. Box 27.2 gives a list of AEZs in India. motors of the export economy.
Box 27.2 AEZs in India

1. Pineapples in Darjeeling 7. Potatoes in and around Agra, Uttar Pradesh
2. Apples in Jalpaiguri regions of West Bengal 8. Mangoes in and around Lucknow, Uttar Pradesh
3. Gherkins in and around Bangalore, Karnataka Within the realm of AEZs, Agri Export Oriented Units
4. Lichees in Udhamsingh, Nagpur, and Nainital, (AEOU) having integrated facilities for procurement
Uttaranchal and processing would be set up. To ensure good-
quality produce, AEZs have to provide good-quality
5. Fruits and vegetables in and around Pune
seeds, pesticides, and micronutrients to farmers.
6. Vegetables in some areas of Punjab
HIGHLIGHTS OF FOREIGN TRADE POLICY,

2009–2014
The new foreign trade policy (NFTP) takes an integrated view of the overall development of
India’s foreign trade and essentially provides a roadmap for the development of the following
sectors.
Higher Support for Market and Product

Diversification
• Incentive schemes under Chapter 3 have been expanded by way of addition of new
products and markets.
• 26 new markets have been added under the FMS. These include 16 new markets in
Latin America and 10 in Asia-Oceania.
• The incentive available under the FMS has been raised from 2.5 per cent to 3 per cent.
• The incentive available under focus product scheme (FPS) has been raised from
1.25 per cent to 2 per cent.
• A large number of products from various sectors has been included for benefits under
FPS. These include, engineering products (agricultural machinery, parts of trailers,
sewing machines, hand tools, garden tools, musical instruments, clocks and watches,
railway locomotives, etc.), plastic (value-added products), jute and sisal products,
technical textiles, green technology products (wind mills, wind turbines, electric
operated vehicles, etc.), project goods, vegetable textiles, and certain electronic items.
• Market linked focus product scheme (MLFPS) has been greatly expanded by inclu-
sion of products classified under as many as 153 ITC(HS) codes at 4 digit level. Some
major products include pharmaceuticals, synthetic textile fabrics, value added rub-
ber products, value added plastic goods, textile madeups, knitted and crocheted fab-
rics, glass products, certain iron and steel products, and certain articles of aluminium
among others. Benefits to these products will be provided, if exports are made to 13
identified markets (Algeria, Egypt, Kenya, Nigeria, South Africa, Tanzania, Brazil,
Mexico, Ukraine, Vietnam, Cambodia, Australia, and New Zealand).
• MLFPS benefits also extended for export to additional new markets for certain prod-
ucts. These products include auto components, motor cars, bicycle and its parts, and
apparels among others.
• A common simplified application form has been introduced for taking benefits under
FPS, FMS, MLFPS, and VKGUY.
• Higher allocation for market development assistance (MDA) and market access
initiative (MAI) schemes is being provided.
Technological Upgradation
• To aid technological upgradation of our export sector, the EPCG scheme at zero duty
has been introduced. This scheme will be available for engineering and electronic prod-
ucts, basic chemicals and pharmaceuticals, apparels and textiles, plastics, handicrafts,
chemicals and allied products and leather and leather products (subject to exclusions
of current beneficiaries under the technological upgradation fund schemes (TUFS),
administered by the Ministry of Textiles and beneficiaries of status holder incentive
scheme in that particular year). The scheme shall be in operation till 31.3.2011.
• Jaipur, Srinagar, and Anantnag have been recognised as ‘towns of export excellence’
for handicrafts; Kanpur, Dewas, and Ambur have been recognised as ‘towns of export
excellence’ for leather products and Malihabad for horticultural products.
EPCG Scheme Relaxations

• To increase the life of existing plant and machinery, export obligation on import of
spares, moulds, etc. under the EPCG Scheme has been reduced to 50 per cent of the
normal specific export obligation.
• Taking into account the decline in exports, the facility of re-fixation of annual average
export obligation for a particular financial year in which there is decline in exports
from the country, has been extended for the 5 year policy period 2009–14.
Support for Green Products and Products from

North East
• Focus product scheme benefit extended for export of ‘green products’ and for exports
of some products originating from the North East.
Status Holders
• To accelerate exports and encourage technological upgradation, additional duty
credit scrips shall be given to status holders @ 1 per cent of the FOB value of past
exports. The duty credit scrips can be used for procurement of capital goods with
actual user condition. This facility shall be available for sectors of leather (exclud-
ing finished leather), textiles and jute, handicrafts, engineering (excluding iron and
steel and non-ferrous metals in primary and intermediate form, automobiles and two
wheelers, nuclear reactors and parts and ships, boats and floating structures), plastics
and basic chemicals (excluding pharma products) [subject to exclusions of current
beneficiaries under the TUFS]. This facility shall be available up to 31.3.2011.
• Transferability for the duty credit scrips being issued to status holders under para-
graph 3.8.6 of FTP under the VKGUY scheme has been permitted. This is subject
to the condition that transfer would be only to status holders and scrips would be
utilised for the procurement of cold chain equipment(s) only.
Stability/Continuity of the Foreign Trade Policy

• To impart stability to the policy regime, duty entitlement passbook (DEPB) scheme is
extended beyond 31-12-2009 till 31-12-2010.
• Interest subvention of 2 per cent for pre-shipment credit for 7 specified sectors has
been extended till 31-3-2010 in the budget for 2009–10.
• Income tax exemption to 100 per cent EOUs and to STPI units under Section 10B
and 10A of Income Tax Act, has been extended for the financial year 2010–11 in the
budget for 2009–10.
• The adjustment assistance scheme initiated in December 2008 to provide enhanced
ECGC cover at 95 per cent, to the adversely affected sectors, is continued till March, 2010.
Marine Sector
• Fisheries have been included in the sectors which are exempted from maintenance of
average EO under the EPCG scheme, subject to the condition that fishing trawlers,
boats, ships, and other similar items shall not be allowed to be imported under this
provision. This would provide a fillip to the marine sector which has been affected by
the present downturn in exports.
• Additional flexibility under the target plus scheme (TPS)/duty free certificate of enti-
tlement (DFCE) scheme for status holders has been given to marine sector.
Gems and Jewellery Sector

• To neutralise duty incidence on gold jewellery exports, it has now been decided to
allow duty drawback on such exports.
• In an endeavour to make India a diamond international trading hub, it is planned to
establish ‘diamond bourse (s).’
• A new facility to allow import on consignment basis of cut and polished diamonds for
the purpose of grading/certification purposes has been introduced.
• To promote export of gems and jewellery products, the value limits of personal car-
riage have been increased from US$ 2 million to US$ 5 million in case of participation
in overseas exhibitions. The limit in case of personal carriage, as samples, for export
promotion tours, has also been increased from US$ 0.1 million to US$ 1 m illion.
Agriculture Sector
• To reduce transaction and handling costs, a single window system to facilitate export
of perishable agricultural produce has been introduced. The system will involve crea-
tion of multifunctional nodal agencies to be accredited by APEDA.
Leather Sector
• Leather sector shall be allowed re-export of unsold imported raw hides and skins
and semi-finished leather from public bonded ware houses, subject to payment of
50 per cent of the applicable export duty.
• Enhancement of FPS rate to 2 per cent would also significantly benefit the leather sector.
Tea
• Minimum value addition under advance authorisation scheme for export of tea has
been reduced from the existing 100 per cent to 50 per cent.
• DTA sale limit of instant tea by EOU units has been increased from the existing
30 per cent to 50 per cent.
• Export of tea has been covered under the VKGUY scheme benefits.
Pharmaceutical Sector
• Export obligation period for advance authorisations issued with 6-APA as input has
been increased from the existing 6 months to 36 months, as is available for other
products.
• Pharma sector extensively covered under the MLFPS for countries in Africa and
Latin America and also for some countries in Oceania and Far East.
Handloom Sector
• To simplify claims under the FPS, requirement of ‘handloom mark’ for availing
benefits under the FPS has been removed.
EOUs
• EOUs have been allowed to sell products manufactured by them in DTA up to a limit
of 90 per cent instead of the existing 75 per cent, without changing the criteria of
‘similar goods’, within the overall entitlement of 50 per cent for DTA sale.
• To provide clarity to the customs field formations, DOR shall issue a clarification to
enable procurement of spares beyond 5 per cent by granite sector EOUs.
• EOUs will now be allowed to procure finished goods for consolidation along with
their manufactured goods, subject to certain safeguards.
• During this period of downturn, board of approvals (BOA) to consider, extension of
block period by one year for calculation of net foreign exchange earning of EOUs.
• EOUs will now be allowed CENVAT credit facility for the component of SAD and
education cess on DTA sale.
Thrust to Value-Added Manufacturing

• To encourage value added manufactured export, a minimum 15 per cent value
addition on imported inputs under advance authorisation scheme has now been
prescribed.
• Coverage of project exports and a large number of manufactured goods under the
FPS and the MLFPS.
DEPB
• DEPB rate shall also include factoring of custom duty component on fuel where fuel
is allowed as a consumable in standard input-output norms.
Flexibility Provided to Exporters

• Payment of customs duty for export obligation (EO) shortfall under advance authori-
sation/DFIA/EPCG authorisation has been allowed by way of debit of duty credit
scrips. Earlier, the payment was allowed in cash only.
• Import of restricted items, as replenishment, shall now be allowed against transferred
DFIAs, in line with the erstwhile DFRC scheme.
• Time limit of 60 days for re-import of exported gems and jewellery items, for partici-
pation in exhibitions has been extended to 90 days in case of USA.
• Transit loss claims received from private approved insurance companies in India will
now be allowed for the purpose of EO fulfilment under export promotion schemes. At
present, the facility has been limited to public sector general insurance companies only.
Waiver of Incentives Recovery, on RBI Specific

Write off
• In cases, where RBI specifically writes off the export proceeds realisation, the incen-
tives under the FTP shall now not be recovered from the exporters subject to certain
conditions.
Simplification of Procedures
• To facilitate duty free import of samples by exporters, number of samples/pieces has
been increased from the existing 15 to 50. Customs clearance of such samples shall
be based on declarations given by the importers with regard to the limit of value and
quantity of samples.
• To allow exemption for up to two stages from payment of excise duty in lieu of refund,
in case of supply to an advance authorisation holder (against invalidation letter) by
the domestic intermediate manufacturer. It would allow exemption for supplies made
to a manufacturer, if such manufacturer in turn supplies the products to an ultimate
exporter. At present, exemption is allowed up to one stage only.
• Greater flexibility has been permitted to allow conversion of shipping bills from one
export promotion scheme to other scheme. Customs shall now permit this conver-
sion within three months, instead of the present limited period of only one month.
• To reduce transaction costs, dispatch of imported goods directly from the port to the
site have been allowed under advance authorisation scheme for deemed supplies. At
present, the duty free imported goods could be taken only to the manufacturing unit
of the authorisation holder or its supporting manufacturer.
• Disposal of manufacturing wastes/scrap will now be allowed after payment of appli-
cable excise duty, even before fulfilment of export obligation under the advance
authorisation and EPCG schemes.
• Regional authorities have now been authorised to issue licences for import of sports
weapons by ‘renowned shooters’, on the basis of NOC from the Ministry of Sports &
Youth Affairs. Now, there will be no need to approach DGFT (Hqrs.) in such cases.
• The procedure for issue of free sale certificate has been simplified and the validity of
the certificate has been increased from 1 year to 2 years. This will solve the problems
faced by the medical devices industry.
• Automobile industry, having their own R&D establishment, would be allowed free
import of reference fuels (petrol and diesel), up to a maximum of 5 KL per annum,
which are not manufactured in India.
• Acceding to the demand of trade and industry, the application and redemption forms
under the EPCG scheme have been simplified.
Reduction of Transaction Costs

• No fee shall now be charged for grant of incentives under the schemes in Chapter 3
of the FTP. Further, for all other authorisations/licence applications, maximum
applicable fee is being reduced to ` 100,000 from the existing ` 1,50,000 (for manual
applications) and ` 50,000 from the existing ` 75,000 (for EDI applications).
• To further EDI initiatives, export promotion councils/commodity boards have been
advised to issue RCMC through a web based online system. It is expected that issu-
ance of RCMC would become EDI enabled before the end of 2009.
• Electronic message exchange between customs and DGFT in respect of incentive
schemes under Chapter 3 will become operational by 31.12.2009. This will obviate
the need for verification of scrips by customs facilitating faster clearances.
• For EDI ports, with effect from December ’09, double verification of shipping bills by
customs for any of the DGFT schemes shall be dispensed with.
• In cases, where the earlier authorisation has been cancelled and a new authorisation
has been issued in lieu of the earlier authorisation, application fee paid already for the
cancelled authorisation will now be adjusted against the application fee for the new
authorisation subject to payment of minimum fee of ` 200.
• An interministerial committee will be formed to redress/resolve problems/issues of
exporters.
• An updated compilation of standard input output norms (SION) and ITC (HS) clas-
sification of export and import items has been published.
Directorate of Trade Remedy Measures

• To enable support to Indian industry and exporters, especially the MSMEs, in avail-
ing their rights through trade remedy instruments, a Directorate of Trade Remedy
Measures shall be set up.
C ase
In yet another step to curb the inflationary pressure during the coming festival season, the
government has eased norms for a duty-free import of vanaspati from Nepal. The STC, which
is the sole agency authorised to import 1-lakh-tonne 1-lt annual quota at nil duty under the
Indo-Nepal Treaty of Trade, has now been allowed to rope in ‘Associates’ to undertake it. This
is against the present arrangement wherein the STC is required to make the imports on its
own and not through third parties.
However, in a public notice issued on 4 October amending an earlier order dated

24 June, 2003, the DGFT extended the facility of importing the annual quota to an ‘Associate’,
appointed by the STC. Simultaneously, it has granted a further three-month reprieve for
utilisation of the 1-lt import quota fixed for 2003–04. The normal annual-time period for
fulfilling the quota entitlement extends from 6 March of a calendar year to 5 March of the
ensuing year.
The treaty also does not allow to carry forward the unutilised quota to the subsequent
year. By this logic, the 2003–04 quota would have ordinarily lapsed on 5 March, 2004.
However, in mid-February, the DGFT extended the Zero Duty Quota entitlement for 2003–
04 by a three-month bill till 5 June. On 23 June, this was extended for an additional three
months ending 5 September. Now the DGFT has given another extension till 5 December,
with an additional 1-lt quota for 2004–05, being permitted for import before 5 March, 2005.
According to trade sources, despite the repeated extension given, only 60,000 tonnes out
of 1-lt quota fixed for 2003–04 have so far entered the country. The reason for non-fulfillment
of the quota is STC’s apparent inability to undertake the imports on its own. The move to
allow STC to appoint associate agencies for carrying out imports is expected to facilitate
utilisation of the remaining 40,000-tonne quota for the year 2003–04 by the specified dead-
line of 5 December, besides allowing an additional 1 lakh tonne, to be imported between
6 December, 2004 and 5 March, 2005 in fulfilment of the 2004–05 quota.
The domestic vanaspati industry is, however, upset with the latest move having only
some time back secured an order from a Calcutta High Court Bench, restraining the STC
from importing through third parties.
The bench had even directed the STC to pay the regular MFN (most favourable nation)
duty of 20 per cent on such imports which, it held, cannot be eligible for duty exemption
under the treaty. The industry’s grouse against allowing the third-party imports was that the
entire vanaspati coming in through this was being ‘dumped’ in the main northern consuming
market and that the STC was not taking any step to ensure a uniform distribution across the
country.
However, according to DGFT, the associate agencies appointed would import the specific
quantity subject to the overall responsibility of STC, who will ensure its distribution and
monitoring as per the government policy. The import of 1 lakh tonne of vanaspati at the
current wholesale prices in Delhi translates into a business of about ` 500 crore.
Case Question
Do you support the decision of DGFT?
s u mma r y
The import policy of India was formulated as a part of FTP and, thus, had suffered a serious foreign exchange crisis at
of the country. During the post-independence period, the the end of the Second Plan. Considering the situation, the
import policy of the country was formulated at different times government reversed its import policy and imposed heavy
in order to limit the volume of the import-preserve foreign restriction on imports. In 1962, the Mudaliar Committee
exchange, encouraging the imports of items that are required recommended the import of raw materials and other com-
for industrialisation of the country and modifying the same ponents for various industries in power, transport, EOUs,
imports for a better export promotion. During the first dec- import-substituting.
ade of planning, the country adopted a liberal import policy
Key W o r d s
● Export Processing Zones (EPZ) ● Export Houses ● Negative List of Import/Export
● Exim Scrip ● Trading Houses ● Domestic Tariff Area (DTA)
● Open General Licence (OGL) ● Canalisation ● Custom Duty
● Antidumping Duties ● Quantitative Restrictions (QRs) ● Target Plus
● Special Economic Zones (SEZs) ● Imports ● OL (petroleum, oil, and lubricants)
P
● iamond Dollar Account Scheme
D ● Exports Imports
(DDAS) ● EPCG
● Agri-export Zones (AEZs) ● Importer–Exporter Code (IEC)
Q u est i o n s
1. Explain the foreign trade policy that is followed by 7. Discuss the import liberalization measures adopted
India since independence. by the government in Exim Policy, 2001.
2. Discuss the export policy of India. Explain the export 8. Discuss the important compositional changes in
promotion measures adopted in this context. India’s exports.
3. Analyse the import policy of India. Explain the import 9. Discuss the important measures adopted in the Exim
substitution measures adopted in this context. Policy, 2009–2014.
4. Discuss the Exim Policy of India for 2008–2012. 10. Analyse the impact of liberalization measures that
5. Critically examine the 1991 trade policy reforms of are adopted by the government since 1991 on
India with regard to imports and exports. imports and exports.
6. What are the objectives of the Exim Policy, 2009– 11. How regional integration will help developing and
2014? Discuss the sailient features and measures underdeveloped countries to boost their export?
adopted in the policy.
Refe r e n ces
n Frances, C. (2005). International Trade and Export Man- n Khurana, P. K. (2002). Export Management, 3rd ed. New
agement, 14th ed. Mumbai: Himalaya Publishing House. Delhi: Galotia Pub.
n Frances, C. (2005). World Trade and Payments: An Intro- n Kumar, N. and R. Mittal (2002). Export Management.
duction. New Delhi: Pearson Education. New Delhi: Anmol Pub.
n Garge, P. (2002). Export of India’s Major Products: Prob- n Misra, S. K. and V. K. Puri (2000). Indian Economy.
lems and Prospects. New Delhi: New Century Pub. Mumbai: Himalaya Publishing House.
n http: parliamentofindia.nic.in/ls/lsdeb/ls10/ses1/ n Mithani, D. H. (2004). Money Banking International
0813089102.htm. Trade and Public Finance, 15th ed. Mumbai: Himalaya
n http://commerce.nic.in/publications/anualreport_ Publishing House.
chapter2-2012-13.asp
n http://www.g20.org/about_g20/g20_
members#sthash.2KY3eono.dpuf
28
C hapter
Special Economic Zones in

India
>>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>>
• Concept and Meaning of Sez 772 • Sez and Export Promotion 786
• The History of Sez 772 • Sez Policy of India: Sez Act and Sez Rules 788
• Definition of Sez 773 • Salient Features/Provisions of Sez Rules 789
• Who Can Set up Sez and its Requirements 774 • Sez Controversy 789
• Approval Mechanism 775 • Sezs—A Global Overview 791
• Sezs in India 776 • Conclusion 792
• Advantages and Disadvantages of Sez 778 • Case 792
• Performance of Sez in India 779 • Key Words 794
• Important Sezs in India 780 • Questions 794
• Features and Facilities of Sezs in India 781 • References 795
CONCEPT AND MEANING OF SEZ

India was one of the first in Asia to recognize the effectiveness of the export processing zone
(EPZ) model in promoting exports, with Asia’s first EPZ set up in Kandla in 1965. With a
view to overcome the shortcomings experienced on account of the multiplicity of controls
and clearances, absence of world-class infrastructure, and an unstable fiscal regime, and also
with a view to attract larger foreign investments in India, the special economic zones (SEZs)
Policy was announced in April 2000.
This policy intended to make SEZs an engine for economic growth, supported by qual-
This policy intended to make ity infrastructure and complemented by an attractive fiscal package, both at the centre and
SEZs an engine for economic at the state level, with the minimum possible regulations. SEZs in India functioned from
growth, supported by quality
infrastructure and complement- 1 November 2000 to 9 February 2006 under the provisions of the foreign trade policy (FTP),
ed by an attractive fiscal pack- and fiscal incentives were made effective through the provisions of relevant statutes. SEZ
age, both at the Centre and at means an area of land that has been demarcated and is treated as a foreign territory for vari-
the State level, with the mini-
ous purposes such as tariffs, trade, and duties. SEZs in India enjoy exemptions from income
mum possible regulations.
tax, service tax, sales tax, and customs duties. However, SEZ in India is in controversy because
of revenue losses due to tax exemption and land acquisition.
THE HISTORY OF SEZ

From 1965 onwards, India The world’s first-known instance of SEZ had been found in an industrial park that was set up
experimented with the concept
of such units in the form of in Puerto Rico in 1947. In the 1960s, Ireland and Taiwan followed suit but in the 1980s, China
EPZs. made the SEZs gain global currency with its largest SEZ being the metropolis of Shenzhen.
Special Economic Zones in India | 773
From 1965 onwards, India experimented with the concept of such units in the form of EPZs.
However, a revolution came in 2000, when Murasoli Maran, the then Commerce Minister,
made a tour to the southern provinces of China. After returning from the visit, he incorpo-
rated the SEZs into the Exim Policy of India. About five years later, SEZ Act (2005) was also
introduced and in 2006, SEZ Rules were formulated.
The history of SEZs in India suggests that the seeds of the basic concept of SEZ were
sown in the mid-1960s. Further, the history also suggests that the basic model of the present-
day Indian SEZ was structured with the establishment of the first EPZ at Kandla in the year
1965. Several other EPZs were set up at various parts of India in the subsequent years. Lack of
good economic policy and inefficient management of the Government of India soon became
the detrimental factors for the success of these EPZs. Thus, the performance of these EPZs of
India fell short of expectations.
The modern-day SEZ came into existence as the economic reforms incorporated in the
early 1990s did not result in the overall growth of the Indian economy. The SEZ policy of The modern-day SEZ came
into existence as the economic
India was devised to act as a catalyst to promote the economic growth attained in the early reforms incorporated in the
1990. The economic reforms incorporated during the 1990s did not produce the desired early 1990s did not result in
results. The Indian manufacturing sector witnessed a sudden dip in the overall growth of the overall growth of the Indian
the industry, during the second half of 1990s. The history of SEZs in India suggests that red economy.
tape, lengthy administrative procedures, rigid labour laws, and poor physical infrastructural
facilities were the main cause of deterioration of Foreign Direct Investments’ (FDI) inflow
into India. Further, the Indian markets were not mature enough to facilitate an easy entry
for the Foreign Institutional Investors (FIIs) into the Indian economic system. Furthermore,
the legal framework of Indian economy was not that strong enough to prevent any misuse of
Indian markets by the FIIs. Thus, the lack of FII-friendly environment in India prevented the
growth of Indian industry, in spite of the implementation of liberal economic policy by the
central government. This resulted in the formation of a much larger and more efficient form
of the model of their predecessors with a world-class infrastructural facility.
The history of SEZs in India suggests that the present-day SEZ policies of India are well
complimented by the provisions of the Acts and the Rules of SEZ. A number of meetings
were held across India for the formulation of ‘The Special Economic Zones Act, 2005’, which
The SEZ Act, 2005 and the SEZ
was subsequently passed by the Parliament in May 2005. The SEZ Act, 2005 and the SEZ Rules became effective on and
Rules became effective on and from 10 February 2006. The SEZ Act, 2005 defines the key from February 10, 2006.
role for the state governments in export promotion and creation of infrastructural facilities.
A single window SEZ approval mechanism has been facilitated through a 19-member, inter-
ministerial SEZ Board of Approval or BOA. And the decision of the SEZ BOA is binding
and final.
DEFINITION OF SEZ
A special economic zone, in short SEZ, is a geographically bound zone where the economic
laws in matters related to export and import are more broadminded and liberal when com-
pared to the rest of the country. SEZs are projected as duty-free areas for the purpose of trade,
operations, duty, and tariffs. SEZ units are self-contained and integrated having their own
infrastructure and support services.
SEZ means an area that has
SEZ means an area that has been specified as an enclave that is duty free and is treat- been specified as an enclave
ed as a foreign territory for various purposes such as tariffs, trade operations, and duties. that is duty free and is treated
A SEZ is a geographical region that has economic laws that are more liberal than a country’s as a foreign territory for various
typical economic laws. The category ‘SEZ’ covers a broad range of more specific zone types, purposes such as tariffs, trade
operations, and duties.
i ncluding free trade zones (FTZ), export processing zones (EPZ), free zones (FZ), industrial
estates (IE), free ports, urban enterprise zones (UEZs), and others.
Within SEZs, a unit may be set up for the manufacture of goods and other activities
including processing, assembling, trading, repairing, reconditioning, making of gold/silver,
platinum jewellery, and so on. As per law, SEZ units are deemed to be outside the customs
territory of India. Goods and services coming into SEZs from the domestic tariff area (DTA)
are treated as exports from India, and goods and services rendered from the SEZ to the DTA
are treated as imports into India.
WHO CAN SET UP SEZ AND ITS

REQUIREMENTS
An SEZ can be set up jointly or individually by the central government, a state government
or any other body, including a foreign company, for the purpose of (1) manufacturing goods,
(2) rendering services, (3) for both of these reasons, or (4) as a Free Trade and Warehousing
Zone (FTWZ). The SEZ Rules specify the minimum land area that is required for setting up
an SEZ in general. This requirement depends on the type of SEZ to be established.
Minimum contiguous area requirements for certain types of SEZs
Type of SEZ Hectares

Multi-product (sec. 5 para. 2 lit. a) SEZ Rules) 1.000 or more
Sector-specific or in one or more services or a port or an airport 100 or more
(sec. 5 para. 2 lit. b) SEZ Rules)
Sector-specific: electronics hardware or software. IT, gems & 10 or more
jewellery, bio-technology, non-conventional energy, including solar
energy equipment and solar cells (sec. 5 para. 2 lit. b) proviso 1
and 2 SEZ Rules)
Free Trade & Warehousing Zone (FTWZ) (sec. 5 para. 2 lit. c) 40 or more
SEZ Rules)
Source: Special Economic Zones in India.
The requirements concerning the minimum size of an SEZ are relaxed with regard to
certain small states. Thus, in the states of Assam, Meghalaya, Nagaland, Arunachal Pradesh,
Mizoram, Manipur, Tripura, Himachal Pradesh, Uttaranchal, Sikkim Jammu and Kashmir,
and Goa or in a union territory, the minimum area requirement for multi-product SEZs
or a sector-specific SEZ has been reduced to 200 and 50 hectares or more respectively. In
the case of a multi-product or a sector-specific SEZ, at least 50 per cent of the area must be
earmarked for developing the processing area. The very specific requirements for sector-
specific operations can be seen from sec. 5 para. 2 lit. b) and c) SEZ Rules. If the developer
proposing to set up an SEZ is not in possession of the minimum contiguous area, the central
government may approve more than one developer. In such cases, each developer shall be
considered as a developer in respect of the land under its possession. Whereas, at first, there
was no ceiling regarding the maximum size of an SEZ, a meeting of the so-called Empowered
Group of Ministers (EGoM) held on 5 April 2007 brought about a capping at 5,000 hectares,
which can still be undercut by states as land matters are state matters according to Indian
constitutional law.
APPROVAL MECHANISM
The developer, which may be the (central and state) government itself, a private developer or
a joint venture in which both parties are involved, is entitled to set up an SEZ after identifying
the proposed area. The procedure for setting up a zone like this may vary according to the
nature of the developer. The private developer submits his or her proposal for establishment
of an SEZ to the state government concerned (sec. 3 para. 2 SEZ Act). Notwithstanding, the
private developer may also approach the BoA directly (sec. 3 para. 3 SEZ Act) and thereafter
get the concurrence of the state government concerned. The state government has to get its
proposal screened directly by the BoA according to sec. 3 para. 4 SEZ Act. After consulting
the respective state government, however, the central government may set up and notify the
SEZ suo motu (sec. 3 para. 4 SEZ Act). The state government has to forward the private de-
veloper’s proposal to the BoA within 45 days of the date of receipt along with its recommen-
dation (sec. 4 Para. 1 SEZ Rules). The BoA then has the power of approving or rejecting the
proposal or modifying such proposals for the establishment of SEZs. In the event of approval,
the BoA communicates the same to the central government, which, in turn, grants formal
approval to the developer (sec. 3 para. 10 SEZ Act) through a Letter of Approval (LoA) within
30 days of receiving the communication from the BoA. The LoA is valid for a period of three
years, during which the developer must take all necessary steps to ensure implementation
of the approved proposal. The powers also include the decision taking regarding authorized
operations to be carried out in the SEZ by the developer as well as granting approval to the
developers or units in the SEZ for foreign collaboration, FDI and regarding infrastructure
facilities (sec. 9 para. 2 SEZ Act).
The proposal paths are visualized in Figures 28.1 and 28.2:
Private Developer Concurrence 1. Proposal Within six

months after using path
State Government as
Forwarder of Proposal
< Figure 28.1
Approval Mechanism
for the Establishment
5. Establishment of an SEZ for a Private
by
d
Developer
ire
2. Forward
ct
Special Economic Zone Proposal within

45 days
4. Letter of Approval
within 30 days
Central Government 3. Communication

as Forwarder of Approval Board of Approval
of Approval
Regarding the overall establishment of an SEZ, one has to differentiate between various
processes. The aforementioned process describes the steps involved in an SEZ approval. After
introducing the other official agencies, which is necessary to understand the further proce-
dures in the SEZ framework, the other procedures that are required to get the SEZ notified
in order to acquire a grant of approval for authorized operations and for setting up a unit in
the SEZ.
Figure 28.2
Approval Mechanism for
> Central Government
as Developer
1. Consulation
State Government
(as Developer)
the Establishment of an
SEZ for the Central and c) Letter of Approval
State Government as a
Developer
2. Establishment d) Establishment
a) Proposal
Special Economic Zone
b) Approval
Board of Approval
Source: www.iosrjournals.com
SEZs IN INDIA
SEZs help in the economic and industrial growth of the state and that is why, the Government
of India has made it SEZs in India. In India, SEZs can be set up by the state government or its
various agencies, or any other public, private, or joint sector. Even foreign companies can set
up SEZs in India. The main objectives of setting up SEZs in India are as follows:
• Generation of additional economic activity,
• Promotion of exports of goods and services,
• Promotion of investment from domestic and foreign sources,
• Creation of employment,
• Development of infrastructure facilities,
• Simplified procedures for development, operation, and maintenance of SEZs, and
also for setting up units and conducting businesses,
• Single window clearance for setting up an SEZ and a unit in SEZ,
• Single window clearance on matters relating to central as well as state governments,
and
• Easy and simplified compliance procedures and documentations with stress on self-
certification.
The number of SEZs in India The number of SEZs in India has increased at a very fast pace over the last few years. In
has increased at a very fast India, SEZs are being set up in many states of the country due to the efforts that are being
pace over the last few years. In
undertaken by the Indian government. Consequent upon the SEZ Rules coming into force
India, SEZs are being set up in
many states of the country due with effect from 10 February 2006, BOA has held nine meetings. At present, there are 589
to the efforts that are being un- valid formal approvals and 48 in-principle approvals. Out of the 589 formal approvals, noti-
dertaken by the Indian govern- fications have already been issued to 389 SEZs, till July 2012.
ment.
The fact that these 589 formal approvals given for setting up SEZs and spread over 19
states/UTs (union territories), show that they are not concentrated in any one particular
region but all over the country. The total land area in the 589 formally approved SEZs is about
71,502 Hectare, out of which 47,190 Hectare approximately are for the notified SEZs.
If we look at the SEZ approvals sector-wise as shown in the Figure 28.3 given below, we
find that almost 90 per cent approves for IT and IT-related SEZs. The number of SEZs in
India has increased at a very fast pace over the last few years. In India, SEZs are being set up
in many states of the country due to the efforts and facilities that are being undertaken by the
Indian government. Box 28.1 details the features of SEZ in India.
Writing & Printing paper mills < Figure 28.3

Sector-wise Distribution
Textiles/Apparel/Wool
of SEZ Approvals
Strategic Manufacturing
Power/alternate energy/solar
Port based multiproduct
Plastic Processing
Pharma/Chemical
Petro chemical & petro
Non conventional energy
Multi services/Services
Multiproduct
Metallurigal Engineering
Metal/St.Steel/Alum/Foundary
IT/ITES/hardware
Handicraft
Granite Processing Industry
Gems and Jewellary
FTWZ
Footwear/Leather
Food Processing
Electronic Product/ind
Building Product/materials
Biotech
Beach & minerals/metals
Aviation/aerospace/Copper
Auto and related
Airport based multiproduct
Agro
0 10 20 30 40
Notified SEZ In Principle approval Formal approvals
Box 28.1 SEZ in India—a Glance
Fact Sheet on Special Economic Zones

(Dedicated website: www.sezindia.nic.in)
Number of formal approvals 589

Number of notified SEZs (as on 17.7.2012) 389 (out of 589) + (7 Central Govt. + 12 State/Pvt. SEZs)
No. of valid in-principle approvals 48
Operational SEZs (as on 31 March, 2012) 153 (Break up: 17 are multi-product SEZs, remaining are IT/TES,
Engineering, electronic hardware, textiles, Biotechnology, Gem &
Jewellery and other sector specific SEZs)
Units approved in SEZs as on 31 March, 3,400
2012)
Notified SEZs Formally approved (FA) incl.
notified SEZs
Land for SEZs 47,190 Hectare 71,502 Hectare
Land is a state subject. Land for SEZs is procured as per the policy
and procedures of the respective state governments.
INVESTMENT Incremental Total
(as on 31 March, 2012) investment investment
SEZs Notified under the Act ` 1,82,750.74 cr. ` 1,82,750.74 cr.
State/Pvt. SEZs set up before 2006 ` 5,881.30 cr. ` 7,637.61 cr
Central government SEZs ` 9,207.21 cr. ` 11,486.41 cr.
Total ` 1,97,839.25 ` 2,01,874.76 cr.
ADVANTAGES AND DISADVANTAGES OF SEZ

A SEZ unit which has been set up for carrying on manufacturing, trading or service activity
has both advantages as well as disadvantages. SEZ advantages are quite far more as compared
to its disadvantages which are almost negligible.
Advantages
• 15 year corporate tax holiday on export profit – 100 per cent for initial 5 years,
50 per cent for the next 5 years, and up to 50 per cent for the balance 5 years equiva-
lent to profits ploughed back for investment.
• Allowed to carry forward losses.
• No licence required for import made under SEZ units.
• Duty free import or domestic procurement of goods for setting up of the SEZ units.
• Goods imported/procured locally are duty free and could be utilized over the approval
period of 5 years.
• Exemption from customs duty on import of capital goods, raw materials, consumables,
spares, etc.
• Exemption from central excise duty on the procurement of capital goods, raw
materials, consumable spares, etc. from the domestic market.
• Exemption from payment of central sales tax on the sale or purchase of goods,
provided that, the goods are meant for undertaking authorized operations.
• Exemption from payment of service tax.
• The sale of goods or merchandise that is manufactured outside the SEZ (i.e., in DTA)
and which is purchased by the unit (situated in the SEZ) is eligible for deduction and
such sale would be deemed to be exports.
• The SEZ unit is permitted to realize and repatriate to India the full export value of
goods or software within a period of 12 months from the date of export.
• ‘Write-off ’ of unrealized export bills is permitted up to an annual limit of 5 per cent
of their average annual realization.
• No routine examination by customs officials of export and import cargo.
• Setting up off-shore banking units (OBU) allowed in SEZs.
• OBUs allowed 100 per cent income tax exemption on profit earned for three years
and 50 per cent for the next two years.
• Exemption from requirement of domicile in India for 12 months prior to appoint-
ment as Director.
• Since SEZ units are considered as ‘public utility services’, no strikes would be allowed
in such companies without giving the employer 6 weeks prior notice in addition to
the other conditions mentioned in the Industrial Disputes Act, 1947.
• The government has exempted SEZ units from the payment of stamp duty and
r egistration fees on the lease/license of plots.
• External commercial borrowings up to $ 500 million a year allowed without any
maturity restrictions.
• Enhanced limit of ` 2.40 crores per annum allowed for managerial remuneration.
Disadvantages
• Revenue losses because of the various tax exemptions and incentives.
• Many traders are interested in SEZ, so that they can acquire at cheap rates and create
a land bank for themselves.
• The number of units applying for setting up EOUs is not commensurate to the number
of applications for setting up SEZs leading to a belief that this project may not match
up to expectations.
PERFORMANCE OF SEZ IN INDIA

The Government of India announced the introduction of SEZ to achieve threefold objective
of increasing employment, exports for accelerating economic growth, and increasing
investment in SEZ.
Export Performance of SEZs
Exports from SEZs

2010–11 % of Total 2011–12 % of Total
production production
DTA sale (counted for +ve NFE) 29093.02 8.11 32472.70 8.00
DTA sale (not counted for +ve NFE) 13881.20 3.87 29664.83 7.00
Total exports 3,15,867.85 – 364477.73 –
Source: Special Economic Zones in India, Ministry of Commerce & Industry, Department of Commerce.
Employment generation of SEZ
Employment (as on 31 March 2012) Incremental Employment Total Employment

SEZs notified under the Act 5,52,048 persons 5,52,048 persons
State/Pvt. SEZs set up before 2006 66,547 persons 79,015 persons
Central government SEZs 91,617 persons 2,13,853 persons
Total 7,10,212 persons 8,44,916 persons
Investment in SEZ
Investment (as on 31 March 2012) Incremental Investment Total Investment

SEZs notified under the Act US$ 32.79 billion US$ 32.79 billion
State/Pvt. SEZs set up before 2006 US$ 1.06 billion US$ 1.37 billion
Central government SEZs US$ 1.65 billion US$ 2.06 billion
Total US$ 35.54 billion US$ 36.27 billion
IMPORTANT SEZs IN INDIA

• Falta Food processing Unit, West Bengal
• Salt Lake Electronic City, West Bengal
• Manikanchan Gems and Jewellery, West Bengal
• Calcutta Leather Complex, West Bengal
• Karnataka Biotechnology and Information Technology Services—SEZ on biotech-
nology sector in Bangalore’s Electronics City, over an area of 43 acres
• Shree Renuka Sugars Limited—SEZ on sugarcane-processing complex covering
100 ha, comprising a sugar plant, power station, and distillery, at Burlatti in Belgaum
district
• Ittina Properties Pvt. Ltd. and three other firms—SEZs in IT sector, covering
electronics, hardware, and software sectors in Bangalore, over an area of 15.732 ha
• Divyasree Infrastructure—SEZ in the IT/ITES sector over an area of 20.234 ha in
Bellandur Amani Kane near Bangalore
• Chaitanaya Infrastructure Pvt. Ltd.—SEZ in the IT/ITES sector in Bangalore over an
area of 20.24 ha
• Bagmane Developers Pvt. Ltd.—SEZ in the IT/ITES sector in Raman Nagar in
Bangalore North over an area of 15.5 ha
• Shipco Infrastructure Pvt. Ltd.—Free Trade Warehousing Zone (FTWZ) in Karnataka
over an area of 120 ha
• Hinduja Investments Pvt. Ltd.—SEZ in the textile and apparel sector at
Doddamannugudde in Bangalore Rural district, over an area of 100 ha
• Wipro Infotech—SEZ on IT/ITES at Electronics City, Sarjapur, Bangalore
• Hewlett-Packard India Software Operation Pvt. Ltd.—SEZ on IT
• Food-processing and related SEZ services in Hassan, over an area of 157.91 ha
• SEZs on pharmaceuticals, biotechnology, and chemical sectors in Hassan, covering
281.21 ha
• SEEPZ—Andheri (East), Mumbai
• Khopata—Multi-product, Mumbai
• Navi Mumbai—Multi-product, Mumbai
FEATURES AND FACILITIES OF SEZs IN INDIA

SEZs in India are not only expected to bring large flow of FDI but also domestic invest-
ment, which will help in generating additional economic activity in the form of enhancing
productive capacity as well as capabilities. The salient features of the SEZ Act mainly revolve
around
a. Satisfying the needs of all major stakeholders in an SEZ, including developers,
operators, suppliers, residents, etc.,
b. Making provisions of single window clearance mechanism,
c. Providing attractive fiscal incentive package,
d. Establishing free trade and warehousing zones with a view to develop internationally
competitive infrastructure facilities to augment import and export of commodities,
e. Setting up of offshore banking units, and
f. Facilitating public–private participation towards development of infrastructure.
The Government of India has introduced various types of special incentives and benefits to
SEZ units, according to the official website www.sezindia.nic.in, of the Government of India,
are as follows:
Customs and Excise

• SEZ units are free to import from the domestic sources without paying any duty
on capital goods, raw materials, consumables, spares, packing materials, office
equipment, DG sets, and so on, for implementation of their project in the zone with-
out any license or specific approval. Goods which are imported duty free could be
utilized over the approval period of five years.
• Sales to DTA by SEZ units is always regarded as import and is subject to all normal
import duties, including countervailing duty (CD), special additional duty (SAD),
and so on.
SEZ units are free from the peri- • SEZ units are free from the periodic examination by customs of export and import
odic examination by customs of
export and import cargo.
cargo.
SEZ units may sub-contract a part of their production through units in DTA/SEZ/EOU/ EPZ
with the permission of the customs authorities. Sub-contracting may also be permitted for
processing abroad with the permission of the BOA.
Income Tax
Part 1—Income Tax Incentives for SEZ Units
The tax exemption for SEZ units

• For the tax exemption for SEZ units that are engaged in manufacture or providing
that are engaged in manufac- services Section 10AA has been newly introduced in the IT Act by SEZ Act, 2005,
ture or providing services. which provides that the units in SEZ that start manufacturing or producing articles/
things or which start providing services on or after 1 April 2005, will be eligible for
a deduction of 100 per cent of export profits for the first five years from the year in
which such manufacture/provision of services commences and 50 per cent of the
export profits for the next five years. Further, for the next five years a deduction shall
be allowed of up to 50 per cent of the profit, as is debited to the profit and loss account,
and credited to the Special Economic Zone Reinvestment Reserve Account (subject
to conditions).
The tax exemption for Offshore

• The tax exemption for OBUs in SEZ—a deduction in respect of certain incomes
Banking Units (OBUs) in SEZ. would be allowed under the newly introduced Section 80LA, to scheduled banks or
foreign banks having an OBU in SEZ or to a unit of IFSC (International Financial
Services Centre). The deduction shall be for 100 per cent of income for five con-
secutive years beginning from the year in which permission/registration has been
obtained under the Banking Regulation (BR) Act, the SEBI Act, or any other relevant
law and 50 per cent of income for the next five years. Further, for the next five years a
deduction shall be allowed of up to 50 per cent of the profit, as is debited to the profit
and loss account, and credited to the Special Economic Zone Reinvestment Reserve
Account (subject to conditions).
• The interest received by non-residents and non-resident ordinary (NRO) on deposits
made with an OBU on or after 1 April 2005 shall be exempt from tax.
The exemption from capital

• The exemption from capital gains—capital gains arising on transfer of assets
gains. (machinery, plant, building, land, or any rights in buildings or land) on shifting of the
industrial undertaking from an urban area to any SEZ would be exempt from capital
gains tax. The exemption would be allowable if within a year before or three years
after such transfer.
• A machinery or plant is purchased for the purposes of business of an industrial

undertaking in SEZ by the assessee.
• An assessee has acquired a land or building or has constructed a building for the
purposes of business in SEZ.
• The amount of exemption for capital gains would be restricted to the costs and
expenses incurred in relation to all or any of the purposes mentioned above.
Part 2—Income Tax Incentives for SEZ Developer

• Tax holiday for SEZ developers—Section 80-IAB has been introduced newly in the IT Tax holiday for SEZ developers.
Act vide SEZ Act, 2005, whereby a deduction of 100 per cent of profits derived from
the business of developing SEZ (notified on or after 1 April 2005) would be available
to the developer of SEZ for any 10 consecutive years out of 15 years beginning from
the year in which the SEZ has been notified.
• Exemption under Section 10(23G) that was available to infrastructure capital fund Exemption under Section
or a cooperative bank on interest and long term capital gains investment had been 10(23G).
extended to investment made by SEZ developers qualifying for tax holiday under
Section 80-IAB of the IT Act. However, this exemption has been withdrawn with
effect from the assessment year 2007–08.
• Exemption from Dividend Distribution Tax (DDT)—No DDT would be payable by Exemption from Dividend Distri-
a developer of SEZ on dividend declared, distributed, or paid on or after 1 April 2005 bution Tax (DDT).
out of current income.
• Exemption from Minimum Alternate Tax (MAT)—Any income earned on or after Exemption from Minimum Alter-
1 April 2005 by an SEZ developer would be exempt from MAT under Section 115JB nate Tax (MAT).
of the Act from DTA to SEZ.
Foreign Direct Investments

• About 100 per cent FDI is freely allowed in the manufacturing sector in SEZ units About 100 per cent FDI is freely
under automatic route—except arms and ammunition; explosives; atomic substances; allowed in the manufacturing
narcotics and hazardous chemicals; distillation and brewing of alcoholic drinks; and sector in SEZ units under auto-
cigarettes, cigars, and manufactured tobacco substitutes. matic route.
• No cap of foreign investments for SSI-reserved items.
Total SEZ investment and Share of FDI

Year Total SEZ investment Share of FDI
1998 223.8 17.4
2003 336 24.5
2008 7859.93 23.5
Offshore Banking Units

• Setting up of OBUs allowed in SEZs.
• OBUs are entitled for 100 per cent income tax exemption, for the first three years and
50 per cent, for the next two years.
Banking/External Commercial Borrowings

• ECBs by units up to US$500 mn a year allowed without any maturity restrictions.
• Freedom to bring in export proceeds without any time limit.
• Flexibility to keep 100 per cent of export proceeds in EEFC (Exchange Earners’
Foreign Currency) account and freedom to make an overseas payment from such
account.
• Exemption from interest-rate surcharge on import finance.
• SEZ units allowed to write off unrealized export bills.
• Exemption from interest-rate surcharge on import finance.
Service Tax
Exemption from service tax to
SEZ units. • Exemption from service tax to SEZ units.
Sales to DTA
• DTA sales can be undertaken subject to achievement of positive NFE (net foreign
exchange). NFE shall be calculated cumulatively for a period of five years from the
commencement of commercial production.
• For the purpose of calculation, the value of imported capital goods shall be amortised
as follows:
• First–Second Year: 5 per cent each year.
• Third–Fifth Year: 10 per cent each year.
• Sixth–Eighth Year: 20 per cent each year.
Exemption from capital gains • Exemption from capital gains on transfer of an industrial unit from urban area
on transfer of an industrial unit to an SEZ.
from urban area to an SEZ.
• Drawback or such other benefits as may be admissible from time to time on goods and
services admitted from the DTA for setting up, operation, and maintenance of units.
• All exports from the DTA to the zone shall be exempt from the state and local-
body taxes or levies; as in some states, the exports made to educational institutions,
hospitals, hotels, residential and/or commercial complexes, leisure and entertain-
ment facilities, or any other facilities as may be notified by the state government are
not exempt.
• Developers of SEZs may import or procure goods from DTA without payment of
duty for development, operation, or maintenance of SEZ.
Exemption from Central Sales
Tax (CST). • Exemption from CST on the supply of goods from the DTA for development, opera-
tion, and maintenance of SEZs.
Income tax exemption for a
block of 10 years in the first • Income tax exemption for a block of 10 years in the first 15 years of operation.
15 years of operation.
• Investment income in the form of dividends, interest, or long term capital gains, of an
infrastructure capital company from investments made in an enterprise engaged in
the development, operation, or maintenance of an SEZ are exempt from tax.
• Foreign investment permitted.
• Service tax exemption on services provided to a developer or to a unit located in the

SEZ region.
• Any activity or transaction in the zone, which is liable for entertainment duty under
the Bombay Entertainments Duty Act, 1923 and luxury tax under the Maharashtra
Tax on Luxuries Act, 1987, shall not be liable to such tax. The fiscal benefits shall
be applicable for a period of 25 years from the date of notification of the zone by
the Government of India or such extended period as may be decided by the state
The fiscal benefits shall be
government. applicable for a period of 25
years from the date of notifica-
• With respect to each SEZ all such transactions between the zones or within the tion of the zone by the Govern-
zone or both, including the transactions of land acquisition for development of ment of India or such extended
the zone between the developer or codeveloper and land owners, and land transactions period as may be decided by
between the developers or codevelopers and the units, carried out after declaration of the State government.
the zone by the Government of India, shall be exempt from the following state taxes,
cess, and levies, viz.,
• Purchase tax, sales tax, and turnover tax.
• Specified sales (lease tax) in respect of lease of goods.
• Stamp duty for the first transaction between the developer or codeveloper and
the land owner, and the first transaction between the developer or codeveloper
and the units.
• Registration fee for the first transaction between the developer or codeveloper
and the land owner, and the first transaction between the developer or codevel-
oper and the units.
• Land assessment tax.
• Electricity duty and tax (only for sales to units in processing area).
• Water pollution cess.
• Works contract tax.
• State government shall.
• Provide exemption from electricity duty or taxes on sale of self-generated or
purchased electric power for use in the processing area of an SEZ.
• Allow generation, transmission, and distribution of power within an SEZ subject
to the provisions of the Electricity Act.
Exemptions in Matters Related to Environment

• SEZs are permitted to have non-polluting industries in IT and facilities like golf
courses, desalination plants, hotels, and nonpolluting service industries in the coastal
regulation zone (CRZ) area.
• SEZ units are exempted from public hearing under Environment Impact Assessment SEZ units are exempted from
public hearing under Environ-
Notification. ment Impact Assessment Noti-
fication.
Company Act
• Enhanced limit of INR (international normalized ratio) of 2.4 crore per annum is
allowed for managerial remuneration.
• Agreement to opening of Regional office of Registrar of Companies in SEZ.

• Exemption from requirement of domicile in India for 12 months prior to appoint-
ment as Director.
Drugs and Cosmetics

Exemption from port restriction • Exemption from port restriction under Drugs and Cosmetics Rules.
under Drugs and Cosmetics
Rules. • Sub-contracting/contract farming.
• SEZ units may sub-contract part of production or production process through units
in the DTA or through other EOU/SEZ units.
• SEZ units may also sub-contract part of their production process abroad.
Labour Laws
Normal Labour Laws are appli- • Normal labour laws are applicable to SEZs, which are enforced by the respective state
cable to SEZs. governments. However, state governments have been requested to simplify the pro-
cedures/returns and for introduction of a single window clearance mechanism by
delegating appropriate powers to Development Commissioners (DCs) of SEZ.
SEZ AND EXPORT PROMOTION

The SEZ and export promotion facilitated the growth of the Indian SEZs, as per the website
of maps of India.com, where the provisions of Indian Export Policy are detailed. The main
factor for the under performance of these SEZs was poor export policy of India, which was
loaded with huge taxes and duties. The Government of India eased the export policy of India
to facilitate easy growth of SEZ and export promotion of Indian goods across international
destinations. This created a congenial environment for the development of a special kind of
units within the designated SEZs. These specialized export-oriented units (EOUs) were cre-
The Government of India eased
the export policy of India to ated to increase the overall export potential of these SEZs. Further, these EOUs were devised
facilitate easy growth of SEZ in such a way that they can focus specifically on the growth of Indian exports.
and export promotion of Indian Further, their recipient also facilitates these units to sell their products in the domestic
goods across international des- markets in case of rejection by them, after a payment of designated tax and within the direct
tinations.
tariff area. Only some exclusive commodities are barred from such selling process. There-
after, the development of SEZ and export promotion could be witnessed simultaneously. In
other words, these EOUs shared a reciprocal dependency with the SEZ of India. The provi-
sions of Indian Export Policy, which facilitated the growth of SEZ and Export Promotion of
Indian goods, are as follows:
• Exemption of duties on Indian capital goods, and inputs are offered as per the
r equirements of the approved business activity.
• Taxes are either exempted or waived and even reimbursed in case they are paid in
advance to the concerned authority.
• Duty-free imports of spares, raw materials, capital goods, and consumables are
Preferential treatment of these offered as per the requirements of the approved business activity.
units to the Indian market for
an easy dissemination of their • Preferential treatment of these units to the Indian market for an easy dissemination
products and/or services.
of their products and/or services.
• Rejected commodities (specifically barred commodities that cannot be sold) within

an overall limit of 50 per cent may be sold in the DTA on payment of respective duties
as applicable after a proper notification to the Indian customs authorities. And such
sales of commodities in the DTA shall be counted against DTA sale entitlement, and
the sale of such rejected commodities (up to 5 per cent of FOB (free on board) value
of exports) shall not be subject to achievement of NFE.
• All EOU/EHTP/STP/BTP (export-oriented unit/electronic hardware technology
park/software technology park/business transaction protocol) units may sell their
finished products or services (excluding pepper and pepper products and marble).
The units manufacturing electronic hardware and software, the NFE, and direct tariff
area, the sale entitlement, shall be judged separately for their hardware and software
products.
• Facilitated to retain 100 per cent in foreign currency in EEFC account of the said
trader.
• Tax waiver of dividends and profits for repatriates, without any application of repa-
triation tax.
• Total tax exemption on corporate incomes as per the provisions of Section 10A and
Section 10B of the Indian Income Tax Act.
• Easy and automatic acceptance system for the use of existing trademarks, brand
names, and technological know-how.
Facilitated with outsourcing
• Facilitated with outsourcing of sub-contract capacities for export production against of sub-contract capacities for
orders secured by other SME (small- and medium enterprise) units. export production against or-
ders secured by other SME
• All SEZ units (excluding gems and jewellery units) may sell goods up to 50 per cent (small- and medium enterprise)
of FOB value of exports subject to fulfillment of positive NFE on payment of conces- units.
sional duties. Within the entitlement of DTA sale, the unit may sell in DTA its prod-
ucts similar to the goods, which are exported or expected to be exported from the
units.
• Facilitated with outsourcing of sub-contract of production or part of production
process to Indian or any foreign units.
• The sale to direct tariff agreement is subject to a mandatory requirement of registra-
tion for pharmaceutical products, inclusive of bulk drugs.
• For software-services units, the sale in the DTA in any mode, including online data
communication, shall be permitted up to 50 per cent of FOB value of exports and/or
50 per cent of foreign exchange earned through exports of such services, where the pay-
ment of such services offered to their overseas clients, is received in foreign exchange.
• SEZ units that are associated with manufacturing gems and jewellery may sell up
to 10 per cent of FOB value of exports of the preceding year in direct trade agree-
ment and subject to fulfilment of positive NFE. Further, in the case of a sale of plain
jewellery, the recipient of such trade shall pay a concessional rate of duty as applicable.
Furthermore, in the case of studded jewellery, duty shall be payable as recommended
and amended from time to time.
• The total exemption of duties/taxes on scrap or waste or remnants, in case the said
scrap or waste or remnants is destroyed as per the approval of the customs authorities
of India.
• If the end-product is a by-product and is included in the LOP (letter of permission),

then it may also be sold in the direct tariff area, subject to achievement of positive
NFE on payment of applicable duties within the provisions of such laws. The sale of
such by-products by units is not entitled to direct tariff area sales.
• Facilitated with outsourcing of sub-contract capacities for export production against
orders secured by other units.
SEZ POLICY OF INDIA: SEZ ACT AND

SEZ RULEs
SEZ Act, 2005 came into force with effect from 10 February 2006, with SEZ rules legally
vetted and approved for notification. It is an act to provide for the establishment, develop-
ment, and management of the SEZs for the promotion of exports and for matters connected
therewith or incidental thereto. The SEZ rules provide for a drastic simplification of
procedures and for a single window clearance on matters relating to central as well as state
The SEZ rules provide for a
drastic simplification of proce- governments.
dures and for a single-window An important feature of the Act is that it provides a comprehensive SEZ policy frame-
clearance on matters relating work to satisfy the requirements of all principal stakeholders in an SEZ—the developer and
to Central as well as state gov-
ernments.
operator, occupant enterprise, out zone supplier, and residents. Earlier, the policy relating
to the EPZs/SEZs was contained in the FTP while incentives and other facilities offered to
the SEZ developer and units were implemented through various notifications and circulars
issued by the concerned ministries/departments. This system did not give confidence to in-
An important feature of the Act vestors to commit substantial funds for the development of infrastructure and for setting
is that it provides a compre-
hensive SEZ policy framework up units.
to satisfy the requirements of Another major feature of the Act is that it claims to provide expeditious and single window
all principal stakeholders in an clearance mechanisms. The responsibility for promoting and ensuring orderly development
SEZ—the developer and opera-
of SEZs is assigned to the BOA. It is to be constituted by the central government. While the
tor, occupant enterprise, out-
zone supplier, and residents. central government may suo motu set up a zone, proposals of the state governments and
private developers are to be screened and approved by the board. At the zonal level, approval
committees are constituted to approve/reject/modify proposals for setting up SEZ units.
In addition, the DC and his/her office is responsible for exercising an administrative
control over a zone. The Labour Commissioner’s powers are also delegated to the DC. Finally,
Clause23 requires that designated courts will be set up by the state governments to try all
suits of civil nature and notified offences that were committed in the SEZs. The affected par-
ties may appeal to high courts against the orders of the designated courts. The Act offers a
highly attractive fiscal-incentive package. The SEZ Act deals primarily with the following
matters:
• Establishment of the SEZ and the various authorities constituted in this connection.
• Appointment of the Developer, Codevelopers and approval for units to be located in
the notified area.
• Exemptions, drawbacks, and concessions including exemptions from customs duty
(on goods brought into or exported from the SEZ), excise, service tax, securities
transaction tax, sales tax, and income tax.
• Offshore Banking Unit and International Financial Services Centre. Setting up of off-
shore banking units/International Financial Services Centre in SEZs.
• Notified Offences and Civil Suits. A single enforcement agency/officer for certain
notified offences as well as the designation of courts by the state governments for
such offences committed in and for civil suits arising in SEZs.
SEZ Rules of 2006 are the rules
SEZ Rules of 2006 are the rules which lay down the complete procedure that an individual is
which lay down the complete
required to follow if he/she intends to develop the SEZ or establish a unit in SEZ. The benefits procedure that an individual
of various taxes available to a developer or a unit are also given in the SEZ rules. is required to follow if he/she
intends to develop the SEZ or
establish a unit in SEZ.
SALIENT FEATURES/PROVISIONS OF
SEZ RULES
• Different minimum land requirement for different classes of SEZs.
• Every SEZ is divided into a processing area where the SEZ units alone would come up
and a non-processing area where the supporting infrastructure is to be created.
• Simplified procedures for development, operation, and maintenance of the SEZs, and
for setting up units and conducting business in SEZs.
• Single window clearance for setting up of an SEZ.
• Single window clearance for setting up a unit in an SEZ.
• Single window clearance for matters relating to central as well as state governments.
The Act is expected to trigger a
• Simplified compliance procedures and documentation with an emphasis on self- large flow of foreign and domes-
tic investment in SEZs, in both
certification. infrastructure and productive
capacity, leading to a genera-
The Act is expected to trigger a large flow of foreign and domestic investment in SEZs, in
tion of additional economic ac-
both infrastructure and productive capacity, leading to a generation of additional economic tivity and a creation of employ-
activity and a creation of employment. ment opportunities.
SEZ CONTROVERSY
In spite of the strong objectives of the Indian Government, the SEZ Policy is in the following
controversies:
• Generation of a little new activity as there may be relocation of industries to take
advantage of tax concessions,
• Revenue loss,
• Large scale land acquisition by the developers may lead to displacement of farmers
with a meagre compensation,
• Acquisition of prime agricultural land, having serious implications for food security,
• Misuse of land by the developers for real estate, and
• Uneven growth aggravating regional inequalities. A major controversy surround-
ing the implementation of the
A major controversy surrounding the implementation of the SEZ scheme has been the ruth- SEZ scheme has been the ruth-
less manner that was adapted for acquiring land. News reports highlighted protests across the less manner that was adapted
for acquiring land.
country against acquisition of lands for the purpose of establishing SEZs. The ‘SEZ No More’
campaign gained momentum after the bloody chapter in Nandigram. Regarding displace-
ment and loss of livelihoods, the picture is even grimmer. The estimates show that close to
114,000 farming house holds (each household on an average comprise five members) and an
additional 82,000 farm-worker families, who are dependent upon these farms for their liveli-
hoods, will be displaced. In other words, at least 10 lakh (one million) people, who primarily
depend upon agriculture for their survival, will face eviction. Experts calculate that the total
loss of income to the farming and the farm-worker families is at least ` 212 crore a year. This
does not include the income lost (e.g., of artisans) due to the demise of local rural economies.
Therefore, if SEZs prove to be successful in the future and more cultivated land is acquired,
the country will be confronted with the problem of food security.
Another issue related to SEZ Another issue related to SEZ is revenue losses due to tax exemption. The Comptroller and
is revenue losses due to tax Auditor General (CAG) of India’s report estimates the duty foregone at ` 8,842 crore in the
exemption. five-year period from 2000–01 to 2005–06, while in 2006–07 alone, the revenue loss amount-
ed to ` 2,146 crore as per the budget estimates. With more SEZs getting the government
approval, the Finance Ministry has upped the estimated revenue loss from tax concessions to
such zones to over ` 1 lakh crore for the four-year period from 2006–07 to 2009–10.
The revenue department has now estimated that the revenue loss for the above period
The revenue department has
could be as high as ` 102,621 crore. Of this, the loss on direct taxes account is estimated to be
now estimated that the revenue
loss for the above period could ` 53,740 crore and indirect tax concessions are expected to generate additional losses to the
be as high as ` 102,621 crore. tune of ` 48,881 crore. Till date, about 128 SEZs have been notified and ` 44,142 crore worth
of investments have been made. The total exports from the notified zones are to be about
` 67,000 crore during 2007–08. Over the next four years, the total investments in SEZs are
expected to be about ` 3.6 lakh crore. Table 28.1 clearly shows the losses due to SEZ in various
periods and in various forms.
As far as the issue of employ-
As far as the issue of employment goes, the total incremental employment generated in
ment goes, the total incremen- all SEZs between the period February 2006 and 31 December 2007 is 146,128. This includes
tal employment generated in all the earlier seven EPZs converted to SEZs, 12 state/private SEZs notified prior to the SEZ Act,
SEZs between the period Feb- 2005, and the 195 SEZs notified under the SEZ Act, 2005. The last category has been at the
ruary 2006 and December 31,
2007 is 146,128.
centre of all controversies. A total of 439 SEZs has been formally approved since the SEZ rules
were notified in February 2006. Of this, 195 have been notified. The incremental employment
in the 195 SEZs approved under the SEZ Act, 2005 is 61,015 persons. The Commerce Minis-
try has claimed this as an impressive employment generation asserting that a total of six lakh
jobs will be created by 2010.
Table 28.1
Losses due to SEZ at
> Revenue loss 1 lakh crore (year 2006–10)
Glance Proposed direct employment 2,215,667 persons (year 2006–07)

Actual direct investment 61,015 persons (year 2006–07)
Proposed indirect employment 3,105,300 persons (year 2006–07)
Actual direct employment 100,415 persons (year 2006–07)
No displacement (if all notified 114,000 farming households (each
SEZs get approval and acquire land) household on an average comprise five
members) and an additional 82,000 farm-
worker families
Total loss of income to the farming and ` 212 crore per year
the farm-worker families
Percentage share of SEZ export in the total 5% (year 2005–06)
export of the country
However, a look at the figures for proposed and actual direct employment (as on
31 December 2007) in the 195 newly notified SEZs shows us that there is no real cause for
optimism as far as employment generation is concerned. As against a proposed direct em-
ployment of 2,215,667 persons, an actual employment of 61,015 persons has occurred, which
is only 2.75 per cent of that which was already proposed. In the case of indirect employment,
100,415 persons have got employment as against the proposed figure of 3,105,300 persons.
Considering both direct and indirect employment, the actual employment has been a mere
3.03 per cent of the proposed employment. The rate of employment creation in SEZs have to
pick up substantially to reach anywhere near the proposed figures.
As developing SEZs involves a massive displacement of farmers, it is essential that a sys- As developing SEZs involves
a massive displacement of
tematic approach should be followed for ensuring balance of interests. Consequently, state farmers, it is essential that a
governments have been advised that in land acquisition for SEZs, the first priority should be systematic approach should be
for acquisition of waste and barren land and if necessary, single crop agricultural land. Thus, followed for ensuring balance of
SEZ is in the controversy since adapted by the government. interests.
SEZs—A GLOBAL OVERVIEW

According to the World Bank estimates, as of 2007, there are more than 3,000 projects taking
According to the World Bank
place in SEZs in 120 countries worldwide. SEZs have been implemented using a variety of estimates, as of 2007, there are
institutional structures across the world ranging from ‘fully public’ (government operator, more than 3,000 projects tak-
government developer, and government regulator) to ‘fully private’ (private operator, private ing place in SEZs in 120 coun-
developer, and private regulator). In many cases, public sector operators and public sector tries worldwide.
developers act as quasi-government agencies in that they have a pseudocorporate institution-
al structure and have budgetary autonomy. SEZs are often developed under a public–private
partnership (PPP) arrangement, in which the public sector provides some level of support
(provision of off-site infrastructure, equity investment, soft loans, bond issues, and so on) to
enable a private sector developer to obtain a reasonable rate of return on the project (typi-
cally, 10 per cent to 20 per cent depending on risk levels).
The SEZ concept proved a success in China and Poland. In China, over 20 per cent of FDI
flows into SEZ and generated about 10 per cent of exports. Poland’s SEZs received 35 per cent
of FDI flows. The success of SEZs in China stemmed from their FII-friendly nature. China
provided the whole package that ensures success of SEZs, which include unique location,
large size, attractive incentive packages, liberal customs procedures, flexible labour laws,
strong domestic market, and allowing local governments to administer the SEZs.
China has accumulated considerable experience with SEZs. The first zone was set up in China has accumulated consid-
erable experience with SEZs.
1980, as soon as the nation decided on the economic reforms. India’s SEZ Policy was incor- The first zone was set up in
porated in the EXIM Policy of 2001–02, a decade after the launch of economic reforms, and 1980, as soon as the nation
considerably lagging behind China. China’s approach has been gradual; it has so far set up decided on the economic re-
forms. India’s SEZ Policy was
only five SEZs. However, India simply seemed to approve left and right, raising scepticism
incorporated in the EXIM Policy
over the real intent behind setting up these zones. of 2001–02, a decade after the
China established the SEZs at strategic locations, that is, close to ports or major indus- launch of economic reforms,
trial locations. However, in India, SEZs have been approved across the length and breadth and considerably lagging be-
hind China.
of the country. In China, all the five SEZs were developed by the government. In India, only
nine SEZs have been developed by the government. None of the 234 SEZs that have formal
approval is so for developed by the Indian Government.
China’s SEZs are huge. Shenzhen, the most important SEZ, covers 32,000 ha. In India, China’s SEZs have attracted
there are just two or three privately developed SEZs, exceeding 1,000 ha. Most of the others many Fortune 500 companies.
approved are less than 100 ha. China’s SEZs have attracted many Fortune 500 companies. Indian SEZs are still not able to
attract worldclass companies.
Indian SEZs are still not able to attract world-class companies.
Indian must redesign the SEZ Policy to suit its needs and not borrow the Chinese model.
In India, 52 per cent of the total land area is under agriculture and 57 per cent of the work-
force relies on farming. Domestic consumption is a major factor in India than in China. The
household consumption ratio to GDP (gross domestic product) is 68 per cent in India when
compared to 38 per cent in China. This is what the policy must leverage.
CONCLUSION
On the track of China’s growth because of SEZ, the Indian government has considered it as a
dream project to promote export, generate employment, and attract huge investment. SEZs
continue to make waves. Designed to promote manufacturing, enhance exports, and entice
foreign capital, SEZs have proved a great success in China—the pioneer of the concept—as
also Poland and the Philippines. However, in India, they have stirred up a hornet’s nest. The
policy has been on a roller coaster, especially post-Nandigram and Singur chapters, with fears
raised by the people that the SEZ may well be a route to grab land.
The key elements for the success of SEZs are political will, better infrastructure, zero
The key elements for the suc-
cess of SEZs are political will, bureaucratic hassles, relaxed labour regulations, better fiscal incentives, and domestic and
better infrastructure, zero international linkages. Do all these parameters hold good in India is the question. SEZs in
bureaucratic hassles, relaxed India have flourished due to the efforts that have been taken by the Government of India.
labour regulations, better fiscal And, therefore, in future too if the Indian government makes such policies with regard to
incentives, and domestic and
international linkages. SEZs that the policies will increase the number of SEZs, which in turn makes us assume that
may bring growth and prosperity for the country.
C ase
Nandigram Violence
The Nandigram violence was an incident in Nandigram, West Bengal, where, on the orders
of the Left Front government, more than 4,000 heavily armed police stormed the Nandigram
area, with the aim of stamping out protests against the West Bengal government’s plans to
expropriate 10,000 acres (40 sq. km.) of land, for an SEZ to be developed by the Indonesian-
based Salim Group. The police shot dead at least 14 villagers and wounded 70 more.
The SEZ controversy started when the government of West Bengal decided that the Salim
Group of Indonesia would set up a chemical hub under the SEZ policy at Nandigram, a rural
area in the district of Purba Medinipur. The villagers took over the administration of the area
and all the roads to the villages were cut off. The administration was directed to break the
Bhumi Uchhed Pratirodh Committee’s (BUPC) resistance at Nandigram.
This happened due to the approval given to the chemical hub of Salim group. The Salim
Group was founded by Sudono Salim, who was closely associated with the Indonesian
ex-president Suharto.
The chemical hub would require the acquisition of over 14,000 acres (57 sq. km.) of land.
The SEZ would be spread over 29 mouzas (villages) of which 27 are in Nandigram. The most
of the land to be acquired is multicrop and would affect over 40,000 people. Expectedly, the
prospect of losing land and, thereby, the livelihood raised concerns among the predominantly
agricultural populace. The villagers, who included the supporters of the party in power,
CPI(M), joined hands with the other opposition supporters, organized a resistance move-
ment under the banner of the newly formed and BUPC (literally, it is a Committee for the
Resistance to Eviction from Land).
In defence of the project, the state government stated that it was won by competing with
nine other Indian states. Being in the vicinity of Haldia Petrochemicals and IOC (Indian Oil
Corporation) refinery, which, the CPI(M) claimed, had earlier led to 100,000 jobs that was
being created through the downstream projects, the party argued that this is the best place to
build a hub, from the point of view of a supply-chain integration.
The Salim Group sought around 35,000 acres (140 sq. km.) of land for a series of am-
bitious projects. Apart from the SEZ (which is a 50:50 joint venture with the West Bengal
Industrial Development Corporation), it has been assigned the construction of the 100-km
long, 100-m wide, Eastern Link Expressway and the construction of a four-lane road bridge
over the Haldia River, from Haldia to Nandigram, has also been planned. The proposed
bridge would provide a link between Haldia and the proposed site for the chemical hub in
Nandigram. The Barasat–Raichak expressway and the Raichak–Kukrahati bridge will con-
nect Haldia to National Highway 34. The land acquisition notice was put up on 3 January
2007 by the Haldia Development Authority. Although the chief minister later verbally
dissociated himself from the notice, it was never annulled by another government notifi-
cation. According to the CPI(M) newspaper, People’s Democracy, 18 November 2007, the
chief minister of West Bengal had pointed out that the chemical hub was not to be placed in
Nandigram, but at a desolate sand-head at the mouth of the River Ganges called ‘Nayachar’.
The resulting mobilization against the proposed hub saw a violent takeover by the villagers,
whoever opposed the project due to fear of losing their owned land. Villagers dug up roads,
cut off the communication cables, and declared Nandigram as a ‘liberated zone’ from the
government’s interference, due to the fear of land acquisition by the government.
The administration was directed to break the BUPC’s resistance at Nandigram, and a
massive operation with at least 3,000 policemen was launched on 14 March 2007. However,
prior information of the impending action had leaked out to the BUPC, who amassed a
crowd of roughly 2,000 villagers at the entry points to Nandigram, with women and children
forming the front ranks. In the police firing, at least 14 people were killed.
The scale of action left the state stunned. Trinamool Congress estimates put the toll at
50. The PWD Minister of the Government of West Bengal, said about 50 bodies were taken
to hospital. In response to this, the people singled out all CPI(M) members and its support-
ers and their families were driven out of the area and their houses were burnt. A week after
the 14 March clashes, The Hindu estimated that around 3,500 persons had been displaced
into relief camps as a result of threats from BUPC. The CPI(M) has accused the Jami Raksha
Committee—a coalition of activists from various parties who oppose land acquisition—of
armed attacks on relief camps, which led to three deaths as well as a series of murders and a
gang rape.
Fresh violence erupted. A team of intellectuals and theatre personalities from Calcutta
was attacked by CPI(M) cadre on their return trip, after disbursing relief material that was
collected from the people in various parts of the state. The deaths in Nandigram have led to a
great deal of controversy on the Left in India. The federal police said that they have recovered
many bullets of a type which was not used by police generally, but was used by the under-
world terrorists. The CPI(M) had adopted the public position that land acquisition will not
be made without the consent of the people of Nandigram. The proposed SEZ has ostensibly
been shelved following the 14 March police action. The local, district, and state administra-
tion have, however, maintained that the chemical hub would be constructed at Nandigram
itself. After the bloodshed at Nandigram and the stiff resistance from opposition parties, such
as Trinamool Congress and Socialist Unity Centre of India (SUCI) and Left Front partners
such as RSP and All India Forward Bloc over the land acquisition, the chief minister on
3 September 2007 expressed the government’s preference for the sparsely populated island of
Nayachar, 30 km from Haldia, to set up the much talked-about chemical hub.
A fresh round of violence came up in November 2007, when the villagers who were
thrown out of Nandigram by the BUPC returned back home. The BUPC had effectively con-
tinued to maintain Nandigram as a ‘liberated zone’ even after the SEZ was cancelled. The
return of the villagers was marred by a violence that was unleashed by the ruling party cadres
over the resisting BUPC cadre in Nandigram. Nationwide protests have resulted from the
new offensive. On 12 November 2007, the National Human Rights Commission has issued
a notice to the West Bengal government directing it to submit a factual report on the issue.
In May 2008, a fresh violence broke out in Nandigram between the supporters of the BUPC
and the CPI(M) activists. Both sides exchanged fire and hurled bombs at each other. The first
political consequence of the Nandigram issue is the ruling CPI(M) suffered a big jolt when it
lost the control of panchayat in the troubled Nandigram and Singur, in 2008 panchayat poll,
for the first time since 1978.
Case Questions
1. Do you support the land acquisition at Nandigram for SEZ?
2. Considering the above case, what are your views about the SEZ policy of India?
3. Suggest some measures to solve the problem of land acquisition for SEZ.
4. Find out the consequences of Nandigram issue on the political and economic envi-
ronment of West Bengal.
Key W o r d s
Special Economic Zones (SEZs) Export Promotion Revenue Losses
Export Processing Zones (EPZs) SEZ Controversy Approval Mechanism
Income Tax Incentives Land Acquisition SEZ Requirement
Tax Exemption Special Economic Zone Act
Q u est i o n s
1. Define SEZ and critically analyse the benefits of SEZ 7. Write down the objectives of SEZ and outline the
to Indian economy. status of SEZ in Indian economy.
2. Highlight the history of SEZ and give the salient 8. Write short notes on:
features/provisions of the SEZ Rules in India. (a) SEZ and wealth creation
3. Write a note on SEZ controversy in India and suggest (b) SEZ is nothing but a real estate development
some measures to handle it effectively.
(c) SEZ and Nandigram land acquisition
4. Analyse the contribution of SEZ to the exports of
India and explain the facilities given to SEZ for export 9. Discuss the approval mechanism of SEZ in brief.
promotion. 10. What are the requirements of SEZ and who can set
5. Describe the facilities and features of Indian SEZs. up SEZ?
6. Distinguish between Indian SEZ and Chinese SEZ. 11. Discuss the advantages and disadvantages of SEZ.
r efe r e n ces
n ‘Change SEZ Act for level playing field, says CAG’, n Research Internship Program 2006, Centre for Civil
Financial Express, March 11, 2008, Online edition, Society, www.ccsindia.org
www.financialexpress.com n ‘Revenue Loss may Lead to Reversal of SEZ Policy:
n Choudhuri, A. (2008), ‘ARC’s Guidelines for SEZs’, Study’, Financial Express, February 15, 2008, Online
March 25, 2008, www.realestatetv.in/researchdesk edition, www.financialexpress.com
n ‘SEZ in India’, May 22, 2008, http://www.sezindia.nic.in
n Majumder, S. (2007), ‘India Needs a Unique SEZ
Model’, Business Line, April 24, 2007, Online edition, n Srivats, K. R. (2007), ‘Economic Activity in SEZs will
www.thehindubusinessline.com Offset Likely Tax Loss’ Business Line, July 9, 2007,
Online edition, www.thehindubusinessline.com
n Ohri, S. (2008), ‘Special Economic Zones—Aping the
Orient’, January 18, 2008, http://www.legalservice n ‘Visible Gains and Employment Proposed and Made
india.com/article. in SEZs Notifi ed After SEZ Act, 2005’, (2007),
www.sezindia.nic.in
n Ranjan, R. K. (2006), ‘Special Economic Zones: Are
n www.iosrjournals.com
They Good for the Country?’ CCS Working Paper No.
156, Summer. n www.eximguru.com
29
C hapter
International Business
Environment
>>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>>
• The Nature of International Business • Asian Development Bank (ADB) 822
Environment 798 • United Nations Conference on Trade and
• Trends in the World Trade and Economic Development (UNCTAD) 822
Growth 798 • United Nations Industrial Development
• General Agreement on Tariffs and Trade Organization (UNIDO) 824
(GATT) 799 • International Trade Centre (ITC) 824
• General Agreement on Trade in Services • Generalized System of
(GATS) 801 Preferences (GSP) 825
• International Organizations 804 • Global System of Trade Preferences
• International Monetary Fund (IMF) 805 (GSTP) 826
• World Bank (WB) 813 • Case 827
• An Evaluation of IMF–WB 815 • Key Words 828
• World Trade Organization (WTO) 817 • Questions 828
• International Finance Corporation (IFC) 820 • References 829
A competitive business environment is an essential characteristic of globalisation. Nature of

competition varies in different economic systems. In the context of the globalisation process,
tremendous changes are taking place in the business environment of economic systems.
Corporate concern for international business environment is understandable in relation with
the globalisation of business. We throw some light on the international business environment.
Business environment varies Business environment varies from place to place and from time to time. The Japanese
from place to place and from
time to time. The Japanese busi-
business environment is entirely different from Indian systems, values, cultural factors,
ness environment is entirely socio-economic background, and so on. On account of their higher productivity and mar-
different from Indian systems, keting success, Japanese systems and methods have been subjected to extensive analysis and
values, cultural factors, socio- appreciation. Collectivism, lifetime employment, stability, total integration of workforce with
economic background, and so on.
the organisation, homogeneity, and so on are the notable aspects of the organisational culture
in Japanese corporations.
In contrast to this, we find individualism, one-man decision making, frequent turnover
of employee mobility, alienation of the workforce, and collective coercion of the management
by trade unions, and so on in the business organisations of India. It means that environmen-
tal contrasts are most decisive in the international business arena. The following differences
may be most common between the business environments in developed and developing or
underdeveloped countries.
International Business Environment | 797
Business Environment in Business Environment in Developing

Developed Countries or Underdeveloped Countries
1. Research and development (R&D) can 1. R&D is marginal in developing
be considered the basic aspect of countries like India or other backward
business environments like the United Countries.
States.
2. Corporate financing is well developed 2. Corporate financing is more in the
and less controlled by the government. control of the government and,
therefore, is less developed.
3. Multimedia advertisements with few 3. Limited media advertisements with
restrictions are common. greater government restrictions.
4. Skilled and committed human 4. Manpower which is more committed to
resources are available. their trade unions is common.
5. Monetary standards, values, and 5. Money is subject to a lot of fluctuation
transactions remain without much and government control.
fluctuation and control.
6. Restrictions and interference of the 6. Restrictions and interference of the
government is minimal. government is high.
7. Transportation, communication, and 7. Transportation, communication, and
infrastructural facilities are excellent, infrastructural facilities require much
modern, and adequate. improvement.
8. Development is uniform. 8. Major part of the economy is
backward.
9. Minimum Centralised state control is 9. Centralised state control is always
ensured. greater.
10. Greater political stability and less 10. Political instability with high political
political influence on business. influence in business.
11. Business contracts are binding even 11. Political changes affect business
after political changes. contracts.
12. Homogeneous culture and one 12. Heterogeneous culture and many
language. languages of states.
13. Management enjoys greater freedom 13. Labour-management relations are
in collective bargaining and effective controlled and regulated by the
methods of industrial relations. Government of India.
14. Trade barriers are nonexistent. 14. Trade restrictions are common in spite
of the liberalization policy.
To sum up, one may observe that the business environment in developing countries like
India, differs substantially from that in the developed market economies. Companies which Companies which operate in a
operate in the global environment must consider such environmental differences before they global environment must have
formulate policies. This is the reason managers who operate in a global environment must a global approach with a local
strategy.
have a global approach with a local strategy. Their operational strategies and business policies
differ in different economic systems.
The Nature of International Business

Environment
The 1990s and the new millennium clearly indicate rapid internationalisation and
globalisation. The entire globe is passing through a transition period at a dramatic pace.
Today, international trade is in
Today, international trade is in a position to analyse and interpret the global social, technical,
a position to analyse and inter- economic, political, and natural environmental factors more clearly.
pret the global social, technical, Conducting and managing international business operations is a crucial venture due to
economic, political, and natural variations in political, social, cultural, and economic factors from one country to another.
environmental factors more
clearly.
For example, most African consumers prefer less-costly products due to their poor economic
conditions, whereas the German consumers prefer high-quality and high-priced products due
to their higher ability to buy. Therefore, an international businessman should produce and
export less-costly products to most of the African countries and vice versa to the most of the
European and North American countries. For instance, high-priced and high-quality Palmo-
live soaps are marketed to the European countries and economically priced Palmolive soaps
are exported and marketed to developing countries like Ethiopia, Pakistan, Kenya, India, and
Cambodia. Other factors for a favourable international business environment are as follows:
International business houses

• International business houses need accurate information to make appropriate
need accurate and timely decisions. Europe was the most opportunistic market for leather goods, particularly
information to make appropri- shoes. Based on the accurate data, The Bata shoe company could make an appropriate
ate decisions. decision to enter various European countries.
• International business houses need to have not only accurate but also timely
information. Coca-Cola could enter the European market based on timely informa-
tion, whereas Pepsi entered later. Another example is the timely entrance of Indian
software companies into the US market when compared to those of other countries.
Indian software companies also made a timely decision in the case of Europe.
• The size of international business should be large enough in order to have an impact
The size of international busi-
ness should be large in order on the foreign economies. Most multinational companies (MNCs) are significantly
to have an impact on foreign large in size. In fact, the capital of some of the MNCs is more than India’s annual
economies. budget and the GDPs (gross domestic products) of some African countries.
• Most international business houses segment their markets based on the geographi-
cal market segmentation. Daewoo, for instance, segmented its markets as North
America, Europe, Africa, Indian sub-continent, and the Pacific.
International markets present

• International markets present more potential than the domestic markets. This is due
more potential than the domes- to the fact that international markets are wide in scope; varied in consumer tastes,
tic markets. preferences, and purchasing abilities; and different in size of the population, and so
on. For example, IBM’s (International Business Machines Corporation) sales are more
in foreign countries than in the United States itself. Similarly, the sales of C
oca-Cola,
Procter and Gamble, and Satyam Computers are more in foreign countries rather
than in their own respective home countries.
Trends in the World Trade and

Economic Growth
The international trading system has, for long time, continued to suffer from gross inequali-
ties and imbalances among the different stratas of economies. The global economic envi-
ronment, characterised by intermittent recessions during the last two decades, has further
widened the disparities in the world trading system. Mounting debt burdens, balance of
payment (BoP) problems and deteriorating terms of trade of developing countries, formation
of powerful, economic trade blocs, rollback from multilaterism to bilaterism, growing pro-
tectionism, and restricted market access in the developed countries are a few manifestations
of the unjust international commercial order. These negative features constitute a mammoth
destabilising force, and their alarming dimensions threaten the collapse of a multilateral
economic cooperation.
Notwithstanding these constraints and limitations, a large number of developing
counties have started opening up their economies, exposing them to international com-
petition, in their efforts to integrate with the global economy. The developing countries,
The developing countries, which
whose share in the international business today is very low, are expected to play a greater number about 170 and have
role in the future. The GDP and the exports of the developing countries are projected to about 85 per cent of the world
grow much faster than that of the developed countries. The developing countries, which population, account for only
about 20 per cent of the world
number about 170 and have about 85 per cent of the world population, account for only
GDP and 22 per cent of the
about 20 per cent of the world GDP and 22 per cent of the exports. exports.
However, the projections are that in the next decade, the developing countries will
increase their share in the world income and trade. In fact, their GDP and exports have During 1995–04 the real GDP
of the world had grown at an
grown faster than those of the developed countries for some time now. According to a World annual rate of 3.3 per cent,
Bank (WB) Staff Report, during 1995–04 the real GDP of the world had grown at an annual which was composed of an an-
rate of 3.3 per cent, which was composed of an annual average growth rate of 2.8 per cent, nual growth rate of 2.8 per cent
for the high-income economies, and 4.9 per cent, for the developing economies. During the for the high-income economies
and 4.9 per cent for the devel-
year 2005–08, the high-income economies had grown more than 2.8 per cent and developing oping economies.
economies more than 6 per cent.
This does not mean that all developing countries will grow at high rates. Although
the estimated average annual rate for the developing countries is nearly 5 per cent, East
Asia and South Asia in the developing world would grow at an annual rate of 7.7 per cent
and 5.4 per cent, respectively, but the performance of Sub-Saharan Africa, North Africa, The share of the developing
the Middle East, and several countries of the former Soviet Union may be very poor. countries in the world output
According to the WB Report, 1995, the share of the developing countries in the world which was 21 per cent in 1994
would increase to 27 per cent
output is estimated to increase from 21 per cent in 1994 to 27 per cent in 2010. This share in 2010.
was about 22 per cent during the 1980s; it is estimated to rise to 38 per cent during the
years 1995–10.
General Agreement on Tariffs and

Trade (GATT)
The General Agreement on Tariffs and Trade (GATT) had its origin in 1947 at a conference in GATT when originated in 1947
Geneva. It was founded in the wake of the Second World War in order to prevent the recur- was having only 23 nation mem-
rence of protectionist policies of the then industrialised states which resulted in a prolonged bers, whereas in 2005, was hav-
ing about 148 countries as its
recession in the West prior to the war. When GATT was signed in 1947, only 23 nations were members.
members of it. By July 1995, the number of signatories had increased to 128 nations. It had
further increased to 148 in 2005. GATT which was founded in
GATT was transformed into the World Trade Organization (WTO) with effect from 1947 transformed into WTO
with effect from January 1,
January 1995. Thus, after nearly five decades, the original proposal of an international trade 1995.
organisation took shape as the WTO. The WTO, which is a more powerful body than GATT,
has a larger role too than GATT. India is one of the founder members of GATT and WTO. WTO is more powerful and has
Box 29.1 details in a nutshell, the history of GATT. a larger role too than GATT.
Box 29.1 History of GATT

1946–47 The first proposal was made to form the International Trade Organization (ITO) as a special agency
of the United Nations. The political climate that lingered after the protectionist trade policies of
the 1920s and 1930s was not supportive. ITO was abandoned, but part of its charter was later
salvaged as GATT.
1948 GATT was established, bringing together 23 nations as a try to liberalise the world trade by
eliminating tariffs.
1949 Annecy Round: Tariffs on specific goods were reduced and some tariff concessions were
exchanged.
1950–51 Torquay Round: Some tariffs were reduced and some tariff concessions were exchanged.
1960–61 The Dillion Round: It was initiated in response to a proposal by some European nations to band
together under a regional trade agreement: 20 per cent cut in average tariffs and 35 per cent cut
in the tariffs of manufactured goods for the first time.
1973–79 Tokyo Round: Agreements covered non-tariff barriers, subsidised exports, and tropical
products.
1986–93 Uruguay Round: It began with the goal of reducing tariffs by one-third. By this time, GATT had
115 member nations which was 23 in 1947. The round covered agricultural products, included
for first time, as well as trade in services, TRIPS, TRIMs; and removal of import barriers, tariff and
non-tariff barriers, and MFA was covered.
1994 GATT was renamed as WTO.
Objectives
India is one of the founder The primary objective of GATT was to expand the international trade by liberalising trade so
members of GATT and WTO. as to bring about an all-round economic prosperity. The preamble to the GATT mentioned
the following as its important objectives:
1. Raising the standard of living.
2. Ensuring full employment and a large and steadily growing volume of real income
and effective demand.
3. Developing full use of the resources of the world.
4. Expansion of production and international trade.
GATT embodied certain conventions and general principles governing international trade
among countries that adhered to the agreement. The rules or conventions of GATT required
that:
1. Any proposed change in the tariff or other type of commercial policy of a member
country should not be undertaken without any consultation with the other parties of
the agreement.
2. The countries that adhere to GATT should work towards the reduction of tariffs and
other barriers to international trade, which should be negotiated within the frame-
work of GATT.
Principles
For the realisation of its objectives, GATT adopted the following principles:
Non-discrimination. The principle of non-discrimination requires that no member
Non-discrimination requires
country shall discriminate between themselves in the conduct of international trade.
that no member country shall
To ensure non-discrimination, the members of GATT agreed to apply the principle of ‘most- discriminate between them-
favoured nation’ (MFN) to all import and export duties. This means that each nation shall be selves in the conduct of interna-
treated as the MFN. As far as quantitative restrictions (QRs) are permitted, they too are to be tional trade.
administered without any favour.
Prohibition of QRs. GATT rules seek to prohibit QRs as far as possible and limit GATT rules prohibit QRs and
restrictions on trade to the less rigid tariffs. However, certain exceptions to this prohibition limit restrictions on trade to the
are granted to countries that are confronted with BoP difficulties and to developing coun- less rigid tariffs.
tries. Further, import restrictions were allowed to apply for agricultural and fishery products
if the domestic production of these articles was subject to equally restrictive production or
marketing controls.
Consultation. By providing a forum for continuing consultation, GATT sought to To resolve disagreements
resolve disagreements through consultation. Eight rounds of trade negotiations were held through consultation.
under the auspices of GATT. Each round took several years. The Uruguay Round, took more
than seven years to conclude as against the originally contemplated four years. This shows the
complexity of the issues involved in the trade negotiations.
General Agreement on Trade in

Services (GATS)
The General Agreement on Trade in Services (GATS) is the first-ever set of multilateral,
legally enforceable rules which cover international trade in services. It was negotiated in the The General Agreement on
Trade in Services (GATS) is the
Uruguay Round. It operates at three levels. First is the main text which contains the general first-ever set of multilateral, le-
principles and obligations. Then there are annexures that are dealing with rules for specific gally enforceable rules which
sectors. Finally, the commitments to provide access to the markets of individual countries cover international trade in
services.
form a part of the agreement.
Principles and Obligations

The general principles and obligations of GATS are very similar to those for trade in goods.
Examples include MFN treatment and national treatment, as well as transparency obligations
and commitments to the development of developing countries. Market-access commitments,
like the tariff schedules under GATT, are an integral part of the agreement.
Scope
The scope of the GATS agreement is particularly broad. It covers all measures affecting The scope of the GATS agree-
ment is particularly broad. It
internationally traded services. In fact, it was important in practical terms for negotiators covers all measures affecting
to define what was meant by the term ‘trade in services’. The definition which was finally internationally traded services.
adopted is particularly wide in scope.
Modes of Delivery
The negotiators decided that ‘trade in services’ was far more than that crossed the border as is
the case in trading of goods. Under GATS, ‘trade’ includes all the different ways of providing Under GATS, ‘trade’ includes all
an international service. GATS defines four such methods of providing an international the different ways of providing
an international service.
service—it calls them ‘modes of delivery’.
Firstly, there are services supplied from one country to another, such as international
telephone calls. In the jargon of the agreement, this is known as the ‘cross-border supply’ of
a service. Secondly, the situation of consumers or firms making use of a service in another
country such as tourism known as the ‘consumption abroad’. Thirdly, a foreign company
may set up subsidiaries or branches to provide services in another country, such as foreign
banks operating in a foreign country. This is known as the ‘commercial presence’. Finally, in-
dividuals travelling from their country to supply services in another country, such as fashion
models or consultants travelling abroad to work. This is referred to as the ‘presence of natural
persons’.
Services Sectors and GATs

The result of adopting this far-reaching definition of trade in services was that a vast area of
commercial activity is covered by GATS. We only have to think of the ‘modes of delivery’ that
exist in the financial services sector which includes banking, security trading, and insurance
of the telecommunications services sector, or the professional services sector or tourism, just
to mention a few services sectors. Box 29.2 describes in detail the four modes of delivery.
Key Rules
MFN Treatment. As far as the rules are concerned, as with GATT, if you favour one, you
MFN treatment means treating favour them all. The MFN treatment means treating trading partners equally. Under GATS,
trading partners equally. if a country allows foreign competition in a sector, equal opportunities in that sector should
be given to service providers from all other WTO members. Unlike in goods, however, GATS
has a special element. It has lists showing where the countries are temporarily not applying
the ‘MFN’ principle of non-discrimination.
National treatment. An, equal National Treatment. An equal treatment or national treatment for foreigners and
treatment or National Treat- nationals is given a different dimension for services when compared to goods. For mer-
ment for foreigners and chandise trade, it is a general principle. In GATS, it applies only where a country has made
nationals.
a specific commitment to offer national treatment, and in such cases, special conditions
may be imposed.
Box 29.2 GATS

The General Agreement on Trade in Services (GATS) • Mode III
was introduced in 1995 under WTO to promote further Commercial presence, that is, supply of services
liberalization and globalisation of services. GATS defined by a service supplier of one country through
services as occurring through four possible modes of commercial presence in another country; for
supply which are as follows: example, establishment of or investment in
• Mode I hospitals.
Cross-border supply, that is, supply of a service • Mode IV
from one country to another country; such as, Movement of natural persons, that is, temporary
provision of diagnosis via telecommunications. cross-border movement of service providers; for
• Mode II example, doctors, chartered accountants, and legal
Consumption, that is, the supply of a service from and managerial functionaries.
one country to the service consumer of any other
member country; such as, through movement of
patients.
Transparency. Under GATS, the governments must publish all relevant laws and Transparency means the
regulations and set up enquiry points within their bureaucracies. Foreign companies and governments must set up
governments can then use these enquiry points to obtain information about regulations in enquiry points within their
bureaucracies.
the services sector. And they have to notify the WTO of any changes in regulations that apply
to the services that come under specific commitments.
Regulations: Objective and Reasonable. Traded services do not face tariffs at the
Objective and reasonable regu-
border. Unlike goods, they do not pass through customs houses. In practice, domestic regulation means the governments
lations are the most significant means of exercising influence or control over the services should regulate the services
trade. Thus, the agreement says that the governments should regulate the services reason- reasonably, objectively, and
impartially.
ably, objectively, and impartially. When a government makes an administrative decision that
affects a service, it should also provide an impartial means, such as a tribunal, to review the
decision.
Better Access to Markets

Specific Commitments. The commitments of individual countries to open markets in
specific sectors and how open those markets will be are the outcome of negotiations. The
commitments appear in ‘schedules’ that list the sectors being opened. The schedules record
the extent of market access being given in those sectors; for example, whether there are any
restrictions on foreign ownership. The schedules also show if there are any limitations on
national treatment; for example, whether some rights granted to local companies will not be
granted to foreign companies.
Binding Market Access. These commitments are ‘bound’. Like bound tariffs, they can
only be modified or withdrawn after negotiations with the affected countries. This would
probably lead to compensation being paid. Since ‘unbinding’ is difficult, the commitments
are virtually guaranteed conditions for foreign exporters and importers to do business in the
sector.
Progressive Liberalization
As far as liberalization is concerned, the Uruguay Round was only the beginning. But, GATS But, GATS requires more ne-
requires more negotiations; an essential part of the Doha Development Agenda (2001) is well gotiations; an essential part of
under progress. The goal is to take the liberalization process further by increasing the level of the Doha Development Agenda
commitments in schedules. (2001) is well under progress.
Intellectual Property: Protection and

Enforcement of Rights
Importance of Ideas. Knowledge and ideas are increasingly an important part of trade.
Most of the value of new medicines and other high-technology products lies in the amount of
invention, innovation, research, design, and testing involved. Films, music recordings, books,
computer software, and on-line services are bought and sold because of the information and
creativity they contain. Their value does not lie in the plastic, metal, or paper used to make
them.
Value is in the Idea. It is important that creators have the right to draw advantage from
It is important that creators
their inventions, designs, and other creations. These rights are known as ‘intellectual prop- have the right to draw advan-
erty rights’. They take a number of forms. For example, books, paintings, and films come tage from their inventions, de-
under copyright protection; inventions can be patented; and brand names and product logos signs, and other creations.
can be registered as ‘trademarks’.
Different Levels of Protection. In the past, the extent of protection and enforcement of
these rights varied widely around the world. As intellectual property became more important
in trade, these differences became a source of tension in the international economic relations.
New internationally agreed trade rules for intellectual property rights were seen as a way to
introduce more order and predictability, and for disputes to be settled more systematically.
Enter the TRIPS Agreement. The TRIPS Agreement was construed as an attempt to
narrow the gaps in the way these rights are protected around the world, and to bring them
under common international rules.
TRIPS—What Does it Cover?
TRIPS Agreement covers five The agreement covers five broad areas as follows:
broad areas.
1. How basic principles of the trading system and other international, intellectual
property agreements should be applied,
2. How to give adequate protection to intellectual property rights,
3. How countries should enforce those rights,
4. How to settle disputes on intellectual property among members of the WTO, and
Special transitional arrange- 5. Special transitional arrangements during the period when the new system is being
ments during the period when introduced.
the new system is being intro-
duced. Need for Balance. In this process, it is important to recognise that there are various
interests involved. When an inventor or creator is granted patent or a copyright protection,
he or she obtains the right to stop other people from making an unauthorised use of the
invention. The society at large sees this temporary intellectual property protection as an in-
centive to encourage the development of new technology and creations. These will eventu-
ally be available to all. The TRIPS Agreement recognises the need to strike a balance. It says
intellectual property protection should contribute to technical innovation and transfer of
technology. According to the agreement, producers and users should benefit, and economic
and social welfare should be enhanced.
Basic Principles. As in GATT and GATS, the starting point of the intellectual property
agreement is its basic principles. And as in the other two agreements, non-discrimination
features prominently: both national treatment as well as MFN treatment.
The TRIPS Agreement ensures Protecting Intellectual Property. The TRIPS Agreement ensures that adequate stand-
that adequate standards of ards of protection exist in all member countries. Here, the starting point is the obligations
protection exist in all member found in the main international agreements of the World Intellectual Property Organisa-
countries.
tion (WIPO). However, the TRIPS Agreement adds a significant number of new or higher
standards.
Intellectual property laws Enforcement. Having intellectual property laws is not enough. They have to be en-
should be enforced properly. forced. According to the Agreement, the governments have to ensure that the intellectual
property rights can be enforced under their national laws, and that the penalties for infringe-
ment are tough enough to deter further violations. The procedures must be fair and equitable,
and not unnecessarily complicated or costly.
International Organizations
There are several international organisations important to the global economy and business.
The influence of some of them—International Monetary Fund, WB, and WTO—is, indeed,
very important. We will discuss the following international economic organisations:
1. International Monetary Fund (IMF)

2. World Bank (WB)
3. World Trade Organization (WTO)
4. International Finance Corporation (IFC)
5. Asian Development Bank (ADB)
6. United Nations Conference on Trade and Development (UNCTAD)
7. United Nations Industrial Development Organisation (UNIDO)
8. International Trade Centre (ITC)
9. General System of Preferences (GSP)
10. General System of Trade Preferences among developing countries (GSTP)
International Monetary Fund (IMF)

The International Monetary Fund (IMF) was established on December 27, 1945, with
29 member countries. It began its financial operations on March 1, 1947. It is an organisa-
tion of countries that seeks to promote international monetary cooperation, facilitate the
expansion of trade, and thus contribute towards an increased employment opportunities and
improved economic conditions of the member countries.
Membership in the IMF is open to every country that controls its foreign relations and
is able and prepared to fulfil the obligations of membership. Membership in IMF is a pre-
requisite for membership of the WB, as a close-working relationship exists between the two
organisations, as well as among IMF, WTO, and the Bank for International Settlements (BIS).
The IMF had a membership of 182 countries as on September 1, 2000. Currently, the
number is 107.
Objectives
The main objectives of IMF are as follows:
1. Promote international monetary cooperation. Promote international coop-
2. Facilitate the expansion and balanced growth of international trade. eration, facilitate the expansion
and balanced growth of interna-
3. Promote exchange stability and maintain orderly exchange arrangements among tional trade, promote exchange
stability, assist in eliminating
members. foreign exchange restrictions,
make resources available to
4. Assist in establishing a multilateral system of payments in respect of current trans-
members, and maintain equi-
actions among member countries, and also assist in eliminating foreign exchange librium in the BoP of members.
restrictions that hamper the growth of world trade.
5. Make available to members the general resources on a temporary basis to enable them
to correct BoP problems without resorting to measures that would harm national or
international prosperity.
6. Shorten the duration and lessen the degree of disequilibrium in the international BoP
of members.
Organisation
The IMF’s organisation consists The IMF’s organisation consists of
of Board of Governors, Execu-
tive Board, Managing Director, 1. Board of Governors,
Staff of International Civil
Servants, and Development 2. Executive Board,
Committee.
3. Managing Director,
4. Staff of International Civil Servants, and
5. Development Committee.
Board of Governors. The Board consists of one governor and one alternate for each mem-
ber country. The Board of Governors is the highest decision-making body of the IMF. The
governor appointed by the member country is usually the Minister of Finance or the Central
Bank Governor. The Board of Governors has delegated to the Executive Board all except
certain reserved powers. It normally meets once a year.
The Executive Board. The Board consists of 24 directors who are appointed or elected
by the member countries or a group of countries. The Board is responsible for conducting the
businesses of the IMF. The Managing Director serves as its Chairman. The Board deals with a
wide variety of policies, both in operational and administrative matters, including exchange-
rate policies, provision of IMF financial assistance to member countries, and discussion of
issues in the global economy.
Managing Director. The Managing Director of IMF is selected by the Executive Board.
He/she serves as the head of the organisation’s staff under the Board’s direction and is respon-
sible for conducting the ordinary businesses of the IMF. He/she serves a five-year term and
may be re-elected to successive terms.
Staff of International Civil Servants. The International Monetary and Financial
Committee of the Board of Governors is an advisory board consisting of 24 IMF governors,
ministers, or other officials of comparable rank. It normally meets twice a year, in April or
May, and at the time of the annual meeting of the Board of Governors, in September or
October. Its responsibilities are to guide the Executive Board and to advise and report to
the Board of Governors on issues related to the management of international monetary and
financial system.
The Development Committee. With 24 members, of a comparable rank, of finance
ministers or other officials, the Development Committee generally meets at the same time as
the International Monetary and Financial Committee, and reports to the Board of Governors
of the WB and the IMF on development issues.
Borrowings, Financing Facilities, and Policies

The IMF provides financial assistance to its members to help them correct BoP problems in
a manner that promotes a sustained growth. The assistance is subject to a member’s commit-
ment to take steps to address the causes of its payment imbalance. Financing is made avail-
able to member countries under various policies or facilities whose terms address the nature
and source of BoP problem that the country is experiencing.
A member can generally borrow
The maximum amount of financing a member can obtain from the IMF is based on its
up to 300 per cent of its quota. quota. Under the regular IMF facilities, a member can generally borrow up to 300 per cent
of its quota. Two of the IMF’s reserve facilities, Contingent Supplemental Reserve Facility
CCL access is in the range of (CSRF) and the Contingent Credit Lines (CCL), do not specify a limit. However, the Execu-
300 per cent to 580 per cent tive Board has indicated that the CCL access is expected to be in the range of 300 per cent to
of quota.
580 per cent of its quota.
Regular Landing Facilities consists of a Stand-by Arrangement and Extended Fund Financing Facilities and Policy
Facilities (EFF). The special Landing Facilities includes Supplement Reserve Facilities (SRF), Landing facilities consist of
CCL, and Compensatory Financing Facilities (CFF). IMF also provides concessional financ- EFF, SRF and CFF.
ing facilities to assist poor countries in their poverty reduction and growth facilities (PRGF)
programmes. It supports its member countries with emergency assistance through the
Emergency assistance through
Emergency Financing Mechanism (EFM). It futher delivers technical assistance in areas, viz., EFM and technical assistance
macro-economic policy, monetary and foreign exchange policy and systems, fiscal policy and too given. The resources are
management, external debt, and macro-economic statistics. It began to extend its technical from member subscriptions and
assistance to its members in 1964 in response to requests for help from newly independent borrowings.
African and Asian countries, to help in establishing their Central banks and ministries of
finance.
Resources
The resources of the IMF come from two sources— (i) subscription by members and
(ii) borrowings.
Quotas and Subscriptions. The IMF’s system of quotas is one of its central features.
Each member is assigned a quota expressed in Special Drawing Rights (SDRs). Quotas are
used to determine the voting power of members, their contribution to the Fund’s resources,
their access to these resources, and their share in allocations of SDRs. A member’s quota
reflects its economic size in relation to the total membership of the Fund. Each member sub-
scribes to the Fund an amount equivalent to its quota, and the Board of Governors decides
on the proportion to be paid in SDRs or in the member’s currency. A member is generally
required to pay about 25 per cent of its quota in SDRs or in currencies of other members that
are selected by the IMF; it pays the remainder in its own currency.
The quotas of all Fund members are reviewed at intervals of not more than five years. The quotas of all Fund mem-
Several general increases have been agreed in the past to bring fund quotas in line with the bers are reviewed at intervals
growth of the world economy and the need for additional international liquidity, while spe- of not more than five years.
cial increases from time to time have been agreed to adjust for differing rates of growth
among members and for changes in their relative economic positions.
As a result of the members’ payments of subscriptions, the IMF holds substantial
resources in members’ currencies and SDRs, which are available to meet member countries’
temporary BoP needs. Each IMF member has 250 basic votes plus 1 additional vote for each Each IMF member has 250
SDR 100,000 of quota. Thus, the quota defines a member’s voting power in IMF decisions. basic votes plus 1 additional vote
As the quota is based on the criterion of economic size, the developed countries account for for each SDR 100,000 of quota.
a substantially larger share of the total voting rights, enabling them to significantly influence
the decisions.
Borrowings. The quota subscriptions of the member countries are the primary source
of the financial resources for the IMF. The IMF, however, is authorised under its Articles
of Agreement to supplement its ordinary resources by borrowing. The Fund may seek the
amount it needs in any currency and from any source, that is, from official entities as well
as from private sources. Two sources of supplementary financing now exist: the General
Arrangements to Borrow (GAB), created in 1962 and the New Arrangements to Borrow
(NAB), created in 1998.
Under the GAB, the IMF is able, under certain circumstances, to borrow specific
amounts of currencies from 11 industrial countries or their Central banks at market-related
interest rates. The NAB, approved in January 1997, seeks to augment substantially the funds
that are available under GAB. Following the Mexican financial crisis in December 1994, it
became clear that more resources might be needed substantially to respond to future finan-
cial crises. This led to the initiatives for the NAB. These are credit arrangements between the
Participants in the NAB com- IMF and 25 members and institutions that are prepared to provide the IMF with supplemen-
mit amounts based primar- tary resources. Participants in the NAB commit amounts based primarily on their relative
ily on their relative economic economic strength, as measured by their IMF quotas. Although the NAB do not replace
strength, as measured by their
the existing arrangements (the GAB remain in force), they are the IMF’s first and principal
IMF quotas.
recourse for supplementary resources.
Financing Facilities and Policies

The IMF provides financial assistance to members to help them correct the BoP problems in
a manner that would promote a sustained growth. Assistance is subject, in most cases, to the
member’s commitment to take steps to address the causes of its payment imbalance. Financ-
ing is made available to member countries under various policies, or facilities, whose terms
address the nature and source of the BoP problem that the country is experiencing.
The maximum amount of financing a member can obtain from the IMF is based on its
quota. Under regular IMF facilities, a member can generally borrow up to 300 per cent of
its quota. Two of the IMF’s special facilities—the SRF and the CCL—do not specify a limit;
however, the Executive Board has indicated that CCL access is expected to be in the range of
300 per cent to 500 per cent of quota.
Regular Lending Facilities

Regular lending facilities con-
The principal way in which the IMF makes its resources available to its members is by selling
sists of selling to the members to them the currencies of other members or SDRs in exchange for their own currencies. For
the currencies of other mem- example, if India needs US dollars to meet its BoP obligations, it may purchase the dollars
bers of SDRs in exchange for from the IMF by exchanging rupees. Such transactions change the composition, but not the
the own currencies.
overall size of the Fund’s resources. A member to which the Fund sells currencies or SDRs,
is said to make ‘purchases’ (also referred to as ‘drawings’) from the Fund. The IMF levies
charges on these drawings and requires that, within a specified time, members ‘repurchase’
(or buy back) their own currency from the IMF with other members’ currencies or SDRs.
The IMF credit is subject to different conditions depending on the relative size of the
financing provided. For drawings up to 25 per cent of a member’s quota (called the ‘first
credit tranche’), the members must demonstrate that they are making reasonable efforts to
overcome their BoP difficulties. Drawings above 25 per cent of quota (‘upper credit tranche’
drawings) are made in instalments as the borrower meets certain established performance
targets. Such drawings are normally associated with Stand-by or Extended Arrangements.
Stand-by arrangements are
Stand-by Arrangement. Under a Stand-by Arrangement, which is typically one to two-
to resolve BoP problems of a year long but can be as long as three years, a country carries out a programme that it has
largely cyclical nature. designed in consultation with the IMF staff to resolve BoP problems of a largely cyclical
nature. The programme focuses on key macro-economic policy measures and, to receive the
financing, the member must meet the performance criteria marking its successful imple-
mentation of the programme. These criteria—which allow both the member and the IMF to
assess progress and may signal the need for further corrective policies—generally cover ceil-
ings on government-budget deficits, credit, and external debt, as well as targets for reserves.
The country repays the money it has borrowed in about three to five years.
Extended arrangements are
Extended Fund Facility (EFF). The IMF provides financial support to its members
designed to correct BoP dif- for longer periods under EFF. Extended Arrangements are designed to correct BoP difficul-
ficulties that stem largely from ties that stem largely from structural problems and take longer time to correct. A member
structural problems and take requesting an Extended Arrangement outlines its goals and policies for the period of the
longer period to correct.
arrangement, which normally runs for three years but can be extended for a fourth too, and
presents a detailed statement every year of the policies and measures it will implement over
the next 12 months. The repayment period is 4–10 years.
Special Lending Facilities

Supplemental Reserve Facility (SRF). The SRF was established in December 1997 in
SRF is intended to help
response to an unprecedented demand for IMF assistance that resulted from the Asian crisis. member countries that are
It is intended to help the member countries that are experiencing exceptional BoP problems, experiencing exceptional BoP
which are created by a large, short-term financing need, which is resulting from a sudden and problems which are created
by a large, short-term financing
disruptive loss of market confidence. Assistance is available when there is a reasonable expec- need, which is resulting from a
tation that strong adjustment policies and adequate support will enable a country to correct sudden and disruptive loss of
its BoP difficulties in a short time. Access under the SRF is not subject to the usual limits market confidence.
but is based on the member’s financing needs, its ability to repay the IMF, the strength of its
programme, its record of the past use of IMF resources, and its cooperation with the IMF.
Financing under the SRF, which is provided in the form of additional resources under
a Stand-by or an Extended Arrangement, is generally available in two or more drawings,
subject to conditions. Countries that are drawing under the SRF are expected to repay within
1–1.5 years of the date of each purchase. The Board may, however, extend this repayment
period up to a year. Repayment must be made no later than 2–2.5 years after the drawing.
An interest surcharge is levied on SRF financing to encourage early repayment.
Contingent Credit Lines (CCL). The CCL was established in 1999 for members that
are pursuing strong economic policies to obtain IMF financing on a short-term basis. Only
members that are satisfying strict eligibility criteria qualify for the CCL. The CCL is intended The CCL is intended to be a
to be a preventive measure, solely for members that are concerned about their potential vul- preventive measure, solely for
nerability to contagion but are not facing a crisis at the time of the commitment. Thus, the members that are concerned
drawings on CCL are not expected to be made unless a crisis stemming from a contagion about their potential vulner-
ability to contagion but are not
strikes. The repayment period for and the rate of charge on CCL financing are the same as facing a criss at the time of the
for SRF. commitment.
Compensatory Financing Facility (CFF). The CFF (formerly known as the Compensa-
tory and Contingency Financing Facility [CCFF]) provides timely financing to members that
are experiencing a temporary shortfall in export earnings or an excess in cereal-import costs
that are attributable to circumstances that are largely beyond their control.
Concessional Lending Facility

Poverty Reduction and Growth Facility (PRGF). The IMF’s concessional financing facil-
ity to assist poor countries that are facing persistent BoP problems, known formerly as the
Enhanced Structural Adjustment Facility (ESAF), was renamed as PRGF on November 22,
1999, and given a more explicit anti-poverty focus. Programmes supported under PRGF are PRGF programmes are expected
expected to be based on a strategy that is designed by the borrowing country to reduce poverty, to be based on a strategy that
and are formulated with the participation of civil society and developmental partners. The is designed by the borrowing
country to reduce poverty.
strategy, to be spelled out in a poverty-reduction strategy paper, produced by the borrowing
country in cooperation with the IMF and the WB, should describe the authorities’ goals and
macro-economic and structural policies for the three year programme.
Review of Facilities
During the financial year 2000, the Executive Board initiated a review of the IMF’s non-
concessional lending facilities and policies to determine if they were all still needed and
were appropriately designed. It agreed to eliminate several financial support mechanisms,
including the Buffer Stock Financing Facility, support for commercial bank debt, debt
service-reduction operations, currency stabilisation funds, and the contingency element of
the CCFF. These facilities had been used only infrequently and, in some cases, had not been
used at all for a number of years. The Board also considered that the other IMF facilities were
adequate for the purposes these facilities had originally been created to serve. At the same
time, the Board began a more fundamental discussion about the IMF’s financing role and
how its facilities might best be tailored to the evolving world economic environment.
Other IMF Policies and Procedures

The IMF provides emergency
Emergency Assistance. The IMF provides emergency assistance to members that are facing
assistance to members that are BoP difficulties which are caused by a natural disaster. The assistance is available through out-
facing BoP difficulties which are right purchases, usually limited to 25 per cent of quota, provided that the member cooperates
caused by a natural disaster. with the IMF to solve its problems. In most cases, this assistance is followed by an arrangement
from the IMF under one of its regular facilities. In 1995, the policy on emergency assist-
ance was expanded to cover countries that are emerging from civil unrest or international
armed conflict, and are unable to implement regular IMF-supported programmes because of
damage to their institutional and administrative capacity. In April 1999, the Executive Board
agreed on the steps to improve the terms of emergency assistance to post-conflict countries. It
also agreed that a second phase of assistance of up to an additional 25 per cent of quota could
be provided to countries that are meeting certain requirements; for example, the rebuilding
process is slow despite the authorities’ efforts and commitment to reform. It further agreed
that the IMF, in carrying out its strategy on overdue financial obligations, would take into ac-
count the special difficulties faced by the post-conflict countries in arrears.
Emergency Financing Mechanism (EFM). The EFM procedures allow for a quick
The EFM is to be used in rare
Executive Board approval of the IMF financial support, under the usual facilities. The EFM is
circumstances which are repre- to be used in rare circumstances which are representing or threatening a crisis in a member’s
senting or threatening a crisis in external accounts that requires an immediate response from the IMF. The EFM was estab-
a member’s external accounts. lished in September 1995 and was used in 1997, for Philippines, Thailand, Indonesia, and
Korea and in July 1998, for Russia.
Conditionality
When the IMF provides financial support to its member countries, it must be sure that its
members are pursuing policies that will improve or eliminate their external payment prob-
The explicit commitment that
lems. The explicit commitment that the members make to implement corrective measures in
members make to implement return for the IMF’s support is known as ‘conditionality’. Fund-conditionality requirements,
corrective measures in return linking the financial assistance to the adoption of economic adjustment policies by members,
for the IMF’s support is known seek to ensure that the member’s policies are adequate to achieve a viable BoP position over
as ‘conditionality’.
a reasonable period. This commitment also ensures that members are able to repay the IMF
in a timely manner, which, in turn, allows the IMF’s limited pool of financial resources to be
made available to the other members that are with BoP problems. The IMF financing, and
the important role it plays in helping a country secure other financing, enables the country
to adjust in an orderly way without resorting to measures that would harm its own or other
countries’ prosperity.
The conditions for IMF financial support may range from general commitments to
The conditions for IMF financial
support may range from gen- cooperate with the IMF in setting policies, to the formulation of specific quantified plans for
eral commitments to cooperate financial policies. The IMF financing from its general resources in the upper-credit tranch-
with the IMF in setting policies. es (that is, where larger amounts are provided in return for implementation of remedial
measures) is disbursed in stages. The IMF requires a ‘letter of intent’ or a ‘memorandum of
economic and financial policies’, in which a government outlines its plans as follows:
• its policy intentions during the period of the adjustment programme;
• the policy changes it will make before the arrangement can be approved;
• performance criteria, which are objective indicators for certain policies that must be
satisfied on a quarterly, semi-annual, or, in some instances, monthly basis in order for
drawings to be made; and
• periodic reviews that allow the Executive Board to assess whether the member’s
policies are consistent with the programme’s objectives.
The conditionality is flexible. The Executive Board’s guidelines on conditionality encourage
members to adopt corrective measures at an early stage. The guidelines stress that the IMF
should take into consideration members’ domestic, social and political objectives, as well as
their economic priorities and circumstances; permit flexibility in determining the number
and content of performance criteria; and emphasise that IMF arrangements are decisions of
the IMF that set out, in consultation with members, the conditions for its financial assistance.
The IMF recognises that not one reform model suits all members, and that individual The IMF recognises that not one
countries—both governments and civil society—must have ‘ownership’ of their programmes. reform model suits all members,
Thus, each member country, in a close collaboration with the IMF staff, designs its IMF-sup- and that individual countries—
ported programme. The process involves a comprehensive review of the member’s economy, both governments and civil
society—must have ‘ownership’
including the causes and nature of the BoP problems, and an analysis of the policies needed of their programmes.
to achieve a sustainable balance between the demand for and the availability of resources.
The IMF-supported programmes emphasise certain key aggregate economic variables—
domestic credit, public sector deficit, international reserves, and external debt—and crucial
elements of the pricing system—including exchange rate, interest rates, and, in some cases,
wages and commodity prices—that significantly affect the country’s public finances and for-
eign trade, and the economy’s supply response.
Although the macro-economic policies that are designed to influence aggregate demand
(the total amount of national planned expenditure in an economy), continue to play a key role
in many IMF-supported adjustment programmes, it is widely recognised that measures to
strengthen an economy’s supply side (production of goods and services) are frequently essen-
tial to restore and maintain external viability and sound growth. Among the IMF-supported
policy adjustments, which member countries make to enhance the growth potential and flex-
ibility of their economies, are measures to remove distortions in the external trade system
and in the domestic relative prices, improve the efficiency and soundness of the financial
system, and foster a greater efficiency in the fiscal operations.
The structural reforms in these areas have been particularly important in programmes
under the EFF and PRGF. The latter focuses particularly on poverty reduction as well.
Given the emphasis on structural reforms in the IMF-supported programmes, a close col-
laboration with the WB has been important. During a Stand-by Arrangement, an Extended
Arrangement, or an arrangement under the PRGF, the IMF monitors a member’s reform
programme through a performance criteria that are selected according to the economic and
institutional structure of the country, the availability of data, and the desirability of focusing
on broad macro-economic variables, among other considerations. The performance under
IMF-supported reform programmes is also monitored through periodic reviews by the IMF
Executive Board.
Criticism has been levelled from several corners on the Fund conditionality. One impor-
tant criticism is that the conditionalities endanger a nation’s sovereignty. Conditionalities are Criticism has been levelled from
not something peculiar to the IMF. Any responsible financial institution will lend only after several corners on the Fund
satisfying itself about the repaying capacity of the borrower, and it will impose conditions conditionality. One important
necessary to ensure proper utilisation of the loan and its repayment. It is true of the public- criticism is that the conditionali-
ties endanger a nation’s sover-
sector financial institutions in India too. The IMF and WB cannot be exceptions to this long- eignty.
standing, well-accepted, and sound financing principle. However, just as the rehabilitation
package drawn up by public-sector financial institutions in India for sick units need not
ecessarily be the most appropriate one, the IMF–WB prescriptions need not necessarily be
n
the most appropriate ones. A nation should, of course, ensure that it does not accept any con-
ditionality which harms its interests. At the same time, there is no reason to hesitate to take
the assistance of the institutions as and when required because they have been established to
help the needy member countries. In fact, it is the right of every member country to obtain
legitimate assistance from these institutions. It may be noted that, although, in the past, the
communists had a tendency to describe IMF and WB as organs of capitalist imperialism, the
communist countries have themselves come to seek large assistance from these institutions.
China and Russia are now among the largest borrowers from the WB.
Although conditionality is essential, the appropriateness of any particular set of condi-
Although conditionality is es-
tionalities for a country needs to be carefully evaluated. It has been observed that the IMF’s
sential, the appropriateness of conditionality has generally been monetarist and deflationary, obliging the governments to
any particular set of condition- reduce their demand imports by curtailing the overall demand—cutting back on both pri-
alities for a country needs to be vate and public spending. These cutbacks have often reduced consumption, investment, and
carefully evaluated.
employment.
An alternative strategy would have been an adjustment with growth, which would have
aimed more at promoting production, both to increase exports and to meet a higher
proportion of local demand from a local production. Although there have been indica-
tions for a change in the IMF policy in this direction, there is as such no well-articulated
agenda of reform.
Technical Assistance
The IMF provides technical assistance in areas within its core mandate, viz., macro-economic
policy, monetary and foreign exchange policy and systems, fiscal policy and management, ex-
ternal debt, and macro-economic statistics. The IMF began to extend its technical assistance
to its members in 1964—in response to requests for help from newly independent African
and Asian countries in establishing their own Central banks and ministries of finance. The
IMF’s technical-assistance activities grew rapidly and by the mid-1980s, the number of staff
members devoted to these activities had almost doubled.
In the 1990s, many countries—those of the former Soviet Union as well as a number of
countries in Eastern Europe—moved from command to market-oriented economies, turn-
ing to the IMF for technical assistance. The IMF has also recently taken steps to advise coun-
tries that have had to re-establish governmental institutions that are following severe civil
unrest—for example, Angola, Cambodia, Haiti, Lebanon, Namibia, Rwanda, and Yemen. The
IMF provides technical assistance in the following three broad areas:
1. Designing and implementing fiscal and monetary policies.
2. Drafting and reviewing economic and financial legislation, regulations, and
Designing and implementing fis- procedures; thereby, helping to resolve difficulties that often lie at the heart of
cal and monetary policies, draft- macro-economic imbalances.
ing and reviewing economic
and financial legislation, regula- 3. Institution and capacity building, such as in Central banks, treasuries, tax and
tions, and procedures; and in- customs departments, and statistical services.
stitution and capacity building.
In addition, the IMF provides training to officials from its member countries through courses
offered at its headquarters in Washington, as well as in the Joint Vienna Institute, Singapore
Training Institute, Joint Africa Institute, and other regional and sub-regional locations.
Assistance is provided also through several IMF departments.
External Cooperation. In the recent years, technical-assistance projects have grown

both larger and more complex, requiring multiple sources of financing to support activities.
Large projects now commonly involve more than one IMF department and more than one
development partner. Donors with whom the IMF cooperates include the United Nations
Development Programme (UNDP); the governments of Australia, Denmark, Japan, and
Switzerland; WB; and the European Union (UNDP). These partners currently support nearly
one-third of the IMF’s technical-assistance and about one-half of the cost of short and long-
term experts in the field. The government of Japan also makes generous annual contribu-
tions to IMF’s technical assistance programmes and scholarship support. Such cooperative
arrangements with multilateral and bilateral donors not only support activities financially,
but also help to avoid conflicting advice and redundant activities; and have led to a more inte-
grated approach to the planning and implementation of technical assistance. As the demand
for technical assistance in macro-economic and financial management grows, such arrange-
ments will become even more valuable.
World Bank (WB)

The International Bank for Reconstruction and Development (IBRD) or the World Bank WB was established in the
(WB) was established in 1945. year 1945.
Resource
The capital of the Bank is subscribed by its member countries. A substantial contribution
to the Bank’s resources also comes from its retained earnings and flow of repayments of its
loans. The Bank finances its lending operations primarily from its own borrowings in the
world capital markets. The loans generally have a grace period of five years and are repayable The WB gives loans to more
over 20 years or less. The loans of the Bank are directed at more advanced stages of economic advanced stages of economic-
and social growth of the devel-
and social growth of the developing countries. The Bank’s interest rates are calculated in oping countries.
accordance with its cost of borrowing.
Organisation
All the powers of the Bank are vested in the Board of Governors. The Board consists of The Board of Governors con-
Governors for each member country. The Governors of the Bank have delegated their powers sists of Governors for each
to the Board of Executive Directors that performs its duties on a full-time basis at the Bank’s member country. All powers
of the Bank are vested in the
headquarters. There are 21 Executive Directors. Each director selects an alternative direc- Board of Governors. There are
tor. The Bank’s five directors are appointed by the five members having the largest number 21 Executive Directors.
of shares of capital stock; the rest are elected by the Governors representing other member
countries.
The Executive Directors are responsible for the conduct of the general operations of the
Bank. They decide on the bank policy in the framework of the Articles of Agreement. They
also decide on all loan and credit proposals. In practice, they reach most of their decisions
by consensus.
Objectives
The objectives of the WB as noted down in its Articles of Agreement are as follows:
1. To assist in the reconstruction and development of territories of the members by
facilitating the investment of capital for productive purposes.
2. To restore the economies of member counties destroyed or disrupted by war, and the
reconversion of production facilities to peacetime needs.
3. To encourage the development of productive facilities and resources in the
less-developed countries (LDCs).
4. To promot a private foreign investment by means of guarantees of participation in
loans and other investments that are made by private investors.
5. To supplement a private investment on suitable conditions when a private capital is
not available on reasonable terms.
6. Finance for productive purposes out of its own capital funds raised by it and other
resources.
7. To promote the long-range balanced growth of international trade and the mainte-
nance of equilibrium in the BoP.
8. To encourage an international investment of the productive resources of members,
thereby assisting in raising the productivity, the standard of living, and the conditions
of labour in their territories.
Financing Policies
The WB finances all kinds of infrastructure development such as roads, railways, telecommu-
nication, ports, and power. It has stepped up its lending for energy development. The largest
part of the Bank’s finances goes for power reforms and energy programmes. The commit-
ment of the Bank for financing oil and gas developments have shown the greatest increase.
Structure adjustment lending 1. Structure Adjustment Lending (SAL). The Bank’s SAL is designed in such a way
is designed to achieve a more to achieve a more efficient use of resources and contribute to a more sustainable BoP in the
efficient use of resources and maintenance of growth in the face of severe constraints. The Bank’s landing programme lays
contribute to a more sustain-
more importance on the future growth.
able BoP in the maintenance
of growth in the face of severe 2. Special Action Programme (SAP). The object of the SAP is to help countries im-
constraints. plement adjustment measures and high-priority projects, that are needed to restore credit
working and growth. According to the Bank, the SAP had been highly successful in meeting
The object of the SAP is to help its objectives, surpassing in most respects, the expectations set for it.
countries implement adjust-
ment measures and high-prior- In its lending operations, the Bank is guided by certain policies which have been formulated
ity projects. on the basis of the Articles of Association.
1. The Bank should properly assess the repayment prospects of the loans. For this
purpose, it should consider the availability of natural resources and the existing pro-
ductive plant capacity to exploit the resources, and open to the plant, and it should
also consider the country’s post-debt record.
2. The Bank should lend only for specific projects that are economically and technically
sound and of a high-priority nature.
3. The Bank lends only to enable a country to meet the foreign exchange context of
any project cost. It normally expects the borrowing country to mobilise its domestic
resources.
4. The Bank does not expect the borrowing country to spend the loan on a particular
country alone. In fact, it encourages the borrower to procure machinery and goods
for the Bank’s financial projects in the cheapest possible market, which is consistent
with satisfactory performance.
5. It is the Bank’s policy to maintain continuing relations with borrowers, with a view
to check the progress of projects and keep in touch with the financial and econom-
ic development in the borrowing countries. This also helps in the solution of any
problem, which might arise in the technical and administrative fields.
6. The Bank indirectly attaches special importance to the promotion of local private
enterprises.
The WB gives loans to more advanced stages of economic and social growth of developing The WB gives loans to more
countries. advanced stages of economic
and social growth of developing
countries.
WB’s Assistance to India
India is one of the founder members of the WB and is one of the largest beneficiaries of WB’s
assistance. India was the largest beneficiary of WB’s assistance until China became a member
of the WB in 1980. Now, there are a number of larger beneficiaries than India. In 1997, the
total WB’s assistance to India amounted to about 5 per cent of the total Bank’s assistance.
India’s share in the Bank’s global credit has declined over the years. Until 1979–80, WB’s
aid to India accounted for, on an average, about 40 per cent of its total aid. Thereafter, there
was a decline in this share. In 1998, it was about 14 per cent. Apart from the resource crunch
the Bank has been facing, China’s entry into the WB has seriously affected the fund flow to India, with about a third of the
world’s poor, needs a substan-
India. Although the WB’s assistance to India is very large in absolute terms, the per capita tial increase in concessional
assistance has been low. India, with about a third of the world’s poor, needs a substantial finance to accelerate the pro-
increase in concessional finance to accelerate the programmes of poverty alleviation and grammes of poverty alleviation
economic development. and economic development.
An Evaluation of IMF–WB
The contribution made by IMF and WB in helping the member countries in different ways
cannot be ignored. Studies show that the projects assisted by the WB group could have a sig-
nificant impact in the respective countries. The IMF has played an important role in provid-
The IMF has played an important
ing international liquidity and in the structural adjustment programmes. There is, however, a role in providing international
wide gap between aspirations and achievements. A criticism made often is that these institu- liquidity and in the structural
tions, which are dominated by the developed countries, have not been paying an adequate adjustment programmes.
attention to the needs of the developing countries.
The objective of the Bretton Woods Conference was to establish a global monetary and The objective of the Bretton
financial system to promote stable exchange rates, foster the growth of world trade, and in- Woods Conference was to
ternational movement of capital in the desired directions. At the time of the establishment establish a global monetary and
of these institutions, most of the developing countries were colonies and, therefore, were not financial system to promote sta-
ble exchange rates, foster the
represented at the Bretton Woods. The major concern of these institutions was, naturally, the growth of world trade, and inter-
major problems of the main participants, that is, the developed countries, and ‘... there was an national movement of capital in
almost an inevitable lack of concern for the interests of the developing countries’. Even after the desired directions.
the developing countries have far outnumbered the developed countries in the total mem-
bership of these institutions, the dominance of the developed countries continues because of
the voting system which gives a clear control to the large contributors.
However, as the South Commission observes, the concern for developing countries was
not completely absent; the mandate of the WB included the provision of a development assist-
ance. But in the early post-war years, financing the reconstruction of war-devastated Europe
and Japan received much more attention than the crying development needs of the develop-
ing countries. The proposal for a Special United Nations Fund for Economic Development
(SUNFED), which would offer large-scale aid on easy terms to developing countries, was
rejected in the 1950s mainly because of the objection raised by the developed countries that
the United Nations was involving itself in the financial aid to developing countries.
The view that in the interna- The view that in the international management of BoP disequilibria, there should be
tional management of BoP pressure to adjust on both surplus countries and deficit countries, rather than only on those
disequilibria, there should be in deficit, was also ignored. If fact, Keynes’ original proposal for an International Clear-
pressure to adjust on both
surplus countries and deficit ing Union (the prototype for the IMF) included the possibility of a penalty on surplus
countries, rather than only on countries—1 per cent of the surplus per month to encourage them to make adjustments too.
those in deficit, was also ignored. Again, only very little could be done by the IMF in solving the international liquidity problem
of the developing countries in comparison with those of the developed countries. Indeed,
the developing countries need a much larger attention of the multilateral institutions than
the developed countries for various reasons. The developed countries have the capability for
and a ready access to commercial borrowing whenever their reserves run short. The United
States, which has the largest deficit among the developed counties, has also had the option of
running a permanent deficit since other countries have been content to hold on to dollars.
The situation for the developing countries is quite different. Due to their poor economic
conditions, the relative burden of their payments deficit is much more than that of the
absolute burden; the absolute deficit itself has been huge. Not only that, the commercial bor-
rowing capability of these nations is limited; the accessibility has also been limited because
of their poor creditworthiness. It may be recalled here that, in the early 1990s when India’s
foreign exchange reserves (FER) position became very critical, the sources of short-term
commercial borrowings dried up due to the fall in the credit rating. To make matters worse,
because of the poor credit ratings, the developing countries have had to pay an average rate
of interest, which was about four times the rate applied to the developed countries on the
commercial borrowings.
Against this background, the IMF system has been ironic as far as the developing coun-
The unconditional borrowing tries are concerned. The unconditional borrowing rights based on the quota are highly dis-
rights based on the quota are criminate against the developing countries. What is more draconian has been the allocation
highly discriminate against the of the SDRs and the created liquid assets, in proportion to the quota. This is like giving away
developing countries.
the lion’s share of a cake that was received as a gift to the fairly well fed, ignoring the severe
hunger of those who have been in an abject starvation.
One of the major problems of One of the major problems of the developing countries is the increase in the debt service
the developing countries is the due to the payment commitments of the past debt. There has been a transfer of large amounts
increase in the debt service due of funds from the developing countries to the creditors as debt service. This has not been
to the payment commitments of compensated by an increased flow from the IMF to the developing countries. During 1986–
the past debt.
90, the IMF was actually withdrawing funds from the developing countries—a net transfer of
$6.3 bn a year despite new concessional mechanisms such as SAF and the ESAF. WB transfers
moved in much the same direction, despite the softening influence of concessional lending
through the IDA. (International Development Association). In 1991, the net WB transfers
were minus $1.7 bn. ‘The Bretton Woods institutions thus failed many developing countries
at their times of great need’.
One problem as far as the proper functioning of the IMF has been that it has not had
any control over the rich nations. It could not, therefore, avert the breakdown of the Bretton
Woods Association’s monetary system. It has been rightly observed that the WB is not closer
to meeting its mandate, either. It was ‘established to borrow the savings of the rich nations
and to lend them to poor nations—to finance sound development projects and programmes,
particularly where a private investment failed or was inadequate. In fact, it has done little to
recycle the global surpluses to deficit nations’.
Only a small portion of the total WB’s assistance is in the form of soft loans (IDA credits).
The IDA now represents only 30 per cent of the WB lending. The major part of the WB
lending to many developing countries like India is on commercial terms. This is one of the
reasons for the increase in their debt-service problems. The IBRD lending rates now ‘float’ in
line with the world market rates.
This is a major shift from the Bank’s original role of cushioning developing countries
against fluctuations in the market interest rates. The Bank was supposed to raise capital
and lend it at rates that it could afford to subsidise because of its own strength and that
of its industrial country partners.
Another limitation is the size of the funds available to the Bank. The availability of funds
depends, inter alia, on the willingness of the developed countries to contribute. It has been In short, ‘... the quantity and
pointed out that the United States which is the largest contributor, is not only reluctant to composition of World Bank
increase its own contribution, but also reluctant to let other countries (like Japan which lending is clearly inadequate
would be able to offer a lot more) to do so as its own voting power would be correspond- for the challenges it faces in the
developing countries’.
ingly reduced. In short, ‘... the quantity and composition of World Bank lending is clearly
inadequate for the challenges it faces in the developing countries’.
Despite these failures of IMF–WB, it is necessary to recognise the useful role they have
played all these years by extending different types of assistance to the different categories of
countries. The increase in the membership of these institutions is a clear evidence of their
utility. Although the communists in the past had described these institutions as organs of
capitalist imperialism, several communist countries have become members of these institu-
tions and recently, all the states of the former Soviet Union and East European countries have
become members.
World Trade Organization (WTO)

The eighth round of multilateral trade negotiations held under GATT and lasting for seven
years (1986–93), named the Uruguay Round, resulted in new legal agreements for trade and
strengthening the settlement system. Following this, there was a Ministerial Conference
in Marrakesh, Mor-occo, in April 1994, attended by 125 government representatives from
across the world to sign the establishment of a new successor institution to GATT, viz., the
World Trade Organization (WTO). It is an embodiment of the Uruguay Round results. WTO WTO came into force on Janu-
came into force on January 1, 1995, with all the assets and liabilities of GATT transferred to ary 1, 1995, with all the assets
the former. Geneva was to be its headquarters. All GATT committees were superseded by and liabilities of GATT trans-
WTO committees. Initially, there were four sub-committees, which are as follows: ferred to the former.
1. Budget, finance, and administration,

2. Institutional, procedural, and legal matters,
3. Trade and environment, and
4. Services.
WTO ensured that each member country negotiates with its trading partners, its terms WTO ensured that each mem-
of entry into the multilateral trading system and a market access schedule for goods and ber country negotiates with its
services. All the contracting parties (member countries) pledged to make every effort to trading partners, its terms of
quickly conclude a domestic rectification of the WTO agreement. entry into the multilateral trad-
ing system and a market ac-
cess schedule for goods and
Emergence of WTO services.
WTO’s creation on January 1, 1995, marked the biggest reform of international trade since
1948. During those 47 years, the international commerce had come under GATT and that
WTO came into force on Janu- had helped to establish a prosperous multilateral trading system. However by the end of
ary 1, 1995 with an objective 1980s, an overhaul was due. The Uruguay Round brought about that overhaul. It was the larg-
to help a free trade flow, trade est trade negotiation that WTO ever had. At times, the talks seemed doomed to fail, but in
liberalization, and to set up
an impartial means of settling
the end the Uruguay Round was successful. The talk was so immense that some people won-
disputes. dered whether there would ever be another negotiation like this. WTO is GATT plus a lot
more. GATT was a small and provisional institution, and not even recognised by the law as
an international organisation. It has now been replaced by the WTO. GATT (the agreement)
has been amended and incorporated into the new WTO agreements. GATT dealt only with
trade in goods, whereas WTO agreements cover services and intellectual property as well.
Objectives
WTO is the only international body dealing with the rules of trade among nations. Box 29.3
details the facts of why an individual should be aware of the WTO. At its heart are the WTO
agreements, the legal ground rules for international commerce and trade policy. The agree-
ments have three main objectives, which are as follows:
1. To help trade flow as freely as possible.
2. To achieve further liberalization gradually through negotiations.
3. To set up an impartial means of settling disputes.
In short, WTO is expected to
1. Administer WTO trade agreements.
2. Provide a forum for trade negotiations.
3. Handle trade disputes.
4. Monitor national trade policies.
5. Provide technical assistance and training for developing countries.
6. Cooperate with other international organisations.
Areas of Negotiations
Broadly speaking, WTO has been set up to continue negotiations and bring agreements in
the following areas:
1. Basic telecommunications.
2. Maritime transport.
Box 29.3 Why Should an Individual be Aware of the WTO

An individual should be aware of the WTO because he/ in the availability of better-quality goods at fair prices.
she is a consumer. Trade and trade policies are of great With a minimum level of knowledge on the international
importance to consumers everywhere. Consumers are trade system as governed by the WTO, an empowered
the ultimate beneficiaries of free trade. They get better consumer will be able to protect his/her rights and
access to, have a choice of products that are to be interests in areas as diverse as medicines, vehicles, and
to be consumed, and increased competition results financial services.
3. Movement of natural persons.

4. Financial services.
5. General Agreement on Trade and Services (GATS).
6. A reaffirmation of the rule of the law in trade and economic relations.
7. A reversal of long-standing protectionist practices in agriculture, textiles, and
clothing.
8. An extension of multilateral rules to services and intellectual property rights.
The economic case for an open trading system based on multilaterally agreed rules is sim-
ple enough and rests largely on commercial commonsense. However, it is also supported by
evidence. Protectionism leads to bloated inefficient companies and can, in the end, lead to
factory closures and job losses. One of the WTO’s objectives is to reduce protectionism.
WTO is run by its governments. All major decisions are made by the membership as a
whole, either by ministers (who meet every two years) or by officials (who meet regularly in
Geneva). Decisions are normally taken by consensus. The highest authority is the Ministerial
Conference which meets at least once in every two years. More routine work is supervised by
the General Council. Numerous other councils, committees, working parties, and negotiat-
ing groups cover the wide range of WTO issues.
WTO and India

India became a founder member of WTO by ratifying the WTO agreement on December 30, India is a founder member of
1994. According to the estimates prepared by the WB, OECD (Organisation for Economic WTO.
Cooperation and Development), and GATT Secretariat, the overall trade impact as a conse-
quence of the Uruguay Round package served as a value addition to the merchandise good
by $745 bn by the year 2005. The GATT Secretariat further projects that the largest increas-
es will be in the area of clothing (60 per cent); agriculture, forestry, and fishery products
(20 per cent); and processed food and beverages (19 per cent). According to the Economic
Survey 1994–95,
Since India’s existing and potential export competitiveness lies in the product groups,
it is logical to believe that India will obtain large gains in these sectors. Assuming that
India’s market share in world exports improves from 0.5 per cent to 1 per cent, and that
we are able to take advantage of the opportunities that are created, the trade gains may
conservatively be placed at 2.7 billion US dollars extra exports per year. A more gener-
ous estimate will range from 2.5 to 7 billion US dollars worth of extra exports.
As a result of the policies of globalisation followed by India after joining the WTO in 1995, The critics believe that the
India’s exports increased by $4.1 bn in 1994–95; they surged by $5.5 bn in 1995–96, touching new policies have developed a
$31.8 bn as against $26.3 bn in 1994–95. During 1997–98, the exports increased by barely dependency syndrome on the
$1.50 bn and during 1998–99, they have declined by $1.3 bn. Obviously, the new policies, the international market, and the
Indian economy’s fortunes have
critics believe, have developed a dependency syndrome on the international market and the been geared to it.
Indian economy’s fortunes have been geared to it.
But the Economic Survey 1994–95 underlined the stark reality that whereas the devel-
oped countries want that under the pressure of the super-state organisation (WTO), the de-
veloping counties should reduce the trade barriers and permit a free flow of goods; but, on
the contrary, they themselves want to pursue protectionist policies to save their interests by
erecting trade barriers. The Economic Survey, therefore, categorically states as follows:
Unemployment in industrial countries is at the highest level since the 1990s. This has
created problems not only in these countries, but could translate into a clamour for
protectionism, threatening multilateral trade. Although several developing countries
have substantially liberalised trade as part of economic reforms, developed countries
have raised barriers, threatening marketing access to items of interest to developing
countries.
It is due to the existence of this kind of situation, which exhibits a contradiction between
the rhetoric and reality, that the Indian Parliament has not given its seal of approval to the
patents (Amendment) Ordinance of 1994, which was promulgated on December 31, 1994.
Similarly, a Bill to amend the Trade and Merchandise Marks Act of 1958, to provide for the
protection of service marks, introduced in the Parliament in 1993 has not yet been passed.
The fact that the government is not able to get the approval of the Parliament, for the various
legislations introduced by it following the Uruguay Round Final Act, only confirms the fact
that the majority opinion is apprehensive of the intentions of the developed countries that
want to use WTO, to appropriate a major portion of the gains of trade and leave some crumbs
for the developing countries.
International Finance
Corporation (IFC)
IFC was established in 1956.
The International Finance Corporation (IFC) was established in 1956. The IFC has its own
operating and legal staff but draws upon the WB for administration and other services.
Mission
Its mission was to contribute to The mission of IFC is to contribute to the WB group’s overall purpose of reducing poverty
the WB groups’ over all purpose and improving the living standards by playing a leading role in the development of a sustain-
of reducing poverty and improv- able private sector. The goal of IFC, in partnership with others, is to deliver the development
ing the living standards.
impact. IFC’s basic tools to achieve these goals are loan and equity financing of private enter-
prises, mobilisation of external capital alongside its own resources, and provision of related
advisory and technical-assistance services. But the context of the Corporation’s work has
dramatically altered, opening many new areas of activity.
Objectives
The objectives of IFC are to
The objectives of IFC are to assist the economic development of the LDCs by promoting
assist the economic develop- growth in the private sector of their economies and help to mobilise domestic and foreign
ment of the LDCs by promoting capital for this purpose. The IFC’s role is to stimulate the flow of private capital into produc-
growth in the private sector of tive private and mixed private/public enterprises. It acts as a catalyst in bringing together
their economies and help to
mobilise domestic and foreign entrepreneurship, investment capital, and production. The origin of the IFC lies in the
capital for this purpose. recognition by the industrial countries that the provision of an essential infrastructure for
development alone would not be enough to attract private investment flows to countries
where underdevelopment was pronounced. It was necessary, in addition, to encourage the
growth of productive private investment and saving in the developing world. These broad
objectives were translated into specific objectives that were embodied in the IFC’s Articles of
Agreement.
Main Features of Assistance

The main features of IFC’s assistance are as follows:
1. The IFC makes its investments in partnership with private investors, from the capital-
exporting country or from the country in which the enterprise is located, or both.
2. It is envisaged that the Corporation’s investments will never be more than half of the
capital requirements of the enterprise.
3. The minimum investment the IFC will make in an enterprise is fixed at $10,000 or its
equivalent, but no upper limit is fixed.
4. The enterprises eligible for loans from the Corporation should be predominantly
industrial and contribute to the economic development of the country.
5. The rate of interest in each case would be a matter of negotiation depending on the
risks and other investments.
6. The IFC will not seek or accept a government guarantee for the repayment of any of
its investment, nor will it seek formal government approval of any proposed financ-
ing, except when such approval is required by the Law in any country.
One important feature that distinguishes the IFC from the commercial financial institutions
is its commitment to provide project sponsors with the necessary technical assistance that
will help to ensure that their ventures are potentially productive and financially sound. In
addition, the Corporation provides policy assistance to its member governments in support
of their efforts to develop the necessary investment climate that will encourage productive as
well as beneficial domestic and foreign investment.
Recognising the important contributions of financial markets to economic development,
the IFC has a specialised department that is the focal point of the capital-market development
activities of the IFC and the WB. The department provides specialised resources for address-
ing the financial market needs and the problems of developing countries. In response to the
economic situation, in 1984, the IFC began to expand its operation in a new area—assisting
in the physical and financial restructuring of the existing firms (corporate restructuring).
In addition to corporate restructuring, IFC expanded its activities into several other new
areas too. For example, it helped to create a bonding facility for construction firms that are
operating outside their own country. It helped to establish a secondary mortgage-marketing
institution, and provided financing for a regionally oriented venture-capital company. The
privatization trend all around the world has greatly increased the role of the IFC.
IFC and India

The IFC has assisted in a number of projects in India. The New Economic Policy (NEP) of
India which has substantially enhanced the role of the private sector implies a greater role
for the IFC in the industrial development of the country. The Corporation has identified five
priority areas in India where it plans to beef up its activities. These five areas for strengthened The IFC has identified five prior-
activities are capital market development, foreign direct investment (FDI), access to foreign ity areas in India for its activi-
markets, equity investments, in new and expanding companies to finance capital investment, ties, which are capital market
development, FDI, access to
and infrastructure. The IFC opened up a mission in Mumbai to speed up the assessment
foreign markets, equity invest-
of project proposals. India is the first of the IFC’s member countries to benefit from such a ments, and infrastructure.
decentralisation.
Firstly, the IFC will invest in a range of financial service companies and provide technical
assistance to help in developing India’s capital market. Secondly, with its global network of
contacts, IFC could act as a catalyst in bringing together the Indian and foreign companies,
stimulating the flow of foreign investment and technology into India. Thirdly, IFC will in-
tensify its efforts to help the Indian companies gain access to funding in the international
financial market through loan syndications and underwriting of securities. Fourthly, Indian
companies need to strengthen their balance sheet by increasing the equity levels and reduc-
ing the debt levels if they have to survive in a more competitive market. The IFC is giving a
special emphasis to equity investments in companies that are internationally competitive.
Asian Development Bank (ADB)

Some regional development banks have been established to assist the development of the
developing countries in the respective regions—the African Development Bank (AfDB),
Asian Development Bank (ADB), Caribbean Development Bank (CDB), and Inter-American
Development Bank (IDB). The influence of the regional banks is growing as they are becom-
ing more responsive to the special needs of their own constituencies.
ADB was set up in December 1966 under the auspices of the United Nations Economic
Commission for Asia and Far East (ECAFE) to foster the economic development of Asian
countries. Its headquarters are in Manila. The funds of the ADB are contributed by developed
countries such as Japan, the United States, Canada, West Germany, Australia, and others. The
main objectives of the ADB are as follows:
1. To promote investments in the ESCAP (Economic and Social Commission for Asia
and the Pacific) region of public and private capital for development and
2. To utilise the available resources for financing development, giving priority to those
regional, sub-regional, as well as national projects and programmes which contribute
more effectively to the harmonious economic growth of the region as a whole.
At the 23rd Annual Meeting of the Board of Governors of the ADB, the President pointed out
that the Bank’s most appropriate response to Asian and Pacific development in the future lies
in the following three board directions:
1. Greater priority must be placed on alleviating poverty and protecting the environment;
2. The Bank must strengthen its assistance to the private sector to improve productivity
and efficiency; and
3. The Bank must work with its developing members to create a policy framework that
makes the most efficient use of human and capital resources.
A major problem which the ADB is facing is ‘shortage of funds’. The Western donors now
show a lot of interest in the development of Eastern Europe.
United Nations Conference on Trade

and Development (UNCTAD)
The widening trade gap between the developed and the developing countries, the general dis-
satisfaction of the developing countries with GATT, and the need for a new organisation for
international economic cooperation in the field of trade and aid, which has been designed to
reduce the trade gap of the developing countries, encouraged the establishment of the United
Nations Conference on Trade and Development (UNCTAD), in 1964, as a permanent organ
of the UN General Assembly. The UNCTAD was designed to serve as a forum in which the UNCTAD was established in
trade-related development issues could be discussed and analysed, to lead to negotiations of 1964 as a permanent organ
international understanding on issues that were in dispute. The Conference, which is a ple- of the UN General Assembly.
It was designed as a forum in
nary body of a large number of countries, meets normally at intervals of four years. which the trade-related devel-
opment issues could be dis-
cussed and analysed, to lead
Functions to negotiations of international
understanding on issues that
The principal functions of UNCTAD are as follows:
were in dispute.
1. To promote international trade with a view to accelerate the economic development.
2. To formulate principles of and policies on international trade and related problems of
economic development.
3. To negotiate multinational trade agreements.
4. To make proposals for putting its principles and policies into effect.
The major activities of UNCTAD include research and support of negotiations for commod-
ity agreements, and technical elaboration of new trade activities designed to assist the devel-
oping countries in the areas of trade and capital.
Basic Principles
UNCTAD’s action programme and priorities have been laid down in various recommen-
dations adopted by the first conference in 1964. These recommendations are based on the
following basic principles:
1. Every country has the sovereign right to freely dispose of its natural resources in the
interest of the economic development and well-being of its own people and to freely
trade with other countries;
2. Economic relations among countries, including trade relations, shall be based on
respect for the principles of sovereign equality of states, self-determination of people,
and non-interference in the internal affairs of other countries; and
3. There shall be no discrimination on the basis of differences in the socio-economic
systems, and the adoption of various trading methods and trading policies shall be
consistent with this principle.
A Review of the Functioning of UNCTAD

About eight conferences have been held so far under the auspices of UNCTAD. Given the
important role of primary commodities and natural resources in the external sectors of
the developing countries, the initial focus of UNCTAD was on commodity policy and efforts to
stabilise and expand the export earnings of these countries. In the process, UNCTAD adopted
a group approach to negotiation with OECD countries (i.e., the industrial economies), lining
up together (Group B) the Centrally planned economies of Central and Eastern Europe and
the Soviet Union plus a few similar economies forming their own grouping (Group D),
and the developing countries coming together under the aegis of the Group 77 to coordinate
their positions. China formed a separate group. Despite debates and disagreements over the UNCTAD played a key role in
the emergence of the GSP, a
years, UNCTAD played a key role in the emergence of maritime shipping code, special
international programmes to
1. The Generalized System of Preferences (GSP).
help the LDCs, and internation-
2. A maritime shipping code. al aid agencies.
3. Special international programmes to help the LDCs.

4. International aid agencies.
During the 1970s, in line with the major changes in the international economic environment,
the breakdown of the Bretton Woods system, oil price, stocks, inflation, and accumulation of
debt by many developing countries, UNCTAD became a central forum for debates between
the North and the South. Its negotiations became politically chartered and most of its ses-
sions during the 1970s and 1980s reflected sharp divisions among participants, even as a
global consensus seemed to be emerging in the 1980s.
United Nations Industrial Development

OrganiZation (UNIDO)
The United Nations Industrial Development Organization (UNIDO), which was set up in
UNIDO was established in Janu- January 1967, is an organ of the UN General Assembly. The primary function of UNIDO
ary 1967 with an objective to is to promote industrialisation in the developing counties by encouraging the mobilisa-
promote industrialisation in tion of national and international resources. Particular attention is given to manufacturing
the developing countries. The
major activities of UNIDO are industries. Unlike UNCTAD, UNIDO works directly with business firms, generally on an
direct technical assistance industry basis. The major activities of UNIDO fall into the following three categories:
to industries, research, and Operational Activities. These include direct technical assistance to industries, at the
coordination. request of the governments of the developing country and the in-plant training programmes,
whereby groups of technicians and engineers from the developing countries, who are facing
a common industrial problem, are brought together to consider how industry in the more
advanced countries avoids or solves similar problems.
Research. In this area, UNIDO conducts feasibility studies on the requirements for a
potential industry in the developing countries. Export-oriented industries are given a special
attention.
Coordination. The coordinating activities of UNIDO include mostly the organisation
and sponsoring of inter-regional and international meetings, seminars, and symposia.
International Trade Centre (ITC)

The International Trade Centre (ITC) is the focal point in the United Nations’ system for
technical cooperation with developing countries in trade promotion. ITC was created by the
GATT in 1964 and since 1968, has been operated jointly by GATT (now WTO) and the UN,
ITC is directly responsible for
the latter acting through the UNCTAD. As an executing agency of the UNDP, ITC is directly
implementing UNDP-financed responsible for implementing UNDP-financed projects that are related to trade promotion in
projects that are related to the developing countries.
trade promotion in the develop- ITC can advise the developing countries on their overall approach to marketing com-
ing countries.
munications, as well as on the individual information and publicity activities. This entails
establishing a strategy with broad-communication objectives that are in line with the firm’s
international marketing goals and defining specific actions to achieve those objectives. Trade
fairs are one such specific activity. For instance, ITC can provide guidelines on choosing the
most appropriate fairs for firms and products concerned, preparing the exhibition budget,
designing the stands, producing publicity materials, briefing the participants, manning the
stands, following upon business enquiries, and evaluating exhibition, performance. Similar
ITC services are available for planning and executing the trade missions, solo exhibitions,
and store promotions, which all call for skills in conducting marketing research, selecting
participants and products, preparing promotional material, making detailed arrangements,
and following through with business contracts.
For trade-promotion publications, ITC can give advice on developing a publication plan
and determining specific types of publications to be a part of it, such as product and compa-
ny brochures, export directories, and trade-promotion bulletins; newsletter; and magazines.
Suggestions on content, graphics, production, and distribution are a part of this service.
Briefly, the ITC assists the developing countries by working with them in the following ways: The ITC assists the developing
countries by working with them
1. Developing a national trade promotion strategy, including analysing the export in developing a national trade
potential, choosing the priority markets, and setting the export targets; promotion strategy; establish-
ing appropriate government
2. Establishing appropriate government institutions and services, such as a Central trade institutions and services; find-
promotion organisation and services for the exporters in trade information, export ing market opportunities for
financing, export quality control, export costing and pricing, export packaging, trade current export products; Train-
ing government trade officials,
fairs and commercial publicity, legal aspects of foreign trade, international physical business men, and institutions
distribution of goods, trade promotion services for small- and medium-sized enter- in exports; and improving im-
prises (SMSE), and commercial representation abroad; port operations and techniques.
3. Finding market opportunities for current export products, both non-traditional

items and elected primary commodities, and using effective marketing techniques
to promote them abroad; adapting other products to foreign-market requirements
and developing new items for export; and promoting exports of technical consulting
services;
4. Training government trade officials, businessmen, and instructors in export mar-
keting and trade promotion, and establishing a national framework for developing
export training over a long term; and
5. Improving import operations and techniques to optimise scarce foreign exchange
resources.
Generalized System of
Preferences (GSP)
The Generalized System of Preferences (GSP) is a scheme designed by the UNCTAD to The GSP is a scheme designed
encourage the exports of developing countries to developed countries. Under this scheme, by the UNCTAD to encour-
the developed countries grant duty concession on the imports of specified manufactures and age the exports of developing
countries to developed coun-
semi-manufactures from the developing counties. It was a resolution adopted at UNCTAD-II,
tries. Under this scheme, the
held in 1968, in New Delhi, that led to the introduction of GSP, which is the result of the developed countries grant duty
realisation that temporary advantages in the form of generalised arrangements for special- concession on the imports of
tariff treatment for developing countries, in the market of developed countries, may assist the specified manufacturers and
semi-manufacturers from the
developing countries to increase their export earnings and so, contribute to an acceleration developing countries.
in the areas of their economic growth.
The EEC (European Economic Community) countries and a number of other countries,
such as the United States, Japan, Norway, New Zealand, Finland, Sweden, Hungary,
Switzerland, Australia, Canada, Austria, Bulgaria, and Poland have introduced GSP. The
facility is available to developing countries; it is subject to certain stringent limitations. The
preferential rates of duty allowed on the import of manufactures and semi-manufactures and
processed agricultural products differ in schemes of different developed countries as each
country has developed its own GSP, keeping in view its local production base and certain
other factors. Each scheme has a safeguard clause or an escape to protect the sensitive sectors
in its economy. A particular item qualified for GSP benefits only if the following conditions
are satisfied:
1. The product must be included in the GSP list.
2. The country exporting the items should be declared under the GSP as a beneficiary
country.
3. The value-added requirements/process criteria must be complied with.
4. The product must be imported into the GSP donor country from a GSP beneficiary
country.
5. The exporter must send to his buyer/importer a certificate of origin in the prescribed
form, which is duly filled in and duly signed by him, and then certified by a desig-
nated government authority.
Global System of Trade

Preferences (GSTP)
The expansion of trade among the developing countries is viewed as an important aspect of
economic cooperation among the developing countries. It is felt that trade preferences can
help to achieve the expansion of South–South trade. Although the UNCTAD gave its sanc-
tion to a scheme of trade preferences as far back as 1968, it was not until 1979 that the Group
of 77 (G77) drew up an action plan for a collective self-reliance. It took three more years for
the group to formally adopt a programme of Global System of Trade Preferences (GSTP).
The G77 Ministerial Conference, held in New Delhi, in July 1985, resolved to complete
the first round of negotiations on GSTP by May 1, 1987. The agreement reached at the Con-
ference included an across-the-board tariff-preference margin of 10 per cent, the removal
or reduction of non-tariff barriers, selection of specific sectors and products where trade
preferences could be extended, and trade-creating, production-sharing, and marketing
arrangements.
The inordinate delay in formulating and implementing a meaningful scheme of GSTP is
an indicator of a lack of unity of purpose and will among the developing countries. Curiously,
the GSP, designed by the major industrialised countries to give tariff concessions in favour
of the developing countries to facilitate an easier access for the latter’s exports to the former,
particularly of manufactures and semi-manufactures, came into being much faster than the
GSTP. Indeed, the ‘problem of trade preferences among the developing countries is a com-
plex one. These countries form an extremely heterogeneous lot with great diversities in the
levels of development and industrialisation, foreign trade regimes and not the least of all,
approaches to development’. Further,
however effective the GSTP may be, it can only be one of the many instruments for
promoting South–South financial and monetary cooperation, new payment arrange-
ments and joint debentures in production and marketing. On most of these issues, the
developing countries have made a little progress in the past decade. Unless they display
a unity of purpose and sense of urgency backed by a strong political will, South–South
trade will continue to remain on a weak wicket.
The agreement on GSTP adopted at the Ministerial Meeting of the developing countries
of the G77, held in Belgrade, in April 1988, annexed a list of tariff concessions exchange among
the 48 participating countries of G77 in the first round of negotiations. India exchanged tariff
concessions with 14 countries. The tariff concessions exchanged in the first round were only
modest in terms of trade and product coverage. But the significant achievement lies in the
conclusion of the agreement, which provided a framework for exchange of trade concessions
among the developing countries and for promoting trade and economic cooperation among
themselves.
C ase
The case that came up before the World Intellectual Property Organisation (WIPO) was
Hindcool Petroleum Corporation Ltd. vs Zeel Zunatar. Hindcool is in the business of
refining and marketing petroleum products. It is the second largest company in the country
with a turnover of $10,000 mn in the Fiscal Year (FY) 2001–02. It has 4,500 petrol pumps,
17.3 million consumers, and 17 registered domain names in its name. Hindcool had regis-
tered the domain name Hindpetro.com in 1996, because it was something that reflected its
common abbreviation.
A lapse appears to have happened in 2003, when a domain name was not renewed. How
naïve, you wonder, but Hindcool relied on a software company to do the job. Only subse-
quently did Hindcool discover that the name had already been registered by the Domainsite.
com in favour of Zeel Zunatar. The harsh truth perhaps took time to sink in the head of the
oil major and at last on May 10, 2004, Hindcool sent a complaint to WIPO. However, it was
‘administratively deficient’ and took two more weeks for the company to satisfy all the formal
requirements of the uniform domain name dispute resolution policy as also the appropriate
rules of WIPO.
In its complaint, Hindcool made a strong case that Hindpetro belonged to it: that it has
coined that word with ‘hind’ meaning Hindcool and ‘petro’ for petroleum, the trade mark has
been used continuously since 1974 and the domain name is identical to its trademark. Zeel
has ‘no legitimate interest in the domain name’, argued Hindcool. A case of use in ‘bad faith’
which can lead to use of the trade mark as passing off. Hindcool informed WIPO of Zeel’s
voice mail on July 17, 2004 as ‘Seeking $20,000–$21,000 for a transfer of the domain name’.
A sum seeming to be ‘in excess of likely out of pocket costs’.
What did Zeel have to say on the issue? It said that it relied on the ‘the non-registration
of the mark’ in the United States and stated that WIPO policy ‘does not arbitrate on claims
on trade names’. Zeel also argued that ‘Hind’ and ‘Petro’, are also generic form for ‘skilled
farmers’ and ‘rock’, respectively, and that it intended to use the domain name ‘Hindpetro’
for a ‘rock collection and informational site’. It claimed, ‘The fact that the complainant is a
big company in the country does not automatically mean it was aware of their rights’.
The Arbitration and Mediation Centre reasoned that the domain name was ‘identical or
confusingly similar’, because it was identical to a trademark in which Hindcool has a right.
The name ‘has clearly been used continuously and extensively as an abbreviation’ by the com-
pany and the bourses. ‘As such, the reputation acquired through such use would be capable of
protection as a trademark at common law’, it concluded.
Also, the Centre found Zeel to have no ‘right or legitimate interests’ in the domain name,
based on the evidence made available. ‘There is no evidence that the respondent is commonly
known by the domain name even though it acquired no trademark or service mark rights’,
noted the Centre. There was no evidence that Zeel was making ‘a legitimate non-commercial
use of the domain name without an intent for commercial gain to misleadingly divert con-
sumers or tarnish the trademark or service mark in issue’.
Case question
What should WIPO do?
Case analysis
One interesting observation here is that the explanation offered by Zeel for the choice of
the name relied on a less well-known derivation for the roots of the portmanteau word in
question. On the question of ‘Bad Faith’ that Zeel was against, was an ‘evidence of registration
of the domain name for the purpose of selling it to the complainant for a valuable considera-
tion in excess of the respondent’s apparent, out-of-pocket expenses’. The decision, therefore,
should go in favour of Hindcool, that the domain name Hindpetro can be transferred to the
complainant.
KEY WORDS
● Modes of Delivery ● International Monetary Fund (IMF) ● Intellectual Property
● Quantitative Restriction (QRs) ● Special Drawing Rights (SDR) ● GSP
● Most-favoured Nation (MFN) ● Compensatory Financing Facility ● IFC
● Quota (CFF) ● Stand-by Arrangement
● World Bank (WB)
● Conditionality ● Supplemental Reserve Facility (SRF)
● GATS
● Structure Adjustment Landing (SAL) ● Contingent Credit Lines (CCL)
● GATT
● Special Action Programme
QUESTIONS
1. What do you mean by an international business envi- 7. Discuss the functions and basic principles of
ronment? Explain the different factors that favour an UNCTAD.
international business environment. 8. Write short notes on:
2. Explain in detail how GATT is responsible for the (a) Asian Development Bank (ADB)
establishment of WTO.
(b) United Nations Industrial Development Organi-
3. Explain the role of India in WTO and WTO’s role in zation (UNIDO)
India’s socio-economic development.
(c) International Trade Centre (ITC)
4. Discuss the objectives and organisation of IMF.
(d) General System of Preferences (GSP)
5. Discuss the financing policies of WB and its assis-
tance to India. (e) Global System of Trade Preferences (GSTP)
6. Describe the mission, objectives, and features of the
International Finance Corporation (IFC).
REFERENCES
n Adhikary, M. (2001). Global Business Management. n John, D. and L. Radebaugh (2002). Business Environ-
New Delhi: Macmillan India. ment. New Jersey: Prentice Hall.
n Bennett, R. (2003). International Business. New Delhi: n ——— International Business, 8th ed. New Jersey:
Pearson Education. Prentice Hall.
n Bhall, V. K. and S. Ramu (2004). International Business, n Rao, S. (2005). International Business [Text and Cases],
8th ed. New Delhi: Anmol Pub. 4th ed. Mumbai: Himalaya Pub.
n Daniels, J. (2004). International Business: Environments
n Rugman, A. M. (2005). International Business, 3rd ed.
and Operations, 9th ed. New Delhi: Pearson Education.
New Jersey: Prentice Hall.
n Francis, C. (2003). International Business Environment,
1st ed. Mumbai: Himalaya Publishing House. n Sharam, V. (2005). International Business: Concept,
Environment and Strategy. New Delhi: Pearson Education.
n Helen, D. (2003). International Management: Manag-
ing Across Borders and Cultures, 4th ed. New Delhi:
Prentice-Hall.
30
C hapter
World Trade Organization

>>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>> >>>
• Background 830 • Trade-related Investment Measures
• Meaning and Agreements 832 (TRIMs) 849
• Functions 834 • Non-tariff Barriers (NTBs) and Dispute
Settlement Mechanism 850
• Principles of Trading 835
• Provisions for Developing Countries 836 • Anti-Dumping Measures 850
• Other Provisions 837 • Subsidies 851
• The WTO Agreement 838 • Singapore Ministerial Meeting, 1996 851
• Liberalizing Trade in Goods 839 • Geneva Ministerial Meeting, 1998 852
• Textiles—Back in the Mainstream Rules 840 • Seattle Ministerial Meeting, 1999 853
• Agriculture: Fairer Markets for All 841 • Doha Ministerial Meeting, 2001 853
• Trade Remedies 841 • Cancun Ministerial Meeting, 2003 854
• Standards and Procedures 842 • Trade and Development: Recent Trends and
the Role of the WTO 858
• Administrative Procedures 844 • Conclusion 873
• Investment Measures 845 • Summary 874
• Disputes Settlement Mechanisms 845 • Key Words 875
• Ministerial Meetings 847 • Questions 875
• Trade-related Aspects of Intellectual • References 875
Property Rights (TRIPs) 847
Background
The World Trade Organiza- The World Trade Organization (WTO) is one of the most important institutions dealing
tion (WTO) is one of the most with international economic relations. In broad terms, its role is twofold. One, to establish
important institutions dealing
and enforce the rules of the road for international trade in both goods and services. Two, to
with international economic
relations. progressively liberalise that trade, in 2006 valued at close to US$12,083 bn every year. While
the WTO began its life on January 1, 1995, its origins are more than half-a-century old. They
lie in the economic and social disaster of the Great Depression of the 1930s. At this time in
history, countries turned inwards and provoked a descending spiral of declining output and
trade. The reaction in terms of trade policy was to resort to extreme protectionism. This
meant raising tariffs and other trade barriers to such a level that imports were drastically
reduced. Discriminatory arrangements that favoured some countries and excluded others
became the name of the game.
World Trade Organization | 831
The Second World War followed. The war taught many important lessons. One of
the most important was that a secure political future could not be built without a greater
economic security. The search was on for better international instruments of international
cooperation. This search bore fruit at a conference held in Bretton Woods in the United States
in 1944. At this Conference, the International Monetary Fund (IMF) and the World Bank
(WB) were created to deal with matters such as currency instability and financing of post-war
reconstruction.
Attempts to create a counterpart, the International Trade Organization (ITO), to deal
with problems of international trade took much longer. An interim arrangement was agreed
among a limited number of countries. However, it did not deal with many of the important
aspects of international trade. This arrangement took the form of the General Agreement on
Tariffs and Trade (GATT) and came into being in 1948. The fully developed answer to the
question of what would be the institution to deal with international trade came half a century
later. It came with the birth of the WTO.
Notwithstanding the early failure to create an ITO, there were significant improvements
in the conduct of world trade in the post-war period. This was largely due to two key insights
on the part of those who were responsible for the trade policy. Firstly, there was a realisation
that the road to post-war economic recovery lies only in the progress towards open markets
and liberalised trade. Secondly, trade would not grow unless traders themselves could count
on a degree of stability and predictability in the system. The best way of achieving this was
to develop a mutually agreed set of rules, binding on all members and enforceable through a
dispute settlement. Trade would be conducted according to rules—not by the power of indi-
vidual nations. Together, these two insights have shaped the multilateral trading system, and
have been fundamental to its success.
The improvements in the post-war trading system have manifested themselves in a vari-
ety of ways. Since 1948 the world trade has consistently grown faster than the world output.
In fact, the volume of trade in goods has grown by an average of 6 per cent a year, whereas
the world merchandise output has increased by 4 per cent a year. In volume terms, that rep-
resents an 18-fold increase in the world trade since 1948. The exports of manufactured goods
are now 43 times larger than it was 50 years ago. The end result is that around one quarter of
The end result is that around
world production is now traded. This means that one quarter of world production is subject one quarter of world production
to the rules of international trade. The institution that creates and enforces those rules is is now traded. This means that
the WTO. one quarter of world production
Much of the post-war trade expansion can be traced to eight rounds of multilateral trade is subject to the rules of inter-
national trade. The institution
negotiations carried out under the auspices of GATT. Each round involved more countries that creates and enforces those
than the one before. It resulted in dramatic reductions in tariffs on industrial goods. Average rules is the WTO.
tariffs among the industrialised counties were progressively cut from between 40 per cent
and 50 per cent to less than 4 per cent. Most of the non-tariff restrictions—such as quan-
titative restrictions (QRs)—were abandoned. As for rules, those contained in the original
GATT of 1947 were developed and elaborated in the light of experience. In this manner, the
market-access gains achieved through tariff-cuts could not be cancelled out by new trade
barriers such as subsidies, discriminatory technical standards, and unreasonable regulations
and procedures.
Notwithstanding the considerable expansion in trade, the GATT was in some ways an
unsatisfactory instrument. It was a provisional and makeshift agreement pressed into serv-
ice because the ITO was stillborn. Its arrangements of settling disputes were ineffective. If
The WTO comprises a wide
governments chose to disregard the dispute settlement rulings then they could—and they variety of legally binding multi-
did. Also, the reach of the GATT rules did not go beyond trade in goods. The time had come lateral trade agreements cover-
when international commerce also embraced trade in services and trade-related aspects of ing a vast area of international
intellectual property rights (IPR). As a result, GATT was replaced by the WTO. The WTO activity.
comprises a wide variety of legally binding multilateral trade agreements covering a vast area
of international activity. The rules contained in these agreements are adhered to by almost
150 countries accounting for well over 90 per cent of the world trade. It was with the success-
ful conclusion of the Uruguay Round—the eighth round of negotiations under the auspices
of GATT—that the WTO came into being on January 1, 1995.
Thus, it is the WTO which now provides the legal ground rules for international com-
merce. It has extended the reach of multilateral trade rules far beyond merchandise trade
to trade in services and trade-related aspects of IPR. The rules also deal with numerous
other areas such as dumping, custom procedures, technical barriers to trade, and sanitary
and phytosanitary (SPS) measures. The existing rules have themselves been greatly strength-
ened and the effectiveness of the dispute settlement system has increased greatly. The rules
are contained in multilateral trade agreements which are essentially contracts binding the
governments to operate their trade policies in accordance with what was agreed in the
multilateral negotiations.
Why are these agreements that are described as multilateral agreements opposed to
global or international agreements? The answer lies in the fact that while almost 153 coun-
tries of the world are members of the WTO, as on 23 July 2008, some are not. These agree-
ments are very different from regional trade agreements such as the European Union (EU),
NAFTA (North American Free Trade Agreement), or ASEAN (Association of Southeast
Asian Nations) Free Trade Area. Regional trade agreements have a narrower participation
The WTO system is commonly
referred to as the ‘open and
in terms of parties to the agreements. The WTO system is commonly referred to as the ‘open
liberal rule-based multilateral and liberal rule-based multilateral trading system’. It is open and liberal because of the proc-
trading system’. ess of progressive removal of trade restrictions. It is a rule-based one as international trade is
conducted according to the agreed rules.
Meaning and Agreements

Different Things to Different People
Perhaps, it is important to recognise at an early stage that the WTO is not without its critics.
In general terms, we frequently hear of what the WTO does and does not do or what it should
The criticisms include the and should not do. The criticisms include the accusation that the WTO is non-transparent,
accusation that the WTO is non- non-democratic, and non-accountable to the public. We hear that the WTO is harmful for
transparent, non-democratic, and the environment and not sufficiently supportive of any economic development. Nevertheless,
non-accountable to the public.
is important to make the following point. When we talk of the WTO, it means different
things in different contexts (refer to Box 30.1).
Box 30.1 Genesis of WTO

Year Event
1947 The General Agreement on Trade and Tariffs (GATT) was drawn up to record the results of tariffs
negotiations among 23 countries. The agreement entered into force on January 1 , 1948.
1948 The GATT provisionally entered into force. Delegations from 56 countries met in Havana, Cuba, to
consider the final draft of the International Trade Organization (ITO) Agreement; in March 1948,
53 countries signed the Havana Charter establishing an ITO.
(Continued)

1950 China withdrew from GATT. The US administration abandoned its efforts to seek a congressional
ratification of the ITO.
1955 A review session modified numerous provisions of the GATT. The United States was granted a waiver from
GATT disciplines for certain agricultural policies. Japan acceded to GATT.
1965 Part IV (on trade and development) was added to the GATT, establishing new guidelines for trade policies
of and towards the developing countries. A committee on trade and development was created to monitor
implementation.
1974 The agreement regarding international trade in textiles, better known as the Multifiber Agreement (MFA),
came into force. The MFA restricted the export growth in clothing and textiles to 60 per cent per year.
It is renegotiated in 1977 and 1982, and again extended in 1986, 1991, and 1992.
1986 The Uruguay Round is launched in Punta del Esta, Uruguay.
1994 In Marrakesh, on April 15, the ministers signed the final act, establishing the WTO and embodying the
results of the Uruguay Round.
1995 The WTO came into force on January 1.
1996 The ministerial meeting in Seattle failed to launch a new round. Wide-scale protests in Seattle and
elsewhere on the proposed inclusion of labour clause in the WTO, was the main cause for the failure of
the meet.
2001 Doha Ministerial Meet.
2002 Fifth Ministerial Meet in Cancun, Mexico, from September 10–14, 2003.
2005 Sixth Ministerial Meet was held in December 2005 in Hong Kong.
2006 The mini-Ministerial Conference of the WTO that was held in Geneva during June–July 2006 ended in a
deadlock, conference over the issues that were raised by the developing countries.
2007 Another mini-Ministerial Conference in Davos in January and yet another meet in July to finish
negotiations.
Source: Statistical Outline of India 2007–08, published by Tata Services Ltd., Department of Economics and Statistics, Mumbai.
Agreements. For example, the WTO is a set of agreements that create legally binding
rights and obligations for all members. So too, do the commitments to provide an agreed
degree of openness of domestic markets to imported goods and services. The agreements and
commitments have been negotiated multilaterally and agreed to by all WTO members.
Negotiations. The WTO is also an intergovernmental forum where delegations from
member countries meet to discuss and negotiate a number of trade-related matters. In the
Trade Policy Review Body, for example, governments periodically review the trade policies
of other members. They also discuss recent developments in the multilateral trading system.
Secretariat. The WTO is also sometimes referred to in the context of a relatively small
secretariat. The 500 staff members have neither enforcement powers nor any role in the
interpretation of the legal rights and obligations of members. It has an annual budget of less
than $90 mn. It is one of the smaller international organisations dwarfed by the WB, United
Nations, IMF, and numerous other organisations. It is located in Geneva and headed by a
Director General (DG).
Governments. Most importantly, the WTO comprises almost 153 sovereign states, the
vast majority of which are democratically elected. They have collectively agreed to conduct
their trade according to multilaterally agreed rules that have been agreed to on a consensus
basis. After an agreement is reached between trade negotiators, the agreements are ratified by
the domestic parliaments of all WTO members countries. To criticise the WTO is—in practi-
cal terms—to criticise the collective action of close to 150 sovereign states acting on the basis
of consensus and according to the rules accepted by their national parliaments.
Functions
Institutional Characteristics
Before turning to the substance of the world of the WTO, it is perhaps useful to look at its
The WTO Agreement com- institutional characteristics. Formally speaking, the WTO Agreement comprises all specific
prises all specific trade agree- trade agreements—such as those relating to agriculture, services, or anti-dumping. They are
ments, such as those relating attached to the agreement establishing WTO. This agreement was signed in Marrakesh on
to agriculture, services, or anti- April 15, 1994, and marked the closure of the Uruguay Round. The specific agreements come
dumping.
in the form of four annexures. These annexures contain the multilateral trade agreements as
well as other understandings and decisions reached during the Uruguay Round negotiations.
All individual WTO members have accepted all these—it is all or nothing.
Ministerial Conferences
The institutional structure of the The institutional structure of the WTO is such that it is headed by a Ministerial Conference.
WTO is such that it is headed by This is composed of all members of the WTO and meets at least once in every two years. One
a Ministerial Conference. This such meeting was in Cancun, Mexico, in September 2003. Prior to that, the ministers met in
is composed of all members
of the WTO and meets at least Doha, Qatar, in 2001, and in Seattle in 1999. They also met in Singapore in 1996 and Geneva
once in every two years. in 1998. Between the sessions of the Ministerial Conference, the General Council exercises
the functions of the Ministerial Conference. It is also made up of the full membership of the
WTO. It is responsible for the continuing management of WTO and supervises all aspects of
its activities. The General Council also meets as the Dispute Settlement Body (DSB) and as
the Trade Policy Review Body.
Taking Decisions
An important characteristic of As mentioned earlier, an important characteristic of the decisions taken in the WTO is that
the decisions taken in the WTO they are adopted on the basis of consensus. An issue is first discussed to the point of all
is that they are adopted on the members agreeing, or at least not opposing the decision. To the extent that voting takes place,
basis of consensus.
it is a mere formality. It is usually concerned with the pre-negotiated terms of accession of
a country to the WTO, or, perhaps, a waiver to permit a member to deviate from a cer-
tain rule. Formally each WTO member has one vote. The normal rule is that a decision is
taken according to the majority of the votes cast. Matters are far more complicated when
it comes to amendments to WTO rules. For certain key articles such as those relating to
non-discrimination, no change is possible unless all members agree formally.
Settling Disputes
DSB is the WTO General Coun-
A further important feature of the WTO is its dispute settlement process. This lies at the
cil which meets to settle trade heart of WTO. In all of the diverse multilateral trade agreements, breaking the rules means
disputes. being taken to court; in fact, the same court for all breaches of agreement. If, as a result of
an enquiry, measures are found to be in error with respect to WTO rules, they have to be
brought into conformity with the WTO obligations. If they are not, then compensation and
r etaliation—with the approval of the General Council sitting as the DSB—are provided for
and in this context, the inter-relationship between the trade agreements is critical. Compen-
sation, for example, can be sought in the form of improved market access in any of the areas
covered by the multilateral trade agreements. It is not necessarily with respect to the agree-
ment where the breach of obligations was committed.
Principles of Trading
Much in Common
The various multilateral agreements are sometimes complex and difficult to understand.
However, they are all underpinned by the same basic principles. Understanding these princi-
ples simplifies the task of comprehending the agreements.
Non-discrimination. The pillar of the rule-based multilateral trading system is non-
discrimination. But what does this mean in operational terms? How is it interpreted in the
various WTO agreements? In answering these questions, there are two important aspects to
consider as follows:
• MFN. Firstly, non-discrimination means that countries cannot discriminate MFN treatment—that is, the
between the same goods coming from different trading partners. This principle is most favoured nation treatment
known as ‘most-favoured-nation, or MFN’ treatment. The name sounds like a con- is the principle of not discrimi-
tradiction. It suggests some kind of a special or favoured treatment for one specif- nating between one’s trading.
ic country. But in WTO, it actually means the opposite. What happens under the
WTO Agreement is this. Each member treats all the other members equally as ‘most
favoured’ trading partners. If a country improves the benefits that it gives to one
member, it has to give the same ‘best’ treatment to all other members. In this manner,
they all remain ‘most favoured’. This has very practical implications. Grant someone
a special favour—such as in terms of a lower tariff—then you have to do the same for
all other WTO members.
• National Treatment. However, in WTO rules, non-discrimination applies not
National Treatment—that is,
only to goods and services from different supplying countries, but it also means that the principle of giving other the
imported and locally produced goods should be treated equally even after the for- same treatment as one’s own
eign goods have entered the local market. Foreign goods and services cannot be dis- nationals.
criminated against the local market just because they are imported. This principle of
‘national treatment’ means giving the product of other countries the same treatment
as one’s own national products. But it also means that charging customs duties on an
imported good is not a violation of national treatment even if the locally produced
products are not charged an equivalent tax. National treatment only applies after
border regulations have been dealt with.
Freer Trade. Some of the multilateral trade agreements are also characterised by provi-
sions to ensure that trade is carried out in a progressively freer manner. In the past, tariff
negotiations were launched periodically under the auspices of the GATT. While industrial
tariffs have been greatly reduced over the past 50 years, tariff negotiations remain an im-
portant aspect of the Doha Development Agenda. With respect to agricultural products, all
non-tariff barriers have been eliminated and substituted by tariffs. However, these tariffs are
in many cases at very high levels, and an objective of the 2004 agricultural negotiations is
to reduce them. Similarly, as far as services trade is concerned, there is a WTO Agreement
which establishes a multilateral framework providing for the progressive liberalization of
trade in services.
Predictable and Transparent. A further characteristic of the multilateral trading

s ystem is the importance it assigns to conducting business in a predictable and transparent
manner. This means that foreign companies, investors, and governments should be confident
that trade barriers will not be raised arbitrarily. The WTO has created a wide variety of ob-
ligations and notification procedures to ensure that regulations affecting international trade
are publicly and freely available. In addition, the WTO Trade Policy Review Mechanism
provides the possibility for WTO members to discuss the trade policies of other countries.
The ‘binding of a tariff’ is consid- A further important means to ensure security and predictability in the market transactions
ered to be an important contri-
bution to market openness and
is through the commitment to bind market openness. A ‘bound’ tariff, for example, is a tariff
a legitimate contribution to the where there is a legal commitment of not to raise it beyond the bound level. The ‘binding of
process of trade liberalization. a tariff ’ is considered to be an important contribution to market openness and a legitimate
contribution to the process of trade liberalization.
Provisions for Developing Countries

Growing Number
Developing countries account Developing countries account for more than two-thirds of the total WTO membership. They
for more than two-thirds of the rightfully expect the multilateral trading system to contribute positively to their develop-
total WTO membership. ment prospects. As a consequence, they play an increasingly important role in all aspects of
the work of the WTO. The outcome is that much attention is paid in the multilateral trading
system to the special needs and problems of developing countries.
Need for Flexibility

The need for additional flexibility with regard to GATT obligations for the developing coun-
tries in terms of their use of commercial policy instruments has long been recognised. For
example, the structural nature of their balance of payment (BoP) problems was recognised
almost half a century ago, along with the flexibility needed in terms of maintaining BoP
restrictions. Similarly, the developing countries have long been able to adopt measures
deviating from GATT obligations for the promotion of a particular industry.
Trade and Development

In fact, in 1965 a special section called the ‘Trade and Development’ was added to the GATT.
This section recognized the
This section recognised the need for a rapid and sustained expansion of the export earnings
need for a rapid and sustained of the less developed countries (LDCs). To this effect, the developed countries were called
expansion of the export earn- upon to assign high priority to the reduction and elimination of barriers to products of export
ings of the LDCs. interest to developing countries. It also codified in the multilateral trading system the concept
of non-reciprocity in trade negotiations between the developed and the developing countries.
Enabling Clause
The Trade and Development Section of the GATT was further elaborated at the end of the
1970s in the discussion which has come to be known as the ‘enabling clause’. This decision con-
solidated the concept of ‘differential and more favourable treatment for developing countries’
as well as the principle of non-reciprocity in trade negotiations. The most significant provi-
sion of the enabling clause is the one which enables members to accord differential and more
favourable treatment to developing counties as a departure from the MFN clause. A number
of categories of such treatment are identified, including preferential tariff treatment accorded
by the developed countries to products originating in the developing c ountries.
Other Provisions
There are other special provisions in favour of developing countries in the WTO multilateral
trade agreements, which include provisions that require WTO members to safeguard the
interests of the developing countries, when adopting their own trade measures; the provision
of technical assistance in the implementation of commitments undertaken by the developing
countries; and also providing technical assistance to ensure that the developing countries
benefit from the outcome of negotiations.
Least Developed Countries (LDCs)

What is clear, however, is that while a number of developing countries have benefitted from
the multilateral trading system, the advantage they have drawn has been far from uniform.
Some have done much better than others. Most worrying of all is the position of the world’s
49 poorest nations. These countries are classified by the United Nations as least developed
countries (LDCs). With 10.5 per cent of the world’s population, they account for one-half of These countries are classified
1 per cent of the world trade. This tiny share is shrinking. Many of these countries are saddled by the United Nations. These
with enormous debts, lack of infrastructure, and are starved of investment. The LDCs receive countries with 10.5 per cent of
an extra attention in the WTO. For example, WTO members have agreed on a plan of action the world’s population account
for one-half of 1 per cent of the
for the LDCs. This envisages special efforts to improve access to the markets of the developed world trade.
countries, including the possibility of removing the tariffs completely.
Gradual Evolution
The development of the rule-based multilateral trading system has been a gradual one
and the evolution has progressed through many rounds of negotiations. The importance of
these rounds cannot be overemphasised. The most recent of the completed rounds was the
Uruguay Round. The current round is the Doha Development Agenda.
Package Approach
Negotiating through rounds of negotiation can be lengthy. The Uruguay Round took
seven-and-a-half years. However, negotiating agreements in the context of rounds has its
advantages. They offer a package approach to trade negotiations that can sometimes be more
fruitful than the negotiations on a single issue. The size of the package can mean more ben-
efits because participants can seek and secure advantages across a wide range of issues.
Making Trade-offs
In such a package, the ability to trade off different issues can make an agreement easier to
reach. Not all the outcomes of each of the issues under negotiation is necessarily of ben- As far as developing countries
efit—or even of interest to every country. Nevertheless, for everyone to agree, each country are concerned, they have a
must see that it is in their interest to adopt the total package. In this manner, a reform in greater chance of influencing
the multilateral trading system
politically sensitive sectors of world trade such as agriculture can be more feasible in the in a trade round than in bilat-
context of a global package if an agriculture reform is complemented by other market eral negotiations with powerful
openings. As far as developing countries are concerned, they have a greater chance of trading nations.
influencing the multilateral trading system in a trade round than in bilateral negotiations
with powerful trading nations.
Strengths and Weaknesses

But wide-ranging rounds have both strengths and weaknesses. The results of the ongoing de-
bate on the effectiveness of multi-sector rounds vs single-sector negotiations are ambiguous.
At some stages, the Uruguay Round seemed so cumbersome that reaching an agreement on
every subject by all participating countries appeared impossible.
The Longest of Them All

The Uruguay Round extended The Uruguay Round extended from 1986 to 1994 and was by far the largest, longest, and most
from 1986 to 1994 and was productive of the eight rounds of GATT negotiations. It was preceded by seven other rounds,
by far the largest, longest, and including the Dillon Round, Kennedy Round, and the Tokyo Round. In some respect, the
most productive of the eight
rounds of GATT negotiations. Uruguay Round was just more though much more of what had gone before in earlier rounds.
The tariffs on industrialised products were reduced and the defences against non-tariff barri-
ers were strengthened. The Uruguay Round also reversed earlier failures.
The member governments agreed to phase out restrictions on textiles and clothing. They
agreed to ban the so-called ‘grey area’ measures, where governments agreed to operate out-
side the rules of the trading system and do private deals to restrict trade. These arrangements
were particularly prevalent in the area of textiles and clothing. The governments also made
a start on a long-term effort to reform trade in the agricultural products. In addition, they
negotiated a brand new set of rules, together with initial market-opening measures, for trade
in services. This was a dynamic area of world trade they had not previously touched. Another
new agreement set out rules on minimum protection to be given to IP through, for example,
patents, copyright, and measures against counterfeiting.
Further, the adoption of the integrated dispute settlement mechanism applying to all areas
of trade, that is, goods, services, and IPR, now provides a solid basis for the multilateral trading
The whole package of trade lib- system. The overall results of the Uruguay Round are contained in more than 500 pages of legal
eralization and rules was firmly
tied together in the agreement
texts, plus over 26,000 pages of schedules. These schedules are commitments to provide market
establishing the WTO and plac- access to other countries for both goods and services. They are an integral part of the WTO
ing it under the responsibility of Agreement. The whole package of trade liberalization and rules was firmly tied together in the
the new institution. agreement establishing the WTO and placing it under the responsibility of the new institution.
The WTO Agreement

What is It
The agreement establishing the In formal terms, the agreement establishing the WTO is the legal instrument through which
WTO is the legal instrument all the countries participating in the Uruguay Round decided to create the WTO. It is a short
through which all countries par- agreement and includes provisions on a variety of matters, which include the scope and func-
ticipating in the Uruguay round
decided to create the WTO. tions of the WTO and its relations with other organisations. It also sets out matters that are
relating to the legal status of the WTO and its decision-making procedures.
More than a Short Agreement

All the multilateral trade agreements relating to services, agriculture, IP, and so on, which
emerged from the Uruguay Round are annexed to the agreement establishing the WTO.
As a result, the expression ‘the WTO Agreement’ is understood to cover the totality of all
the agreements. These texts are to be found in the volume entitled The Results of the Uruguay
Round of Multilateral Trade Negotiations: The Legal Test.
Bad News and Good News

The WTO agreement is an intimidating document. Its table of contents (TOC) is a list of about The WTO agreement is an intim-
60 agreements, annexures, decisions, and understandings. They are complex and, at times, idating document. Its table of
very difficult to understand. The good news is, however, that while the WTO Agreement is contents (TOC) is a list of about
difficult, and deals with very different matters, the individual multilateral trade agreements 60 agreements, annexures, de-
cisions, and understandings.
are all underpinned by the same core principles such as non-discrimination and transparency.
Where Are We Today

Returning to the two key roles for the multilateral trading system, liberalising trade and cre-
ating and enforcing the rules of the road, let us take stock of where we are today in terms of
the liberalization process and the rules that govern international trade.
Liberalizing Trade in Goods

Industrial Goods: Tariffs
WTO negotiations produce general rules that apply to all members and specific commit- WTO negotiations produce gen-
ments made by the individual member governments. The specific commitments are listed in eral rules that apply to all mem-
‘schedules of concessions’. For trade in goods, in general, these consist of the maximum tariff bers and specific commitments
levels that a country can apply to a specific product. For agriculture, they also include tariff made by the individual member
governments.
quotas, limits on export subsidies, and some kinds of domestic support.
Tariffs and Developed Countries

With the implementation of the Uruguay Round results, the tariffs on industrial products
The tariffs on industrial prod-
imported by the developed countries were reduced by 40 per cent on an average, from ucts imported by developed
6.3 per cent to 3.8 per cent. These tariff reductions are now fully implemented. The propor- countries were reduced by
tion of industrial products which enter the markets of developed countries and face zero 40 per cent.
MFN duties more than doubled from 20 per cent to 44 per cent of the industrial imports. The
share of industrial imports facing duties of 15 per cent or more decreased from 7 per cent
before the Uruguay Round to 5 per cent after the full implementation. Tariff peaks, that is,
high tariffs on individual items, continue to be of concern mainly in textiles, clothing, leather,
rubber, footwear, and travel goods.
Tariffs and Developing Countries

As far as the developing countries are concerned, the tariff levels and the continuing process
As far as the developing coun-
of negotiated reductions varies considerably. India, for example, would have reduced its aver- tries are concerned, the tariff
age tariff on industrial goods from 71 per cent to 32 per cent by the end of 2005, and Korea’s levels and the continuing pro-
average tariff will be reduced from 18 per cent to 8 per cent. Most other developing countries cess of negotiated reductions
varies considerably.
have offered a mixture of tariff reductions and ceiling bindings. The tariff reductions agreed
to by the developing countries in the Uruguay Round were fully implemented by 2005.
Binding of Tariffs
As noted, market access schedules are not simply announcements of reduced tariff rates.
They are also commitments of not to increase tariffs above the listed bound rates. For the
developed countries, the bound rates are generally the rates actually charged. Most of
the developing countries have bound the rates somewhat higher than the actual rates, and
so the bound rates serve as ceilings.
Tariffs are Bound … But

Countries can break a com- Countries can break a commitment of not to raise a tariff above the bound rate but only with
mitment of not to raise a tariff difficulty. To do so they have to negotiate with the countries most affected, and that could
above the bound rate but only result in a compensation for a trading partner’s loss of trade.
with difficulty.
Textiles—Back in the Mainstream

Rules
Fighting the Goods Fight
On a sectoral basis, liberalising trade in textile and clothing was a challenge facing the GATT
for some years. Creating an agreement to phase out QRs on textiles and clothing was one
of the longest and hardest-fought issues in the GATT. However, as a result of the Uruguay
Round, it is now a challenge facing the WTO. The trade in this sector is now going through a
fundamental change under a 10-year schedule to phase out QRs.
Outside the System

This means that the system of discriminatory import quotas that has dominated textile trade
since the early 1960s is being phased out. By 1974 till the end of the Uruguay Round, the
trade in textiles and clothing was governed by the MFA. The MFA was a framework for
bilateral agreements on unilateral actions that was a derogation from the rules of the GATT.
The MFA—a Derogation

The bilateral agreements came
The bilateral agreements came in the form of quotas limiting imports from the developing
in the form of quotas limiting countries into the markets of the developed countries. Industries in the developed countries
imports from the developing were facing a serious damage from rapidly increasing imports. The quotas were the most
countries into the markets of visible feature of the MFA. They conflicted with the GATT’s general preference for customs
the developed countries.
tariffs instead of measures that restrict quantities. They were also exceptions to the GATT
principle of treating all trading partners equally: in fact, they specified how much the import-
ing country was going to accept from the individual developing countries.
Back in the Mainstream

By 2005, the sector was fully integrated into normal GATT rules. In particular, the quotas
came to an end. The importing countries no longer are able to discriminate among the
exporters. The agreement on textiles and clothing (ATC) by itself no longer exists. In fact,
it is the only WTO Agreement that has self-destruction built in.
Agriculture: Fairer Markets for All

Outside the System
The other sector that was continually at the centre of a heated debate in the GATT and now
the WTO is the agriculture sector. While the original GATT applied to agricultural trade, it
contained loopholes. For example, it allowed countries to use some non-tariff measures such
as import quotas, and to heavily subsidise the activities in this sector. Production and trade
in agricultural products became highly distorted. This was especially due to the use of export
subsidies that would have normally been outlawed for industrial products.
Agreement on Agriculture on Centre Stage

The WTO Agreement on agriculture is a significant first step towards fair competition and The WTO Agreement on agri-
less-distorted trade in agricultural products. It is being implemented over a six-year period culture is a significant first step
with 10 years for developing countries. The process began in 1995. towards fair competition and
less-distorted trade in agricul-
tural products.
Objectives of the Agreement
The most fundamental objective of the agreement is to introduce a reform that will make agri- The most fundamental objec-
cultural policies more market oriented. The rules and commitments spelled out in the agree- tive of the agreement is to
ment are broadly directed at three areas. Firstly, improving the market access by removing introduce a reform that will
make agricultural policies more
the various trade restrictions confronting imports. Secondly, reducing the domestic support market oriented.
in the form of trade-distorting subsidies and programmes that raise or guarantee farm-gate
prices and farmers’ incomes. And finally, dealing with export subsidies and other methods
used to make exports artificially competitive. Although these are the objectives of the agree-
ment, it should be noted that governments are permitted to support their rural economies.
The preference under the agreement, however, is for this to be done through policies that do
not distort trade.
A Better Deal for Developing Countries

There are also special provisions for developing countries in the agreement on agricul-
ture. They do not have to cut their subsidies or lower their tariffs as much as developed
Special provisions are designed
countries. They are also given extra time to fulfil their obligations. Special provisions are to protect the interests of those
designed to protect the interests of those countries that rely on the imports for their food countries that rely on the im-
supplies. There are also special provisions for LDCs. ports for their food supplies.
Trade Remedies
Key Agreements
Binding tariffs and applying them equally to all trading partners is the key to the smooth flow
of trade in goods. However, there is more to secure market access than that. It is important,
for example, to ensure that the trading conditions are fair, and that industries in trouble on
a short-term basis can have short-term protection. Three agreements are important in this
respect. The first one deals with the actions that are taken against dumping, that is, selling
a product at unfairly low prices. The second one addresses subsidies that distort competi-
tion. And finally, the agreement that deals with emergency measures to limit the unexpected
surges in imports, thereby ‘safeguarding’ the domestic industries. Let us look at each of these
agreements briefly.
GATT 1994 permits the imple-
Anti-dumping Actions. It is the action taken against dumping. If a company exports a
mentation of anti-dumping du- product at a price lower than the price it normally charges in its own home market, it is said
ties against dumped goods, to be ‘dumping’ the product. Is this unfair competition? Opinions differ. But many govern-
which causes injury to produc- ments take action against dumping in order to defend their domestic industries. The focus
ers of competing products in
the importing country.
of the WTO’s anti-dumping agreement is on how governments can or cannot react to dump-
ing. Broadly speaking, the agreement allows but does not oblige, governments to act against
dumping. To take anti-dumping action, a government must show that dumping is taking
place. That means calculating the export price and comparing it to the exporter’s home mar-
ket price. It is then necessary to show that the dumping is causing injury, and there is a causal
link between the dumped goods and injury that is resulting.
Subsidies and Countervailing Measures. The agreement on subsidies and coun-
tervailing measures defines the term ‘subsidy’ and provides that only specific subsidies are
subject to its disciplines. The criteria for establishing whether a subsidy is ‘specific’ to an
industry are laid down. These are based mainly on their propensity to distort trade. Subsidies
are classified as either prohibited or actionable subsidies. For each category of subsidies the
agreement provides different remedies. The agreement also contains provisions on the use
of countervailing measures: the disciplines relating to countervailing measures are, broadly
speaking, similar to those applicable to anti-dumping cases.
Action taken by the importing Safeguarding Producers. The agreement on safeguards permits countries to take
country, usually in the form of ‘safeguard’ action to restrain the unexpected surges of imports when certain specific con-
increased duties to offset sub-
ditions are met. This provides a ‘safety valve’ when there is a surge of imports. This may
sidies given to producers or ex-
porters in the exporting country. come, for example, after a tariff reduction has been implemented. Having such a safety valve
may encourage countries to undertake liberalization commitments that they may not other-
wise undertake. It is also a means of avoiding private bilateral agreements with competitive
Action taken to protect a specif- exporters through the so-called ‘grey area’ measures. These come in the form of ‘voluntary’
ic industry from an unexpected
build-up of imports.
export restraints or other market-sharing agreements. They have affected trade in several
industrial sectors such as automobiles, steel, and electronic products. They generally work to
the disadvantage of the weaker trading partners, particularly the developing countries. The
WTO’s agreement on safeguarding establishes a prohibition against ‘grey area’ measures and
sets a ‘sunset’ clause on all the existing safeguard measures.
Standards and Procedures

Technical Barriers to Trade
Access to markets can also be impeded through the use of technical standards. A number of
agreements deal with various technical, bureaucratic, or legal issues that could create hin-
drances to trade.
Standards and Technical Regulations. Technical regulations and industrial standards
are important, but they vary from country to country. Having too many different standards
makes life difficult for producers and exporters. If the standards are set arbitrarily, they could
be used as a disguised protection. The agreement on technical barriers to trade tries to ensure
that technical regulations, standards, and conformity assessment procedures do not create
unnecessary obstacles to trade.
Right to Adopt Standards. However, the agreement recognises the countries’ rights
to adopt the standards they consider appropriate. This may be for human, animal, or plant
life, or health, for the protection of the environment, or to meet other consumer interests.
WTO Structure
Ministerial Conference
Trade Policy Dispute Settlement

General Council
Review Body Body (DSB)
Committees/ Council for Council Council for Trade

Working Parties/ Trade in for Trade in Plurilaterals Negotiations
Working Groups Goods TRIPS Service Committee
Committees on Committees on Committees on Committees on Bodies

• Trade & • Market Access • Trade in Financial • Trade in Civil established
Environment Service Aircraft •Special Session of
• Agriculture
• Trade & Council relating to
• Specific • Specific
Development • SPS Measures Trade in Services
Commitments Commitments
• TRIPs
• Sub-committee on • Technical Barriers
Working Parties on • Government • Special
LDCs to Trade
Procurement Session of
• Domestic
• Regional Trade • Subsidies & Committees
Regulation
Agreement Countervailing Relating to
• BoP Restrictions Measures • GATS Rules • Agriculture
• Trade &
Working Parties on • Anti-dumping
Environment
• Accession Practices
• Trade &
Working Group on • Customs Valuation Development
•
Special Session
• Relationship • Rules of Origin
of DSB
between Trade &
• Import Licensing • Negotiating Group
Investment
on Market Access
• Interaction • TRIMs
Rules.
between Trade & • Safeguards
Competition Policy
• Textile Monitoring
• Transparency in Body
Government
Procurement Working Party on
• Trade, Debt, & • State Trading
Finance Enterprises
• Trade & Transfer
of Technology
Moreover, members are not prevented from taking measures that are necessary to ensure that
their standards are met in order to prevent too much diversity. The agreement encourages
the countries to use international standards where these exist. They can also employ other
mechanisms such as equivalence and mutual recognition of the standards of others.
Sanitary and Phytosanitary Measures (SPS)

SPS measures or regulations Sanitary and phytosanitary (SPS) measures are measures taken to protect human, animal, or
are the government standards plant life from risks arising from additives or disease-causing organisms in food. They are
to protect human, animal, and also used to protect a country from the damage caused by the spread of pests. The agreement
plant’s life and health, to help
to ensure that food is safe for
on the implementation of SPS measures applies to all such measures which may, directly or
consumption. indirectly, affect international trade.
Role for Scientific Evidence

The governments have the right to take SPS measures. However, they have to ensure that
these measures do not arbitrarily or unjustifiably discriminate among countries where the
same conditions prevail. Moreover, SPS measures must not be applied in a manner which
would constitute a disguised restriction on international trade. They must be based on scien-
tific evidence. As in the case of the technical barriers to trade agreement, the governments are
encouraged to base their measures on international standards, guidelines, and recommenda-
tions whenever and wherever possible.
Administrative Procedures
Red Tape and Trade
The WTO Agreement also deals The WTO Agreement also deals with the very basic processes than can have an important
with the very basic processes influence on the flow of trade.
than can have an important in- Customs Valuation. For example, it is important for importers to know that the value
fluence on the flow of trade.
placed on imported goods by customs officials is fair and uniform. It is also important from
the point of view of the customs administration that fictitious values are not declared for
customs’ purposes. The agreement on customs valuation provides a set of valuation rules to
ensure that these objectives are met.
Import Licensing. A further potential barrier to trade relates to import-licensing
systems that are applied to administrate QRs. The agreement on import-licensing procedures
says that the procedures should be simple, transparent, and predictable. The objective is also
to ensure fair and equitable application and administration of such procedures. It is also to
ensure that the procedures do not themselves have restrictive or distortive effects on imports.
Pre-shipment Inspection. The practice of employing specialised private compa-
nies to check the shipment details such as price, quantity, and quality, for goods-ordered
overseas is called ‘pre-shipment inspection’. In particular, it is a process used by govern-
ments of some developing countries to prevent capital flight and commercial fraud as
well as customs-duty evasion. In a sense, it is a means to compensate for inadequacies
in the administrative procedures. The agreement on pre-shipment inspection ensures a
non-discrimination in the application of regulations which will relate to pre-shipment
It is important for importers to inspection procedures as well as transparency through the prompt publication of those
know the customs valuation regulations.
and import-licensing systems, Rules of Origin. An administrative procedure, ‘rules of origin’ can also restrict trade.
to check the shipment details
and the rules of origin defined They are normally defined as the criteria needed to determine the territorial origin of a
as the territorial origin of a product. The main aim of the agreement is to harmonise the non-preferential rules of origin
product. so that the same criteria can be applied by all the WTO members whatever their purpose
may be.
Investment Measures
The agreement on trade-related investment measures recognises that certain investment
measures such as a minimum domestic content for exported goods can restrict and distort
trade. It states that no member shall discriminate against foreigners in the application of such
measures. An illustrative list of trade-related measures that are agreed to be inconsistent with
the agreement is appended to it.
Disputes Settlement Mechanisms

A Dispute About What?
What if some of the WTO members believe that the other members are violating trade rules
in any of the agreements mentioned so far? The answer is that they will use the multilateral
system of settling disputes instead of taking action unilaterally. That means abiding by the
agreed procedures of the WTO dispute settlement understanding (DSU). Typically, a dispute
arises when one country adopts a trade policy measure, or takes some action that one or
more fellow WTO members consider to be breaking the WTO Agreements. It can also arise
when a member fails to live up to its obligations.
Rapid Settlement
The WTO DSU emphasises that a prompt settlement of dispute is essential if the WTO is
The WTO DSU emphasises that
to function effectively. It, therefore, sets out in considerable detail the procedures and the a prompt settlement of dispute
timetable to be followed in resolving the disputes. If a case runs its full course, it should not is essential if the WTO is to
normally take more than one year or 15 months if the case is appealed. function effectively.
Better than GATT

Under the previous GATT procedure, the rulings could only be adopted by the consensus. This
meant that a single objection could block the ruling. It was, therefore, possible for the losing
country to block the adoption of the ruling. The rulings are now automatically adopted unless
there is a consensus to reject them. Any country wanting to block a ruling has to persuade all
other WTO members including its adversary in the case, to share its view. Although much of
the procedure does resemble the procedure in a court or a tribunal, the preferred solution is for
the countries that are concerned to discuss their problems and settle the dispute by themselves.
Dispute Settlement
Settling disputes is the responsibility of the DSB which is the General Council in another
DSB has the sole authority to
guise. It has the sole authority to establish a panel of experts to consider a case, and to accept establish a panel of experts to
or reject a panel’s findings or the results of an appeal. It monitors the implementation of rul- consider a case and to accept
ings and recommendations and has the power to authorise retaliation when a country does or reject.
not comply with a ruling.
Right to Appeal
Either side can appeal a panel’s ruling. Sometimes both sides do so. Appeals have to be based
on points of law such as legal interpretation. They cannot re-examine the existing evidence
or examine a new evidence.
WTO Dispute Settlement Flow Chart
Consultations
(Members may request the panel if no mutual solution was found within 60 days)
Panel established by DSB

(Not later than 2nd DSB meeting)
Expert Review
Terms of reference Group may be
(Standard terms unless special terms agreed within 20 days) formed in
Composition case technical
advice is
required
Panel examination
(2 meetings with parties and 1 with third parties)
Review meeting
Interim review stage with panel upon
(Descriptive part of report sent to parties for comment) request
Panel report issued to parties

(6 months from panel composition, 3 months if urgent)
DSB adopts the panel report Appellate review

(Within 60 days unless appealed) (Not to exceed 90 days)
DSB adopts appellate report

‘Reasonable
(Within 30 days)
period of
time’—a member
DSB monitors implementation of adopted panel/appellate proposes, DSB
body recommendations agrees; or parties
(To be implemented within defined ‘reasonable period of time’) in dispute agree;
or arbitrator?
In case of non-implementation (approx. 15
months)
Negotiation of compensation
pending full implementation
If no agreement on compensation
DSB authorises retaliation/cross-retaliation pending full implementation

(30 days after expiry of a ‘reasonable period of time’)
More is Better
The WTO deals with an increasing number of dispute settlement cases. Does this mean that
law and order are breaking down? Not necessarily. Sometimes, it means that people are turn-
ing more to the courts instead of taking the law in their own hands. There are strong grounds
for arguing that the increasing number of disputes is simply the result of the expanding world The fact that more disputes are
trade and the stricter rules that are now applicable. The fact that more disputes are coming to coming to the WTO reflects a
growing faith in the system.
the WTO reflects a growing faith in the system.
Ministerial Meetings
When
The WTO was a result of not only the eighth round of multilateral trade negotiations, at Uru-
guay, but it was also built on the progress made in the earlier rounds such as the Tokyo Round
and the Kennedy Round. The process of periodic meetings of ministers has been important
in the progress of both trade liberalization and the development of rules, sometimes culmi-
nating in the launching of a round of negotiations. The importance assigned by governments
The importance assigned by
to ministerial meetings is underscored by the fact that they formally agreed that with the cre- governments to ministerial
ation of the WTO they would hold meetings of ministers on a regular basis every two years. meetings is underscored by the
fact that they formally agreed
that with the creation of the
What Do They Do WTO they would hold meetings
of ministers on a regular basis
The ministerial conferences guide the work of the WTO. The central tasks of the ministerial every two years.
meetings are threefold. Firstly, to review what the WTO has been doing. Secondly, to assess
the present situation of international trade relations and to identify the challenges that must
be met. Finally, to agree on the work programme of the WTO for the months and years
ahead. This may, for example, involve the launching of a new round of multilateral trade
negotiations.
When and Where

The venues and years of WTO conferences that are held so far are as follows: Singapore, 1996;
Geneva, 1998; Seattle, 1999; Doha, Qatar, 2001; (during which the ministers agreed to launch
the Doha Development Agenda) Cancun, 2003; Geneva, 2004; Paris, May 2005; Hong Kong,
December 2005; Geneva, 2006; Potsdam, 2007; and Geneva, July 2008. The objective was to
take stock of progress in the Doha Development Agenda, and to provide an impetus and di-
Each of the ministerial meet-
rection to the process of negotiations. Each of the ministerial meetings has been very different ings has been very different in
in terms of location, objectives, and outcomes. As they have influenced the direction of the terms of location, objectives,
WTO, it is worth briefly reviewing each ministerial meeting in turn, a little later in the chapter. and outcomes.
Trade-related aspects of Intellectual

Property Rights (TRIPs)
The subject of IPR or trade-related IPR (TRIPs) has always been very controversial. Intel- The TRIPS Agreement is the
most comprehensive multina-
lectual Property (IP) refers to ‘a creation of human mind that is of value to the society, while tional agreement on IP. The
Intellectual Property Rights (IPR) are rights granted by the state to persons over creation of areas of IP that it covers are
their mind’. The WTO’s agreement on TRIPS covers nine categories of IP: copyrights and created rights.
1. Patents
2. Plant and seed variety
3. Micro-organism
4. Copyrights and neighbouring rights
5. Trademarks, including service marks
6. Industrial designs
7. Geographical indications
8. Integrated circuits
9. Trade secrets
For each of these categories, certain norms of protection are prescribed. These norms do
not necessarily have to be attained overnight. There is a transition period allowed. Legisla-
tions in most of these items are at various stages of formulation and implementation. Under
the TRIPS Agreement, India agreed to accept applications from January 1, 1995 onwards.
The applications are received in the ‘mailbox’ and are examined with effect from January
The TRIPS Agreement also
1, 2005. Further, the TRIPS Agreement also makes it obligatory for India to grant exclu-
makes it obligatory for India to sive marketing rights (EMRs) to pharmaceuticals and agro-chemicals which have been given
grant exclusive marketing rights product patents and marketing approval in another member country of the WTO. India’s
(EMRs) to pharmaceuticals and major concerns in the area of IPR are as follows:
agro-chemicals which have
been given product patents and 1. Granting of product patents to pharmaceuticals and agro-chemicals.
marketing approval in another
member country of the WTO. 2. Patenting of micro-organisms or life forms, including patenting of products based on
our biodiversity and traditional knowledge in other parts of the world.
3. Establishing an effective ‘sui generis system’ for the protection of new plant varieties
and plant breeders’ rights, which recognises and rewards the traditional contribution
of rural communities to the conservation of biodiversity.
The product patent systems for pharmaceuticals and agro-products became effective
from January 1, 1995. By implication, this means that the Indian industry, which enjoyed
the freedom of the Indian Patents Act, 1970, will not have the freedom to do a reverse
engineering of the new patented products that come to the market some time after 2005.
It has been observed that it takes at least three to five years for a new patented drug to come
to the market. India’s concern should not be on EMRs, but more on how to manage the
product patent system in future and address our public interest concerns. For this purpose,
an enactment of the required patents legislation complying with the provisions of the TRIPS
Agreement is imperative. Besides, there is an urgent need for modernising our patent office
and strengthening the manpower involved in the administration of the patent system. There
are many other contentious issues such as (1) matters relating to biological resources under
TRIPS; (2) conservation of traditional community knowledge, biodiversity, and the IPs of
the community; (3) safeguards against EMRs; and (4) the sui generis systems, patenting of
micro-organisms, and so on.
The Patents (Amendment) Act, 1999, was expected to be ratified by the legislative proc-
ess that came into force, effectively from January 1, 2000. But public opinion, as is expected, is
India with its tremendous po-
sharply divided. There is an urgent need of spearheading a movement towards the implemen-
tential of biodiversity and intel-
lectual capital will have much to tation of a national IP policy. India with its tremendous potential of biodiversity and intel-
gain from the well-administered lectual capital will have much to gain from the well-administered patents system. The threat
patents system. perception about an escalation in pharmaceutical product prices is surely important from the
short-term point of view, but effective TRIPS will go a long way in bringing in foreign direct
investment (FDI) and facilitating a significant R&D (research and development) activity.
Trade-related Investment
Measures (TRIMs)
The objective of Trade-related Investment Measures (TRIMs) is to prevent member coun-
tries from resorting to measures that violate non-differential treatment between domestic
and foreign investors, and impose QRs on imports and exports. Towards this end, the WTO
provisions explicitly prohibit the following trade-restrictive and distortive measures:
Local Content Requirement. Mandatory use of local outputs in production.
Trade-balancing Requirement. Imports to be maintained at a specific proportion of
exports.
Foreign Exchange Balancing Requirement. Forex made available for imports to
equal a certain proportion of value of forex from exports.
Exchange Restrictions. Free access to forex curbed, resulting in import restrictions.
Export Performance Requirement. Certain proportion of production should be
exported.
The agreement provides for a transitional period for an elimination of prohibited TRIMs,
with effect from January 1, 1995—two years for developed countries, five years for develop-
ing countries, and seven years for transitional and least developed economies. TRIMs is cur-
TRIMs is currently being
rently being renegotiated and is expected to encompass a wider scope, covering issues in renegotiated and is expected
services and competition policy. to encompass a wider scope,
Before 1991, India used to have local-content requirements in the form of the phased covering issues in services and
manufacturing programme (PMP). This has now been scrapped and exists only in the form competition policy.
of a memoranda of understanding (MOU) imposed on the automobile manufacturers. Ex-
port commitments exist in the form of a dividend-balancing requirement that is imposed for
FDI in consumer goods. Although TRIMs are prohibited under certain conditions (Provi-
sions of Article XVI[IB]), a country may use such measures. India still has such a cover and
hence, there is an escape clause for a temporary period. However, we will eventually have to
scrap various TRIMs measures, say, by 2005. Refer the content under ‘Hong Kong Ministerial
Conference’ for the same and further proposals that are mentioned.
At this stage, it is important to note that as a part of promoting global investment flows,
OECD (Organisation of Economic Co-operation and Development) countries have been
keen to take up the issue of Multilateral Agreement on Investment (MAI) in the WTO ne-
gotiations agenda. The demand of MAI seems to have been temporarily set aside, but would
soon come up in some form or other. MAI will have far-reaching implications as it will
involve the following:
1. Further liberalization of foreign investment by a host country;
2. Fair and equal treatment to foreign investors; and
3. Legal security for investment and effective dispute settlement procedure; indeed, The Indian industry has to
the definition of investments is going to be very wide to include every kind of asset continuously monitor the likely
owned or controlled, directly or indirectly, by a foreign investor. impact of the phasing out of
TRIMs and the prospect of MAI
Obviously, the Indian industry has to continuously monitor the likely impact of the phasing eventually becoming a part of
out of TRIMs and the prospect of MAI eventually becoming a part of the WTO negotiations. the WTO negotiations.
Non-tariff Barriers (NTBs) and Dispute

Settlement Mechanism
Most industrial countries as well as a number of developing countries use a variety of non-
tariff barriers (NTBs) such as import–export control, certifications, standards, subsidies,
The NTBs are often used as a
protectionist measure, which anti-dumping measures/duties, and so on. As a result, for a number of products, Indian
goes against the very spirit of exports have been denied the market access in countries like the United States, Japan, Canada,
the WTO mandate. Saudi Arabia, and the EU. Thus, the NTBs are often used as a protectionist measure, which
goes against the very spirit of the WTO mandate.
However, a country can raise these issues with the WTO DSB. The WTO members have
agreed that if they believe fellow members are violating the trade rules under some pretext,
they will use the multilateral system for settling disputes instead of taking action on a unilat-
eral basis. In other words, the members are required to abide by the agreed procedures and
India has taken the United respect the judgement that is based on an objective assessment of the situation. In fact, India
States, the EU, and several oth- has taken the United States, the EU, and several others to the Dispute Settlement Panel of the
ers to the Dispute Settlement WTO and has won many cases. At the same time, many other countries also have taken cases
Panel of the WTO and has won
against India to the same panel and have won too. During the 46 years till 1994, there were
many cases.
only 315 cases of dispute settlement under the GATT regime, but in the short period of 1995
to 1998, as many as 120 cases were brought to the WTO.
Anti-Dumping Measures
With a commitment to substantial tariff reduction and much freer market access under the
WTO framework, there are growing threat perceptions about dumping of products and
GATT permits the imposition services. Broadly speaking, if a company exports a product at a price lower than the price
of anti-dumping duties against it normally charges in its domestic market, it is considered as ‘dumping’ the product. The
dumped goods, equal to the dif- intensity of competition from imports is expected to affect the interest of domestic produc-
ferences between their export
price and their normal value.
ers and unfair competition can even cause them a serious injury. While the Indian industry
is complaining about dumping of various manufactured products such as steel, soda ash,
pharmaceutical products, polyester film, and newsprint, many other countries are registering
similar complaints about Indian products (e.g, steel, cotton bed linen, polyester staple fibre)
being dumped in their markets.
In this context, a country can take safeguard measures for protecting its domestic in-
dustry under the provisions of anti-dumping. In India, we have created the Directorate of
Anti-dumping under the DG of Foreign Trade to deal with anti-dumping cases. But even this
revamped anti-dumping cell is inadequately equipped in comparison with many other coun-
tries. Illustratively, the United States has over 1,430 officers—430 in Ministry of Commerce
and 1,000 in the US International Trade Commission. The US steel industry aggressively uses
its anti-dumping mechanism to prevent/delay steel imports in the United States. Even if cases
are turned down, time is available to delay imports.
Apart from anti-dumping action,
Apart from anti-dumping action, a country can take safeguard measures (emergency
a country can take safeguard action) to protect the domestic producers against any serious injury or a threat thereof caused
measures (emergency action) by the increased imports. In case of both anti-dumping and safeguard, certain essential con-
to protect the domestic produc- ditions on the quantity of imports and the extent of injury have to be fulfilled. A knowledge
ers against any serious injury or
a threat thereof caused by the of the intricate complexities of rules and regulations governing anti-dumping is essential for
increased imports. the Indian industry to effectively protect its interests.
Subsidies
Subsidies have been one of the most contentious issues in trade negotiations. Subsidies are
considered to distort resource allocation and harm free trade. But almost all the countries
Almost all the countries of the
of the world have been using various types of subsidies as an integral part of their economic world have been using various
policies, either to protect the income of farmers, to promote exports, or to bring about a types of subsidies as an integral
balanced regional development. In the case of export subsidies on the manufactured prod- part of their economic policies,
either to protect the income of
ucts, the WTO classifies them under three broad categories: prohibited, actionable, and
farmers, to promote exports, or
non-actionable, and all these are being described in ‘traffic light terms’ (that is, ‘red’, ‘amber’, to bring about a balanced re-
and ‘green’). Red export subsidies are those that are prohibited under the WTO and are, gional development.
therefore, actionable by the trading partners. Amber export subsidies are permissible under
WTO, but are nonetheless actionable by the trading partners. Green export subsidies are
permissible under WTO and are non-actionable by the trading partners.
Examples of red export subsidies include the income tax exemption on export profits
and concessional interest rates on export credit. Likewise, special import licences and exces-
sive duty drawbacks also constitute red export subsidies. Although such subsidies are pro-
hibited, there is an escape clause for India. This prohibition does not apply to countries that
have a per capita income lower than $1,000; India is covered under this clause. However, if
in a particular product, the country is found to be ‘export competitive’ in the global market,
that is, accounting for more than 3.25 per cent of the world market share of the product, such
export subsidies have to be phased out regardless of whether the per capita income is more
or less than the fixed $1,000. In the case of India, for example, gems and jewellery will dis-
qualify for export subsidies and perhaps, these will have to be phased out in eight years, that
is, by 2005.
While on this subject, another major area relates to the treatment of subsidies under the
Agreement on Agriculture. Here too, green-box measures, which are perceived to have mini-
mal distortive effect on trade (e.g., R&D, pest and disease control, domestic food security,
environmental assistance, disaster relief, etc.) are non-actionable. Likewise, even blue-box
measures comprising direct payment under production limiting programmes (e.g., income
support to farmers, structural adjustment assistance, safety net, etc.) are usually not subject
to reduction commitment under the WTO framework. In contrast, amber-box measures
(e.g., government buying at a guaranteed price, market price support, etc.) are seen to be
trade distorting and therefore, subject to reduction commitment.
In the context of WTO framework, India will have to redesign its subsidies whether for
exports or for agriculture. Practically, each and every country offers subsidies to subserve its India’s problems are primarily
respective socio-economic objectives. Surely, India cannot be an exception. Thus, while pro- on account of the fiscal burden
posing to phase out some of the export benefits (Section 80 HHC under the Income Tax Act), of subsidies and here too, we
and reviewing the measurement of support for agriculture, our policymakers need to think need a far more careful evalu-
ation of non-merit subsidies,
in terms of alternative measures that are WTO compatible. India’s problems are primarily rather than scaling down the
on account of the fiscal burden of subsidies and here too, we need a far more careful evalua- merit subsidies that contribute
tion of non-merit (and hidden) subsidies, rather than scaling down the merit subsidies that towards our developmental
contribute towards our developmental objectives. objectives.
Singapore Ministerial Meeting, 1996

At Singapore, in December 1996, the ministers decided to set up three new working groups
on trade and investment, on the interaction of trade and competition policy, and on trans-
parency in government procurement. These groups have had a continuing impact on the
The Singapore issues were work programme of the WTO and in ensuring ministerial conferences. So too has the fact
trade investment, trade facili- that ministers instructed the WTO Goods Council to look at all possible ways of simplifying
tation, transparency in govern- trade procedures, an issue sometimes known as ‘trade facilitation’.
ment procurement, interaction
of trade, and competition policy.
The Singapore Issues
These above mentioned four areas are commonly known as the ‘Singapore issues’. The work-
ing groups on trade and competition policy and trade and investment were not given the
mandate to negotiate new rules or commitments. The ministers made it clear that no decision
had been reached on whether there would be negotiations in future. In addition, discussions
could not develop into negotiations without a clear consensus decision.
Government Procurement
The working group on transparency in government procurement is, in fact, different. This
is largely because the WTO has already an agreement on government procurement. It is a
plurilateral agreement as only some WTO members have signed it. The decision by minis-
ters in Singapore did two things. One, it set up a multilateral working group that included
all WTO members. Two, it focused the group’s work on transparency in the government
procurement practices.
Labour Standards
Some developed countries, at the urging of trade unions, periodically suggest that the WTO
should consider labour issues. The developing countries have been strongly opposed to these
suggestions, fearing that these concerns are only a cloak for protectionism. At the Singapore
meeting, the ministers reconciled their differences through a statement which expressed their
commitment to core labour standards. They endorsed a collaboration between the WTO
and the secretariat of the International Labour Organization (ILO), but did not support any
specific WTO work on labour standards.
Action for LDCs

At the Ministerial Meeting, the ministers also adopted the comprehensive and integrated
WTO plan of action for LDCs in an attempt to improve their situation in the world trade.
Geneva Ministerial Meeting, 1998

The Second Session of the Ministerial Conference was held in Geneva in May 1998. It came
when the 50th anniversary of the establishment of the multilateral trading system was being
celebrated.
Planning for the Future. While some ministers emphasised the need to improve the
implementation of the existing agreements, the others wanted a more forward-looking agen-
da, including the possibility of the a new round of negotiations. The ministers decided to
establish a process to ensure the implementation of the existing agreements, and to prepare
It was decided to establish a for the next Ministerial Meeting. It was envisaged that recommendations would be made
process to ensure the imple-
mentation of the existing agree- regarding the WTO’s work programme, including further negotiations on trade liberalization.
ments, and to prepare for the Electronic Commerce. At the Geneva meeting, one new subject, electronic commerce,
next Ministerial Meeting. was added to the WTO work programme. Dramatic though its growth and implications
may be, electronic commerce falls squarely within the WTO’s mandate: the core issue is,
however, whether the existing trade rules are adequate to cover it.
Celebrating 50 Years. The occasion of the 50th anniversary of the multilateral trad-
ing system was marked by a number of heads of the government attending the anniver-
sary meeting. They came from all parts of the world: President Clinton of the United
States, President Fidel Castro of Cuba, and President Nelson Mandela of South Africa, to
mention a few.
Seattle Ministerial Meeting, 1999

Launching the Millennium Round. The Third Ministerial Conference took place in the
United States, in Seattle, in December 1999. It was expected to launch a broad work programme
for the first years of the new millennium. A process to prepare for the Seattle Ministerial
Conference was organised in Geneva, but despite negotiations it did not result in a consensus
text. There was no draft declaration with a broad-based support to take to Seattle, for the min-
isters to launch a new round of negotiations. It became clear that the ministers would have to
take the critical political decisions necessary to conclude an agreement in Seattle itself.
No Millennium Round. After some days of discussion in Seattle, it was evident that The work of the Conference was
too little time remained to complete the work of narrowing gaps among the positions of dif- formally suspended despite an
ferent countries. Regrettably, ministers had to acknowledge that despite intensive work over intensive work over the four
days.
the four days of the Conference, they had simply run out of time. The work of the Conference
was formally suspended.
Public Demonstrations. The meeting took place against the backdrop of, some-
times, violent street demonstrations against the WTO. These demonstrations were held by
non-governmental organisations (NGOs) and other groups such as organised labour. The
demonstration considerably hampered the organisation and conducting of such meetings.
Doha Ministerial Meeting, 2001

The Fourth WTO Ministerial Conference was held in Doha, Qatar, in November 2001.
In this Meeting, the ministers adopted a broad work programme for the coming years, called In this meeting, the ministers
the ‘Doha Development Agenda’. It envisaged negotiations on improving the market access adopted a broad work pro-
gramme for the coming years
and a variety of other challenges facing the trading system. The three-year work programme called the ‘Doha Development
placed the growth of developing countries at its core. Agenda.’
Improving Market Access

As far as agriculture was concerned, the negotiations were to open markets, and reduce with
a view to phasing out all forms of export subsidies and trade-distorting, domestic farm sup-
port. The market access for industrial goods was declared to be another priority, and the The market access for indus-
negotiating mandate focused on reducing or eliminating tariff peaks and escalation as well as trial goods was declared to be
another priority.
the removal of other non-tariff barriers. Particular attention was paid to products of export
interest to developing countries.
Singapore Issues to the Fore

It was agreed that negotiations on the Singapore issues would take place after the next
Ministerial Conference, but only on the basis of a decision by an explicit consensus to be
taken at that session on the modalities for negotiations.
Declaration on TRIPs
A declaration on the TRIPS Agreement and public health was also adopted by ministers.
A declaration on the TRIPS
Agreement and public health This was in response to the concerns expressed about the possible implications of the TRIPS
was also adopted by ministers. Agreement for access to drugs for people in the developing countries. The declaration em-
phasised that the TRIPS Agreement does not and should not prevent members from taking
measures to protect public health and reaffirmed the right of members to use the full provi-
sions of the TRIPS Agreement, which provide flexibility for this purpose.
A commitment on environment Trade and Environment

was also taken, and govern-
ments would negotiate the A commitment on environment was also taken, and governments would negotiate the rela-
relationship between the exist- tionship between the existing WTO rules and the trade obligations contained in the multi-
ing WTO rules and the trade lateral environmental agreements. They would also negotiate the reduction or elimination of
obligations.
tariff and non-tariff barriers to environmental goods and services.
Cancun Ministerial Meeting, 2003

The Fifth Ministerial Meeting took place in Cancun, Mexico, in September 2003. After the
launching of the Doha Development Agenda in November 2001, there had been intensive
negotiations among WTO members to meet deadlines that were established in the Doha
Declaration and where an agreement was to be reached prior to the Cancun Meeting.
Missed Deadlines
In particular, modalities were to be established for further liberalization of trade in both
industrial and agricultural goods. In discussing these modalities, it quickly became clear that
an agreement on agriculture would not come that easily. Despite the numerous proposals
from the members, there was no agreement on how to achieve substantial improvements in
the market access in agriculture, along with an eventual phase out of all forms of export sub-
sidies as well as substantial reduction in the trade-distorting, domestic support. There were
also other important areas. For instance, in Cancun, members were to report on their nego-
tiations on the relationship between the WTO and the many multilateral environment agree-
ments that contain trade-related provisions. At the time of Cancun, the position of members
remained far apart on this matter as well.
Optimism Prevails
Notwithstanding the challenges facing the delegations in Cancun, many remained optimis-
tic. They were encouraged, in particular, by a breakthrough in the days prior to the Cancun
meeting when an agreement was struck in making operational the compulsory licensing pro-
visions of the TRIPS Agreement to improve the access of impoverished nations to essential
medicines. Further, the process of countries acceding to the WTO was progressing, with the
accession of Cambodia and Nepal to be announced in Cancun. These were the first LDCs to
accede to the WTO since its establishment.
Despite further intensive ne-
gotiations among ministers at No Agreement at Cancun
Cancun, no agreement could
be struck on a number of core Despite further intensive negotiations among ministers at Cancun, no agreement could be
issues.
struck on a number of core issues. In particular, there was no agreement on how to proceed,
if at all, with the Singapore issues, and whether they should be dealt with individually or
collectively. A further stumbling block related to agreement on the modalities for future
negotiations in agriculture. An important development with respect to both these issues was
the emergence of 21 developing countries from very different parts of the world negotiating
with a common position. There was also disappointment on the part of some particularly im-
poverished developing countries that a more positive result could not be achieved in remov-
ing trade-distorting subsidies for products of special export interest to them, such as cotton
and sugar. The lack of agreement on how to advance in these critical areas led to the Cancun
Meeting ending without a comprehensive declaration.
Issues after Cancun

The Doha Round of trade negotiations, which received a setback when a consensus evaded it
at the Fifth Ministerial Conference of WTO at Cancun in September 2003, got a boost with
the members adopting a Framework Agreement on August 1, 2004, outlining the elements
and principles to guide the further negotiations. The framework is at an interim stage, and
further negotiations including those on detailed modalities and preparing the specific com-
mitments of each member in respect of agricultural (AMA) and non-agricultural market
access (NAMA) will be held before the Sixth Ministerial Conference of WTO scheduled to
be held at China from December 13–18, 2005.
Negotiations on agriculture, which have been taking place in special sessions of the
Negotiations on agriculture
WTO Committee on Agriculture, have focused on achieving progressive and substantial have focused on achieving
reforms in the global agricultural trade. While the discussion leading to Cancun centred progressive and substantial
around bridging the divergence among the common positions taken by the European Com- reforms in global agricultural
trade.
munity (EC), the United States, and those of the G-20 Alliance, post-Cancun deliberations
strengthened the G-20 and emphasised their outreach to others, in particular, the G-33
Alliance of developing countries on Special Products (SPs), the Africa Group, and the Cairns
Group of agricultural exporting countries. The G-20 was successful in exposing the EC–US
as demanders of substantial market access in the developing countries, in particular, the large
and relatively more advanced among them; and without regard to their legitimate food and
livelihood security and rural development concerns, with only minimal market-access com-
mitments being called forth from themselves. The G-20 also emphasised the requirement
to eliminate all forms of export subsidies within a credible time frame, and to achieve sub-
stantial reductions in trade-distorting domestic support. In the lead-up to the WTO General
Council’s Decision of August 1, 2004—Framework Agreement—the negotiations among the
five interested parties (FIPs), comprising EC, the United States, Australia, Brazil, and India,
resolved the divergent positions on key aspects of each of the three pillars in the agriculture
negotiations.
The Framework Agreement explicitly agrees to eliminate export subsidies by a credible
end date. It imposes a down payment of 20 per cent on the overall trade-distorting domestic
support in the first year of implementation, besides containing a combination of cuts, disci-
plines, and monitoring requirements in the various elements of the domestic support pillar,
and a tiered formula for tariff reductions based on proportionately lower commitments by
the developing countries than by the developed countries. The framework also recognises the The framework also recognizes
critical importance of agriculture to the economic development of developing countries and the critical importance of agri-
the need to enable them to pursue agricultural policies that are supportive of their develop- culture to the economic devel-
ment goals; poverty-reduction strategies; food security and livelihood concerns, including opment of developing countries.
through instruments such as SPs; and a new special safeguard mechanism (SSM) against
likely import surges. The framework, thus, provides a useful basis for further negotiations on
detailed modalities that could help create market-access opportunities for products of export
interest and safeguard small and vulnerable producers of farm products.
Under NAMA, the framework Under NAMA, the framework identifies the initial elements for future work on modalities
identifies the initial elements for negotiations. The negotiations per se seek to achieve the objective of reduction or elimi-
for future work on modalities nation of tariffs, including tariff peaks, high tariffs, tariff escalation, and non-tariff barriers.
for negotiations.
The framework prescribes a continuation of the work on the use of a non-linear formula
applicable on a line-by-line basis. The application of the formula, which is one of the initial
elements identified for future work on modalities for negotiations, has been stated to cover
all products; and would commence from the bound rates for bound tariff lines and the MFN
rate for unbound tariff lines. Credit would be given for autonomous liberalization, and all
non-ad valorem rates would be converted into ad valorem equivalents based on a methodol-
ogy negotiated upon. Exemptions from formula seductions have been granted to members
with less than 35 per cent unbound tariff lines who would merely bind all their tariff lines
instead. Flexibility granted to developing countries under the special and differential treat-
ment (S&DT) and less-than-full reciprocity (LTFR) include both a longer implementation
period as well as applying less-than-formula cuts or no cuts for a specified list of tariff lines
or retaining some of the unbound tariff lines as unbound.
On the proposal for sectoral initiatives, India, as most other developing countries, em-
phasised that formula approach should be the main modality for negotiation, and sectoral
initiative can be considered only after the precise formula is decided upon. India’s stand has
been that the sectoral initiatives, if any, should focus on specific sectors of interest to the de-
veloping nations, with the concept of ‘LTFR’ in reduction commitments being built into such
an initiative. As regards the issue of non-tariff barriers, the focus was on encouraging the
WTO members to make notifications by October 31, 2004, on such barriers faced by them
to facilitate identification, examination, categorization, and ultimately negotiations on such
barriers. India submitted a notification, within the given date on some of the NTBs faced by
its exports. Although no modalities have been specified in this context, the framework af-
firms the need for S&DT for the developing nations.
The salient features of the services component of the Framework Agreement include:
members to strive for high-quality offers in sectors and modes of supply of interest to devel-
oping countries to ensure a substantive outcome and provide market access to all members;
special attention to be given to sectors and modes of supply of export interest to developing
countries; recognition of interest of developing countries and some developed countries in
Mode 4 (movement of natural persons); stipulation of a time limit for submission of revised
offers by May 2005; and a general recognition of interest in intensified negotiations.
India’s core objective in the negotiations in trade and services is to induce our trad-
Indian’s core objective in the
negotiations in trade and servicing partners to undertake more liberal commitments in cross-border supply of services
es is to induce our trading part- (Mode 1) and movement of natural persons (Mode 4). Cross-border supply of services,
ners to undertake more liberal especially through electronic mode of delivery, is an area of key interest to India, given that
commitments in cross-border the outsourcing activities are undertaken through this mode of supply of services with its
supply of services.
comparative advantage and potential of ITES (IT–enabled services). In this context, with
regard to movement of natural persons, developing countries, including India, have taken
up a number of related issues, such as recognition of qualifications, economic needs tests
(ENTs), administrative procedures relating to visas, mutual recognition agreements (MRAs),
and social-security contributions, which are likely to be addressed in the current negotia-
tions. India also aims to encourage a greater inflow of FDI in those sectors in which such in-
vestment could generate spin-off benefits or externalities. While India’s core interest is in the
liberalization of Mode 1 and Mode 4, the core interest of its trading partners, as evident from
the requests, is in Mode 3 (commercial presence), with a request either to bind the presently
applicable FDI policy or to offer a more liberal policy.
India submitted the initial requests for specific commitments to 62 member countries and
in turn, received the initial requests from 27 member countries in various services sectors. As
many as 48 member countries have submitted their initial offers as of now. India submitted
its initial offer in December 2003. Through the initial conditional offer, the existing Uruguay
Round commitments in sectors such as engineering services, computer and related services
(CRS), construction and related engineering services, financial services, health services, and
tourism services, have been improved. Fresh commitments in new sectors such as account-
ing and bookkeeping services; medical and dental services; services provided by midwives,
nurses, physiotherapists, and para-medical personnel; and maritime transport services; have
also been offered. Horizontally, India’s Uruguay Round commitments have been improved
by way of enhancing the period of stay for business visitors and also expanding the category
of professionals to include contractual service suppliers (CSS), both employees of enterpris-
es and independent professionals in certain identified sectors. India, in 2005, engaged in
bilateral discussions with trading partners on its initial conditional offers and also on the
response to its requests, particularly in Modes 1 and 4, in the initial offers tabled by its trading
partners.
A significant aspect of the July Framework Decision of August 1, 2004, was the drop-
ping from the Doha Agenda, the three of the four Singapore issues. With the dropping of
issues such as trade and investment, trade and competition policy, and transparency in the
government procurement, negotiation on only trade facilitation will now commence on the
basis of agreed modalities. The concerns and reservations of the developing countries on
starting negotiations on trade facilitation have largely been met in the modalities for negotia-
tion through an extensive provision of S&DT for the developing countries and LDCs. These
provisions include responsibilities as follows:
1. Extent and timing of entering into commitments shall be related to implementation
capacities of the developing countries and LDCs;
2. Support and assistance for development of infrastructure as part of requirement for
taking commitments wherever not required;
3. LDC members will only be required to undertake commitments to the extent consist-
ent with their individual development, financial and trade needs, or their administra-
tive and institutional capabilities;
4. Developed countries would ensure adequate technical assistance and capacity build-
ing for the developing countries and LDCs; and
5. Concerns of the developing countries and LDCs related to cost implications of
proposed measures shall be addressed as an integral part of the negotiations.
Further, the modalities provide for an establishment of an effective mechanism for coopera-
tion between customs authorities on trade facilitation and customs compliance issues, thus
helping to address issues relating to violation of customs laws. Trade facilitation essentially Trade facilitation essentially
refers to simplification, harmonisation, and computerisation of customs-clearance proce- refers to simplification, harmon-
dures. The agreed modalities on negotiations on trade facilitation will address these issues isation, and computerisation of
customs-clearance procedures.
through clarification and improvement of the existing GATT disciplines dealing with free-
dom of transit; fees and formalities connected with import and export; and publication and
administration of trade regulations. These disciplines were covered under Articles V, VIII,
and X of GATT 1994.
The General Council’s decision of August 30, 2003, under Para 6 of the Doha Ministerial
Declaration on TRIPS and Public Health, enables manufacture and export of pharmaceuti-
cal products under compulsory licence to countries with limited or no sector, by granting
suitable waivers from various articles under this mechanism. Discussions were under way in
the TRIPS Council on the method of incorporation of the decision in the TRIPS Agreement,
that is, whether this may be effected by inserting a footnote on Article 31 or by creating an
Article 31 bis, or by adding an annexure, or by incorporating the full text of the relevant
provision of the decision in the text of the TRIPS Agreement. The target for completing the
process was set for the end of March 2005. An Ordinance on Patents (Third) Amendment
was promulgated by the government on December 26, 2004 to make the Indian patents law
WTO compliant and to fulfil India’s commitment under TRIPS to introduce product-patent
protection for drugs, food, and chemicals with effect from January 1, 2005. The ordinance is
an interim measure and would be discussed in detail in the Parliament in the Budget session.
Another significant develop-
Another significant development in the world trade is the expiry of the ATC at the end of
ment in the world trade is the 2004, ending a historic anomaly in the world trading system by putting textiles and clothing
expiry of the ATC at the end of on the same footing as other industries under the WTO. It is important to note that China,
2004, ending a historic anom- which is poised to grab the lion’s share of global trade in clothing, has a cap of 7 per cent to
aly in the world trading system
by putting textiles and clothing
8 per cent annual increase in the export of clothing to the US/EU until January 1, 2008, by
on the same footing as other virtue of their being a late signatory to the WTO. India needs to concentrate on this window
industries under the WTO. of opportunity from January 2005 till December 2007, to gain a serious market share while
China’s export of clothing is still restricted. It has been reported that the following appeals
from the United States and the EU to China to moderate its exports, China has undertaken to
impose duties on some of its textile exports to ensure a smooth transition following a lifting
of global quotas on textiles and garments. Other options to secure a greater market access for
India could include sectoral-tariff elimination initiative for the textiles and clothing sector,
negotiating a reduction in the MFN tariff in textiles of its major trading partners in the cur-
rent Doha Round, and a exploring greater market access under preferential Generalised Sys-
tem of Preferences (GSP) in the EU/US markets. The determinants of being able to retain and
increase the market share post-ATC will include the following: the ability to adjust, invest,
and rise to the challenges of increased competition; structure, size evolution, and direction
of international textile and clothing production and market; and the condition for any effec-
tive market access beyond that of quotas, as disappearance of quotas, will be only one of the
variables in larger post-ATC market access picture. Preferential market, GSP schemes, and a
duty-free treatment will continue to be advantageous for the preferred suppliers.
Trade and development: recent trends

and the role of the WTO
The World Trade Report 2014 looks at how many developing economies are successfully
leveraging trade for rapid growth. It focuses on four recent trade trends – the rise of new
global players, the spread of production chains, increasing commodity prices, and growing
economic interdependence. These trends are transforming the way developing economies
benefit from global economic integration. The rules, flexibilities, technical assistance and
institutional infrastructure of the WTO have been helpful for developing economies to take
advantage of, adapt to and mitigate risks arising from these four trends. The multilateral
trading system itself will also need to continue to adapt, so that it can serve to realize the full
development potential inherent in the world economy’s ongoing transformation.
Introduction
Globalization is transforming development. This section examines how, in its scope and
speed, the recent rise of the developing world is unprecedented – eclipsing the rise of the
newly industrializing countries after the Second World War, and dwarfing the earlier rise
of Europe and North America in the late 19th century. There are many reasons why the
eveloping world has achieved economic lift-off. One of the most important is its integration
d
into the world economy – and the new access to markets, technology and investment that
has resulted. This rise of the developing world is one of four recent trends that holds new de-
velopment opportunities while also bringing new challenges. The same is true for three other
trends identified here: the spread of production chains, high commodity prices, and growing
economic interdependence.
Some key facts and findings
• Four new trends have affected the relationship between trade and development since
the start of the millennium. As a result, new opportunities and challenges have arisen,
particularly for developing countries.
• The four trends are the economic growth of many developing countries (Section B),
the growing integration of global production through supply chains (Section C), the
higher prices for agricultural goods and natural resources (Section D) and increas-
ing interdependence of the world economy, which causes shocks to reverberate more
quickly and globally (Section E). This changing trade and development landscape in
turn has implications for the WTO (Section F).
• Since the Industrial Revolution, economic development has widened, deepened and
accelerated. In the 19th century, it spread quickly from England to Western Europe
and North America. After the Second World War, Japan and newly industrializing
economies rapidly caught up, and starting in the 1980s, much of the rest of the devel-
oping world began a process of even more rapid industrialization.
• These episodes of development were accompanied by increases in trade, spurred by
reductions in trade barriers and costs. During periods of trade repression, such as
between the two world wars, economic growth was more subdued.
The rise of the developing world is the most significant economic event of our time. Part-
ly because of the shift to more outward-looking economic policies, partly because of the
impact of new transport and communications technologies, and partly because the world
economy is more open than ever before, emerging economies have been able to harness
globalization to achieve unheard-of rates of economic growth – with 11 economies, repre-
senting half the world’s population, growing collectively at over 6 per cent a year since 2000.
Since 1980, the developing world’s share of global trade has grown from a third to almost
half. China, to take the most obvious example, is now the world’s largest exporter; thirty
years ago it ranked 32nd. Most developing countries have seen their economies grow in
tandem with their dramatically increasing shares of world trade. China, with its 1.35 billion
people, has seen its economy grow at an average of 10 percent per year for the past three
decades. India, with its 1.2 billion people, grew at 7.5 per cent a year between 2000 and 2011,
although progress has recently slowed. While these emerging giants have captured the lion’s
share of attention, this remarkable story of trade-led development includes countries of all
sizes and regions – from Indonesia, Ethiopia and Chile, to Cambodia, Ghana and Qatar.
Economic growth is not the only condition for development, but it is a necessary condi-
tion – which explains why many of these same countries are also making enormous strides
in improved health, educational attainment, living standards and poverty reduction. As the
United Nations observed in 2013, ‘never in history have the living conditions and pros-
pects of so many people changed so dramatically and so fast’ (United Nations Development
Programme, 2013). At the same time, the recent slowdown of several – though certainly
not most – developing countries in the aftermath of the Great Recession of 2008–09 is a
reminder that future progress is neither inevitable nor irreversible. Successfully integrating
into a turbulent, volatile, ever-changing global economy is a difficult process for developing
countries, made even more challenging by the need to share out domestically the benefits and
costs of economic growth and adjustment if political support for trade opening is to be sus-
tained. A number of economic and political obstacles – whether self-inflicted or inflicted by
others – could still prevent developing countries from continuing along their current growth
trajectory.
More than anything, the continued rise of developing countries will depend on main-
taining an open global economy. This task too has become more challenging, even as it has
become more important. Just as expanding trade is transforming development – opening up
new export opportunities, improving access to capital and resources, and stimulating tech-
nological diffusion, adaptation and innovation – so too is the rise of the developing world
transforming the trading system. Fast-emerging economies such as China are generating
enormous new demand for raw materials and manufacturing inputs, pulling other develop-
ing economies into their slip-stream, while providing new markets for industrialized coun-
tries’ machinery, services and technologies. Developing economies may be increasing their
share of world trade, but everyone’s trade is growing. However, the vertiginous rise of new
trade giants requires that all economies, developed and developing alike, adjust and adapt.
The result is a more complex, multi-speed, multi-polar world economy.
It is not just trade power that is shifting but trade relations as well. The expansion of
global supply chains – where national economies form links in globally integrated produc-
tion systems – is dramatically deepening economic interdependence. So too is the growth of
services trade in recent years. In a world growing more, not less, interconnected, the global
rules and policy coordination provided by the multilateral trading system are more necessary
than ever.
Four Recent Trade Trends

The first of the four trends highlighted in this report is the economic rise of developing and
emerging economies, which is explored in depth in Section B. Not coincidentally, the rising
living standards in developing regions since 2000 have gone hand-in-hand with rising shares
in world trade for these countries. By embracing a policy of trade openness and integration,
these countries now have access not just to the capital, technology, and resources needed to
fuel rapid industrialization, but to vast and expanding overseas demand for their surging
exports.
The old patterns of world trade dominated by the advanced economies in the North are
being transformed as emerging economies in the South become new poles of trade expan-
sion. Since 1990, South-South trade – that is, trade among emerging and other develop-
ing economies – has grown from 8 per cent of world trade in 1990 to around 25 per cent
today, and is projected to reach 30 per cent by 2030. Trade corridors between Asia and North
America, and between Asia and Europe, now surpass the old transatlantic trade corridor,
while trade corridors between Africa and Asia or Latin America and Africa are growing in
importance. Even as the South’s share of world trade expands, world trade as a whole contin-
ues to grow, meaning that developing countries have ever-richer and more diverse markets
for their exports. In short, the rise of new trade powers is a positive sum game.
But despite these gains, developing countries still have a long development path ahead of
them, since they fall short of industrial countries on a large number of important econom-
ic indicators. Significant proportions of their populations still live below the poverty line.
Incomes in emerging economies are still a fraction of those in developed economies. While
the export success of today’s emerging economies highlights new opportunities and paths for
other developing countries, the pace of growth among developing countries remains uneven.
Some are experiencing high and sustained growth, others are struggling to move beyond
middle-income levels, while still others may be falling behind. This report sheds light on
the growing importance of developing countries in the world trading system, and explores
how the WTO can play an increasingly central role in advancing their various development
objectives.
A second, related, trend, explored in Section C, is the growing integration of global pro-
duction – especially the rise of supply chains – which is transforming the nature of trade and
the way developing countries ‘connect’ to the global economy. A combination of reduced
transport and logistics costs, improved information technologies and more open economies
have made it easier to ‘unbundle’ production, not only within countries, but across a range of
them. Four-fifths of world trade are now channelled through multinationals that locate vari-
ous stages or tasks of the production process in the most cost-efficient locations around the
planet.
Whereas, in the past, value chains were mainly North-South arrangements, South-South
value chains are now expanding as well. For developing economies, value chains can lower
the bar for entry into the global economy by linking them to established trade networks, thus
lowering the costs of economic integration, and allowing them to focus on the products or
sectors where they have a comparative advantage, without the need for a comprehensive in-
dustrial base. Value chains are also influencing the trade integration strategies of developing
economies.
While the average import content of exports is around 25 per cent – and increasing over
time – and almost 30 per cent of merchandise trade is now in intermediate goods or compo-
nents, increasing exports now directly hinges on increasing imports and on removing obsta-
cles to imported inputs. Since value chains involve the integration of production platforms,
not just cross-border trade flows, these obstacles can involve everything from tariff barriers
and transport bottlenecks to differing standards, investment restrictions and inefficient serv-
ice suppliers. The emerging world of ‘unbundled production’ offers an important new chan-
nel for trade growth and development, while at the same time highlighting differences in
countries’ capacity to integrate – or in the quality of their integration – as well as the costs of
remaining on the margins.
A third major trend, examined in Section D, is the rising price of agricultural goods and
natural resources since 2000. With some of the fastest-growing developing economies in the
Middle East, Africa and Latin America recently having become commodity-rich exporters,
attention has now shifted from how developing economies can diversify out of resources
to how they can strengthen their comparative advantage in resources, benefit more (and
more widely) from them, and reduce the adverse impact of the boom and bust cycles that
typically characterize these markets. This section identifies a number of key issues to be ad-
dressed if developing economies with actual or potential comparative advantages in agri-
culture or natural resources are to exploit higher commodity prices. These include reducing
new and less transparent forms of trade protection, guaranteeing adequate rates of return on
natural resources and addressing the social and environmental issues critical to inclusive and
sustainable growth.
As the world economy has become more interconnected through trade, investment,
technology and people flows, it has also become more interdependent. This is the subject of
Section E. Just as the economic benefits of widening and deeper integration now spread more
quickly across countries and regions, so too do the economic costs, as exemplified by the way
in which the Shock waves from the 2008 financial crisis and the subsequent economic down-
turn reverberated globally. Policy decisions in one country can have simultaneous and often
unintended spill-over effects in many distant countries. These spill-overs can become major
setbacks for developing economies, especially for the smallest and poorest countries, which
lack adequate shock absorbers and are the most vulnerable to economic volatility.
However, there are also major benefits that flow from growing global economic
interdependence and diversification. Without strong and robust growth in the developing
world after 2008, especially in China and India, the economic fallout from the recent global
downturn would have been much worse. Unlike during past crises – such as that of the 1930s –
the world economic system proved surprisingly resilient in the face of the Great Recession
of 2008–09. Section E explores the lessons we have learned from the recent crisis regarding
reducing risks and promoting security in times of global turmoil.
Sections B to E follow similar structures in examining the opportunities and challenges
that these four trade trends present to developing countries. They first provide broad, ‘stylized’
facts about these trends and their determinants. Subsequently, the development implications
of the trends are analysed, clarifying how participation in supply chains, increasing com-
modity prices and the global recession have played a significant part in different develop-
ment patterns across countries in the last 15 years. Finally, the sections identify policies that
have proved successful for emerging economies. This highlights the obstacles that need to be
removed if other developing countries are to benefit from these trends, and the additional
policies that may be needed to maximize benefits and reduce risks.
Building on this analysis, Section F shows how existing WTO rules and practices address
development challenges, and how flexibilities currently available to developing and least-
developed countries in these trade rules can help facilitate their integration.
Expanding trade may be essential for development but it is hardly sufficient. Countries
that have succeeded in transforming trade and economic growth into inclusive, sustainable
and broad-based development – whether measured in terms of improving health, rising edu-
cation, increasing opportunities for women, or decreasing poverty – have also pursued a
range of policies that not only share the gains (and costs) of trade openness but ensure that
societies are equipped to benefit from global economic integration. While such policies are
largely beyond the scope of this study, the report does consider income distribution – not
including income per capita – and environmental quality as dimensions of development. This
broad perspective is also useful in understanding how the multilateral trading system can
contribute to creating a more inclusive and environmentally sustainable development, and
thus reinforce popular support for further trade opening and global economic cooperation.
The sheer scope and scale of the latest wave of global economic development may look
revolutionary but it is in fact evolutionary, building on trends that began 200 years ago dur-
ing the Industrial Revolution. The following section looks at these trends from an historical
perspective, not only to better understand the relationship between trade and development,
but to speculate where the process may be heading in the years ahead.
Development and Trade: An Historical Analysis

Global Economic Development: Widening, Deepening and Accelerating
Two hundred years ago, as a result of the Industrial Revolution, the world entered a period
of unprecedented economic growth that continues till date. Although economic progress
was slow and geographically limited at first, it gradually accelerated and radiated outwards,
each phase, or wave, of global economic development faster and more extensive than its
predecessor (refer to Figure 30.1).
The first wave, which took place in the second half of the 19th century, saw Great
Britain, a number of other countries in Western Europe and North America—the early
industrializers—race ahead of the rest of the world, a process which has been called ‘the great
divergence’ (Pritchett 1997). A subsequent wave, which occurred after the Second World
War, saw the fast-developing economies of that era—Japan and the newly industrializing
40,000
<Figure 30.1
Per Capita GDP for
35,000
Selected Economies,
30,000 1840–2012
(1990 International
Geary–Khamis Dollars)
Per capita GDP
25,000
20,000
15,000
10,000
5000
0
1840 1860 1880 1900 1920 1940 1960 1980 2000 2020
Great Britain United States China Republic of Korea
Germany Japan India Brazil
Source: Maddison Project and IMF.
e conomies—rapidly catch up with the developed West, even as the advanced industrial
countries redoubled their lead on the poorer and less developed economies that had been
left behind.
A final wave, which began in the 1980s, has seen much of the rest of the developing
world, including the two giants, China and India, finally begin their own process of rapid
industrialization. This ‘great convergence’, which in many ways is only beginning, represents
the largest and fastest phase of economic catch-up so far. As Martin Wolf succinctly puts it,
‘never before have so many people—or so large a portion of the world’s people—enjoyed such
large rises in their standards of living’ (Wolf 2004).
This accelerating and widening circle of development was only possible because the
world economy grew more open and integrated. At each stage, expanding trade was a
powerful driver of economic development—opening up new markets, improving access to
raw materials, promoting international specialization and stimulating technological diffu-
sion and innovation—which in turn drove further trade expansion.
A central challenge at each historical stage was the development of international rules
and structures capable of helping countries to coordinate their increasingly international
economic interests, and of managing the powerful forces and stresses unleashed by economic
change, such as the rise of new economic powers, the spread of technology and production,
and the deepening of global economic integration. Periods of relative economic openness—
after the mid-19th century, after 1945, and after the Cold War—have tended to coincide with
global economic development, while periods of trade fragmentation and protectionism—
most notably during the inter-war period—have seen economic development stall or go into
reverse.
The First Wave—Early Industrializers

The Industrial Revolution, despite its name, had modest beginnings. Although Great Britain
was the first industrializer—a lead secured in part because of its access to vast overseas colonial
markets and its early embrace of free trade—its economic growth of less than 1 per cent a year
in the first half of the 19th century was unremarkable by subsequent standards. Only when
other early ‘developing countries’, including Germany, France, the Netherlands, Belgium and
later the United States, began to catch up with Great Britain after the mid-19th century, did
the world experience the first major period of rapid economic expansion.
From 1870 to 1913, world capita GDP rose 1.3 per cent a year compared with 0.5 per cent
between 1820 and 1870, and 0.07 per cent between 1700 and 1820 (Maddison 2001). Trade,
which expanded four times as fast as world output, was a critical driver of economic growth
and technological diffusion throughout this period, not only because of new transport and
communications innovations—steamships, railways, telegraph cables—but also because of
the spread of open trade and exchange rate policies. This period is sometimes referred to as
the ‘first age of globalization’, but in reality only a small cluster of countries in Europe and
its former colonies experienced dynamic development, while the vast majority of the world’s
population, especially in Asia, Latin America and Africa, progressed only slowly, if at all. This
growing divergence in living standards and wealth between the fast-industrializing ‘core’ of
the world economy and the pre-industrial ‘periphery’ became a defining feature of the global
economic landscape over much of the subsequent two centuries.
Death of Distance
Breakthroughs in transport and communications technologies in the 19th century were both
an effect and a cause of economic development (refer to Figure 30.2). By the late 1830s, steam-
ships were regularly crossing the Atlantic, by the 1850s service to South and West Africa had
begun and, with the opening of the Suez Canal in 1869, creating an important shortcut to
Asia, transoceanic steam shipping took over Far Eastern trade routes as well, sealing their
dominance of global trade (Landes 1969).
Railways were the other major transport breakthrough of the early Industrial Revolu-
tion. The world’s first freight rail line, the Stockton–Darlington route, opened in 1825, and
was soon copied, not just throughout Great Britain, but in the rest of Europe, the Ameri-
cas, and, by the end of the century, Asia and Latin America as well. A transcontinental line
linked the East and West coasts of the United States by 1869, playing a major role not just
in the settlement of the West, but in linking the vast American hinterland to global markets
(O’Rourke and Findlay 2007). The Canadian–Pacific railroad was completed by 1885 and
the trans-Siberian railway by 1903. The decade prior to the First World War also saw an
explosion of railway building in Argentina, India, Australia, China and elsewhere. Railway
lines increased from 191,000 km in 1870 to nearly 1 million km in 1913 (Fogel 1964).
Figure 30.2
Per Capita Merchandise
> 1000
900
Exports of Selected
Per capita merchandise exports
800
Economies, 1840–1913
(1990 US$) 700
600
500
400
300
200
100
0
1840 1850 1860 1870 1880 1890 1990 1910
Great Britain Germany United States Japan France

Source: Maddison Project and IMF.
reakthroughs in refrigeration after the 1830s reinforced the impact of steamships and rail,
B
allowing for the transport of chilled meat and butter over great distances (Mokyr 1990).
Other technologies contributed to lowering communications costs. The arrival of the
telegraph in the mid-19th century was as revolutionary as steamships and railroads, effectively
ushering in the modern era of instantaneous global communications. The first successful trans-
atlantic telegraph message was sent in August 1858, reducing the communication time between
Europe and North America from 10 days—the time it took to deliver a message by ship—to a
matter of minutes. By the end of the 19th century, British-, French-, German-, and American-
owned cables linked Europe and North America in a sophisticated web of telegraphic commu-
nications. As transoceanic steamships linked up distant markets, railways connected emerging
industrial centres and telegraphs linked financial centres, world trade and investment surged.
Minimalist International Cooperation

Although technology was the major driver of trade and integration in the second half of the
19th century, the spread of liberal economic policies also played a key role. First, Great Britain
removed many of its tariff barriers and trade restrictions unilaterally (the so-called Naviga-
tion and Corn Laws) between 1846 and 1860, providing a powerful push towards more open
international trade. Next, in 1860, it negotiated the Cobden Chevalier Treaty with France
which, in reducing trade barriers between the world’s two biggest economies on a conditional
most-favoured nation (MFN) basis, created an incentive for other European countries to
conclude similar bilateral trade agreements. Next, in the 1870s, again following Great Britain’s
lead, the world’s major economies shifted to the gold standard and fixed exchange rates, add-
ing perhaps the most important pillar to global economic stability during that period.
Although these institutional arrangements were largely focused on European countries,
Europe’s place at the centre of the world economy and its extensive imperial and colonial ties
meant that large parts of the world economy were automatically (and involuntarily) drawn
into the open trading order being constructed after 1860. French, German, Belgian and
Dutch colonies essentially adopted the same tariff codes as their home countries while most
of Great Britain’s dependencies, such as India, applied the same low, non-discriminatory
tariff on foreign as well as British imports. Where developing countries attempted to resist
opening up to foreign trade and investment, Western powers were prepared to use military
muscle to prise open markets, for example, during the Anglo–Chinese Opium War between
1839 and 1842, and when US Naval Commodore Perry, by threatening to use force, opened
Japan to Western trade in 1853.
This combination of technological change, spreading trade-opening and mass migration
fuelled a period of extraordinary economic integration. Indeed, economic historian Kevin
O’Rourke argues that ‘the most impressive episode of international economic integration
which the world has seen to date were the years between 1870 and the Great War’. Openness—
that is, the share of trade in output—rose steadily, from just 1 per cent in 1820 to 7.6 per cent
in 1913—a high point not surpassed until the 1960s (Maddison 2001).
Global Specialization—If Not Yet Global Value Chains

While the late 19th century saw nothing as complex and sophisticated as today’s global value
chains, signs of growing international specialization, the ‘unbundling’ of global production
and the spread of foreign investment were already evident. With the arrival of steamships
and railways, a vast range of commodities were suddenly accessible to the world’s industrial
centres, just as new manufactured goods began to flood the rest of the world.
Transoceanic trade in grains, metals, textiles and other bulk commodities—as well as in
manufactured goods—became increasingly common in the latter half of the 19th century.
Global trade and exchange rate stability encouraged massive outflows of foreign capital
uring this period—especially from Great Britain, which directed about half its savings
d
abroad, but also from France and Germany. Much of this investment went into railway con-
struction in the United States, Canada, Russia, Latin America and Asia, further strengthening
economic integration and accelerating growth. The period 1870 to 1913 also saw large-scale
international migration, with an outflow of 17.5 million people from Europe to the Americas
and Australasia, further cementing global economic integration. The most striking feature
of this emerging global economic system is that it was underpinned by simple—though
fragile—rules and agreements, not by a network of international organizations designed to
‘manage’ the world economy.
One of the key factors facilitating Europe’s rapid industrialization throughout the 1800s
was the vast amount of fertile land in the Americas which could be used to grow the large quan-
tities of food needed to feed a fast-expanding European population, thereby allowing Europe’s
labour and land to be freed up for further industrialization (Pomeranz 2000). Despite a fast-
growing population and limited arable land, Great Britain saw food prices stop rising in the
1840s and start falling thereafter, helped by the abolition of the Corn Laws, which had imposed
high duties on imported corn (O’Rourke and Williamson 1999; O’Rourke and Findlay 2007).
Declining food prices benefited industrial workers and urban consumers—helping to
fuel further industrialization and urbanization—but disadvantaged landowners and farm
labourers. By the 1870s, Great Britain’s farm sector employed less than a quarter of its work-
ing population. Great Britain also absorbed over a quarter of the world’s exports, mainly food
and raw materials, and was the main exporter of manufactured goods as well as the largest
provider of trade-related services, such as shipping, trade finance and insurance.
Just as farmers in industrialized countries faced increased competition from highly
competitive agricultural producers in the new world, developing-country artisanal and craft
producers increasingly found themselves outdone by capital- and technology-intensive pro-
ducers, often protected behind tariff walls, in the fast-industrializing North. For example, the
1690–1721 Calico Acts which shielded Great Britain’s textile industry from surging Indian
imports (Bairoch and Kozul-Wright 1996). It may be an exaggeration to argue, as does
economic historian Paul Bairoch, that massive inflows of European manufactured goods,
particularly of textiles and clothing, resulted in the ‘deindustrialization’ of the developing
world, but there is no question that the latter half of the 19th century saw the continued con-
solidation of the North’s manufacturing dominance. The destruction of India’s textile indus-
try was a striking example but a similar process was taking place in China, Latin America and
the Middle East (Bairoch and Kozul-Wright 1996). According to Bairoch, the developing
world saw its share of global manufacturing fall from over a third to less than a tenth between
1860 and 1913 (Bairoch 1982). Only after the turn of the 20th century did the North’s grow-
ing manufacturing dominance over the South begin to reverse.
The Industrialized Core Converging—But the Core and the Periphery

Diverging
This ‘first age of globalization’ was less than global in its scope. As the early industrializing
countries pulled ahead of thepre-industrial rest (Pomeranz 2000), a new and uneven global
economic landscape began to emerge, defined by a European ‘core’ increasingly focused on
manufacturing, and the largely colonial ‘periphery’ supplying raw materials (O’Rourke and
Findlay 2007).
Although commodity specialization brought significant economic benefits—Argentina
and Mexico, for example, had among the world’s highest growth rates in the second half of
the 19th century—for many others, economic progress was modest or non-existent. China,
which had the world’s largest economy in 1820, saw its per capita GDP actually shrink by
over 1 per cent a year between 1870 and 1913. India, other Asian economies and Africa
erformed marginally better, but still per capita income rose by just a quarter during this
p
period (Maddison 2001). Meanwhile, the industrialized countries’ access to cheaper raw
materials and vast markets for their manufactured goods allowed them to advance at a much
greater pace, both economically and technologically, than the rest of the world. In 1860, the
three leading industrial countries—Great Britain, Germany and the United States—were
producing over a third of total global output; by 1913 their share was a little under two-thirds
of a much larger total. In 1820, the richest countries of the world had a GDP per head of
about three times the poorest; by 1913, the ratio was 10:1 (Maddison 2001).
The Inter-war Interregnum—Disaster Strikes and Development Stalls

Global integration reversed between 1914 and 1945, the result of a series of related politi-
cal shocks to the international system—war, depression and economic nationalism. This, in
turn, caused economic development largely to stall in many regions and, in Europe, to go
backwards. The world economy grew much more slowly than in 1870–1913, world trade
grew much less than world income, and the degree of inequality between regions continued
to increase (Maddison 2001). There were exceptions, however. Although the United States
and the British ‘dominions’ suffered significant war casualties and the diversion of resources
into the war effort, they were spared many of the most destructive aspects of the conflict
and benefited from supplying Europe with armaments, munitions and resources. Meanwhile
Latin America and Africa were only mildly affected by the disruption of world trade, and in
fact benefited from the temporary dislocation of European commodity suppliers.
The First World War was an unmitigated disaster. Sixteen million died and another
20 million were wounded. In the war’s aftermath, Germany faced huge reparations payments
and France lost two-thirds of its foreign investments, while Great Britain suffered major
losses to its merchant shipping fleet, liquidated much of its overseas investments, and accu-
mulated massive foreign debts. Frontiers were dramatically redrawn in Europe, as Germany’s
territory was reduced and the Austrian, Russian and Turkish empires were dismembered,
creating new tariff barriers and currency areas, upsetting transport routes and generating
massive problems of dislocation and adjustment. The war caused a drop in GDP across most
Western European countries, with the biggest falls in Belgium, France and Austria. Western
Europe’s prewar levels of GDP were not regained until 1924.
Nonetheless, the world made some tentative progress towards rebuilding the pre-war
order with a return to the gold standard in 1925 and the launch of new bilateral trade ne-
gotiations in 1927. However, this progress, fragile at best, was soon shattered by the Great
Depression of 1929–33. A series of policy mistakes in response to the 1929 Wall Street stock
market crash quickly translated into widespread debt default, a massive flight of capital from
Europe to the United States, and collapsing global demand. Thanks to the United States’ ill-
conceived Smoot–Hawley tariff legislation of 1929–30—which massively increased US tariffs
on imported goods—it also led to the collapse of open trading.
A wave of trade protectionism unleashed by the US tariff increase, and exacerbated by
falling import prices, saw the volume of world trade fall by more than a quarter over the
following years; its 1929 peak was not reached again until 1950 (Eichengreen and Irwin
2010). The economic downturn was most severe in the United States because of the col-
lapse of its financial system, but the Depression’s impact was felt throughout Europe and the
Americas. World GDP fell further during the Depression than it had during the First World
War. By undermining international cooperation and fuelling the rise of militaristic regimes
in Germany, Italy and Japan, the Depression also laid the groundwork for the outbreak of the
Second World War.
The Second World War was even more devastating than the First, leaving over 80 million
dead, much of Europe and parts of Asia destroyed, and the international economy in ruins.
It also led to civil war in China, and the beginnings of the disintegration of the British,
Dutch and French empires. However, the experience of other regions was very different.
In the United States, for example, output doubled during the war years (at growth rates of
13 per cent a year) as the large slack in the economy after the Depression was mobilized
behind the war effort. Latin America’s output increased by nearly a quarter, boosted by war-
fuelled demands for its commodity exports, and output also grew in Asia and Africa.
The Second Development Wave—A Post-War ‘Golden Age’ of Growth

The second wave of economic development ran from the immediate post-Second World War
era until the early 1970s—the so-called ‘golden age’ of prosperity—with world GDP grow-
ing by 4.9 per cent a year and world trade growing by an even more impressive 7 per cent.
The United States grew at over 2.5 per cent a year, consolidating its position as the world’s
economic and industrial leader but European countries achieved even faster growth rates
reflecting the huge scope both for recovery from depression and war and for catch up to the
technological advances of the United States (refer to Figure 30.3).
However, the most dramatic economic story during the golden age was the rapid rise
of newly industrializing economies in East Asia, which quickly closed the gap with the ad-
vanced West. Japan, the ‘miracle’ developing economy of its era, grew at an astounding 10 per
cent a year on average between 1950 and 1973—comparable to the spectacular growth rates
recently achieved by China—partly because it was recovering from the war, but mainly be-
cause it was catching up with the industrial leaders (Takatoshi 1996). Its successful export-
led ascent provided a model for the subsequent rise of Asia. In some respects, the Republic
of Korea’s economic growth trajectory was even more extraordinary because it lasted longer.
Among the world’s poorest economies after the Korean War of 1950–53, the Republic of
Korea was recording annual growth rates of 10 per cent a year in the early post-war dec-
ades, 9 per cent in the 1970s and 1980s, and 6.6 per cent in the 1990s—the fastest sustained
growth rate in history—fuelled in no small part by even faster-growing trade. The ratio of
its merchandise exports to GDP rose from 0.7 per cent in 1950 to 36.3 per cent in 1998
(Wolf 2004). Other Asian ‘tigers’, such as Chinese Taipei, Hong Kong (China) and Singapore,
Figure 30.3
> 3000
Exports for Selected 2500

(1990 US$)
2000
1500
1000
500
–
1913 1923 1933 1943 1953 1963 1973
Great Britain Germany United States Japan Republic of Korea France

Source: Maddison Project.
also advanced at similarly unprecedented rates. This resulted not only in an expansion of
the industrial ‘core’, but also in a further widening of the gap between the rich world and the
pre-industrial poor.
China, which had endured 12 years of war between 1937 and 1949, barely grew at all in
the 1950s and 1960s. Although Africa started in 1950 with a per capita GDP slightly higher
than Asia’s, its per capita income grew the slowest during the golden age, at just 1.8 per cent.
Latin America, which had done better than any other region during the inter-war years, also
grew more modestly during the golden age, in part because of more restrictive trade regimes.
A New International Economic Order

The post-war era saw a rapid return to trade growth. This was due in large part to the new inter-
national economic order established after the war—anchored in the International Monetary
Fund (IMF), the World Bank, the General Agreement on Tariffs and Trade (GATT) and the
Organisation for Economic Co-operation and Development (OECD)—which underpinned
the gradual restoration of open trade after its collapse in the inter-war years.
Although the Cold War divide destroyed the wartime dream of building a universal eco-
nomic system, this divide, and the security concerns it raised, reinforced solidarity and coop-
eration within the Western alliance, and encouraged countries to hold in check the economic
conflicts and beggar-thy-neighbour policies that had proved so disastrous in the 1930s. The
United States assumed the leadership role it had largely avoided in the inter-war period,
not only by designing the post-war order, but also by providing a substantial flow of aid for
Europe, encouraging open trade policies and fostering cooperation. Until the 1970s, it also
provided the world with a strong anchor for international monetary stability. North–South
relations were also gradually transformed, turning from colonial dominance and exclusion
to a greater focus on development and financial aid, reinforced by Cold War interests.
In addition to the Cold War divide, however, the gap between the advanced and the
developing world continued to widen—leading to what economic historian Lant Pritchett
describes as ‘divergence, big time’ (Pritchett 1997). The biggest beneficiaries of the post-war
open trade were the advanced economies, especially Europe and newly industrializing Asia,
where trade growth averaged 8.6 and 8 per cent a year, respectively. Latin America, with its
greater resistance to trade opening and reliance on domestic production rather than imports,
benefited less from trade’s unprecedented expansion. Africa enjoyed higher export growth
than Latin America but significantly lower than the United States, Europe or newly industri-
alizing Asia. Meanwhile, the Soviet bloc and China purposely isolated themselves from the
increasingly open and integrated world economy.
The Technological Revolution Continues

Fast-expanding post-war trade was also a reflection of further technological advances in
transport and communications, many of which were fuelled by the war. Innovations in
transoceanic shipping included the development of turboelectric transmission mechanisms
and the replacement of coal-fired plants with diesel engines. In 1914, coal-burning steam-
ships made up almost the entire world merchant fleet. By the 1920s, this had fallen to only
70 per cent; then to less than 50 per cent in the 1930s; and to only 4 per cent by 1961. The
closure of the Suez Canal in 1956–57, and again in 1965, prompted the shipping industry to
invest in huge, specialized bulk freighters and oil tankers as well as in the harbour facilities
needed to handle them, as a way of reducing the costs of longer shipping routes. The biggest
modern super-tankers are more than 30 times the size of their post-war predecessors, and
bulk freighters have grown almost as quickly, making it more economical to move commodi-
ties and other low-value-to-weight goods over great distances.
The introduction of container ships after the 1960s also drove down ocean bulk shipping
costs, although some of the gains in the 1970s and 1980s were offset by rising fuel prices.
According to economic historian David Hummels, prices for ocean shipping, which were
largely unchanged from 1952 to 1970, increased substantially from 1970 to the mid-1980s,
then steadily declined over the next two decades (Hummels 2007). Railway networks also
expanded rapidly, including between the two world wars, especially in developing econo-
mies, while diesel and electric locomotives increasingly replaced steam engines. Mass adop-
tion of motor vehicles also began in the inter-war period, and transformed passenger travel
and overland haulage. Initially limited to transporting passengers in urban areas, large mo-
torized trucks were soon being used on feeder routes to the main railways lines, and even-
tually competed with those lines. Air freight represented yet another major transportation
breakthrough that began with rising wartime demand, leading to a ten-fold decline in air
shipping prices since 1950. As a result, according to Hummels, air shipping has grown from
an insignificant share of trade in 1950 to a third of US imports by value and half of US exports
outside of North America today (Hummels 2007).
The Rise of Multinational Enterprises—Laying the Groundwork for

Globalized Production
A central feature of the post-war economic landscape was the growing importance of mul-
tinational enterprises (MNEs), fuelled by a surge in foreign direct investment. MNEs are
not a 20th-century invention. Transnational firms, such as the Dutch East India Company
or the British East India Company, played key roles in Europe’s colonial dominance of Asia
and other regions from the 18th century. Growing transport, trade and investment links in
the 19th century only accelerated this trend. However, in the decades after the Second World
War, MNE activity expanded most dramatically, thanks to US commercial dominance and
the increasing internationalization of trade and especially investment, which grew more rap-
idly (though also more erratically) than either production or international trade after 1945.
US MNEs heavily dominated foreign investment activity in the two decades after the
Second World War but European and Japanese corporations also began to play ever-greater
roles. Most of the huge expansion in international investment took place among advanced
industrial countries. However, MNE activity in developing countries also expanded through-
out this period, with the stock of foreign capital rising from 4 to 22 per cent of developing
countries’ GDP between 1950 and 1973. As MNEs expanded their global reach and became
more interconnected, business activity became increasingly internationalized—laying the
groundwork for even greater international specialization and the rise of global value chains.
The Great Divergence Grows Greater

As the United States continued to grow, Europe rapidly recovered, and the Asian tigers raced
to catch up, the wealth and income gap between the advancing industrial countries and the
developing world grew ever wider. By 1970, the world’s richest countries had a per capita
GDP 30 times higher than the poorest—compared with only a three-to-one differential a
century before. Never before had the world experienced income and wealth differences on
this scale (Pomeranz 2000). The ‘great divergence’ continued.
Some economists, most notably Raul Prebisch, argued that peripheral countries were
trapped permanently in a cycle of under development because of structural imbalances in the
world economy, and that radical reforms to the international system and to national industrial
policies were needed if the gaps between rich and poor were to be narrowed. Their proposals
included shielding infant industries from foreign competition and encouraging inward in-
vestment and technology transfers – policies which, it was argued, many advanced economies
had also employed to promote their economic and technological development. These ideas
helped to shape a generation of developing countries’ industrial strategies as well as the design
of the GATT’s so-called ‘special and differential’ rules—including lower obligations, longer
phase-in times and more beneficial market access—for developing countries after the 1960s.
The Third Development Wave—The Age of Globalization

Since the late 1980s, the world has witnessed a cycle of economic development, the largest
so far (refer to Figure 30.4). Its most striking feature is the dramatic growth trajectory of
emerging markets, with the vertiginous rise of economic giants such as Brazil, China, India,
Indonesia and the Philippines. While, from 1950 to 1973, Japan recorded super-growth of
over 10 per cent a year, the rest of Asia only grew at 2.6 per cent. From 1973 to 2000, the rest
of Asia grew twice as fast as Japan, and in the 1990s the region grew four times as fast.
Since the 1980s, seven Asian economies (China, Hong Kong, Malaysia, Singapore, the
Republic of Korea, Chinese Taipei and Thailand) have grown at an average rate of 8 per cent a
year for more than 25 years (Growth Commission 2008)—a scale and speed of development
unmatched in history. Economic growth in the United States has been marginally slower since
the early 1970s, at an average rate of 2.4 per cent, than in the post-war period. Europe’s and
Japan’s rapid catch up to US per capita income levels during the golden age (between the
Second World War and the early 1970s) had ended for most countries by the 1990s. Between
1973 and 1998, Western Europe’s GDP grew by 2.1 per cent a year compared with 4.8 per cent
between 1950 and 1972, and has grown even less in the first decade of the 21st century. Once
again, expanding trade has both reflected and reinforced this period of global growth.
The Post-War Order Goes Global

While the structure of the international system has not changed significantly since the post-
war era, its scope and composition have altered dramatically. The successful conclusion of
the GATT’s Uruguay Round and the creation of the WTO in 1994 were the culmination
of a half-century of evolution, deepening existing rules and practices while bringing whole
new sectors, such as services and intellectual property, into the rules-based trading system.
25,000
< Figure 30.4
Exports for Selected
20,000
(1990 US$)
15,000
10,000
5000
0
1980 1985 1990 1995 2000 2005 2010 2015
Great Britain United States China Republic of Korea

Germany Japan India Brazil
Source: WTO Secretariat.
Membership also expanded dramatically over this period. From just 23 members in 1947,
the WTO has 160 members today—three-quarters of which are developing economies,
including China and Russia.
The Rise of Global Value Chains

One prominent feature of today’s more open and integrated world economy is the rise of val-
ue chains. Just as rapidly falling transport costs in the 19th century led to globalization’s ‘first
unbundling’—separating factories’ locations from those of consumers—the newest wave of
integrationist technologies (containerization, air freight, telecommunications, informatics)
is leading to globalization’s ‘second unbundling’, as Richard Baldwin describes it—the end of
the need to perform most manufacturing stages near one another (Baldwin 2011).
Manufacturing is increasingly managed through complex global supply chains, effec-
tively world factories, which locate various stages of the production process in the world’s
most cost-efficient locations. The proliferation of multinational enterprises, the global reach
of which allows them to coordinate production and distribution across many countries, has
been indispensable to this process. To enhance efficiency and to optimize profits, MNEs now
locate research, development, design, assembly, production of parts, marketing and branding
activities in many different countries around the globe. While in 1969, there were just 7000
MNEs, by 1990 there were 24,000, and today that number has risen to 111,000—a 16-fold
increase (United Nations Conference on Trade and Development (UNCTAD) 2013). Cross-
border trade between MNEs and their affiliates—or intra-firm trade—now accounts for the
largest share of international trade in goods and services.
Global value chains not only have an impact on the strategy of firms, but on that of coun-
tries as well. Given that economies participating in value chains can only increase exports in
direct proportion to the increase in imports, governments have a key role to play in establish-
ing a policy environment that enhances and facilitates ‘connectivity’, including by unilaterally
lowering trade barriers and reducing transaction and logistics costs. The growing importance
of global value chains helps explain why China, for example, has emerged as the world’s largest
manufacturer over the past decade, its factories importing parts and components—mainly from
East Asia but also from other economies across the globe—for assembly into final products.
Resurgence of Commodities?
Rising demand for food and raw materials as a result of rapid industrialization and urbani-
zation has fuelled a worldwide commodities boom, or super-cycle, that started in the late
1990s and peaked in 2011. Price rises have been widespread across all commodities but most
notably in those commodities closely linked to China’s rapidly expanding manufacturing and
export sector. Some argue that long-standing terms of trade imbalances between manufac-
turing and commodity exporters are being reversed, and that the recent rise in commodity
prices probably represents a deeper structural shift in the global economy that will continue
to benefit developing economies. However, others argue that the commodity super-cycle is
simply the most recent example of the typical boom and bust pattern that has always gov-
erned commodity prices and that signs of slowing demand and values—hastened by a cool-
ing Chinese economy and growing US self-sufficiency in energy—are already evident.
A Great Convergence?
The last two centuries have been the most dynamic in world economic history. For many
developing economies, recent decades were particularly favourable for growth—to the point
that the ‘great divergence’ appears to be giving way to the ‘great convergence’. In the space of
a generation, China has become the world’s second-largest economy and leading exporter,
while India, Brazil, Indonesia and other emerging economies—representing half of the
world’s population—have also achieved historically high growth rates. As Michael Spence
has argued, we are not at the end, nor the beginning, of a process but rather part way through
an industrial revolution that is now entering its third century (Spence 2011). This rapidly
spreading advancing and accelerating process of development has been possible because the
world economy has become more open and integrated. Economic openness has, in turn,
depended on the underlying strength and resilience of the international system—its ability to
absorb rising giants, to withstand shocks and to promote cooperation and coherence.
However, while global economic development and convergence are bringing enormous
benefits and opportunities—not least to those in fast-emerging economies—they also carry
cost and risks. The World Trade Report 2014 evaluates these opportunities and risks created
by the four main trade factors that are currently driving development—the rise of new eco-
nomic powers, the spread of global value chains, the growing importance of commodities
trade and the deepening integration and volatility of the world economy.
Conclusion
This obviously cannot deal with the all-pervasive scope and coverage of the WTO. Many
crucial issues have been highlighted but many others have not been commented upon. The
objective here is essentially to provide a glimpse of the WTO and its strategic framework. The
world has been a witness to the rapid spread of influence of the WTO and the consequential
forces of globalisation. The major challenges before the industry is to accept the inevitable, The major challenges before
and vigorously work towards exploiting opportunities that are likely to be unleashed by the industry is to accept the
inevitable, and vigorously work
globalisation. Undoubtedly, the WTO will impact each and every business, and each and towards exploiting opportuni-
every aspect of various businesses. Following are the combination of a few crucial ‘positives’ ties likely to be unleashed by
and ‘negatives’ of the new WTO scenario: globalisation.
1. The WTO is for transparency of policies, rules, and procedures and for multilateral
conformism. It is not for insular and protected economic trade and investment
regime.
2. The WTO is for greater and greater market access; it is not for import restriction or
import substitution.
3. The WTO does not believe in a mere focus on export orientation, but is consistently
and passionately seeking an outward orientation in the economic polices of member
countries.
4. The WTO is not for unrestrained or imprudent use of capital resources in the devel-
opment strategy, but for deploying capital on the basis of comparative and competi-
tive advantage of nations.
5. The WTO is not for subsidies, but for wider and effective use of pricing mechanism
for allocation of resources domestically and globally.
6. The WTO is for internal deregulation serving to complement the process of trade and
investment liberalization.
7. The WTO is for promoting a climate for FDI flows based on undistorted trade and
investment regime; it is not for substitution of trade by investment being protected
through tariffs and restrictive import-licensing system.
8. The WTO is for competition and globalisation. Therefore, member countries are un-
der compulsion to observe critical macro-level disciplines—be it fiscal stability, price
stability, or exchange-rate management. Consequently, it is not for soft options, be it
high tariffs, QRs, subsidies, or lack of transparency in the policies, procedures, and
rules governing trade and investment.
It is no one’s case that commit- There, invariably, will be proponents and opponents of both WTO and globalisation. It is
ment to the goals of WTO alone no one’s case that commitment to the goals of WTO alone will deliver growth and prosper-
will deliver growth and prosperity across the world, leave alone in India. The ultimate aim of all these global and domestic
ity across the world, leave alone
efforts is to expand domestic wealth and ensure the trickling down of prosperity for the
in India.
betterment of the material lot of millions of our own people. The WTO happens to be an
ongoing process, and the Indian industry has to be ever vigilant to respond to the challenges
in a more positive and proactive way with the support and cooperation of our policymakers.
SUMMARY
The WTO is an international organisation of 153 member The WTO expanded the key aspects of the NAFTA, which had
countries, which is a forum for negotiating international been signed the year before, to the entire world. Like NAFTA,
trade agreements, and the monitoring and regulating body the WTO vested enforcement panels staffed by trade bureau-
for enforcing agreements. The WTO was created in 1995, by crats to enforce its binding rules. And like NAFTA, the WTO
passing the provisions of the Uruguay Round of the GATT. rules subject a broad array of non-trade-related local and
Prior to the Uruguay Round, GATT focused on promoting the national laws, regulatory structures, and policy approaches
world trade by pressurising countries to reduce tariffs. With to challenge if they are claimed to pose barriers to trade and
the creation of WTO, this corporate-inspired agenda was sig- investment. In the WTO’s 10 years, there have been 117
nificantly ratchet tipped by targeting the so-called non-tariff cases in which a country has challenged a law or practice
barriers to trade—essentially any national or local protective of another country. In all, 15 cases have led to binding WTO
legislation that might be construed as impacting trade. rulings, and another 18 are currently being considered at the
The WTO has taken charge of administering the new global WTO tribunals.
trade rules, agreed in the Uruguay Round, which took effect The WTO’s tribunals conduct WTO challenge cases in secret.
on January 1, 1995. These rules, achieved after seven years Even briefs from the public are only accepted by WTO panels
of negotiations among 125 countries, establish the rule of if endorsed by a government (NGOs cannot file briefs with
law in the international trade. Through the WTO agreements the WTO unless they find a government that is willing to
and market-access commitments, the world income is ex- submit the briefs). Furthermore, only national governments
pected to rise by over $500 bn annually by 2005. The annual are allowed to participate, so a state attorney general could
global trade growth will be as much as a quarter higher by the only assist with defence of a challenge against a state law
same year than it would otherwise have been. if invited by the current administration. A government that
The WTO, unlike GATT, is empowered to enforce global com- has lost a WTO case has no recourse to appeal outside
merce rules with the imposition of economic sanctions. of the WTO’s limited appellate process. Once a final WTO
The WTO’s rules are also much broader ‘covering food and ruling is issued, losing countries have only three choices:
environmental standards, regulation of services such as change their law to conform to the WTO requirements, pay
insurance and transport; how the government can use tax permanent compensation to the winning country, or face
dollars, copyright and patent law, farm policy, and more’. trade sanctions.
KEY WORDS
● Dumping ● TRIPs ● Most Favoured Nation (MFN)
● Subsidy ● Red Export Subsidies ● National Treatment
● Red Tape ● Electronic Commerce ● Distortive Measures
● Disputes ● Non-tariff Barriers (NTB) ● Amber Export Subsidies
● Intellectual Property (IP) ● Negotiation ● Green Export Subsidies
● Intellectual Property Right (IPR) ● World Trade Organization (WTO) ● Trade Facilitation
● TRIMs ● Multilateral Trading System
QUESTIONS
1. What is WTO and what is its role in today’s business 5. Write short note on:
environment? 1. Singapore Ministerial Conference
2. Explain the features of the WTO agreement. 2. Geneva and Seattle Ministerial Conference
3. Explain the administrative procedures of WTO. 6. Highlight WTO-related issues after the Cancun
4. What is role of WTO in settling disputes regarding Conference of September 2003.
trade policies of any country? 7. Give a brief outline of the WTO structure.
REFERENCES
n Bhandari, S. (1998). World Trade Organization (WTO) and n Narasaiah, M. L. (2004). World Trade Organization and
Developing Countries. New Delhi: Deep and Deep Agriculture. New Delhi: Sonali Pub.
Publications. n Raja, M. G. B. (2003). World Trade Organization: Region-
n Chadha, G. K. (2001). WTO and the Indian Economy. al Trading Arrangements and India. New Delhi: Serials.
Delhi: Deep and Deep Publications. n Ratmesh, K. (2003). WTO: Structure, Functions, Tasks
n ——— (2003). WTO and Indian Economy. New Delhi: and Challenges. New Delhi: Deep and Deep Publications.
Deep & Deep Publications. n Suryakant, B. (2003). WTO Challenge for the Developing
n Chandirmani (1999). World Trade Organization and Countries. Mumbai: Palak Pub.
Globalisation. Mumbai: Shroff Pub. n Verma, S. B. (2005). WTO and Development Opportuni-
n Gupta, K. R. (2000). A Study of World Trade Organiza- ties. New Delhi: Deep and Deep Publications.
tion. Delhi: Atlantic. n Wardha, H. (2002). WTO and Third World Trade
n Gupta, K. R. (2000). WTO Text, Vol. I and II. New Delhi: Challenges. New Delhi: Commonwealth.
Atlantic. n World Trade Report 2014.
Glossary
AEZ Agri-Export Zone. An area that provides remunerations to BoT Balance of Trade. The balance between imports and exports
growers by enhancing the marketability of the produce of these of the country.
zones in the international as well as domestic market.
Bank rate The rate at which the central bank of a country buys
Amalgamation The merger of one or more companies with or re-discounts eligible bills of exchange, securities, or commercial
another company, or the merger of two or more companies to form papers.
one company.
Banking reforms Polices designed, formulated, and imple-
Amber export subsidies (Non-actionable subsidies) Subsidies mented by the Central Bank, through a wide network of commer-
permissible under WTO, but non-actionable by trading partners. cial banks and other institutions.
Ancillary units Investments in plant and machinery on owner- Bearer certificate A certificate by the delivery of which the
ship, by lease or hire purchase, up to Rs 75 lakh. title to the securities becomes transferrable.
Anti-dumping duties Duties that prevent cheap imports be- Bill market A market where short-term bills (up to 90 days) are
ing dumped at unreasonable prices which may cause harm to the bought and sold.
domestic industry.
Black income Unaccounted or undisposed income.
Assessee A person liable to pay tax under the Income Tax Act.
Black money Unaccounted money in the hands of income-tax
Assessing officer The Assistant Commissioner, Deputy evaders.
Commissioner, Assistant Director, Deputy Director of Income
Board of directors Representatives of shareholders expected to
Tax, or the Income Tax Officer.
provide corporate leadership and strategic- and competent guid-
Assessment year The Income Tax Year, that is, the year in ance independent of the company management.
which the income of previous year is to be assessed.
BRPSE The Board of Reconstruction of Public Sector Enter-
Audit committee Body that reviews internal audit reports and prise, an advisory board of the government.
makes recommendations to the Board.
Budget deficits The excess of a government’s total expenditure
Authorised dealer A person temporarily authorised, under over revenue receipts.
Section 6 of FERA, to deal in foreign exchange.
Business environment The aggregate of all conditions, events,
Authorised person Any person authorised by the Reserve and influences that surround and affect business.
Bank of India (RBI) (based on an application) to deal in foreign
Call money market An important sub-market of the Indian
exchange or foreign securities.
money market, meant for very short-term funds.
Automatic route The route under which a foreign investor is re-
Capital asset Property of any kind held by an assessee, which
quired to inform the RBI within 30 days of making the investment.
may- or may not be connected to his business or profession.
Average rate of income tax The rate calculated by dividing
Capital goods Goods used within the factory for manufactur-
the amount of income tax by the total income.
ing the final product, vide Rule 2(b) of CENVAT.
Backward linkages Raw-material-supplying activities or
Capital infusion The investment of new/fresh capital.
ancillary units of large-scale industries producing a range of raw
materials, intermediates, or components. Capital market The market dealing in long-term loanable
funds.
BoP Balance of Payment. A double-entry system of record for all
economic transactions between the residents of a country and the CDS Current Daily Status. The activity status of a person for each
rest of the world, carried out in a specific period of time. of the preceding 7 days.
878 | Glossary
Central financing The planned expenditure of the central gov- Delicensing The abolishing of industrial-licensing require-
ernment in a Five-Year Plan. ments to reduce entry barriers and encourage the flow of private
investment.
CENVAT MODVAT re-formulated.
Demand-pull factors Factors responsible for a faster rise in
Community The part of society which provides the immediate demand than the available output or supply, leading to an excess
social environment of the company. in demand.
CFF Compensatory Financing Facility. A facility that provides Direct taxation A system of taxes on individuals or organisa-
timely financing to members of the IMF, experiencing a temporary tions levied according to income or wealth.
shortfall in export earnings.
Discount-flow method A comprehensive method of evaluation
Conditionality The system in which members make an explicit by the PSU (public sector unit) that reflects the expected income
commitment to implement corrective measures in return for the flow to the investors.
IMF’s support.
Disinvestment A process by which a government dilutes its
CPI Consumer Price Index. An index that measures the cost of stake in the public sector.
buying goods or service at different points of time.
DTA Domestic Tariff Area. The area from which a sale can be
CCLs Contingent Credit Lines. Economic policies to obtain IMF conducted only upon the full payment of custom duty.
financing on a short-term basis.
Economic inequality An uneven distribution of resources,
Corporate accountability The responsibility of businesses to employment growth, and per capita income in a country.
remain accountable or its obligation to its constituents, that is, Economy A system in which productive units use scarce
owners, financiers, employees, government, and customers. resources to produce a variety of marketable products that satisfy
Corporate governance A system by which companies are human needs.
run and the means by which they respond to their shareholders, Electronic commerce Business through electronic media.
employees, and society.
Employee-welfare programmes Programmes which provides
CSR Corporate Social Responsibility. A corporation’s respon- services, facilities, and amenities to enable persons employed to
siveness to public consensus. perform their work in healthy- and congenial surroundings.
Country risk Exposure to a loss on cross-boarder lending, Environmental risk Risk faced by businesses due to the
caused by events in a particular country. ynamic, social, technological, cultural, economical, political, and
d
legal environment in a country.
Credit control The proper regulation of the volume of credit.
EPCG Zero-duty Export Promotion Capital Goods. A scheme
Cross-functional teams Teams responsible for developing and for importing capital goods without paying any import duty in
implementing the ethics management programme. return for an export obligation for five times the amount.
CRR Cash Reserve Ratio. The minimum amount of non-interest EPS Employee’s Pension Scheme.
bearing reserves with the Central Bank (RBI) required to be held
by commercial banks. Ethics tools Policies and techniques to manage ethics at a
workplace.
Curative provisions Provisions by which a government can
take over the management or control of industrial enterprises and Exchange rate The price of one unit of a currency in terms of
control of supply, price, and distribution of certain commodities. the number of units of another currency.
Custom duty Taxes imposed on goods and services crossing Exemption A special privilege or release.
international borders. Exim scrip A replenishment for export-based imports.
Customs tariff Duties are levied on imports at rates specified in EPZ Export Processing Zones. An area with business units
the annual budget. e ngaged in manufacturing, trade, or other services, separated from
the rest of economy by fiscal barriers.
DDAS Diamond Dollar Account Scheme. A scheme under which
the export proceeds can be retained in a dollar account which the Export promotion zones Resource zones which are promoted
exporter can use to import rough diamonds. and awarded special schemes to increase export.
Deficit financing Forced savings which are the result of price External debt The amount raised by government loans from
increases during a period of the government investment. external sources.
Glossary | 879
External sector The international economy in terms of markets, Globalisation A process of global integration of products,
investment, and technologies. technology, labour, investment, information, and culture.
FDI inflow The flow of investment from different external sources. GNP Gross National Product. The total and final output
produced by the residents of a country.
FEMA The Foreign Exchange Management Act.
Goods (a) Products manufactured, processed, or mined;
FERA The Foreign Exchange Regulation Act.
(b) Shares and stocks, including those before allotment;
Fiscal adjustment The adjustment in the revenue and expen- (c) Imported goods in relation to goods supplied, distributed, or
diture of a country. controlled.
Fiscal crises Fiscally undesirable situations in which the Green export subsidies Subsidies permissible under the WTO
government has to raise fresh loans to pay off past loans. and are non-actionable by the trading partners.
Fiscal policy The policy under which a government uses Grievance An employee’s dissatisfaction or feeling of personal
taxation, public expenditure, and public-debt programmes to injustice relating to his or her employment.
achieve predetermined economic- and social goals and to solve
GDC Gross Domestic Capital. Gross Domestic Savings and the
specific problems in the economy.
Net Capital inflow.
Foreign affiliate A foreign enterprise which invests in a host
GSP Generalised System of Preferences. A scheme designed by
country in cash (foreign exchange) or kind (technical equipment
the UNCTAD to encourage exports of developing countries to de-
or infrastructure)
veloped countries.
FDI Foreign Direct Investment. An investment made to acquire
Host countries The countries where MNCs operate, other than
interest in an enterprise operating in an economy other than that
their parent countries.
of the investor.
IEC Importer–Exporter Code.
Foreign exchange certificates Certificates introduced in
place of the exim scrip. IFC International Finance Corporation. Its overall purpose is the
reduction of poverty and improvement of living standards through
Foreign exchange Foreign currency, which includes all
a leading role in the development of the private sector.
deposits, credits, and balances payable.
IMF International Monetary Fund. An organisation of countries
Foreign investment Investment from foreign corporate bodies,
that seeks to promote international monetary cooperation and
individuals, and non-resident Indians.
facilitate the expansion of trade.
Fringe benefit Any privilege, service, facility, or amenity directly-
Indian custom waters The waters extending into the sea to a
or indirectly provided by an employer to his/her employees.
distance of 12 nautical miles, measured from the appropriate base
GATS General Agreement on Trade and Services. line on the coast of India.
GATT General Agreement on Tariffs and Trade. Indirect tax Taxes the burden of which can be shifted onto
others.
GDP Gross Domestic Product. The total value of all domestic
goods produced and services rendered in the country in its econ- Industrial licensing Permission by law to run a business or
omy over a specified period of time, usually a year. Can also be ex- related activity.
pressed as a sum of four major components: personal-consumption
Industrial policy The rules, regulations, principles, policies, and
expenditure, gross private domestic investment, government ex-
procedures laid down by a government for regulating, developing,
penditure on consumption, and net investment exports.
and controlling the industrial undertakings within a country.
GDS Gross Domestic Saving. The saving in the household,
Inflation A process in which the general price index (GPI)
private corporate, and public sector.
records a sustained- and appreciable increase over a period of time.
Geographical factors The locations, seasonal variations, and
Infrastructure An umbrella term connoting a physical frame-
climatic conditions that influence a business environment.
work of facilities through which a variety of goods and services are
GDR Global Deposit Receipt. A mechanism by which shares of commonly provided to the public.
a firm are traded indirectly. The shares are held by a depository,
Infrastructure risk Risk due to poor or non-available infra-
generally a large multinational bank, which receives a dividend on
structure.
shares and issues claims against these shares. GDRs are often used
to tap multiple foreign markets for equities with the help of single Internal debt The amount raised by the government from loans
instruments of depository receipts. within the country.
880 | Glossary
IPO Initial Public Offering. NNP Net National Product. Calculated by subtracting deprecia-
tion from the GDP.
LDC Less-developed Countries
Nominee directors Directors nominated by shareholders of the
LERMS Liberalised Exchange Rate Management System.
organisation.
Liberalisation The process of freeing the economy from the
NPA The National Plan of Action. Formulated to ensure the req-
various regulatory and control mechanisms of the state and giving
uisite access of women to information resources and services.
greater freedom to private enterprise.
Licence raj A period of restrictions, red-tapism, and corruption. NSDP Net State Domestic Product.
Licensing To permit by law private initiative and enterprise to NTB Non-tariff Barriers. Factors which affect the import- and
provide their goods or services. export mechanism of a country.
LOI Letter of Intent. OGL Open General Licence.
Merchant bankers Also known as issuing houses. Insitutions OMO Open-market Operations. Mainly conducted by the cen-
that provide a range of specialised financial services to their client tral bank of a country and involve periodic sale and purchase of
companies. government securities in the open market.
MFN Most Favoured Nation. Organised enterprises All enterprises either registered with-
or coming under the preview of any of the Acts and/or maintaining
MNCs Multinational Corporations. Any business corporation annual accounts and balance sheets.
which has holdings, management production, and marketing in
several countries and owns huge resources. Parent corporations Main corporations whose subsidiaries
i nvest in a host country.
MNE Multinational Enterprise
PAN Permanent Account Number. A unique number by which
Monetary policy All measures, direct and indirect, which affect
the assessing officer can identify any person.
the supply of money, liquidity, cost, direction, availability of credit,
and the overall efficiency and development of the financial sector. Planning commission The commission responsible for five-
year economic planning of India. Comprises eight members.
Money market A market for lending and borrowing of short-
term funds. POL imports Imports of petroleum, oil, and lubricants.
Monopoly A market condition where only one seller is available Political stability risk A Risk involved due to unstable political
for a particular product. conditions in a country of business.
MRTP Monopolies and Restrictive Trade Practices Act. Previous year The financial year immediately preceding the
Multilateral trading system A mutually agreed-upon set of a ssessment year.
rules, binding on all members of WTO and enforceable through Privatisation The process by which major economic decisions
a dispute settlement. Trade is conducted according to these rules concerning production, exchange, distribution, and consumption
and not by the power of individual nations. are entrusted to market forces, and decisions are taken by a large
National exchequer The system which controls and checks number of individuals and private economic units.
national trade through duties and taxes. Public expenditure The expenditure of a government towards
National income The net national product (NNP) (minus activities like developing infrastructure, industry, health facilities,
indirect taxes). and education; and for non-development activities like the main-
tenance of law and order, and defence.
NAV Net Asset Value. Indicates the value of an asset or unit.
QR Quantitative Restrictions.
NDC National Development Council. The highest national
forum for economic planning in India. R&D Research and Development
Negotiation Bargaining between two or more countries for Recession The results of continuous interaction between a
certain conditions of trade and tariff. number of macro-economic forces which bring about a fall in the
level of aggregate economic activity.
NTP New Trade Policy. Policies to promote exports, regulate
imports, improve terms of trade, enhance export competitiveness, Red export subsidies Subsidies prohibited under the WTO
and create conditions of export-led growth. and therefore actionable by trading partners.
Glossary | 881
Regional imbalances Extreme regional variations in terms Special action programme A World Bank programme de-
like per capita income, proportion of population living below the signed to mplement adjustment measures needed to restore credit
poverty line, working population in agriculture, and employment working and growth.
opportunities.
SRF Supplemental Reserve Facility. A facility that helps member
Registered exporters Exporters regularly exporting for a pe- countries of the IMF experiencing exceptional BoP problems cre-
riod of 3 years, who were permitted to import capital goods (up ated by a large short-term financing need.
to an amount of Rs 10 crore) at a concessional customs duty of
Stand-by arrangement A national program designed in con-
25 per cent on the condition they take up an export obligation of
sultation with the IMF to resolve cyclical BoP problems.
three times the value of their imports within a period of 4 years.
State financing The planned expenditure of the state govern-
Remittances Money sent or invested.
ment in a five-year plan.
Remuneration The compensation a person receives in return
Stock Securities issued by corporate organisations offered to
for his/her contribution to an organisation.
i ndividuals and institutional investors.
Repatriation The bringing into India of realised foreign
Stock exchange An organised marketplace where brokers and
exchange and the selling of such foreign exchange to an authorised
dealers buy and sell securities of corporate organisations.
person within India.
Stock market A highly organised market that provides liquid-
Revenue deficit The excess of revenue expenditure over
ity to the long-term securities issued by an organisation.
revenue receipts.
Subsidy A grant or special monetary benefit given by a
Risk management Procedures by which board members are
g overnment.
informed about risk-assessment and -minimisation.
Takeover A hostile acquisition of an organisation by another
Rupee value The value of Indian currency in terms of foreign
organisation. Sometimes, a takeover may be by mutual under-
currency.
standing.
SAL Structure Adjustment Landing. A process designed by the
Target plus A scheme under which exporters achieving a quan-
World Bank to achieve a more efficient use of resources.
tum growth in exports are entitled to duty-free credit based on
Schedule industries Industries listed in the I Schedule of the incremental exports substantially higher than the general actual
Industrial Development and Regulation Act, 1951. export target fixed.
SDR Special Drawing Rights. The quota assigned to members Tariffs Duties on import goods and services.
of the IMF for supplementing their reserves in order to maintain
Tax evasion The deliberate effort by an individual or a firm to
stability in the foreign exchange market.
evade the payment of taxes.
SEBI Securities and Exchange Board of India.
Tax A compulsory levy imposed by the government on individ-
SEZ Special Economic Zone. A duty-free enclave of business uals or economic units.
firms predominantly engaged in export production.
TDC Technology Development Cell. A department set up to
Shareholders Owners of a business firm who have a direct stake rovide technology inputs to improve the competitiveness and
p
in it. productivity of the small-scale sector.
Sick unit A unit whose accumulated losses equal or exceed its TIN Tax-payer’s Identification Number.
entire network at the end of a financial year.
Tiny units Investments in plant and machinery on ownership by
SLR Statutory Liquidity Ratio. The percentage of a deposit a lease or hire purchase up to Rs 5 lakh.
bank is required to maintain in the form of cash, gold, or any gov-
TNCs Transnational Corporations. Corporations whose busi-
ernment-approved securities to meet liquidity needs.
ness operations extend beyond the boundaries or borders of the
Social audit A system by which the social performance of an country in which they were originally established.
organisation can be evaluated.
TPDS Targeted Public Distribution System. Required to distrib-
Sourcing The successive transfer of materials, components, fin- ute national resources.
ished products, or services from points in the network where they
Trade facilitation The simplifying of trade procedures.
can be most economically produced to points where they can be
most profitably sold. Trade policy Policy regarding import and export.
882 | Glossary
Tradeables Export-oriented products. Wealth tax A tax levied on non-productive assets whose value
exceeds Rs 1.5 mn.
Transfer pricing A method of pricing used by MNCs to carry
out effective transactions for intermediate products and other cur- WBP Whistle Blower Policy. A policy which provides protec-
rent inputs imported by their affiliates. tion to persons who give information about unfair employment
practices.
TRIMs Trade-related Investment Measures.
TRIPs Trade-related Intellectual Property Rights. World bank An organisation that provides financial assistance
to developing nations by giving loans from capital created by its
Two-tier board A board consisting of a supervisory- and a man- member countries.
agement board.
WPI Wholesale Price Index. An index that measures the GPI at
Unorganised enterprise All unincorporated enterprises and the level of second- or subsequent commercial transactions but
household industries other than the organised ones which are reg- before the transaction at the retail level.
ulated by any of the Acts. These enterprises do not maintain annual
accounts and balance sheets. WTO World Trade Organization. It facilitates trade between
member countries and enforces rules governing global trade.
VAT Value-added Tax. A tax levied on the sale of a commodity,
assessed on the increased value of that commodity at each point in X-inefficiency An inefficiency which takes into account the out-
the chain of production and distribution. puts that are produced with the given inputs.
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Index
Page numbers followed by a “t” or “b” indicate that the entry is included in a table or box.
A
Abid Hussain Committee on Trade Policies
B
backward states, selection, 430
call money centres, 171b
Cancun Ministerial Meeting (2003), 830, 854
capital account deficit, 273
(1984), 100, 130 balance of payments (BOP), 13, 92, 257, 264 capital account transaction, 500, 507,
absolute standard, 304 bank rate, 144, 150 509, 512
Acclerated Rural Water Supply Programme basic duty, 467 capital asset, 452
(ARWSP), 405 bench, 500, 770 transfer, 455
accommodating monetary policy, 151 bill market, 171. See also Indian financial capital formation, 173
Accredited Social Health Activist system capital market, 170
(ASHA), 382 biotechnology, 451 laws affecting, 170
additional duty, 463, 468, 775 black income, 418−419 capital market, 168, 170, 190
adjudicating authority, 500 impact on economic and social system, cash compensatory support, 100
agricultural finance, 172 419−420 cash reserve ratio (CRR), 144, 151, 595
agricultural income, 442, 449 black money, 418−419 balance of payments, 264, 270
agricultural sector, development, 230 factors responsible for generation, 422−423 capital account deficit, 273
agricultural taxation, 159 measures for, 423 current account deficit, 266
agriculture: fairer markets for all, 830, 841 blocked accounts, 498 external trade, 499, 811
policies towards, 68 blue-box measures, 851 money supply, 142, 147
Agri-Export Zones (AEZs), 736, 754, 763, 771 broad banding, 586b prices, 185
Air Traffic Controllers (ATC), 568 board constitution, 539 Central Adoption Resource Agency
allied sectors, 221, 401 Board for Reconstruction of Public Sector (CARA), 408
Amalgamation (Section 2(1B) of IT Act), 98 Enterprises (BRPSE), 610, 624 Central Excise and Salt Act (1944), 461
amber export subsidies, 851, 875 Bombay Plan (1944), 25 central excise revenue, 461
ancillary units, 98, 106, 115, 477 Bombay Stock Exchange (BSE), 174 central public sector enterprises (CPSEs),
Anglo-Americans, efforts of, 635 bond, 194, 479 243, 557
Annapurna, 289 bonus shares, 193 Central Sales Tax (CST), 470−471
Annual Plans (1990−91 and 1991−92), 35 Bretton Woods Conference, 634, 815 inter-state trade or commerce, 470−471
anti-dumping actions, 842 broad-based tax net, 159 reduction, 583
anti-dumping duty, 263, 468 broker, 200−201 Central Sales Tax Act (1956), 438, 448, 489
anti-dumping measures, 642, 830, 850 agreement with, 200 Central Statistical Organisation (CSO),
Appellate Board, 493, 515 placing orders with, 201 215, 234
Appellate Tribunal, 500 in secondary market, 201 Central Value Added Tax (CENVAT),
Article 265, 462 brokerage, 201 436, 462
Asian Development Bank (ADB), 796, 822 Budgetary Policy, 157, 584, 589 background of, 472, 476
objectives, 822 Bureau of Indian Standards (BIS), 9 on capital goods, 467, 489
Assam Gas Cracker Project, 109b business ethics, 517–521 eligibility of CENVAT credit, 478
assessee, 436, 442−443, 474 as competitive advantage, 517, 531 highlights of, 477
residential status, 439, 444 impact of globalisation, 5173, 530b inputs eligible for, 477−478
audit, 437, 539, 548, 550, 555 importance of, 517, 520 inputs not eligible for, 479
audit committees, 548−550 in Indian context, 727 other provisions of, 472
authorised dealer, 496 relevance of, 517−518 procedure for, 586−587
in foreign exchange, 496−497 Buyer−Seller Meets, 111 Centre for Monitoring Indian Economy
authorised person, 512 (CMIE), 681
Automatic Approval Scheme, 743 CENVAT Credit Rules, 476−480
automatic licensing, 101
automotives, 255
Ayurveda, Yoga and Naturopathy,
C
Cadbury Committee (UK), 548, 553
chairperson, defined, 500
chartered accountant, 500
child development, 395, 407
Unani, Siddha and Homoeopathy call money market, 168, 171 China, 17, 57, 218, 222, 291
(AYUSH), 385 call money rate, 171 Chidambaram, P., 104
888 | Index
climate change, 360 in United Kingdom, 598 business environment, 376

coal, 43, 68, 109, 179 in USA, 386, 676 and tariffs, 761, 773
Coal Bed Methane (CBM) Policy 109b in Wipro, 556 developing countries, 210, 270
code of ethics, 526−528, 548 corporate managers, 536 business environment, 828
codes of conduct, 528, 534 corporate social responsibility (CSR). See also enabling clause, 836
commercial banks, 61b, 69, 99 social responsibility growing number, 836
commercial paper, 172b, 194 emerging perspectives, 563, 576 need for flexibility, 836
commodity markets, 360 corporate tax, 436, 440 and tariffs, 761, 773
Common Minimum Programme (CMP), deductibility of income, 436 trade and development, 796, 822
36, 371, 615 set-off and carry forward of losses, 445 Development Commissioners (DCs),
Community Development Programme taxable income, 440, 446 743, 786
(CDP), 286 Union Budget 2008−09, 417 Development Economics, 345
Companies Act (1956), 196, 199 corruption, 9, 419 development finance, 172
Compensatory Financing Facility (CFF), 809 categories of solution to, 420 Development of Desert Areas (DDA), 404
competitive business environment, 23, 796 Costal Regulation Zone (CRZ), 785 Development, 25, 30, 36, 42
competitive market condition, 8 cost-push inflation, 158, 347 children, 37, 39
competitiveness, 35, 65, 69, 72, 108 Countervailing Duty (CD), 463, 468 defined, 31, 118, 126
in business ethics, 533 country risk, 11, 23 disabled persons, 220
Constitution of India, 116 creative provision, 118 human development, 220
consumer goods, 244, 249 crude oil process, 179 minorities, 57, 220
Consumer Protection Fund (CPF). affect on global commodity prices, 179b rural development, 29, 42
See Investor Protection Fund (IPF) cumulative convertible preference scheduled castes, 36, 80
consumerism, 354, 388, 659 shares, 193 scheduled tribes, 100, 220
consumption pattern, 280 cumulative preference shares, 193 women, 28, 38, 106, 295
Contingent Credit Lines (CCL), 806, 809 curative provision, 118 developmentalist view, poverty, 276
Contingent Supplemental Reserve Facility currency, 42, 143, 145 Digital Rights Management (DRM), 687
(CSRF), 806 current account deficit (CAD), 10, 49, 67 direct tax, 439, 441
controllable factors. See internal factors components, 98, 100 Directive Principles of State Policy, 116
conventional series, 215, 234 current account transaction, 500, 509 disclosure, 192, 199, 423
convertible bond, 194 custom tariff, 468, 489 features, 199
cooperative banks, 169 additional duty, 463, 468 discount market. See bill market disguised
corporate accountability, 563, 574 anti-dumping duty, 468 unemployment, 307
corporate board, 538 basic duty, 467 disinvestment, 97, 610, 615, 619
and directors, 538 duty on bounty-fed articles, 466 current policy, 164, 625
corporate conduct, 535 export duty, 466, 468 National Investment Fund (NIF), 627
measures to improve, 552 protective duty, 874 strategies, 663
corporate governance, 534–551 customs duty, 101, 463 Disinvestment Programme (2007−08),
best practices in, 535 cut-off amount, 275, 304 621, 629
board constitution, 539 dispute settlement mechanism, 717, 830,
board responsibility, 540
challenges before managers, 535, 554
code of conduct for, 535, 550
D
dealers, 143, 645
838, 850
District Industries Centre (DIC), 91
Dividend Distribution Tax (DDT),
corporate boards and directors, 537 registration, 542 442, 783
defined, 534 debentures, 194 Doha Development Agenda, 803, 835, 853
factors for need of, 644 debt markets, 190, 606 Doha Ministerial Meeting (2001), 830, 853
financial institutions, 71, 553 Decision Support System for Integrated domestic supply management, 185
in Germany, 543, 545 Fertilizer Recommendation Domestic Tariff Area (DTA), 742
in Japan, 546–547 (DSSIFER) drinking-water supply, 405
importance of, 535–536 Defence of India Act, 736 Drought-Prone Area Programme
and India, 535, 552 deficit financing, 48, 149 (DPAP), 404
need and importance of, 535–536 policy, 155 Dutt Committee, 125
new approach to, 548 deindustrialization, 866 Duty Entitlement Passbook Scheme
operational management and control, 538 demand-pull inflation, 347–348 (DEPB), 746
problems, 537 causes of, 347
regulatory framework, 553, 556
reporting and disclosure, 538–539
role of, 536
demonetisation, 423
Depositories Act, The, 1996, 204
depression, 580, 830, 867
E
East India Company, 661, 710
shareholder democracy and protection of Derivatives and New Products Departments economic backwardness, causes, 424−425
minority interest, 538 (DNPD), 195t economic blocs, 9
in Tata Chemicals, 555 developed countries, 17, 57, 67, 799 economic development, 25, 82, 154, 237
Index | 889
role of industries, 235 competitive market condition, 8 export performance, 647

role of rural sector, 304 cultural factors, 5 Export Processing Zone (EPZs), 772
unbalanced sectoral development, 245 defined, 2 export promotion, 102, 113
economic equality, attainment, 28, 317 ecological factors, 7 import liberalisation, 102
economic factors. See also environment economic and financial, 18 involvement of state government in, 734
factors external, 1–2 sector-specific packages, 753
economic growth, 28, 36, 75, 150 factors, 5 Special Economic Zones (SEZs), 736
trends in, 796 features, 3 Export-Import (EXIM) Policy (1985), 100
economic history, phases of, 872 geographic factors, 6 Export-Import (EXIM), 100
economic indicators, 333, 362 government policies, 7 Export-Import Policy (1994), 285
economic inequality, reduction, 28 importance of study, 4 export-oriented unit (EOU), 588
economic planning, 27, 47, 81 internal, 1–2 exports, 102, 238, 683
achievement, 33 labour factors, 7 promotion measures, 736, 760
economic reforms, 66, 71 legal factors, 7 Extended Fund Facility (EFF), 808
advantages, 530 location factors, 8 External Commercial Borrowings
areas of second wave, 160 political, 6 (ECBs), 779
defined, 126, 252 political factors, 6 external debt, 156, 166
economic development and, 82 social factors, 5 external factors, 220
vs monetary policy, 151 technological factors, 6 external sector, 81
shortcomings, 158 environment risk, 11–13 external trade, 499
techniques of, 154 management, 1, 8
Economic Survey (1994−95), 819
economic system, types, 351
educated unemployment, 308
methods of assessment, 11
equity markets, 190
equity, 106, 126
F
Fifth Five-Year Plan (1974−75 to
education, 299, 372 defined, 193 1978−79), 33
and health, 296 kinds, 193 final goods, 212
e-governance, 110, 372 essential commodities, 181 finance, defined, 198
Eighth Five-Year Plan (1992−93 to ethical business, benefits, 519 Finance Act, 1994, 262, 462
1996−97), 35 ethical environment, factors influencing, 525 Financial Dimensions and Macro Parameters
electric power, 68 ethics tools, 526 of the Eighth Plan (1992−97), 97
Eleventh Five-Year Plan (2007−12), 38 ethics, 517 financial environment, 1, 18
challenges, 54–55 code of ethics, 526 automotives, 255
disparities and divides, 31 importance of business ethics, 517 economic environment, 18
employment, 34, 36 management, 521 multilateral initiatives and policies, 21
macro-economic indicators, 10, 12 need in global change, 523 financial market, 21, 172, 194
objectives, 31 relevance in business, 518 types, 172
policy approaches, 874 European Economic Community (EEC), 114 financial repression, 161, 222
strength of economy, 70 excise duty, 441 Financial Sector Adjustment Loan
vision, 30, 51 exclusive marketing rights (EMRs), 848 (FSAL), 594
Emergency Financing Mechanism (EFM), 807 executive directors, 535, 541 financial sector, 81, 130, 164, 222
Employment Assurance Scheme (EAS), EXIM performance, 736 financial sector reforms, 223
77, 158 import structure, 748 financial speculators, 360
Employment Guarantee Scheme, 220 export structure, 749 financial system, 171
employment programmes, 29, 56 EXIM policies, 736 classification, 171
employment, 28, 32, 35, 158, 240 EXIM Policy (1997−2002), 750 functions, 172
organised sector, 311 EXIM Policy, (1999−2000), 752 structure, 172
Empowered Board, 131 EXIM Policy (2000−01), 752 financing facilities and policies, 806
empowerment, 28, 36 EXIM Policy, (2001−02), 754 firms, 504, 681
enterprise, 1–3, 111, 821 EXIM Policy, (2002−07), 754 first credit tranche, 808
medium, 112 Five-year EXIM Policy, 750 First Five-Year Plan (1951−52 to
micro, 111 Modified EXIM Policy (1998), 751 1952−56), 31
small, 111 objectives, 715 First World War, 84, 864
entrepreneurs, 106 EXIM Policy (1997−2002), 750 fiscal adjustment, 162
entrepreneurship, 53 EXIM Policy, (1999−2000), 752 Fiscal Commission (1921−22), 84
entrepreneurship development institutes, 111 EXIM Policy, 2000−01, 752 fiscal corrections, 182, 389
Entrepreneurship Development Programme EXIM Policy, 2001−02, 754 achievement of, 389
(EDP), 99 EXIM Policy, 2002−07, 754 fiscal deficit, defined, 70, 81, 182
Environment, 1 exim scrip, 101, 261 fiscal policy reforms, 159
affect on company’s policy, 4 export duty, 466 fiscal policy statement, 2008−09, 142, 160
and strategic management, 8 export houses, 101 fiscal policy, 142
890 | Index
assessment, 161 foreign investors, relief to, 163, 849 defined, 638
concept, 142 foreign security, 494, 512 effect of, 648
economic crisis, 161 foreign technology agreements, 96, 131 features, 638
financial repression, 161 industries for approval, 131 government measures towards, 641
financing development priorities, 162 foreign tie-ups, 584, 591 impact on Indian industry, 642
fiscal adjustment, 162–163 Foreign Trade Policy (1991), 257, 259 role of transnational corporations, 635
Indian fiscal situation, 161 new export promotion schemes, 257 rules of reforms, 640
long-term challenges, 163 special-focus initiatives, 257 studies on, 634
measures necessary for reforms, 148 forests, 299, 410 threats to, 660
objectives, 143 Fourth Five-Year Plan (1969−70 to views of scholars, 633
various definitions, 142 1973−74), 32 Goods & Services Tax (GST), 472
Five-year EXIM Policy, 750 Fourth Plan (1969−74), 178 governance. See corporate governance
Five-year plans, 25, 28 price situation during 1970s, 178 governance, improving, 55, 413, 544
achievements, 45 Framework Agreement (2004), 760, 855 government finance, 172
failures, 45 Free Trade Zone (FTZ), 468, 774 government policies, foreign
growth performance, 49 Free Zones (FZ), 774 investment, 115
focus market schemes, 761 freer trade, 835 government securities (G-Secs), 144, 170
focus products, 761 fuel and power, 336, 343 Gowda, H. D. Deve, 80, 103
food price index, 363 green export subsidies, 851
Food-for-Work Programme, 288
foreign currency, 493
foreign direct investment (FDI), 92, 163, 268
G
G-20 Alliance, 855
green-box measures, 851
gross domestic savings (GDS), 174, 227
gross national product (GNP), 212, 234
adverse effects, 103 gender budgeting, 407 Gujral, I. K., 103
changes in recent years, 105 General Agreement on Trade and Tariffs
determinants of, 666
East Asian perspective, 678
growth and domestic investment, 682
(GATT), 832b
history, 832b
objectives, 832
H
handicraft sector, initiatives by
in construction sector, 670b principles, 832 government, 107
India and China: sectoral composition General Agreement on Trade in Services handloom sector, 107, 767
and other differences, 680 (GATS), 796, 801 promotion, 640, 766
issues, 680 better access to markets, 803 initiatives by government, 766
mantras for, 667b intellectual property, 803 hardcore reforms, 647
need for, 665, 669 key rules, 802 health, 394, 403, 425
new policies, 692 modes of delivery, 801 and education, 60
pre-liberalisation policies, procedural principles and obligations, 801 higher education, 39, 375
simplification, 135, 474 progressive liberalisation, 803 Hong Kong Ministerial Conference,
rationalisation, 165, 317 scope, 801 December 2005, 849
sectoral distribution, 672 services sector, 802 Hong Kong, 440, 833
foreign exchange bottleneck, 347, 351 General Index Register Number, 457–459 household by income (1990−2000), 17
Foreign Exchange Certificates (FECs), 102 Generalised System of Preferences (GSP), 858 domestic developments in trade, 18
Foreign Exchange Management Act (FEMA) Geneva Ministerial Meeting (1998), 830 other developments, 18
(199), 438, 499, 515 Geneva Package, 2004, 852 relations with China, 17
applicability of, 503 Germany, 544, 546 human development, 292, 365
concepts under, 503 gilt-edged market, 170 attending, 369
determination of residential status, 446 gilt-edged securities, 144 gilts, 147 building capabilities of women, 362
residential status, 444 global economic environment, 21, 798 concept, 365
Foreign Exchange Regulation Act (FERA) global finance markets, 169 education, 326, 366, 372
(1973), 90, 131, 493 channels, 143, 419 fighting climate change, growth of, 386
foreign exchange, 5, 102, 120 monetary policy measures, 149 initiatives for social sector, 371
authorised dealers, 270b, 590 global inflation, 358 poverty and, 368
capital account transactions, 507 global reforms, rules, 633, 640 reasons for necessity, 363
current account transactions, 507–509 global social responsibility, 572 Human Development Report (2007−08),
dealing in, 496 Global System of Trade Preferences (GSTP), 365, 389
export of goods and services, 513 796, 826 Human Poverty Index (HPI), 392
realisation and repatriation of, 520 globalisation, 633, 663 human resource, 365
regulation and management of, 512 Anglo-American effort, 635 Defined, 365, 369
restrictions on dealing, 496 aspects of, 635 empowerment, 368
Foreign Institutional Investors (FIIs), 205, 642 assessment, 656 equity, 367
Foreign Investment Policy (1968−90), 669 challenges, 636 importance, 366
Foreign Investment Promotion Board concept, 637 productivity, 368
(FIPB), 692 critical appraisal, 658 sustainability, 368
Index | 891
I
Iceland, 392
industrial clusters, 587
industrial development. See development
Industrial Estates (IE), 112
science and technology, 65
structure of effective demand, 239
support to agriculture, 246
industrial finance, 170 wealth by, 231, 573
illegal income, 233
industrial growth, 117, 151 industrially backward areas, 91, 429
Import Control Order, 737
declining rupee value, 599 Industries (Development and Regulation)
import licensing, 101, 257, 737
deteriorating balance of trade, 598 Act (1951), The, 117, 119
import structure, 748
disastrous consequences of entry of inflation, 345, 347
import substitution, 35, 100
MNCs, 583 calculating inflation in India, 361, 363
Import Trade Control Handbook of Rules and
mounting external debt and liabilities, 600 causes, 349
Procedures, 737
portfolio investment and stock control of, 354
Import−Export Pass-Book Scheme,
market, 268 cost-push inflation, 347, 349
100–101
industrial licensing, 95, 116 demand-pull inflation, 347, 363
Import-Export Policy, 100, 259
approach, 121 developing economics and, 347
objectives, 100
compulsory, 106, 135 distributional effects, 352
imports, 60, 67, 100, 238
need, 221 effects of production, 354
incentives, 105, 683
objectives, 117 effects on consumption and welfare, 351
inclusive growth, 38, 50
simplification of, 135 global inflation, 358
poverty and, 220
stages, 238 measures, 355
Income Tax Act, 438, 441, 443 other economic effects, 354
industrial licensing 1991 and after
categories of assesses, 441 various definitions, 352
liberalisation in, 129–130
senior citizens, 289 Industrial Licensing Act, 1951, 116–117 WPI−general trends, 334
women, 220, 287 Industrial Licensing Policy (1970), 123 inflationary economy, 331–332
income tax, 436, 439 Industrial Licensing Policy (1973), 140 features, 331–332
agricultural income, 442, 449 Industrial Licensing Policy (1977), 127 Information Technology (IT), 110, 431
assessing officer, 457 Industrial Licensing Policy (1988), 128 Infosys, 555
assessment, 453–454 Industrial Licensing Policy (1989−90), 123 Infrastructure, 60
capital asset, 452, 455 Industrial Licensing Policy Inquiry development, 60
deemed to accrue, 452 Committee (1996), 724 growth by, 60
deemed to be received, 452 Industrial Licensing Policy, 133, 140–141, 724 rural, 60
heads of income, 445–446 Industrial Licensing Policy, 133, 140–141 infrastructure, development, 112
liability of shareholder, 452 industrial policy, 6, 8, 26, 83 input tax credit,. See also value added tax
maximum marginal rate, 442 case study, 114 instability, 158, 531, 658, 667
residential status of an assessee, 444 First World War, 84, 864 institutional reforms, 165, 315, 414
Union Budget 2008−09, 417, 461 Second World War, 84 Integrated Disease Surveillance Project
Indian banking system, 169 industrial policy issues, 85 (IDSP), 384
composition, 169 Industrial Policy Resolution (1948), 87–88, Integrated Rural Development Programme
Indian capital market, 168 103, 114 (IRDP), 158, 304
Indian currency, 467 activities, 87 intellectual property, 102
Indian custom waters, 494 Industrial Policy Resolution (1956), 26, 85, 87 internal debt, 156, 166
Indian economy: sectoral sources of growth, approach to industrialisation, 89 internal factors, 2
1951−2004, 94 classification of industries, 88 International Bank for Reconstruction and
Indian financial system, 168, 172 objectives, 86 Development (IBRD). See World
composition, 168 Industrial Policy Resolution (1991), 725 Bank (WB)
Indian capital market, 168, 170 industrial sector, 20, 79, 88 international business environment, 735
Indian money market, 168, 170 industrial securities market, 170 nature of, 735
Indian financial systems, 168 industrial unemployment, 308 international cultural exchange, 651
Indian Industrial Commission (1916), 84 industrialization, 235, 246 international economic organisations, 634, 804
proposals, 84 challenges and outlook, 255 International Finance Corporation (IFC),
Indian money market, parts, 168 during plan period, 246 and, 796
Indian rupee, 508, 583 economic development and, 244 India, 820
devaluation of, 508 economic stability, 244 main features of assistance, 821
indirect taxes, 158, 165, 441 environment issues, 241 mission, 820
defined, 441 growth of infrastructure, 248 objectives, 821
individualism, 543, 659 inadequacies of the programme, 242 International Financial Services Centre
industralisation, 235 job opportunities, 245 (IFSC), 782
urbanisation, 75 lesser pressure on land, 245 International Monetary Fund (IMF), 21, 805
concept, 235 ownership pattern in Indian industries borrowings, financing facilities and
pattern, 237 (1997−98), 241 policies, 806
stages, 237 recent industrial growth, 235, 248 concessional lending facility, 809
892 | Index
conditionality, 810 and growth of Indian economy, 603 micro small and medium enterprises (MSE)
memorandum to, 584, 725 industrial growth, 124, 255 Development Act, 2006, 133, 252
monetary policy and, 143 industrial licensing 1991 and after, 123 micro, small and medium enterprises
objectives, 149 issues and challenges, 580 development organisation, 108–109
organisation, 187, 215 meaning of, 664 micro-credit, 289–290
other IMF policies and procedures, 810 measures, 711 micro-enterprise, defined, 223
resources, 814 and MNCs, 724 Minerals and Metals Trading Corporation
review of facilities, 809 mode of entry: Greenfield and M&As, (MMTC), 738
special lending facilities, 809 path, 676 Minimum Alternate Tax (MAT), 783
technical assistance, 812 policy changes, 582 ministerial meetings, 847
International Price Reimbursement Scheme reform achievements, 595 Cancun Ministerial Meeting (2003), 854
(IPRS), 743 trends and patterns in FDI Doha Ministerial Meeting (2001), 853
International Trade Centre (ITC), 796, 805, 824 inflows, 670 Geneva Ministerial Meeting (1998), 852
International Trade Organisation (ITO), 799 Liberalised Exchange Rate management Hong Kong Ministerial Conference,
investigating authority, 196–198 System (LERMS), 584, 590 December 2005, 849
incremental capital output ratio (ICOR), 605 License Raj, 122 Seattle Ministerial Meeting (1999), 853
Investor Protection Fund (IPF), 203–204 Licensing, 422 Singapore Ministerial Meeting (1996), 851
ISO 9000/14001 Certification, 113 exemptions from, 772 minorities development, 410–411
IT-enabled products, 856 liquidity, 595 mixed recall period (MRP), 278, 304
Listing Agreement, 554, 558 model tripartite agreement, 200
J local content requirements (LCR), 682

locational policies, 8
low industrial growth, 643
Modified Value Added Tax (MODVAT)
Scheme, 472, 587
background of, 472
Jawahar Gram Samridhi Yojana (JGSY), 287
on consumable stores, 473
M
Jawaharlal Nehru, 26, 75, 85, 223
MODVAT Credit (Rule 57A), 473
objectives during independence, 85
on packing material, 472
joint sector, 125–126, 240
macro-economic policy, 143 monetary policy, 142−143, 147
Juvenile Justice (Care and Protection of
tools, 143 aim, 146
Children) Act, 2000, 408
management board, 545, 550 concept, 395
K
Management Development Programmes IMF and, 369
(MDPs), 113 impact on domestic industry and
management, strategic, 24 exporters, 148
Kasturba Gandhi Balika Vidyalaya impact on interest rate, 147−148
managing ethics, 523−524
(KGBV), 373 impact on stock markets and money,
benefits, 524
Kerala, 327–328 supply, 148
guidelines, 524–525
highest employment, 327 objectives, 143
key roles and responsibilities, 526
Khadi and Village Industrial Commission RBI’s measures, 149−150
market imperfections, 346, 351
(KVIC), 105 vs fiscal policy, 149
Market Intermediaries Registration and
King Committee (South Africa), 548, 561 money at call and short notice, 164
Supervision Department (MIRSD), 195t
Kishori Shakti Yojana (KSY), 407 money changer, 455, 457
market opportunities (2003−2008), 14
Krishi Shramik Suraksha Yojana, 289 money market, 183
Market Regulation Department (MRD), 195t
Kumar Mangalam Birla Committee, 549, 554 capital market, 167
marketing assistance scheme, 111
Kyocera, 568 concept, 162
Marketing Development Assistance (MDA)
Kyoto Protocol, 568 defined, 162
Scheme, 113
primary market, 167−168
L
mass hunger, 276
Maulana Azad Education Foundation, 411 secondary market, 168
medium enterprise, defined, s, 112 money supply, 145, 148
labour policy, 86 MFN treatment, 801–802 concepts of measuring, 142
land reforms, 286 Micro and Small Enterprise Cluster defined, 145
legal practitioner, 501 Development Programme measures for regulation, 148
Letter of Intent (LOI), 120, 141 (MSECDP), 112 Monopolies and Restrictive Trade Practices
liberal monetary policy, 151b micro and small enterprises (MSE), 108. (MRTP) Act, 1969, 491, 507
liberalisation, 672 See also industrialisation monopolistic trade practices, 492
assessment, 161 entrepreneurship and skill New Industrial Policy, 1991, 115
background, 830 development, 113 overview, 791
changing sectoral composition of FDI, 664 infrastructure development, 61, 85 restrictive trade practices, 491–492
changing source of FDI in India, 674 measures for export promotion, 113 Monopoly Restrictive Trade Practices
economic liberalisation, 871 National Small Industries Corporation, (MRTP), 90
future expectations, 630 99, 106, 110 monthly per capita expenditure
global liberalisation, 829 sector, policies, 98 (MPCEs), 282
Index | 893
Most Favoured Nation (MFN), 828 limitations in estimation, 233 features, 106
movement of natural persons (Mode 4), 819 measures, 201 handicraft sector, 107
MSME Development Act, 2006, 108b, 253b net national product (NNP), 212–213 handloom sector, 107
Mudaliar Committee (1962), 258, 264 NIC and CSO estimates, 215 small scale industries, 107
Multilateral Agreement on Investment reasons for slow growth, 230 tiny sector, 107
(MAI), 849 revised series, 215 objectives, 105
Multinational Corporations (MNCs), 713–715 sectoral investment and ICOR, 231−214 New Trade Policy (1991), 264
assessment, 713 suggestions to raise level of growth rate, new-issue market, 170
a blow to domestic companies, 727 230−231 91-day treasury bills, 171
critics of, 725 National Investment Fund (NIF), 627 Ninth Five-Year Plan (1997−98 to 2001−02),
defined, 714 fund managers, 628 30, 48
dominance over Indian economy, 724 investment strategy, 628 No Logo: Taking Aim at the Brand Bullies, 654
favourable impact of MNCs, 722 objectives, 627 Non-Banking Financial Companies
future, 790 structure and administrative (NBFCs), 168
implications on Indian economy, 666 arrangement, 626 non-discrimination, 801
in LDCs, 760 National Manufacturing Competitiveness non-executive directors, 535
liberalisation, 724−725 Council (NMCC), 108 non-resident Indian, 449
meaning, 714 National Minorities Development & Finance Non-Resident Indians (NRIs), 96
objectives, 715 Corporation (NMDFC), 411 non-resident ordinary (NRO), 270b
origin, 713 National Plan of Action, (NPA), 28, 81 non-scheduled banks, 169
reasons for growth, 721 National Programme of Mid-day Meals NRI remittances, 584–585
role in economic importance, 722 Schools, 384b Nutrition programme for Adolescent Girls
mutual recognition agreements (MRAs), 856 National Rural Employment Programme, 318 (NPAG), 407
National Rural Health Mission (NRHM), 381
N
Narayana Murthy Committee, 549, 561
National Safaikaramcharis Finance
and Development Corporation
(NSKFDC), 409
O
Office of Investor Assistance (OIAE), 203
Naresh Chandra Committee Report National Sample Survey Organisation Offshore Banking Units (OBUs), 754
(2002), 549 (NSSO), 275 Open General License (OGL), 66
National AIDS Control Programme, 384b National Small Industries Corporation open unemployment, 307, 321
National Commission for Protection of Child (NSIC), 99, 106, 110 open-market operations (OMO), 166
Rights (NCPCR), 407 marketing assistance scheme, 111 operational management and control, 537
National Commission for Women performance and credit ranking, 110 organisation, 99, 109
(NCW), 407 National Social Assistance Programme aspects, 37
National Commission of Enterprises in the (NSAP), 287 strength, 2
Unorganised Sector (NCEUS), 108 National Task Force on Corporate weakness, 2
National Development Council (NDC), Governance (India), 548 organised industries, 244
25, 37 National Vector Borne Disease Control organised sector, 168
functions, 27 Programme, 383b Overseas Corporate Bodies (OCBs), 96, 591
members, 27 National Virtual Academy (NAV), 303
National Drinking Water Mission
(NDWM), 405
National Foundation for Corporate
Nehru, Jawaharlal, 26, 75, 85
net foreign exchange (NFE), 742
net national product (NNP), 204. See also
P
parallel economy, 418, 435
Governance (NFCG), 554 national income
participating preference shares, 193
National Income Committee (NIC), 214 net state domestic product (NSDP),
per capita income and consumption, 424
CSO estimates, 215 425−427
Permanent Account Number (PAN), 457, 489
features, 232 net-income method, 215
obtaining, 457
sectors, 232 net-product method, 216
usefulness, 457
national income, 211−234 New Industrial Policy (1991), 87, 91
Person Resident in India (PRI), 494, 501
after independence, 214 foreign investment, 87, 90
Person Resident Outside India (PROI), 495
concept, 212 foreign technology, 95
personal income (PI), 213
consumption basket, 213−215 industrial licensing, 95
plan model, 31
conventional series, 205 objectives, 90, 95
planning, 29
CSO’s new series, 205 policy relating to MRTP Act, 95
emergence of, 25, 181
defined, 211 public sector policy, 95, 103
and liberalisation, 26
estimation methods, 204 sectoral sources of growth, 1951−2004, 94t
objectives, 25−28
factor cost, 203 small-sector policy, 95, 98
economic equality, 28
features, 232 new policies, 692
economic growth, 28
gross national product (GNP), 202−203 New Small-Sector Sector Policy (1991), 83,
economic self-reliance, 30
inclusive growth, 214−215 105, 115
full employment, 29
894 | Index
modernisation of various sectors, 30

redressing imbalances, 31–32
social justice, 28
factors contributing to global increase in
prices, 177−179
objectives, 176
R
railways, 62, 582
Second Plan, 26 price movement since independence, rapid growth, 80, 311
strategy, 22 168, 178 RBI’s monetary policy, 2008−09, 149
Planning Commission (March 1950), 25 prices of industrial products, 168, 183 measures, 149
functions, 27 primary education, 288, 300 real effective exchange rate (REER), 19
members, 26 primary market, 190 Recent Industrial Licensing Policy, 116, 133
policy decisions, 131–134 resource mobilisation theory, 190t recession, 561
industrial licensing policy, 130 vs secondary market, 187 Recognized Provident Fund, 452
consequences, 122 private sector, 47 Red Book, 737
foreign investment, 131 and public, 134 red export subsidies, 851
foreign technology agreements, 131 role in industrialisation, 244 regional imbalances, 424
public sector, 132 privatisation, 613 causes of, 424
MRTP Act, 132 concept, 613 indicators, 424
policy relating to MRTP Act, 97 disinvestmet strategies, 615 regional inequality, 426
pollution free technology, 7 objectives, 613 Regional Stock Exchange, 187
legislative measures, 7 Processcum Product Development Centres regular lending facilities, 808
ports, 60 (PPDs), 99 regulatory overlaps, 483
poverty alleviation programmes, 274, product-selling approach, 567 relative standard, 274
286, 417 progressive taxes, 157, 159 Reliance Industries Ltd (RIL), 559
poverty alleviation, 274, 288 Project Approval Board (PAB), 126 REP licensing, 101
corporate sector and, 605 Provisions of Industries (D and R) Act, Repatriate to India, 502
outlook for, 290 1951, 118 reporting and disclosure, 538
through micro-credit, 289 creative provision, 119 repressionist policies, 161
poverty line, 275, 292 curative provision, 119 Research and Information System (RIS), 681
people living under, 274 preventive provision, 118 Reserve Bank of India (RBI) Act, 1934, 169
poverty, 276–277 Section 10, 119 permission for, FII, 586
causes, 276–277 Section 13, 119 resident in India, 444−445
concept, 274 Section 11, 121 resources gap, 347
decline of, controversy over, 268 public debt policy, 154 restrictive monetary policy, 151b
defined, 274 public enterprises, 155 Revised National Tuberculosis Control
historical trends in poverty statistics, 277 development, 155 Programme (RNTCP), 383b
inclusive growth and, 504 public expenditure administration, risk disclosure scheme, 201
measures for reduction, 432 154−155 risk management, 202–203
Pradhan Mantri Gram Sadak Yojana public expenditure policy, 154 risks in strategic management, 9−12
(PMGSY), 288, 412 infrastructure development, 61, 85 security risk, 9
Pradhan Mantri Gramodaya Yojana public enterprise development, 155 government effectiveness risk, 10
(PMGY), 288, 392 social welfare and employment tax policy risk, 10
Pradhan Mantri Gramodaya Yojana—Rural programmes, 155 foreign trade and market risk, 12
Drinking Water Project, 288 support private sector, 155 infrastructure risk, 11
preference shares, 135, 193 public health programmes, 383b political stability risk, 10
pre-liberalisation policies, 668–670 Public Sector Enterprises (PSEs), 132, 610 legal and regulatory risk, 10
acute foreign exchange situation, 669 objectives, 613 macro-economic risk, 10
First-Plan Period, 668 performance, 624b financial risk, 12
Foreign Investment Policy (1968−90), 669 public sector outlay distribution, 25 roads, 62
Second-Plan Period, 669 eighth plan, 35 Rolling Settlement, 201−202
selective foreign exchange policy period fifth plan, 42t rural development, 395. See also human
(1960s−68), 669 first plan, 49t development
preventive provision, 118 fourth plan, 49t areas of scope, 400
price, 168, 178 ninth plan, 49t critical analysis, 396
industrial products, 183, 186 second plan, 49t defined, 395
situation during 1951−71, 178 seventh plan, 49t integrated rural development, 397
situation during 1970s, 178−179 sixth plan, 49t relation with urban development, 403
situation during 1980s, 180−181 third plan, 49t rural water supply, 405
situation during 1990s, 182−183 public sector, 103 sanitation, 405
situation during Janta rule (1977−79), 180 role in industrialisation, 749 strategies, 404
price policy, 178, 183 public sector policy, 95−96, 160 suggested policies, 401
aim, 183 Pulse Polio Immunization Programme, rural economy. See rural sector
control of expenditure, 183 383b rural infrastructure, 76
Index | 895
Rural Landless Employment Guarantee services for, 384 Special Additional Duty (SAD), 263, 463
Programme, 285 Union Budget 2008−09, 417 Special Economic Zone (SEZs), 773,
rural population, 278, 280 service-sub sector, 90 775–776, 782
rural unemployment. See disguised set-off, 445 benefits, 702−704
unemployment Seventh Five-Year Plan (1985−86 to concept, 772
1989−90), 34, 285 controversy, 789
S
sales tax, 422−425
sexual awareness, 652
SEZ Act (2005), 761−762
impact of, 761
defined, 773
export promotion, 786
features and facilities, 781
Samagra Awaas Yojuna, 288 SEZ developers, 783 features, 781
Samproona Grameen Rozgar Yojana shareholder democracy and protection of history, 772−773
(SGRY), 287 minority interest, 538 in India, 776
Sanitary and Phytosanitary Measures Shiksha Sahayog Yojana, 289 meaning, 772
(SPS), 844 Silent Lacunar Infarction (SLI), 680 objectives, 701
sanitation, 58, 406 Singapore Ministerial Meeting (1996), provision of rules, 789
Sarva Shiksha Abhiyan, 371 830, 851 Special Economic Zone Reinvestment
savings, 266, 319 action for LDCs, 852 Reserve Account, 782
scheduled banks, 169 government procurement, 852 Special Incentive Package Scheme (SIPS), 110
scheduled castes development, 409 labour standards, 852 spectacular exemptions, 121
scheduled industry, 117, 119 Singapore issues, 852 stand-by arrangement, 808
scheduled tribes development, 409 Sixth Five-Year Plan (1980−81 to state finances, 70
science and technology, 42, 65 1984−85), 33 deterioration, 70
science and rural development, 417 skill development, 57, 113 State Industrial development corporation
Seattle Ministerial Meeting (1999), 830 Small Industries Development Bank of India (SIDC), 114
Second Five-Year Plan (1956−57 to (SIDBI), 99 statutory liquidity ratio (SLR), 147, 355
1960−61), 32–33 Small Industries Development Organisation strategic management, 115, 562
Second World War, 84 (SIDO), 99 risks in, 115
secondary education, 294 Small Scale Industrial Policy (1991), 99 Structural Adjustment Policy (SAP), 77
secondary market, 187, 190 Small Scale Industries Development Structure Adjustment Lending (SAL), 814
broker subbroker, 187 Corporation (SSIDC), 99 sub-broker, 200
financial products, 193 small-scale industries, 99 brokerage, 201
role of SEBI, 195, 210 initiatives in policies by government, 99 charges levied on investors, 201
vs primary market, 190 small-scale sector, policies for in secondary market, 181
Secretariat for Industrial assistance (SIA), 133 improvement, 98 placing orders with, 201
sectoral employment, 309 small-scale unit, 98 subsidies, 70, 89
sectoral policy issues, 739 small-sector policy, 95, 98 super tax. See corporate tax
Securities and Exchange Board of India Act, social consciousness, 401 Support to Training and Employment
The, 1992, 198 social defence sector, 412 Programme (STEP), 407
Securities Contracts (regulation) Act, social infrastructure, 81 sustainability, 53, 81, 405
The (1956), 194, 204 social injustice, 433 Swarna Jayanti Gram Swarogzar Yojana
securities law, 557 social justice, 317 (SGSY), 50−51, 287
securities transaction, 201 social responsibility Swarna Jayanti Shuhri Rozgar Yojana
Securities Transaction Tax (STT), 201 challenges to, 575 (SJSRY), 288
Security Exchange Board of India (SEBI), concept, 575
187, 194, 196
functions, 188
powers, 196
need for, 566
obstacles to, 641
of business in India, 563, 576
T
Targeted Public Distribution System (TPDS),
redefining, 584 to community, 569 81 tariffs
regulatory requirements for corporate to global business environment, 572 and developed countries, 839
debts securities, 199 to government, 213 and developing countries, 839
risk management, 202−203 to human resources, 568, 570 binding of, 839
role in secondary market, 187 to prospects, 568 Tata Chemicals, 555
security receipt, 193 to society and ecological environment, 571 tax holiday, 461
selective credit control (SCC), 151 towards customers, 572 tax invoice, 442
self-help groups (SHGs), 287 vs corporate accountability, 563, 574 tax rates
self-reliance, 37 social sector, 371–372 around the world, 480, 651
service tax, 201 initiatives, 371–372 tax systems, 9
Exemption for Goods Transport Agency social security programmes, 285 taxable income, 440
(GTA), 202 socio-economic obligation, 565 taxation policy, objectives, 154
exemption for small-service providers, 202 Special Action Programme (SAP), 814 tax-payer’s identification number (TIN), 88, 97
896 | Index
Technology Development Cell

(TDC), 99
telecommunications, 601, 611
U
uncontrollable factors. See external factors
in business, 521
leadership, 522
managerial, 522
Tenth Five-Year Plan (2002−07), 37, 45 underdeveloped countries Village Knowledge Centres (VKC), 303
central finances, 45 business environment, 235, 315 Village Resource Centres (VRC), 303
employment, 37 underemployment, 304, 319 virtue matrix, 567b
external sector, 81 unemployment and underemployment, 277 “Vision 2020”, 30
financial sector, 54 unemployment Vishesh Krishi Upaj Yojana, 761
fiscal corrections, 70t concept, 306 Voluntary Disclosure Scheme (1997), 423
growth, equity and sustainability, 42 defined, 306 Vorstrand, 545
macro-economic parameters, 160
W
factors responsible, 314−315
measures, 152 government policy measures, 318−319
objectives, 153 magnitude, 308−309
population, 75 measures for, 318−319 Wanchoo working group, 430
programmes, 165 overview of, 319−320 wealth tax, 439
sectoral allocations, 45 types, 307 white-collar unemployment, 308
sectoral policy issues, 44 uniform recall period (URP), 278 Wipro, 556, 609
state finances, 45 Union Budget (2007−08), 140 women development, 28, 39
target, 52 Union Budget (2008−09), 417 World Bank (WB), 796, 813
tertiary sectors, 232 Union Budget (2008−09), 417 assistance to India, 815
textiles, 238, 251 corporate tax, 436, 461 evaluation, 815
Third Five-Year Plan (1961−62 to on central excise, 441−442 financing policies, 814
1965−66), 29 on custom tariff, 468 objectives, 813
tiny sector, 91, 106 service tax, 436 organisation, 813
initiatives by government, 91 agriculture, 450 World Trade Organisation (WTO), 634,
tiny unit, 115 Unit Trust of India (UTI), 170, 502 751, 817
TISCO, 570 United Nations Conference on Trade and a decade, 610−611
trade remedies, 841 Development (UNCTAD), 796, 805 and India, 819−820
anti-dumping actions, 842 functions, 823 and ministerial procedures, 757−758
safeguarding procedures, 842 principles, 823 anti-dumping measures, 830, 850
subsidies and countervailing review of functioning, 823 areas of negotiation, 818−819
measures, 842 United Nations Industrial Development disputes settlement mechanism, 817
trade, 832, 841 Organisation (UNIDO), 796, 805 emergence, 817
domestic developments, 18 Urban Enterprises Zones (UEZs), 774 functions, 811
liberalising trade in goods, 21 urban unemployment. See industrial meaning and agreement, 747−748
red tape and, 844 unemployment urbanisation, 75 ministerial meetings, 847
technical barriers, 842 Uruguay Round, 800−801 objectives, 818
Trade-Related Intellectual Property Rights US dollar, decline in, 255 outcomes and timelines of the Hong
(TRIPS), 603 Kong Ministerial Declaration, 857
categories, 603 positives and negatives, 873
Trade-Related Investment Measures
(TRIMS), 845, 849
trading houses, 101
V
Value Added Tax (VAT), 436, 480
principles of trading, 835
provisions for developing countries, 836
recent proposals, 591
trading, 202, 830 background, 482 standards and procedures, 830, 842
principles of, 835 benefits, 482 subcommittees, 733−734
Training rural Youth for Self- concept, 482 subsidies, 842–843
Employment, 319 decision of state-level, 480 trade-related investment measures, 830, 845
transferable advance license, 104 defined, 480 WTO agreement, 507
transfer, 135, 206 effects of, 482 WTO agreement, 507, 809, 834
Transnational Corporations (TNCs), 635. issues, 482 WTO dispute settlement flow chart, 846
See also multinational corporations justification, 482 WTO Structure Ministerial Conference, 843
(MNCs) rates and classification of
transparency, 535, 538
treasury bills, 171
two-tier management structure, 545
commodities, 482
steps take by states, 482
values, 517–518
Z
zero coupon bond, 194

Business Environment by Shaikh Saleem

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Third Edition

foreword xii 3 Industrial Policy 83

Measures to Regulate Money Supply 148 Dematerialization 192

10 Foreign Trade Policy and Balance of Government Policy Measures to Reduce

Women and Child Development 407 Case 514

Case 559 Disinvestment Strategies 615

Liberalization and Changing Sources of FDI in Annexure I 746

General Agreement on Trade in Services Textiles—Back in the Mainstream Rules 840

Meaning and Definition

Organizational R&D Financial Marketing

Suppliers Customers Market Competitors Government

Economic Governmental Legal Technological Geographical Social

WHY A COMPANY NEED TO BE AN

Importance of the Study

Box 1.1 Economic Systems

The Government Policies

Competitive Market Condition

Business Environment and Strategic

Rating and Ranking Systems

Political Environment Foreign Pressures Economic Pressures < Table 1.2

Managing Environment Risk

Box 1.2 Risk Assumption for Different Economic Systems

Good Corporate Citizenship

Tie-up and Collaboration with Other Firms

Avoiding Politically Sensitive Products

Avoiding Sensitive Regions

Maintaining Good Political Relations

Distribution of Household by Income

India’s Political scenario

The Rise of Aam Aadmi Party

Performance of UPA-2 (2009–2014)

Relations with China

Domestic Developments in Trade

Recent Economic and Financial

India’s Gross Fixed Capital Formation

India Gross Fixed Capital Formation

ANNUAL GROWTH RATE OF GDP in India

India GDP Annual Growth Rate

4.7 4.8 4.8

Despite the slowdown in sales India Consumer Spending

6500 6293.1 6309.79 6500

India’s Industrial Production

India Industrial Production

Global Economic Environment The emerging and developing

S. No Factors Environmental Dynamism Belief in Innovation

The Emergence of Planning

The Planning Commission

5. Determining plan machinery at each stage of the planning process;

The National Development Council

Objectives of Planning in India

3. Achieving full employment,

Attaining Economic Equality and Social Justice

Achieving Full Employment

Attaining Economic Self-reliance

Box 2.1 Conditions for the Success of Planning

It ­requires setting up of various types of industries and advancement of technology. However,

Redressing Imbalances in the Economy

Box 2.2 Plan Model

First Five-Year Plan (1951–52 to 1952–56)

Second Five-Year Plan (1956–57 to 1960–61)

Third Five-Year Plan (1961–62 to 1965–66)

Fourth Five-Year Plan (1969–70 to 1973–74)

Besides these two, the other objectives were as follows:

It requires setting up of various types of industries and advancement of technology. However,